<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) MAY 15, 1995
----------------
SEARS, ROEBUCK AND CO.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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NEW YORK 1-416 36-1750680
(STATE OR OTHER (COMMISSION FILE NUMBER) (IRS EMPLOYER
JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION)
SEARS TOWER 60684
CHICAGO, ILLINOIS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (312) 875-2500
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<PAGE>
ITEM 5. OTHER EVENTS.
On May 15, 1995, the Registrant made available the restated financial
statements filed as exhibit 99 to this report in order to reflect Allstate
Insurance Group ("Allstate") as discontinued operations. At a special meeting
on March 31, 1995, the Registrant's shareholders approved the distribution of
its interest in The Allstate Corporation, through which the business of
Allstate is conducted, to the Registrant's common shareholders and the
distribution was further considered by the Registrant's Board of Directors at
their May 1995 meeting. The distribution is expected to occur in the middle of
1995, but is subject to market conditions, a favorable tax ruling or opinion
on the tax-free nature of the distribution and certain other conditions.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
23 Consent of Deloitte & Touche LLP.
99 Restated financial statements issued for the Registrant and
consolidated subsidiaries.
</TABLE>
2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
SEARS, ROEBUCK AND CO.
/s/ James A. Blanda
By: _________________________________
James A. Blanda
Vice President and
Controller
Date: May 15, 1995
3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S> <C>
23 Consent of Deloitte & Touche LLP.
99 Restated financial statements issued for the Registrant and
consolidated subsidiaries.
</TABLE>
4
<PAGE>
Exhibit 23
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SEARS, ROEBUCK AND CO.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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We consent to the incorporation by reference in Registration Statement Nos. 2-
64879, 2-80037, 33-18081, 33-23793, 33-41485, 33-43459, 33-45479, 33-49992, 33-
55825 and 33-58851 of Sears, Roebuck and Co., Registration Statement Nos. 33-
51361 and 33-57205 of Sears, Roebuck and Co. and The Savings and Profit Sharing
Fund of Sears Employees, and Registration Statement No. 33-44671 of Sears,
Roebuck and Co. and Sears DC Corp., of our report dated February 24, 1995 (May
10, 1995 as to Note 4), which expresses an unqualified opinion and includes an
explanatory paragraph relating to the Company changing its method of accounting
for postretirement benefits in 1992, appearing in this filing on Form 8-K of
Sears, Roebuck and Co.
DELOITTE & TOUCHE LLP
Chicago, Illinois
May 15, 1995
<PAGE>
Exhibit 99
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SEARS, ROEBUCK AND CO.
Consolidated STATEMENTS
of INCOME
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<TABLE>
<CAPTION>
Year Ended December 31
................................................................................
millions, except per common share data 1994 1993 1992
<S> <C> <C> <C>
REVENUES
Merchandise sales and services $29,451 $27,171 $29,829
Credit revenues 3,574 3,273 3,114
................................................................................
Total revenues 33,025 30,444 32,943
................................................................................
COSTS AND EXPENSES
Cost of sales, buying and occupancy 21,568 19,918 22,218
Selling and administrative 7,526 7,064 8,124
Depreciation and amortization 528 504 500
Provision for uncollectible accounts 698 821 910
Restructuring (note 5) -- -- 2,782
Interest 1,279 1,318 1,389
................................................................................
Total costs and expenses 31,599 29,625 35,923
................................................................................
Operating income (loss) 1,426 819 (2,980)
Other income 45 135 38
Gain on sales of subsidiaries' stock (note 3) -- -- 91
................................................................................
Income (loss) before income taxes (benefit) 1,471 954 (2,851)
Income taxes (benefit) (note 6) 614 329 (1,039)
................................................................................
INCOME (LOSS) FROM CONTINUING OPERATIONS 857 625 (1,812)
Discontinued operations (note 4) 402 1,960 (247)
................................................................................
Income (loss) before extraordinary gain (loss) and
cumulative effect of accounting changes 1,259 2,585 (2,059)
Extraordinary gain (loss) related to early
extinguishment of debt (note 8) 195 (211) --
Cumulative effect of accounting changes (note 2) -- -- (1,873)
................................................................................
NET INCOME (LOSS) $ 1,454 $ 2,374 $(3,932)
................................................................................
EARNINGS (LOSS) PER COMMON SHARE, after allowing for
dividends on preferred shares (note 1)
Income (loss) from continuing operations $2.13 $1.56 $ (4.98)
Discontinued operations 1.03 5.12 (0.67)
................................................................................
Income (loss) before extraordinary gain (loss) and
cumulative
effect of accounting changes 3.16 6.68 (5.65)
Extraordinary gain (loss) 0.50 (0.55) --
Cumulative effect of accounting changes -- -- (5.07)
................................................................................
Net income (loss) $3.66 $6.13 $(10.72)
................................................................................
Average common and common equivalent shares
outstanding 388.9 382.9 369.6
</TABLE>
................................................................................
See accompanying notes.
1
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SEARS, ROEBUCK AND CO.
ANALYSIS OF CONSOLIDATED OPERATIONS
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Sears, Roebuck and Co. conducts merchandising and credit operations in the
United States, Canada and Mexico. In November 1994, the Company announced
its intention to:
. distribute to the Company's common shareholders its 80.3% ownership interest
of The Allstate Corporation, and
. pursue a divestiture of Homart Development Co. and affiliated entities
(Homart).
The distribution proposal was approved by the Company's shareholders at a
special meeting on March 31, 1995 and further considered by the Company's Board
of Directors at their May 1995 meeting. The declaration of the distribution is
expected to occur in mid-1995, but is subject to market conditions, a favorable
tax ruling or opinion on the tax-free nature of the distribution and certain
other conditions. Refer to note 4 to the consolidated financial statements
for further information.
In September 1992, the Company announced a strategic repositioning. The
highlights of the repositioning, which was completed in 1993, were as follows:
. Dean Witter, Discover & Co. was spun-off as a separate company in June 1993,
following the primary initial public offering of 19.9% of its common stock in
March 1993.
. The Allstate Corporation completed a primary initial public offering of 19.9%
of its common stock in June 1993, resulting in a gain of $635 million.
. The sales of the Coldwell Banker residential services businesses, consisting
of the residential brokerage and relocation businesses and mortgage banking
operations, were completed in the fourth quarter of 1993.
The repositioning decision was followed by a restructuring charge in the
fourth quarter of 1992, which related primarily to the streamlining of the
Company's operations to focus on profitable core retail operations. Refer to
note 5 to the consolidated financial statements for further discussion.
The consolidated financial statements present the results of Allstate
Insurance Group, Dean Witter, Discover & Co., the Coldwell Banker residential
services businesses and Homart as discontinued operations as discussed in note
4 to the consolidated financial statements.
Operating results for the Company's merchandising and credit operations are
reported for two business segments: domestic operations and international
operations. Domestic operations are comprised of domestic merchandising and
domestic credit operations. Domestic merchandising includes the core
merchandising and product services and direct response businesses in the United
States and Puerto Rico. International operations consist of similar
merchandising and credit operations conducted in Canada through Sears Canada
Inc. (Sears Canada), a 61.1% owned subsidiary, and in Mexico through Sears
Roebuck de Mexico, S.A. de C.V. (Sears Mexico), a 75.2% owned subsidiary.
Consolidated revenues for 1994, 1993, and 1992 were as follows:
<TABLE>
- --------------------------------------------------
<CAPTION>
millions 1994 1993 1992
- --------------------------------------------------
<S> <C> <C> <C>
Domestic operations:
Domestic merchandising
Continuing businesses $26,127 $23,806 $21,549
Exited businesses -- -- 4,732
- --------------------------------------------------
26,127 23,806 26,281
Domestic credit 3,249 2,970 2,827
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Total domestic operations 29,376 26,776 29,108
International operations 3,649 3,668 3,835
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Total revenues $33,025 $30,444 $32,943
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</TABLE>
Consolidated revenues in 1994 increased $2.58 billion, or 8.5%. Domestic
revenues rose $2.60 billion, or 9.7%, primarily due to strong durable goods and
apparel sales during the year. International revenues declined $19 million, or
0.5%, due to adverse changes in exchange rates. In local currencies,
international revenues increased 5.5%.
In 1993, consolidated revenues decreased $2.50 billion, or 7.6%, primarily
due to the impact of exited businesses. Exited businesses included the domestic
catalog operations, Sears Business Centers, selected retail department and
specialty stores and certain home improvement services. Excluding exited
businesses, domestic revenues increased $2.40 billion, or 9.8%, primarily due
to more focused and aggressive merchandising and marketing strategies and
enhanced customer service. International revenues declined 4.4%, reflecting a
weak Canadian economy and an unfavorable Canadian exchange rate.
The Company made several reclassifications to the 1993 and 1992 statements of
income to conform to the 1994 classifications. Revenues from licensed
departments, which previously were recorded based on net commissions received,
are included on a gross basis. Refer to note 1 of the consolidated financial
statements for further information. Distribution costs which previously were
recorded in selling and administrative expenses, are included in cost of sales,
buying and occupancy. Depreciation and amortization expense, which previously
was recorded in cost of sales, buying and occupancy and selling and
administrative expense, is included as a separate caption in the Company's
statement of income.
2
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ANALYSIS OF CONSOLIDATED OPERATIONS CONTINUED
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Domestic operations
Supplementary domestic merchandising information:
<TABLE>
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<CAPTION>
millions, except number of stores 1994 1993 1992(1)
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<S> <C> <C> <C>
Department store revenues $21,090 $19,433 $17,673
Free-standing store revenues 3,184 2,649 2,301
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Core merchandising revenues 24,274 22,082 19,974
Other revenues 1,853 1,724 1,575
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Domestic merchandise sales and services $26,127 $23,806 $21,549
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Number of department stores 800 799 859
Number of free-standing stores 1,140 1,018 842
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Core merchandising stores 1,940 1,817 1,701(2)
Core merchandising revenues per selling square
foot $ 346 $ 321 $ 289
Comparable store sales increase 8.3% 8.9% 3.6%
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</TABLE>
(1) Includes continuing businesses only.
(2) 1992 store counts include 113 stores which were part of the restructuring
actions announced in January 1993 and exclude the closed catalog and
specialty merchandising operations.
In 1994 and 1993, the Company's revenue growth strategy focused on improving
the productivity of its department stores. The success of this strategy can be
measured in the comparable store sales percentages which have remained strong
over the past two years.
In addition to strong comparable store sales increases, core merchandising
revenues per selling square foot have also shown steady increases in 1994 and
1993, up 7.8% and 11.1%, respectively.
Department store revenues increased 8.5% in 1994, which built on a 10.0%
increase in 1993. This strong revenue performance reflects the continued
revitalization and repositioning of the Company's base business, the department
stores. Actions taken to drive this revenue growth included the exiting of
unprofitable merchandise and service lines, the remodeling and modernization of
240 department stores in 1993 and 1994, the conversion of 2.9 million square
feet of non-selling space and 1.5 million square feet of selling space formerly
occupied by furniture departments to apparel selling space and a more target
customer focused merchandise selection.
Increased sales of home-related products paced the growth in department store
revenues in 1994. Brand Central contributed the greatest share of the increase
in home product sales on the strength of excellent consumer demand for
appliances and home electronics. Strong consumer demand coupled with good in-
stock inventory positions resulted in double digit sales growth for the home
improvement business during 1994 as well.
Despite weak fashion industry conditions, apparel sales, which are entirely
department store based, increased significantly in 1994. Sales gains were
strongest in women's dresses and juniors, fine jewelry and cosmetics. These
departments benefited the most from the store remodeling and selling floor
space expansion programs in 1994. Men's apparel and footwear also provided
significant sales gains during 1994.
Automotive revenues declined in 1994 as a result of the discontinuation of
unprofitable product lines and services, which were partially offset by gains
in the base automotive product lines--tires and batteries.
In 1993, the increase in department store revenues was led by double-digit
percentage increases in women's, children's and men's apparel, accessories and
jewelry, footwear and electronics. The gains were primarily attributable to
more competitive values, an extensive brand advertising campaign and a greater
emphasis on customer service. Automotive department revenues declined against
1992 due to the elimination of unprofitable operations.
With the department stores making considerable progress, the Company has also
planned the expansion of a variety of free-standing store concepts such as the
Homelife furniture stores, Sears Hardware stores, Dealer stores and Western
Auto stores.
Free-standing store revenues in 1994 increased 20.2% over 1993. Dealer
stores, which are primarily independently-owned and operated and focus on a
home-related product assortment, contributed the largest portion of the revenue
growth. The Company opened 98 new Dealer stores in 1994 and 192 new stores in
1993. Western Auto, a wholly-owned subsidiary which participates in the retail
and wholesale automotive products and services business, also contributed to
the revenue growth with increases from its free-standing formats. The Company
opened 22 new Homelife stores and 11 Sears Hardware stores in 1994 which also
helped drive revenue increases over 1993.
In 1993, free-standing store revenues increased 15.1% over 1992. The growth
in revenues was attributable to increases at Western Auto, a new revenue stream
from the creation of the Dealer store concept in 1993 and growth at the
Homelife stores.
Other revenues, which are generated by the product services and direct
response businesses, increased 7.5% in 1994 and 9.5% in 1993. Increases in
product services maintenance agreement sales, which benefitted from strong
appliance sales, and higher revenues at direct response, on the addition of 12
new specialty catalogs, accounted for the 1994 and 1993 revenue growth.
Supplementary domestic credit information:
<TABLE>
- -------------------------------------------------
<CAPTION>
millions 1994 1993 1992
- -------------------------------------------------
<S> <C> <C> <C>
Gross revenues $ 3,600 3,486 3,446
Funding cost on
securitized
receivables $ (351) (516) (619)
Net revenues $ 3,249 2,970 2,827
SearsCharge sales as a
% of sales (1) 58.3% 58.0 54.5
Gross customer
receivables $21,325 20,351 20,287
Balances sold at Dec.
31 $ 3,946 5,174 7,116
Owned customer
receivables at Dec. 31 $17,379 15,177 13,171
Average gross
receivables $20,094 19,649 19,510
Average owned
receivables $15,718 13,471 12,428
Average account balance
(dollars) $ 842 795 752
- -------------------------------------------------
</TABLE>
(1) For department and Homelife stores only.
3
<PAGE>
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SEARS, ROEBUCK AND CO.
ANALYSIS OF CONSOLIDATED OPERATIONS CONTINUED
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In 1994, gross credit revenues increased 3.3% due to increased merchandise
sales and a lower liquidation rate. The increase in domestic credit revenues
came despite the Company's decision in 1993 to provide customers a choice of
payment vehicles by accepting third party payment products in the retail
stores. Despite the strategic decision to accept third party credit cards, the
percentage of merchandise sales and services transacted with the SearsCharge
card in 1994 was comparable to that experienced in 1993. The Company has
implemented a variety of marketing initiatives to offset any negative impact on
SearsCharge market share relative to the acceptance of third party payment
products. In 1993, gross credit revenues increased 1.2% compared with 1992
reflecting the strong merchandise sales performance and higher gross receivable
balances.
In 1994, the Company established Sears National Bank, a credit card bank
limited to engaging in credit card operations, to provide a more unified
pricing environment. The Bank is subject to certain restrictions applicable to
credit card banks under federal law. In 1994, the Bank became the issuer of the
SearsCharge card in the state of Arizona and plans to expand to other states in
1995.
Key operating measures for domestic operations:
<TABLE>
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<CAPTION>
millions 1994 1993 1992(1)
- --------------------------------------------------
<S> <C> <C> <C>
Gross margin $7,093 6,548 5,871
Percent of merchandise
sales and services 27.1% 27.5 27.2
Selling and administrative
expense $6,680 6,288 5,936
Percent of total revenues 22.7% 23.5 24.4
Interest expense $1,095 883 733
Funding cost on
securitized receivables $ 351 516 619
Total funding costs $1,446 1,399 1,352
Provision for
uncollectible accounts $ 650 795 872
Operating income $1,465 1,117 779
Percent of total revenues 5.0% 4.2 3.2
Net credit charge-offs to
average gross customer
receivables 3.32% 3.45 3.57
Gross credit customer
receivables delinquent
sixty days or more 3.86% 3.55 2.99
Allowance for
uncollectible accounts as
a percentage of gross
credit customer
receivables at Dec. 31 4.31% 4.72 4.23
- --------------------------------------------------
</TABLE>
(1) Includes continuing businesses only.
Gross margin as a percentage of merchandise sales declined slightly in 1994
to 27.1% from 27.5% in 1993. The decline was attributable to the strong 1994
sales performance in the Brand Central and home improvement departments, which
provide a lower gross margin rate than domestic merchandising as a whole. The
gross margin rate in these businesses was further pressured due to competition
from specialty retailers. The gross margin rate on apparel sales was
successfully maintained in 1994, despite the heavy promotional environment that
plagued the apparel industry throughout 1994. Automotive department gross
margin rates improved in 1994 due to the discontinuation of unprofitable
product lines and services and the strategic sourcing initiatives that lowered
product costs.
In 1993, gross margin as a percent of merchandising sales and services
increased to 27.5% from 27.2% in 1992 as a decrease in buying and occupancy
costs as a percent of merchandise sales and services was partially offset by
higher markdowns due to a continued emphasis on growing market share by
offering competitive values.
Domestic selling and administrative expenses as a percent of revenues in 1994
improved approximately 80 basis points to 22.7% from 23.5%. The improvement in
the selling and administrative expense ratio reflects the Company's continued
emphasis on controlling expenses and leveraging its fixed cost base with strong
revenue growth. Store operating costs continued to decline as a percent of
revenues in 1994.
In 1993, selling and administrative expenses applicable to continuing
domestic operations as a percent of revenues declined approximately 90 basis
points to 23.5% from 24.4% in 1992. The improvement was primarily attributable
to a reduction in payroll as a percent of revenues related to previously
announced restructuring initiatives, partially offset by higher advertising
costs.
Total funding costs, comprised of interest expense and the funding cost of
securitized receivables, increased 3.3% as compared to 1993 reflecting the
growth in gross credit receivables. In 1993, total funding costs increased 3.6%
reflecting higher effective interest rates attributable to a change in the
funding mix resulting from the Company's repositioning.
The provision for uncollectible accounts was 18.2% lower than 1993 due to
favorable customer receivable write-off trends. Despite the improvement in
write-offs, delinquencies trended upward in the fourth quarter of 1994 and the
Company responded by increasing its collection staff and implementing
additional collection strategies. In 1993, the provision for uncollectible
accounts declined 8.9% primarily due to a decline in customer bankruptcies.
A key measure of domestic operations' improved profit performance is growth
in operating income. The improvement from 1992 through 1994 resulted from
strong merchandising revenue growth, a relatively stable gross margin rate, the
reduction in selling and administrative expenses as a percent of revenues and
the strong credit performance.
International operations
Revenues in local currencies increased 5.5% in 1994. The improvement in local
currency revenues was attributable to a 1.7% revenue increase at Sears Canada
coupled with a 27.5% increase at Sears Mexico as sales benefited from the
opening of two new stores. Revenues in U.S. dollars declined slightly against
1993 due mainly to an unfavorable Canadian exchange rate.
4
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ANALYSIS OF CONSOLIDATED OPERATIONS CONTINUED
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Gross margin as a percent of revenues in 1994 increased to 23.8% from 20.9%
in 1993 due to improved inventory control at Sears Canada partially offset by
lower gross margins at Sears Mexico as a result of a repositioning of that
business. Selling and administrative expense as a percent of revenues was
slightly lower at 21.6% in 1994 compared with 21.8% in 1993, as expense
reductions at Sears Canada were partially offset by cost increases at Sears
Mexico. Operating income as a percent of revenues improved approximately 250
basis points over 1993 due primarily to improved performance at Sears Canada
partially offset by lower operating income at Sears Mexico stemming from the
merchandise inventory repositioning.
In 1993, revenues in local currency increased 1.4% as compared to 1992. Local
currency revenue increases at Sears Mexico, which benefited from the opening of
three new retail stores were partially offset by lower local currency revenues
at Sears Canada due to a soft Canadian economy. Revenues in U.S. dollars
declined in 1993 due to an unfavorable Canadian exchange rate. Gross margin as
a percent of revenues declined to 20.9% in 1993 as compared with the 1992 gross
margin rate of 21.4% due to increased inventory shrinkage at Sears Canada,
primarily in the catalog business. Selling and administrative expenses as a
percent of revenues decreased to 21.8% from 22.5% in 1992 due to cost
containment efforts at Sears Canada. Operating income as a percent of revenues
improved approximately 140 basis points in 1993 over 1992 due largely to
improved results at Sears Canada.
Interest expense and funding costs
Consolidated interest expense declined $39 million in 1994 and $71 million in
1993. Interest expense at Corporate decreased $274 million to $25 million in
1994, compared with $299 and $537 million in 1993 and 1992, respectively.
Corporate interest expense reflects interest on debt that has either not been
specifically allocated or supports Corporate investments. The decrease in
Corporate interest expense in 1994 and 1993 was primarily due to the paydown of
debt from the proceeds of the strategic repositioning transactions and a
reduction in Corporate investments. The reduction in Corporate interest expense
was partially offset by increases in domestic operations' interest expense of
$212 and $150 million for 1994 and 1993, respectively. These increases were
primarily due to the higher level of debt needed to fund increases in owned
retail customer receivables.
Since the Company uses securitizations of retail customer receivables as a
significant funding source, its total funding costs include interest expense
and funding cost of securitized receivables. The changes in funding cost were
as follows:
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<TABLE>
<CAPTION>
millions 1994 1993
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<S> <C> <C>
Decrease in interest expense $ (39) $ (71)
Decrease in funding cost of securitized receivables(1) (173) (114)
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Funding cost reductions $(212) $(185)
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</TABLE>
(1) Funding costs of securitized receivables are reported as a reduction of
revenues in the statement of income.
Funding costs declined in 1994 and 1993 primarily due to lower funding needs
resulting from the strategic repositioning. The effective interest rate
associated with the funding costs declined in 1994 and increased in 1993
primarily due to changes in the funding mix.
Other income
Other income decreased in 1994 primarily due to lower gains from property sales
and sales of investments. In 1993, other income increased primarily due to
higher gains from property sales and improved joint venture results. Improved
joint venture results in 1993 reflect the first year of operations for Advantis
and a lower Prodigy loss. A summary of other income by type follows:
<TABLE>
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<CAPTION>
millions 1994 1993 1992
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Gain on sales of property $ 22 $ 63 $ 9
Gain (loss) on sales/writedown of securities -- 12 (30)
Equity in joint ventures and unconsolidated companies 27 33 (54)
Minority interest (14) (7) 18
Interest income 14 34 82
Other gains (losses), net (4) -- 13
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Total $ 45 $135 $ 38
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</TABLE>
Gain on sales of subsidiaries' stock
During 1992, the Company sold a minority interest in Sears Mexico through an
initial public offering and recognized a gain of $96 million ($55 million
after-tax). In addition, a $5 million loss resulted from a primary offering of
common stock by Sears Canada that diluted the Company's ownership.
Income tax expense
Income tax expense in 1994 and 1993 was 41.7% and 34.5% of pretax income
respectively. The 1992 income tax benefit on operations was 36.5% of pretax
loss. The 1993 rate was favorably impacted by a $57 million tax credit from the
adjustment of deferred tax assets due to the 1% increase in the federal income
tax rate resulting from the Omnibus Budget Reconciliation Act of 1993.
5
<PAGE>
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SEARS, ROEBUCK AND CO.
ANALYSIS OF CONSOLIDATED OPERATIONS CONTINUED
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Income from continuing operations
The following table summarizes the impact on income from continuing operations
of certain significant items in 1993 and 1992, net of taxes.
<TABLE>
- ---------------------------------------------------
<CAPTION>
millions 1993 1992
- ---------------------------------------------------
<S> <C> <C>
Restructuring $ -- $(1,745)
Gain on sales of subsidiaries' stock -- 50
Tax rate change 57 --
Merchandising exited businesses -- (244)
- ---------------------------------------------------
</TABLE>
Income from continuing operations in 1994 was $857 million, compared with
$625 million in 1993. Results reflect the impact of the deferred tax asset
adjustment in 1993. Excluding the significant items noted in the table, 1994
income from continuing operations increased $289 million, or 50.9%, from $568
million in 1993 and 1993 income from continuing operations increased $441
million from 1992 income of $127 million.
Extraordinary items
Results for 1994 also included a $195 million extraordinary gain related to the
early extinguishment of debt associated with the Company's transfer of Sears
Tower and all related assets and liabilities to a third party as trustee of a
trust in November 1994. The elimination of the related mortgages reduced
Corporate debt by $845 million and will result in annual interest savings of
approximately $75 million.
An extraordinary loss of $211 million related to the early extinguishment of
debt was included in 1993 results. This extraordinary loss included the call of
a $300 million, 7% deep-discount bond issue ($66 million) and payments to
terminate interest rate swaps associated with retired commercial paper that was
allocated to the funding of discontinued operations ($145 million). The 7%
deep-discount bond issue carried an effective yield of 14.6%, and the interest
rate swaps, which converted variable to fixed-rate debt, carried an average
fixed rate of 9.2%.
Accounting changes
In 1992, net income included a $1.87 billion, or $5.07 per common share,
cumulative effect of accounting changes related to the adoption of new
accounting for postretirement and postemployment benefits.
Inflation
Reported earnings have been impacted by inflation; however, there is no simple
way of separating those effects. Competitive and regulatory conditions
permitting, the Company modifies the prices charged for its goods and services
in order to recognize cost changes as incurred or as anticipated. By also
attempting to control costs and efficiently utilize resources, the Company
strives to minimize the effects of inflation on its operations.
6
<PAGE>
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ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
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The Company's significant financial capacity and flexibility are exemplified by
the quality and liquidity of its assets and by its ability to access multiple
sources of capital.
The retail customer receivables portfolio includes $18.20 billion of owned
receivable balances and $4.46 billion of receivables sold through
securitization. Domestic and international accounts represent $17.04 and $1.16
billion of the owned portfolio, respectively. The portfolio is geographically
diversified in the U.S., Canada and Mexico. The Company extends and monitors
retail customer credit based on extensive use of proprietary and commercially
available credit histories and scoring models. The Company promptly recognizes
uncollectible accounts and emphasizes maintenance of an adequate loss
allowance, which is assessed using multiple modeling approaches based on
portfolio risk characteristics. Domestic accounts are systematically written
off at 210 days delinquent or upon receipt of a bankruptcy notice.
Merchandise inventories are primarily valued on the last-in, first-out or
LIFO method. Inventories would have been $692 million higher at Dec. 31, 1994
if valued on the first-in, first-out or FIFO method. Inventories on a FIFO
basis totaled $4.74 billion as of Dec. 31, 1994, as compared to $4.24 billion
at Dec. 31, 1993. The increase in inventory levels reflects the expansion of
selling space in the department stores and the growth of the free-standing
store businesses.
In the fourth quarter of 1992, the Company recorded a pretax restructuring
charge of $2.68 billion to streamline its domestic merchandising operations by
focusing on profitable core retail operations. The restructuring program
included discontinuing domestic catalog operations, a voluntary early
retirement incentive program, closing 113 unprofitable retail department and
specialty stores, streamlining or discontinuing various unprofitable
merchandise lines and the write-down of underutilized assets to market value.
The restructuring program was intended to reduce operating costs and improve
the Company's competitive position and earnings potential. The restructuring
program eliminated approximately 50,000 full-time and part-time positions. The
following represents the reserve activity during 1994 and 1993:
<TABLE>
- ------------------------------
<CAPTION>
millions 1994 1993
- ------------------------------
<S> <C> <C>
Beginning balance $647 $2,150
Cash charges 247 1,216
Non-cash charges 216 287
- ------------------------------
Ending balance $184 $ 647
- ------------------------------
</TABLE>
For 1994, the cash charges related primarily to employee termination
benefits. For 1993, the cash charges related primarily to operating losses
associated with the catalog and other exited businesses. The remaining reserve
balance at Dec. 31, 1994 related primarily to commitments remaining under
contractual obligations. Management believes that the remaining reserve balance
at Dec. 31, 1994 is adequate.
----
CAPITAL RESOURCES
Strong fundamental operating results and the breadth and depth of capital
resources of the Company contributed to a strengthening financial position in
1994.
Total net funding for the Company at Dec. 31, 1994 was $20.53 billion
compared with $20.81 billion at Dec. 31, 1993, which was used primarily to fund
retail customer receivables. Net funding includes debt reflected on the balance
sheet and investor certificates related to retail customer receivables sold
through securitizations, less investments related to funding. During 1994, the
Company eliminated debt of $845 million through the transfer of Sears Tower and
all related assets and liabilities to a third party as trustee of a trust. Debt
was reduced by $2.41 billion as a result of the classification of Allstate and
Homart as discontinued operations. Funding related to customer receivables grew
during the year as gross customer receivables increased, reflecting the
continuing strength of the SearsCharge business. The Company's debt-to-equity
ratio, excluding unrealized net capital gains, was 1.5 at Dec. 31, 1994 and
1993.
7
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
Consolidated BALANCE SHEETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
................................................................................
millions 1994 1993
<S> <C> <C>
ASSETS
Current assets
Cash and invested cash $ 548 $ 1,066
Retail customer receivables 19,033 16,695
Less: Allowance for uncollectible accounts and unearned
finance charges 832 789
................................................................................
18,201 15,906
Other receivables 321 1,062
Merchandise inventories 4,044 3,518
Prepaid expenses and deferred charges 303 436
Deferred income taxes (note 6) 998 1,264
................................................................................
Total current assets 24,415 23,252
Property and equipment
Land 371 414
Buildings and improvements 4,041 4,368
Furniture, fixtures and equipment 3,777 3,679
Capitalized leases 229 239
................................................................................
8,418 8,700
Less accumulated depreciation 4,165 4,299
................................................................................
Total property and equipment, net 4,253 4,401
Deferred income taxes (note 6) 607 661
Other assets 806 896
Net assets of discontinued operations (note 4) 7,231 8,701
................................................................................
TOTAL ASSETS $37,312 $37,911
................................................................................
LIABILITIES
Current liabilities
Short-term borrowings (note 8) $ 6,190 $ 4,636
Current portion of long-term debt and capitalized lease
obligations (note 8) 1,141 2,603
Restructuring reserves 184 647
Accounts payable and other liabilities 5,123 5,214
Unearned revenues 795 772
Other taxes 480 437
................................................................................
Total current liabilities 13,913 14,309
Long-term debt and capitalized lease obligations (note 8) 8,844 8,187
Postretirement benefits (note 7) 2,810 2,743
Minority interest and other liabilities 944 1,008
................................................................................
TOTAL LIABILITIES 26,511 26,247
................................................................................
COMMITMENTS AND CONTINGENT LIABILITIES (notes 9, 10, 12, 13)
SHAREHOLDERS' EQUITY (note 13)
Preferred shares ($1 par value, 50 shares authorized)
8.88% Preferred Shares, First Series (3.25 shares issued
and outstanding) 325 325
Series A Mandatorily Exchangeable Preferred Shares (7.1875
shares issued and outstanding) 1,236 1,236
Common shares ($.75 par value, 1,000 shares authorized,
351.7 and 350.8 shares outstanding) 294 294
Capital in excess of par value 2,385 2,354
Retained income 8,918 8,163
Treasury stock (at cost) (1,690) (1,704)
Deferred ESOP expense (note 7) (558) (614)
Unrealized net capital gains 32 1,674
Cumulative translation adjustments (141) (64)
................................................................................
TOTAL SHAREHOLDERS' EQUITY 10,801 11,664
................................................................................
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $37,312 $37,911
</TABLE>
................................................................................
See accompanying notes.
8
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company accesses a variety of capital markets to preserve flexibility and
diversify its funding sources. The broad access to capital markets also allows
the Company to effectively manage liquidity and repricing risk. Liquidity risk
is the measure of the Company's ability to fund maturities and provide for the
operating needs of its businesses. Repricing risk is the impact on net income
due to changes in interest rates. The Company's cost of funds is affected by a
variety of general economic conditions, including the level and volatility of
interest rates. To aid in the management of repricing risk, the Company uses
off-balance-sheet instruments, such as interest rate swaps and caps. The
Company has policies that centrally govern the use of off-balance-sheet
instruments.
The current debt ratings of the Company appear in the table below. The
Company believes that its debt ratings continue to afford cost-effective access
to the capital markets and it will continue to obtain funds on a competitive
and cost-effective basis after the proposed Allstate distribution.
<TABLE>
- ----------------------------------------------------------------------
<CAPTION>
Moody's Duff & Fitch
Investors Phelps Investors
Services, Standard Credit Service
Inc. & Poor's Rating Co. Inc.
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unsecured long-term debt A2 BBB A- A
Unsecured commercial paper P-1 A-2 D-1 F-1
Term securitization Aaa AAA AAA AAA
Asset-backed commercial paper P-1 A-1+/A-1 NR NR
- ----------------------------------------------------------------------
</TABLE>
NR--Not rated.
The Company issues commercial paper through Sears Roebuck Acceptance Corp.
(SRAC) and through the Sears Credit Corp. (SCC) entities. SRAC's total
commercial paper outstandings were $4.91 and $2.48 billion at Dec. 31, 1994 and
1993, respectively. The increase in 1994 supported the Company's 1994
refinancing goal of raising the percentage of floating-rate funding to total
funding from the level at Dec. 31, 1993. Commercial paper outstandings
decreased by $6.04 billion in 1993 due to the paydown of commercial paper from
strategic repositioning proceeds and lower funding needs to support continuing
businesses. With ratings in the highest category from three nationally
recognized debt rating agencies, SRAC is a tier one issuer of commercial paper,
which broadens access within the commercial paper market.
Commercial paper issuance is supported by SRAC's $4.50 billion syndicated
credit facility that expires in 1999 and $600 million in uniform bilateral
credit agreements. In 1994, SRAC borrowed $845 million of term loans with
original maturities between two and five years.
The commercial paper issued by SCC is collateralized by SearsCharge
receivables and allows for the cost-effective management of certain of the
Company's term securitization issues. At Dec. 31, 1994 and 1993, SCC commercial
paper outstandings were $1.75 billion, supported by syndicated credit
facilities of $1.82 billion.
The Company uses a continuously offered medium-term note program to average
interest rates on a portion of its term senior unsecured financings. Variable-
rate notes totaling $705 million were issued in 1994 at an average maturity of
2.3 years. Fixed-rate issuances in 1994 totaled $476 million with a weighted
average coupon of 6.6% and an average term of 4.3 years. The Company also
issues larger discrete senior debt offerings from time to time. In January
1994, it issued $300 million of 6.25% notes, due in 2004.
The Company securitizes credit card receivables to access intermediate-term
investors in a cost-effective manner. These securities are rated in the highest
category by the national rating agencies. The Company issued $1.31 billion of
domestic, fixed-rate term securitizations in 1994 at an average coupon of 7.1%.
As of Dec. 31, 1994, there were $7.22 billion of investor certificates
outstanding, which were backed by $3.95 billion of sold domestic retail
customer receivables and $3.27 billion of other investments.
On Mar. 20, 1995, the Company exchanged all of its 28.8 million Series A
Mandatorily Exchangeable Preferred Shares (PERCS) for 35.7 million common
shares of the Company. The exchange will not dilute earnings per share as the
PERCS are reflected in the Company's earnings per share calculation.
The Company is currently in the middle of a five-year, $4 billion capital
expenditure program, which began in 1993. The program is primarily focused on
expanding the Company's revenue opportunities. The capital expended during the
past three years has been used as follows:
<TABLE>
- --------------------------------------------------------
<CAPTION>
millions 1994 1993 1992
- --------------------------------------------------------
<S> <C> <C> <C>
Department stores, primarily remodel and
expansion efforts $673 $306 $339
Free-standing formats 106 82 70
Cost and productivity initiatives 141 109 179
Corporate 34 65 225
- --------------------------------------------------------
Total capital expenditures $954 $562 $813
- --------------------------------------------------------
</TABLE>
The Company plans capital expenditures for 1995 of $1.2 billion (including
leases) which includes the remodeling and upgrade of merchandise presentations
in approximately 109 existing department stores, 17 new department stores, 50
new Sears Hardware stores, 30 new Homelife stores and 62 new Western Auto
stores.
9
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
Consolidated STATEMENTS
of CASH FLOWS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
................................................................................
millions 1994 1993 1992
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,454 $2,374 $(3,932)
Adjustments to reconcile net income (loss) to net
cash provided by
(used in) operating activities
Depreciation, amortization and other noncash items 601 645 719
Cumulative effect of accounting changes -- -- 2,440
Restructuring charges -- -- 2,782
Extraordinary (gain) loss related to early extin-
guishment of debt (319) 107 --
Provision for uncollectible accounts 698 821 910
Gain on sales of subsidiaries' stock -- -- (91)
Loss (gain) on sales of property and investments (22) (73) 36
Change in deferred income taxes 359 341 (2,163)
Increase in retail customer receivables (3,199) (2,868) (1,325)
Decrease (increase) in merchandise inventories (594) 514 357
Decrease (increase) in other operating assets 622 (111) (329)
Increase (decrease) in other operating liabilities (148) (865) 200
Discontinued operations (402) (1,960) 610
................................................................................
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (950) (1,075) 214
................................................................................
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investments 16 364 60
Proceeds from sales of property and equipment 26 10 4
Purchases of property and equipment (954) (562) (813)
Discontinued operations--net 233 1,289 (273)
................................................................................
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (679) 1,101 (1,022)
................................................................................
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 2,798 707 1,348
Repayments of long-term debt (2,717) (1,537) (1,678)
Increase (decrease) in short-term borrowings, pri-
marily 90 days or less 1,617 980 (938)
Proceeds from sales of subsidiaries' stock -- -- 162
Repayments from ESOP 69 15 10
Mandatorily exchangeable preferred shares issued -- -- 1,205
Common shares issued for employee stock plans 45 193 81
Dividends paid to shareholders (698) (727) (779)
................................................................................
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 1,114 (369) (589)
................................................................................
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND INVESTED
CASH (3) (1) (3)
................................................................................
NET DECREASE IN CASH AND INVESTED CASH (518) (344) (1,400)
................................................................................
CASH AND INVESTED CASH AT BEGINNING OF YEAR 1,066 1,410 2,810
................................................................................
CASH AND INVESTED CASH AT END OF YEAR $ 548 $1,066 $ 1,410
</TABLE>
................................................................................
See accompanying notes.
10
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OPERATING, INVESTING AND FINANCING ACTIVITIES
Cash flows from operating activities consist primarily of net income adjusted
for certain noncash expense items, including depreciation and the provision for
uncollectible accounts, changes in receivables, inventories and deferred taxes.
Cash used in operations in 1994 decreased $125 million, compared with 1993.
The change was due to higher income from continuing operations, a decrease in
other operating assets and a smaller decrease in other operating liabilities
compared to 1993. These changes were partially offset by an increase in
merchandise inventories, a larger increase in owned retail customer receivables
compared with 1993 and a lower provision for uncollectible accounts. The
decrease in other operating assets was primarily due to changes in receivables
related to the Company's outstanding domestic pass-through certificates. The
increase in owned retail customer receivables was due to higher gross retail
customer receivables partially offset by lower liquidations of outstanding
domestic pass-through certificates. Net liquidations of outstanding domestic
pass-through certificates increased owned receivables by $1.23 billion in 1994
compared with $1.94 billion in 1993. Merchandise inventories increased as a
result of expansion of selling space in the department stores and the growth of
the free-standing store businesses.
Cash provided by operations declined $1.29 billion in 1993 compared with
1992. The loss from continuing operations in 1992 included a non-cash
restructuring charge of $2.78 billion. The decline in 1993 cash from operations
was primarily due to increases in owned retail customer receivables partially
offset by higher income from continuing operations. Cash payments in 1993
related to the restructuring reserve were mainly offset by the decrease in the
corresponding deferred tax asset and the liquidation of exited businesses'
inventories.
Net cash used in investing activities increased in 1994 primarily due to a
decrease in cash provided by discontinued operations and a higher level of
expenditures for property and equipment related to the store remodeling
program. The most significant investing activities in 1993 were purchases of
property and equipment.
Net cash provided by financing activities in 1994 was primarily due to
increases in short-term borrowings supporting higher owned retail customer
receivable balances, resulting from the decrease in receivables sold through
securitizations.
In 1993, financing activities consisted primarily of repayment of debt from
proceeds of the Company's strategic repositioning. Cash used in financing
activities was also affected by an increased level of debt due to the increase
in the amount of owned retail customer receivables.
The Company paid cash dividends of $1.60 per common share in 1994, the 59th
consecutive year of payout. It is currently expected that, if the proposed
Allstate distribution occurs, the sum of the annual dividends to be received by
a Sears common shareholder who retains the Allstate common stock received in
the distribution will be approximately $1.64. It is expected that the Company
will pay approximately $0.92 of this amount. The payment of common dividends is
dependent upon the Company's earnings and internal investment opportunities.
11
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
Consolidated STATEMENTS
of SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
.....................................................................................
1994 1993 1992 1994 1993 1992
.....................................................................................
$ millions shares in thousands
<S> <C> <C> <C> <C> <C> <C>
8.88% PREFERRED SHARES, FIRST
SERIES (note 13)
Balance, beginning of year $ 325 $ 325 $ 325 3,250 3,250 3,250
Issued during year -- -- -- -- -- --
.....................................................................................
Balance, end of year $ 325 $ 325 $ 325 3,250 3,250 3,250
.....................................................................................
SERIES A MANDATORILY
EXCHANGEABLE
PREFERRED SHARES (note 13)
Balance, beginning of year $ 1,236 $ 1,236 $ -- 7,188 7,188 --
Issued during year -- -- 1,236 -- -- 7,188
.....................................................................................
Balance, end of year $ 1,236 $ 1,236 $ 1,236 7,188 7,188 7,188
.....................................................................................
COMMON SHARES
Balance, beginning of year $ 294 $ 291 $ 290 391,752 387,514 386,057
Stock options exercised and
other changes -- 3 1 558 4,238 1,457
.....................................................................................
Balance, end of year 294 294 291 392,310 391,752 387,514
.....................................................................................
CAPITAL IN EXCESS OF PAR VALUE
Balance, beginning of year 2,354 2,195 2,154
Stock options exercised and
other changes 31 159 41
.....................................................................................
Balance, end of year 2,385 2,354 2,195
.....................................................................................
RETAINED INCOME
Balance, beginning of year 8,163 8,772 13,514
Net income (loss) 1,454 2,374 (3,932)
Preferred share dividends
(note 13) (137) (137) (120)
Common share dividends ($1.60,
$1.60 and $2.00 per share) (562) (558) (690)
Distribution of Dean Witter,
Discover & Co. shares -- (2,288) --
.....................................................................................
Balance, end of year 8,918 8,163 8,772
.....................................................................................
TREASURY STOCK (AT COST)
Balance, beginning of year (1,704) (1,734) (1,746) (40,904) (41,670) (41,961)
Reissued under compensation
plans 14 30 12 334 766 291
.....................................................................................
Balance, end of year (1,690) (1,704) (1,734) (40,570) (40,904) (41,670)
.....................................................................................
DEFERRED ESOP EXPENSE (note 7)
Balance, beginning of year (614) (700) (740)
Reductions 56 86 40
.....................................................................................
Balance, end of year (558) (614) (700)
.....................................................................................
UNREALIZED NET CAPITAL GAINS
Balance, beginning of year 1,674 428 365
Net increase (decrease) (1,642) 1,246 63
.....................................................................................
Balance, end of year 32 1,674 428
.....................................................................................
CUMULATIVE TRANSLATION
ADJUSTMENTS
Balance, beginning of year (64) (40) 26
Net unrealized loss during
year (77) (24) (66)
.....................................................................................
Balance, end of year (141) (64) (40)
.....................................................................................
TOTAL COMMON SHAREHOLDERS'
EQUITY AND
SHARES OUTSTANDING $ 9,240 $10,103 $ 9,212 351,740 350,848 345,844
.....................................................................................
TOTAL SHAREHOLDERS' EQUITY $10,801 $11,664 $10,773
.....................................................................................
See accompanying notes.
</TABLE>
12
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Sears, Roebuck
and Co. and all significant domestic and international companies in which the
Company has more than a 50% equity ownership. Investments in companies in which
the Company has a 20% to 50% ownership are accounted for using the equity
method. The Allstate Corporation (Allstate), Dean Witter, Discover & Co. (Dean
Witter), the Coldwell Banker residential services businesses and Homart
Development Co. and affiliated entities (Homart) are presented as discontinued
operations.
Although not a part of the financial statements, included with the
consolidated statements is a five-year summary of consolidated financial data.
Certain reclassifications have been made in the 1993 and 1992 financial
statements to conform to current accounting classifications.
---
FISCAL YEAR
In 1994, the Company changed its fiscal year-end from Dec. 31 to a 52 or 53
week year ending on the Saturday closest to Dec. 31.
---
MERCHANDISE SALES AND SERVICES
Revenues from merchandise sales and services are net of returns and allowances
and exclude sales tax. Revenues from licensed departments, which previously
were recorded based on net commissions received, are included on a gross basis.
Included in merchandise sales and services are gross revenues from licensed
departments of $1.07, $1.03 and $1.15 billion for 1994, 1993 and 1992,
respectively.
---
MAINTENANCE AGREEMENTS
The Company sells extended service contracts with terms of coverage between 12
and 36 months. Revenue and incremental direct acquisition costs from the sale
of these contracts are deferred and amortized on a straight-line basis over the
lives of the contracts. Costs related to servicing the contracts are expensed
as incurrred.
---
STORE PRE-OPENING EXPENSES
Costs associated with the opening of new stores are expensed in the year
incurred.
---
SALE OF SUBSIDIARY'S STOCK
Gains or losses are recognized on the sale of a subsidiary's stock based on the
difference between the offering price and the Company's carrying amount of such
stock, unless the sale is part of a broader corporate reorganization.
---
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share is computed based on the weighted average
number of common and common equivalent shares (dilutive stock options)
outstanding and after adjustment for dividends of $29 million in 1994, 1993 and
1992 on the 8.88% Preferred Shares. The Series A Mandatorily Exchangeable
Preferred Shares (PERCS) are considered common stock due to their mandatory
conversion into common stock and the dividends thereon are not deducted from
net income (loss) for purposes of calculating earnings (loss) per common share.
Refer to note 13 for discussion of the Company's election to exchange the PERCS
on Mar. 20, 1995.
For the year ended Dec. 31, 1992, the inclusion of the PERCS as common shares
resulted in an anti-dilutive impact on the loss per common share calculation.
Excluding the PERCS from common shares, the loss from continuing operations and
net loss per common share would have been $5.59 and $11.73, respectively. The
net loss applicable to common shares, including all preferred share dividends,
for the year ended Dec. 31, 1992 was $4.05 billion.
---
CASH AND INVESTED CASH
Cash and invested cash is defined to include all highly liquid investments with
maturities of three months or less.
---
RETAIL CUSTOMER RECEIVABLES
Retail customer receivables at Dec. 31, 1994 include approximately $8.3 billion
of domestic accounts and $382 million of Canadian accounts which will not
become due within one year. These receivables are expected to earn finance
charge revenue at annual percentage rates ranging from 9.75% to 21.0% for
domestic accounts and 28.8% for Canadian accounts.
Retail customer receivables are shown net of an allowance for uncollectible
accounts. When receivables are securitized and sold with recourse, the portion
of the allowance for uncollectible accounts pertaining to such receivables is
transferred to a recourse liability at the date of sale. Factors such as prior
account loss experience, changes in the volume of the account portfolio and
overall portfolio quality are considered in determining the allowance and the
recourse liability.
---
MERCHANDISE INVENTORIES
Merchandise inventories of domestic operations are valued primarily at the
lower of cost (using the last-in, first-out or LIFO method) or market by
application of internally developed price indices to estimate the effects of
inflation in merchandise inventories.
13
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The LIFO adjustment to cost of sales was a credit of $34 million in 1994,
compared with a charge of $5 million in 1993 and a credit of $18 million in
1992. Partial liquidation of merchandise inventories valued under the LIFO
method in all three years resulted in credits of $3, $74 and $39 million in
1994, 1993 and 1992, respectively. If the first-in, first-out (FIFO) method of
inventory valuation had been used instead of the LIFO method, merchandise
inventories would have been $692 and $726 million higher at Dec. 31, 1994 and
1993, respectively.
Merchandise inventories of international operations, Western Auto and Puerto
Rico, which represent approximately 16% of merchandise inventories, are stated
at the lower of cost (using the first-in, first-out or FIFO method) or market.
---
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is provided principally by the straight-line method over the
estimated useful lives of the related assets, generally 5 to 10 years for
equipment and 40 to 50 years for real property. Accumulated depreciation was
$4.17 and $4.30 billion at Dec. 31, 1994 and 1993, respectively.
---
INCOME TAXES
The consolidated federal income tax return of Sears, Roebuck and Co. includes
results of the domestic operations of both the continuing business groups and
discontinued operations. Tax liabilities and benefits are allocated as
generated by the respective businesses, whether or not such benefits would be
currently available on a separate return basis.
---
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The Company utilizes various off-balance-sheet financial instruments to manage
the interest rate and market risk associated with its borrowings. The
counterparties to these instruments are major financial institutions with
credit ratings of primarily AA.
Interest rate swap agreements modify the interest characteristics of a
portion of the Company's debt. The differential to be paid or received is
accrued as interest rates change and recognized as an adjustment to interest
expense in the statement of income. The related accrued receivable or payable
is included in other assets or liabilities. The fair values of the swap
agreements are not recognized in the financial statements.
Interest rate caps are used to lock in a maximum rate if rates rise, but
enable the Company to otherwise pay lower market rates. The cost of interest
rate caps is amortized to interest expense over the life of the caps. Payments
received due to the interest rate caps reduce interest expense. The unamortized
cost of the interest rate caps is included in other assets.
---
2. ACCOUNTING CHANGES
Effective Jan. 1, 1992, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions" and SFAS No. 112,
"Employers' Accounting for Postemployment Benefits," for all domestic and
foreign postretirement and postemployment benefit plans by immediately
recognizing the transition amounts. The Company previously expensed the cost of
these benefits, which consist of health care and life insurance, as claims were
incurred.
---
3. SALES OF SUBSIDIARIES' STOCK
In March 1992, the Company and Sears Roebuck de Mexico, S.A. de C.V. (Sears
Mexico) sold, in a series of transactions, common stock of Sears Mexico
representing 25% of the Company's ownership. These transactions resulted in an
after-tax gain of $55 million.
In September 1992, Sears Canada Inc. (Sears Canada), a subsidiary of the
Company, completed a primary offering of common stock diluting the Company's
ownership in Sears Canada to 61.2%, resulting in a $5 million loss to the
Company.
---
4. DISCONTINUED OPERATIONS
Income (loss) from discontinued operations was as follows:
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31
- -------------------------------------------------------------------------------
millions 1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income (loss), less income tax expense (benefit)
of $(256), $240 and $(775) $402 $1,389 $(247)
Gain from Allstate's initial public offering -- 635 --
Loss on disposal, including income tax expense of $22 -- (64) --
- -------------------------------------------------------------------------------
Total $402 $1,960 $(247)
- -------------------------------------------------------------------------------
</TABLE>
In November 1994, the Company announced it intends to distribute in a tax-
free dividend to the Company's common shareholders its 80.3% ownership interest
of Allstate. The distribution proposal was approved by shareholders at a
special meeting held on Mar. 31, 1995 and further considered by the Company's
Board of Directors at their May 1995 meeting. The declaration of the
distribution by the Company's Board of Directors is expected to occur in
mid-1995, but is subject to market conditions, a favorable tax ruling or
opinion on the tax-free nature of the distribution and certain other
conditions.
If the distribution occurs, shareholders' equity will be reduced by
approximately the Company's investment in Allstate. At Dec. 31, 1994, the
Company's investment in
14
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Allstate was $6.76 billion. In addition, The Savings and Profit Sharing Fund of
Sears Employees, which includes an Employee Stock Ownership Plan (the ESOP),
will be split into two different plans, a plan for employees of the Company and
its affiliates other than Allstate and a plan for Allstate employees. The ESOP
will be split with 50% of the unallocated shares in the ESOP and 50% of the
ESOP debt being transfered to the Allstate plan. In connection with this
transfer, Allstate will purchase from the Company 50% of the Company's
remaining loan to the ESOP. The purchase price is expected to be $327 million.
See note 7 for further information on the ESOP. In addition, the Company repaid
in April 1995 a $450 million note payable to Allstate related to a capital
contribution in 1990.
The summarized operating results of Allstate were as follows:
<TABLE>
- -------------------------------------------------------------------------
<CAPTION>
Year Ended December 31
- -------------------------------------------------------------------------
millions 1994 1993 1992
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $21,464 $20,946 $20,228
Costs and expenses 21,237 19,570 21,653
- -------------------------------------------------------------------------
Income (loss) before income taxes (benefit) 227 1,376 (1,425)
Income taxes (benefit) (257) 75 (926)
- -------------------------------------------------------------------------
The Allstate Corporation income (loss) before
cumulative effect of accounting changes 484 1,301 (499)
Minority interest (96) (141) --
Cumulative effect of accounting changes -- -- (326)
- -------------------------------------------------------------------------
Income (loss) $ 388 $ 1,160 $ (825)
- -------------------------------------------------------------------------
</TABLE>
The assets and liabilities of Allstate, which have been reclassified on the
balance sheet to net assets of discontinued operations, are summarized as
follows:
<TABLE>
- ----------------------------------------------------------------------------
<CAPTION>
December 31
- ----------------------------------------------------------------------------
millions 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments $48,179 $48,791
Premium installment receivables 2,316 1,964
Deferred policy acquisition costs 2,074 1,511
Reinsurance recoverables 1,867 1,916
Deferred income taxes 1,728 444
Other assets 2,405 2,450
Separate Accounts 2,800 2,282
- ----------------------------------------------------------------------------
Total assets $61,369 $59,358
- ----------------------------------------------------------------------------
LIABILITIES
Reserve for property-liability insurance and claims expense $16,933 $15,683
Reserve for life insurance policy benefits 5,224 4,942
Contractholder funds 17,974 16,811
Unearned premiums 5,908 5,729
Other liabilities 4,104 3,611
Separate Accounts 2,800 2,282
- ----------------------------------------------------------------------------
Total liabilities 52,943 49,058
- ----------------------------------------------------------------------------
MINORITY INTEREST 1,666 2,049
- ----------------------------------------------------------------------------
CAPITAL $ 6,760 $ 8,251
- ----------------------------------------------------------------------------
</TABLE>
The Company is pursuing a divestiture of Homart. The Company anticipates that
the divestiture will be completed by Dec. 30, 1995 and no loss is expected to
be incurred.
In March 1993, Dean Witter completed a primary initial public offering of
19.9% of its common stock. The Company did not recognize a gain on this
transaction. On June 18, 1993, the Company's Board of Directors approved a tax-
free spin-off of Dean Witter to the Company's common shareholders. Sears common
shareholders of record on June 28, 1993 received, effective June 30, 1993, .39
shares of Dean Witter for each Sears common share owned. This transaction
resulted in a noncash dividend to Sears common shareholders totaling $2.29
billion.
In May 1993, the Company entered into separate agreements to sell the
Coldwell Banker residential business and the mortgage banking operations. A $64
million after-tax loss was recorded in the second quarter of 1993 primarily due
to adverse income tax effects related to the sale of Sears Savings Bank. These
sales were completed in the fourth quarter of 1993.
The operating results of the discontinued operations, other than Allstate,
are summarized below:
<TABLE>
- ---------------------------------------------------------------------
<CAPTION>
Year Ended December 31
- ---------------------------------------------------------------------
millions 1994 1993 1992
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Dean Witter
Revenues -- $2,832 $5,233
Income -- 248 434
Coldwell Banker residential services businesses
Revenues -- $1,204 $1,523
Income (loss) -- (8) 74
Homart
Revenues $266 $ 234 $ 222
Income (loss) 14 (11) (256)
- ---------------------------------------------------------------------
</TABLE>
---
5. RESTRUCTURING
The Company recorded a pretax charge in the fourth quarter of 1992 of $2.68
billion related to discontinuing its domestic catalog operations, offering a
voluntary early retirement program to certain salaried associates, closing
unprofitable retail department and specialty stores, streamlining or
discontinuing various unprofitable merchandise lines and the writedown of
underutilized assets to market value.
During the first quarter of 1992, the Company recorded a $106 million pretax
charge for severance costs related to cost reduction programs for commission
sales and headquarters staff in domestic merchandising.
15
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6. INCOME TAXES
Income (loss) before income taxes (benefit) was as follows:
<TABLE>
- ---------------------------------
<CAPTION>
Year Ended December 31
- ---------------------------------
millions 1994 1993 1992
- ---------------------------------
<S> <C> <C> <C>
Domestic $1,411 $905 $(2,814)
Foreign 60 49 (37)
- ---------------------------------
Total $1,471 $954 $(2,851)
- ---------------------------------
</TABLE>
Federal, state and foreign taxes were as follows:
<TABLE>
- -------------------------------------------------------------
<CAPTION>
Year Ended December 31
- -------------------------------------------------------------
millions 1994 1993 1992
- -------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax
Current $ 324 $ (35) $ 49
Deferred 171 295 (903)
State income tax
Current 45 (5) (14)
Deferred 38 57 (152)
Foreign income tax
Current 51 8 (4)
Deferred (15) 9 (15)
- -------------------------------------------------------------
Income tax provision (benefit) $ 614 $ 329 $ (1,039)
- -------------------------------------------------------------
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
rate was as follows:
<TABLE>
- ------------------------------------------------
<CAPTION>
Year Ended December 31
- ------------------------------------------------
1994 1993 1992
- ------------------------------------------------
<S> <C> <C> <C>
Statutory federal income
tax rate (benefit) 35.0% 35.0% (34.0)%
State income taxes, net of
federal income taxes 3.8 3.6 (3.8)
Deferred income taxes
adjustment for rate change -- (6.0) --
Other 2.9 1.9 1.3
- ------------------------------------------------
Effective income tax rate
(benefit) 41.7% 34.5% (36.5)%
- ------------------------------------------------
</TABLE>
Deferred taxes were recorded based upon differences between the financial
statement and tax bases of assets and liabilities and available tax
carryforwards. The following deferred taxes were recorded:
<TABLE>
- -----------------------------------------------------
<CAPTION>
December 31
- -----------------------------------------------------
Assets/(Liabilities) in millions 1994 1993
- -----------------------------------------------------
<S> <C> <C>
Unearned maintenance income $ 294 $ 336
Loan loss reserves 362 346
Alternative minimum tax credit 57 37
Workers' compensation reserve 62 50
Public liability claims reserve 60 50
Postretirement benefit liability 1,146 1,106
Restructuring reserves 182 400
Other deferred tax assets 605 671
Fixed assets (527) (381)
Prepaid pension (159) (157)
LIFO (169) (134)
Other deferred tax liabilities (308) (399)
- -----------------------------------------------------
Total $1,605 $1,925
- -----------------------------------------------------
</TABLE>
U.S. income and foreign withholding taxes were not provided on certain
unremitted earnings of international affiliates which the Company considers to
be permanent investments. The cumulative amount of unremitted income
for which income taxes have not been provided totaled $341 million at Dec. 31,
1994. Upon remittance of these earnings, taxes of $160 million would be paid.
Income taxes of $470, $(171) and $362 million were paid (refunded) in 1994,
1993 and 1992, respectively. The Company has $57 million of tax credits that
can be carried forward indefinitely resulting from alternative minimum tax
payments. Net operating loss carryforwards from Canadian operations of $11 and
$43 million will expire in 1999 and 2000, respectively.
---
7. BENEFIT PLANS
Expenses for retirement and savings-related benefit plans were as follows:
<TABLE>
- ---------------------------------------------------------------------
<CAPTION>
Year Ended December 31
- ---------------------------------------------------------------------
millions 1994 1993 1992
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Savings and Profit Sharing Fund of Sears Employees
Defined contribution $ 61 $ 64 $ 1
Additional ESOP expense (benefit) (4) (23) 47
Pension plans (61) (45) (18)
Retiree insurance benefits 232 249 243
Other plans 8 18 18
- ---------------------------------------------------------------------
Total $236 $263 $291
- ---------------------------------------------------------------------
</TABLE>
---
PROFIT SHARING FUND
Most domestic employees are eligible to become members of The Savings and
Profit Sharing Fund of Sears Employees (the Fund). Beginning in 1994, the
Company contribution is based on 6% of consolidated income, as defined, for the
participating companies. Company contributions are limited to 70% of eligible
deposits. Contributions are allocated to participating companies based on
eligible deposits made by their employees.
In 1993 and 1992, the Company contributed up to 35% of eligible deposits by
Fund participants, and at the Company's discretion an additional contribution
of up to 35% of eligible deposits. Total Company contributions could not exceed
6% of consolidated income, as defined.
The Fund includes an Employee Stock Ownership Plan (the ESOP) to prefund a
portion of the Company's anticipated contribution through 2004. The Company
loaned the ESOP $800 million which it used to purchase
21.9 million (increased to 27.2 million as a result of the Dean Witter spin-
off) Sears common shares in the open market. The loan is repaid with dividends
on ESOP shares and Company contributions. The additional ESOP expense
16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(benefit) included in the benefit plan expense table was computed as follows:
<TABLE>
- ----------------------------------------------------------------
<CAPTION>
Year Ended December 31
- ----------------------------------------------------------------
millions 1994 1993 1992
- ----------------------------------------------------------------
<S> <C> <C> <C>
Interest expense recognized by ESOP $ 64 $ 71 $ 72
Less dividends accrued on ESOP shares (43) (40) (46)
Cost of shares allocated to employees
and plan expenses 56 71 42
- ----------------------------------------------------------------
77 102 68
ESOP expense attributable to
discontinued operations (24) (63) (21)
Reduction of defined contribution
due to ESOP (57) (62) --
- ----------------------------------------------------------------
Additional ESOP expense (benefit) $ (4) $ (23) $ 47
- ----------------------------------------------------------------
</TABLE>
The Company contributed $91, $45 and $36 million to the ESOP in 1994, 1993
and 1992, respectively. At Dec. 31, 1994, total committed to be released,
allocated and unallocated ESOP shares were 2.0, 5.6 and 19.6 million,
respectively. Refer to note 4 for a discussion of the proposed split of the
ESOP.
---
PENSION PLANS
Substantially all domestic full-time and certain part-time employees are
eligible to participate in noncontributory defined benefit plans after meeting
age and service requirements. Substantially all Canadian employees are eligible
to participate in contributory defined benefit plans. Pension benefits are
based on length of service, compensation and, in certain plans, Social Security
or other benefits. Funding for the various plans of the Company is determined
using various actuarial cost methods, and amounted to $81, $12 and $13 million
for 1994, 1993 and 1992, respectively.
Pension benefit was comprised of the following:
<TABLE>
- --------------------------------------------------------------
<CAPTION>
Year Ended December 31
- --------------------------------------------------------------
millions 1994 1993 1992
- --------------------------------------------------------------
<S> <C> <C> <C>
Benefits earned during the period $ 81 $ 74 $ 108
Interest on projected benefit obligation 196 225 210
Actual return on plan assets 12 (514) (134)
Net amortization and deferral (350) 170 (202)
- --------------------------------------------------------------
Pension benefit $ (61) $ (45) $ (18)
- --------------------------------------------------------------
</TABLE>
The weighted average discount rate and rate of increase in compensation used
in determining the actuarial present value of the projected benefit obligations
were 9.0% and 4.0% in 1994, 7.5% and 3.75% in 1993 and 8.5% and 5.5% in 1992.
The expected long-term rate of return on plan assets used in determining net
periodic pension cost was 9.5% in 1994, 1993 and 1992.
The plans' funded status was as follows:
<TABLE>
- ------------------------------------------------------------------------------
<CAPTION>
December 31
- ------------------------------------------------------------------------------
1994 1993
- ------------------------------------------------------------------------------
Assets Accumu- Assets Accumu-
exceed lated exceed lated
accumu- benefits accumu- benefits
lated exceed lated exceed
millions benefits assets benefits assets
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations
Vested benefit obligation $1,718 $ 71 $2,770 $ 130
- ------------------------------------------------------------------------------
Accumulated benefit obligation $1,842 $ 72 $2,921 $ 132
- ------------------------------------------------------------------------------
Projected benefit obligation (PBO) $2,027 $ 77 $3,081 $ 152
Plan assets at fair value, primarily
publicly traded stocks and bonds 2,070 6 3,225 --
- ------------------------------------------------------------------------------
PBO less than (in excess of) plan
assets 43 (71) 144 (152)
Unrecognized net loss 329 12 393 17
Unrecognized prior service cost 58 -- 66 --
Unrecognized transitional (asset)
obligation (64) -- (154) --
Adjustment required to recognize
minimum liability -- (13) -- (14)
- ------------------------------------------------------------------------------
Prepaid (accrued) pension
cost in the Balance Sheet at
Dec. 31 $ 366 $(72) $ 449 $(149)
- ------------------------------------------------------------------------------
</TABLE>
Included in the Company's 1992 restructuring charges were pension termination
costs and settlement charges of $233 and $141 million, respectively, which were
partially offset by curtailment gains of $75 million.
---
RETIREE INSURANCE BENEFITS
The Company provides certain health care and life insurance benefits for
retired employees. Generally, qualified employees may become eligible for these
benefits if they retire in accordance with the Company's established retirement
policy and are continuously insured under the Company's group plans or other
approved plans for 10 or more years immediately prior to retirement. The
Company shares the cost of the retiree medical benefits with retirees based on
years of service. The Company's share is subject to a 5% limit on annual
medical inflation after retirement. The Company's postretirement benefit plans
are not funded. The Company has the right to modify or terminate these plans.
17
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Postretirement benefit expense was comprised of the following:
<TABLE>
- ------------------------------------------------------
<CAPTION>
Year Ended December 31
- ------------------------------------------------------
millions 1994 1993 1992
- ------------------------------------------------------
<S> <C> <C> <C>
Benefits earned during the period $ 35 $ 30 $ 36
Interest on accumulated postretirement
benefit obligation 197 219 207
- ------------------------------------------------------
Postretirement benefit expense $232 $249 $243
- ------------------------------------------------------
</TABLE>
Included in the Company's 1992 restructuring charges were postretirement
termination costs of $76 million and postretirement curtailment losses of $61
million.
The plans' funded status was as follows:
<TABLE>
- ---------------------------------------------------------------------------
<CAPTION>
December 31
- ---------------------------------------------------------------------------
millions 1994 1993
- ---------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees $2,097 $2,422
Fully eligible active plan participants 151 220
Other active plan participants 258 388
- ---------------------------------------------------------------------------
Accumulated postretirement benefit obligation 2,506 3,030
Unrecognized gain (loss) 304 (287)
- ---------------------------------------------------------------------------
Accrued postretirement benefit cost in the Balance Sheet at
Dec. 31 $2,810 $2,743
- ---------------------------------------------------------------------------
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 9.0% in 1994 and 7.5% in 1993.
The weighted average health care cost trend rate used in measuring the
postretirement benefit expense was
12.5% in 1995 gradually declining to 6% in 2007 and remaining at that level
thereafter. A one percentage point increase in the assumed health care cost
trend rate for each year would increase the accumulated postretirement benefit
obligation by $57 million and would increase the annual postretirement benefit
expense by $8 million.
---
8. BORROWINGS
Short-term borrowings consisted of:
<TABLE>
- --------------------------------------------------
<CAPTION>
December 31
- --------------------------------------------------
millions 1994 1993
- --------------------------------------------------
<S> <C> <C>
Commercial paper $5,919 $4,133
Bank loans 98 107
Agreements with bank trust
departments 87 140
Other loans (principally foreign) 86 256
- --------------------------------------------------
Total short-term borrowings $6,190 $4,636
Weighted average interest rate at
Dec. 31 6.1% 4.2%
Weighted average interest rate at
Dec. 31, including effects of
swaps and caps 6.5% 5.2%
- --------------------------------------------------
</TABLE>
At Dec. 31, 1994, the Company had credit agreements totaling $7.01 billion.
SRAC's credit facilities totaled
$5.10 billion, including $4.50 billion in syndicated credit agreements and $600
million in uniform credit agreements
with individual banks. The Sears Credit Corp. entities, in support of asset-
backed commercial paper, had $1.82 billion in credit lines. Sears Canada had
credit agreements totaling $95 million. These syndicated and uniform credit
agreements provide for loans at prevailing interest rates and mature at various
dates through June 1999. The Company pays commitment fees in connection with
these credit agreements.
The Company had interest rate swap agreements which established fixed rates
on $752 and $824 million of short-term variable rate debt at Dec. 31, 1994 and
1993, resulting in weighted average interest rates of 9.1% and 9.0%,
respectively. The weighted average maturity of agreements in effect on Dec. 31,
1994 was approximately fifteen years. Due to interest rate caps, the Company
had maximum weighted average interest rates of 9.0% on $450 million of debt at
Dec. 31, 1994 and 7.7% on $900 million of debt at Dec. 31, 1993. The weighted
average maturity of cap agreements in effect on Dec. 31, 1994 was approximately
two years.
Long-term debt was as follows:
<TABLE>
- -----------------------------------------------------------------------------
<CAPTION>
millions December 31
- -----------------------------------------------------------------------------
ISSUE 1994 1993
- -----------------------------------------------------------------------------
<S> <C> <C>
SEARS, ROEBUCK AND CO.
6.25% to 9.5% Notes, due 1994 to 2004 $1,950 $ 2,231
8.2% Extendable Notes, due 1999 31 31
6% Debentures, $300 million face value, due 2000, effective
rate 14.8% 205 194
9.375% Debentures, due 2011 300 300
4.85% to 10.0% Medium-Term Notes,
due 1994 to 2021 3,963 3,656
Capitalized lease obligations 40 43
SEARS ROEBUCK ACCEPTANCE CORP.
6.05% to 6.6% term loans, due 1996 to 1999 845 --
SEARS DC CORP.
5.19% to 9.26% Medium-Term Notes,
due 1994 to 2012 1,521 2,148
SEARS OVERSEAS FINANCE N.V. (GUARANTEED BY
SEARS, ROEBUCK AND CO.)
Zero Coupon Bonds, $400 million face value,
due 1994, effective rate 12.8% -- 382
Zero Coupon Bonds, $500 million face value,
due 1998, effective rate 12.0% 336 300
SEARS CANADA INC.
9 1/4% to 11 3/4% Debentures, due 1994 to 2000 328 357
Notes, mortgages, bonds and capitalized leases 138 237
SEARS CANADA RECEIVABLES TRUST
5.65% to 8.95% Receivables Trusts,
due 1997 to 2004 302 113
SEARS ACCEPTANCE CO. LTD.
9 5/8% to 15 1/8% Secured Debentures,
due 1994 to 2000 59 99
SEARS ROEBUCK DE MEXICO, S.A. DE C.V.
16% Bank Notes, due 1996 120 --
Notes payable to banks 21 38
OTHER SUBSIDIARIES
Participating mortgages, $850 million face value, due 2005,
effective rate 8.7%, collateralized by Sears Tower and
related properties -- 835
Notes and capitalized leases 41 41
Long-term debt attributed to discontinued operations, 7.0%
weighted average rate (215) (215)
- -----------------------------------------------------------------------------
9,985 10,790
Less current maturities 1,141 2,603
- -----------------------------------------------------------------------------
Total long-term debt $8,844 $ 8,187
- -----------------------------------------------------------------------------
</TABLE>
18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
On Nov. 7, 1994, the Company transferred Sears Tower and all related assets
and liabilities to a third party as trustee of a trust and was released from
the related non-recourse mortgages encumbering the building. The second
mortgagee is the residual beneficiary of the trust. The Company is the current
income beneficiary, but cannot receive distributions as beneficiary until all
debt which encumbers Sears Tower is repaid. An affiliate of the second
mortgagee is responsible for operating Sears Tower. As a result of this
transfer, assets and long-term debt were reduced by $501 and $845 million,
respectively, and other liabilities were increased by $25 million, resulting in
an after-tax extraordinary gain of $195 million ($319 million pretax) related
to the early extinguishment of debt.
During the second quarter of 1993, the Company recorded an extraordinary loss
of $145 million after taxes ($234 million pretax) related primarily to payments
to terminate interest rate swaps associated with retired commercial paper that
was allocated to the funding of discontinued operations.
In the third quarter of 1993, the Company recorded an extraordinary loss of
$66 million after taxes ($107 million pretax) related to the call of 7% deep-
discount debentures due to mature Nov. 15, 2001.
As of Dec. 31, 1994, long-term debt maturities for the next five years were
as follows:
<TABLE>
- ------------------
<CAPTION>
Year
Ended
December
31 millions
- ------------------
<S> <C>
1995 $1,141
1996 1,726
1997 1,957
1998 1,714
1999 1,126
- ------------------
</TABLE>
The Company's continuing operations paid interest of $1.2, $1.2 and $1.3
billion for the years ended Dec. 31, 1994, 1993 and 1992, respectively.
Interest capitalized was $1, $3 and $23 million for the years ended Dec. 31,
1994, 1993 and 1992.
---
9. LEASE AND SERVICE AGREEMENTS
The Company leases certain stores, office facilities, computers and automotive
equipment.
Operating and capital lease obligations are based upon contractual minimum
rates and, for certain stores, amounts in excess of these minimum rates are
payable based upon specified percentages of sales. Certain leases include
renewal or purchase options. Operating lease rentals were $341, $314 and $496
million, including contingent rentals of $62, $53 and $48 million, for the
years ended Dec. 31, 1994, 1993 and 1992.
Minimum fixed lease obligations, excluding taxes, insurance and other
expenses payable directly by the Company, for leases in effect as of Dec. 31,
1994 were:
<TABLE>
- -----------------------------------------------------------------------------
<CAPTION>
millions Capital Operating
Year Ended December 31 leases leases
- -----------------------------------------------------------------------------
<S> <C> <C>
1995 $ 33 $ 146
1996 32 125
1997 30 107
1998 30 99
1999 29 94
After 1999 346 433
- -----------------------------------------------------------------------------
Minimum payments 500 $1,004
- -----------------------------------------------------------------------------
Executory costs (principally taxes) 39
Imputed interest 291
- -------------------------------------------------------------------
Present value of minimum lease payments, principally long-
term $170
- -------------------------------------------------------------------
</TABLE>
The Company has a minority interest in Advantis, which began operations in
December 1992. Advantis provides data and voice networking and information
processing services to the Company. Total expenses incurred by the Company for
these services during the years ended Dec. 31, 1994 and 1993 were $311 and $325
million, respectively. The Company has committed to purchase services of at
least $330 million annually through 2002.
---
10. FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets, incurs various financial liabilities and enters into agreements
involving off-balance-sheet financial instruments. The fair value estimates of
financial instruments presented below are not necessarily indicative of the
amounts the Company might pay or receive in actual market transactions.
Potential taxes and other transaction costs have also not been considered in
estimating fair value. As a number of the Company's significant assets,
including merchandise inventories, property and equipment and deferred income
taxes, and liabilities are not considered financial instruments, the
disclosures below do not reflect the fair value of the Company as a whole.
19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL ASSETS
The Company had the following financial assets:
<TABLE>
- --------------------------------------------------------------
<CAPTION>
December 31
- --------------------------------------------------------------
1994 1993
- --------------------------------------------------------------
Carrying Fair Carrying Fair
millions Value Value Value Value
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Retail customer receivables $18,201 $19,758 $15,906 $18,058
Other receivables 321 321 1,062 1,062
Cash and invested cash 548 548 1,066 1,066
Other 2 2 3 3
- --------------------------------------------------------------
</TABLE>
Retail customer receivables are valued by discounting estimated cash flows.
The estimated cash flows reflect the historical cardholder payment experience
and are discounted at a risk-adjusted market rate.
Other receivables and other financial assets are short-term in nature and as
such, their carrying value approximates fair value.
---
FINANCIAL LIABILITIES
The Company had the following financial liabilities:
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
December 31
- -------------------------------------------------------------------------------
1994 1993
- -------------------------------------------------------------------------------
Carrying Fair Carrying Fair
millions Value Value Value Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term debt (excluding capitalized leases) $9,815 $9,851 $10,607 $11,553
Short-term borrowings 6,190 6,190 4,636 4,636
Other 3,255 3,255 3,173 3,173
- -------------------------------------------------------------------------------
</TABLE>
Long-term debt is valued based on quoted market prices when available or
discounted cash flows, using interest rates currently available to the Company
on similar borrowings. Short-term borrowings and other short-term financial
liabilities are short-term in nature and as such, their carrying value
approximates fair value.
---
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The Company is a party to off-balance-sheet financial instruments to manage
market and interest rate risk. These financial instruments involve, to varying
degrees, elements of market, credit and interest rate risk in excess of amounts
recognized in the balance sheet. The Company does not require collateral or
other security to support the financial instruments with credit risk, unless
noted otherwise.
Debt-related
The Company had the following off-balance-sheet financial instruments related
to its outstanding borrowings at Dec. 31, 1994 and 1993:
<TABLE>
- ------------------------------------------------------------------
<CAPTION>
December 31, 1994
- ------------------------------------------------------------------
Contract or
Notional Fair Carrying
millions Amount Value Value
- ------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate swap agreements:
Pay floating rate, receive fixed rate $805 $ (37) $ --
Pay fixed rate, receive floating rate 752 (180) --
Interest rate cap agreements 450 2 --
- ------------------------------------------------------------------
<CAPTION>
December 31, 1993
- ------------------------------------------------------------------
Contract or
Notional Fair Carrying
millions Amount Value Value
- ------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate swap agreements:
Pay fixed rate, receive floating rate $824 $(384) $ --
Interest rate cap agreements 900 1 --
- ------------------------------------------------------------------
</TABLE>
The Company uses interest rate swaps and caps to manage the interest rate
risk associated with its borrowings and to manage the Company's allocation of
fixed and variable rate debt. For pay floating rate, receive fixed rate swaps,
the Company paid a weighted average rate of 5.13% and received a weighted
average rate of 6.76% in 1994. For pay fixed rate, receive floating rate swaps,
the Company paid a weighted average rate of 9.03% and received a weighted
average rate of 4.63% in 1994. The fair values of interest rate swaps and caps
are based on prices quoted from dealers. At Dec. 31, 1994, the Company had
unrealized gains and losses relating to such instruments of $2 and $217
million, respectively. At Dec. 31, 1993, the Company's unrealized gains and
losses were $1 and $384 million, respectively. If a counterparty fails to meet
the terms of a swap or cap agreement, the Company's exposure is limited to the
net amount that would have been received, if any, over the agreement's
remaining life. At Dec. 31, 1994, interest rate swap agreements with notional
amounts of $36, $733 and $788 million had maturity dates within one year, from
two to five years and greater than five years, respectively. At Dec. 31, 1994,
interest rate cap agreements with notional amounts of $250 and $200 million had
maturity dates within one year and from two to five years, respectively.
20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Credit-related
The Company had outstanding securitized retail customer receivables sold with
recourse of $3.95 and $5.17 billion at Dec. 31, 1994 and 1993, respectively.
These receivables represent conditional commitments of the Company to guarantee
performance to a third party. A portion of the securitized receivables are
collateralized by personal property. The Company's credit risk exposure was
contractually limited to $473 and $616 million at Dec. 31, 1994 and 1993,
respectively. The Company had accrued liabilities associated with this credit
exposure included in the balance sheet of $170 and $244 million at Dec. 31,
1994 and 1993, respectively.
The Company had a financial guaranty of $78 and $75 million at Dec. 31, 1994
and 1993, respectively. This guaranty represents a commitment by the Company to
guarantee the performance of certain municipal bonds issued in connection with
the Company's headquarters building for its domestic operations. No amounts
were accrued in the balance sheet for any potential loss associated with this
guaranty at Dec. 31, 1994 and 1993.
----
11. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The Company grants credit to customers throughout the nation. The five states
in which the Company had the largest amount of retail customer receivables,
including those sold with recourse, were as follows:
<TABLE>
- ---------------------------
<CAPTION>
December 31
- ---------------------------
millions 1994 1993
- ---------------------------
<S> <C> <C>
California $2,009 $1,758
Texas 1,717 1,661
Florida 1,612 1,512
Pennsylvania 1,216 1,115
New York 1,186 1,095
- ---------------------------
</TABLE>
12. LEGAL PROCEEDINGS
Various legal and governmental proceedings are pending against the Company,
many involving routine litigation incidental to the businesses. Other matters
contain allegations which are nonroutine and involve compensatory, punitive or
antitrust treble damage claims in very large amounts, as well as other types of
relief.
The consequences of these matters are not presently determinable but, in the
opinion of management, the ultimate liability in excess of reserves currently
recorded will not have a material effect on the results of operations,
financial position, liquidity or capital resources of the Company.
----
13. SHAREHOLDERS' EQUITY
DIVIDEND PAYMENTS
Certain indentures relating to the long-term debt of Sears, Roebuck and Co.,
which represent the most restrictive contractual limitation on the payment of
dividends, provide that the Company cannot take specified actions, including
the declaration of cash dividends, which would cause its consolidated
unencumbered assets, as defined, to fall below 150% of its consolidated
liabilities, as defined. At Dec. 31, 1994, approximately $8.0 billion could be
paid in dividends to shareholders under the most restrictive indentures. If the
proposed distribution had occurred on Dec. 31, 1994, approximately $1.0 billion
could be paid in dividends.
As of Dec. 31, 1994, subsidiary companies could remit to Sears, Roebuck and
Co. in the form of dividends approximately $5.0 billion, after payment of all
related taxes, without prior approval of regulatory bodies or violation of
contractual restrictions.
----
PREFERRED SHARES
The 8.88% Preferred Shares, First Series (8.88% Preferred Shares) were issued
in the form of 13 million depositary shares having cumulative dividends of
$2.22 annually and a liquidation preference of $25 per depositary share, plus
accrued and unpaid dividends. On or after Nov. 9, 1996, the Company may, at its
option, redeem the 8.88% Preferred Shares, in whole or in part, at any time at
a redemption price of $25 per depositary share, plus accrued and unpaid
dividends to the redemption date.
In the event that dividends payable on the preferred stock are in arrears for
six quarterly periods, holders of such stock together shall have the right to
elect two additional directors of the Company until all cumulative dividends
have been paid or set apart for payment. Additionally, dividends cannot be paid
on the Company's common shares if dividends on the preferred shares are in
arrears.
21
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Series A Mandatorily Exchangeable Preferred Shares (PERCS) were issued in
the form of 28.75 million depositary shares having an annual, cumulative
dividend of $3.75 per depositary share. The PERCS had voting rights (equivalent
to one-fourth of a vote for each depositary share) and a liquidation preference
of $43 per depositary share. The Company exchanged the PERCS for common shares
on Mar. 20, 1995. Holders of depositary shares received 1.24 common shares for
each depositary share. The total number of common shares deliverable upon
exchange was 35.7 million.
---
STOCK OPTION PLANS
Options to purchase common stock of the Company have been granted to employees
under various plans at prices equal to the fair market value of the stock on
the dates the options were granted. In addition, the Company may pay to the
optionee in connection with certain options an amount generally equal to the
maximum statutory corporate federal income tax rate then in effect (not to
exceed 46%) times the difference between the market price and the option price.
Options are generally exercisable in not more than four equal, annual
cumulative installments beginning one year after the date of grant, and
generally expire in 10 or 12 years.
Changes in stock options were as follows:
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31
- -------------------------------------------------------------------------------
thousands of shares 1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance 6,800 11,335 13,305
Granted 6,351 2,281 220
Exercised (953) (5,689) (1,728)
Canceled or expired (675) (2,587) (462)
Adjustment due to Dean Witter
distribution -- 1,460 --
- -------------------------------------------------------------------------------
Ending balance 11,523 6,800 11,335
- -------------------------------------------------------------------------------
Reserved for future
grant at year-end 8,855 2,551 3,059
Exercisable 3,480 2,894 7,722
- -------------------------------------------------------------------------------
Option prices per share:
Granted $46.32-$51.19 $34.01-$58.00 $41.25-$45.75
Exercised 20.09- 39.68 19.90- 47.57 26.69- 43.13
Canceled or expired 22.91- 48.57 22.91- 57.88 26.69- 51.25
- -------------------------------------------------------------------------------
Exercise prices of ending balance $19.90-$58.00 $19.90-$58.00 $25.94-$57.88
- -------------------------------------------------------------------------------
</TABLE>
In 1993, the number and exercise price of outstanding stock options were
adjusted to account for the dilutive effect of the spin-off of Dean Witter.
14. SUMMARY OF SEGMENT DATA
The Company operates primarily in retailing. The following three-year summary
includes a refinement within segments. Corporate assets are principally
investments, real estate and ventures not included in the business segments.
Corporate results include items of an overall holding company nature including
the portion of administrative costs and interest not allocated to the Company's
businesses.
<TABLE>
- -------------------------------------------------------------------------
<CAPTION>
millions 1994 1993 1992
- -------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
- -------------------------------------------------------------------------
Domestic operations $29,376 $26,776 $29,108
International operations 3,649 3,668 3,835
- -------------------------------------------------------------------------
Total $33,025 $30,444 $32,943
- -------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT)
- -------------------------------------------------------------------------
Domestic operations $ 1,484 $ 1,141 $ 384
International operations 46 32 72
Corporate (59) (219) (525)
Restructuring -- -- (2,782)
- -------------------------------------------------------------------------
Total $ 1,471 $ 954 $(2,851)
- -------------------------------------------------------------------------
NET INCOME (LOSS)
- -------------------------------------------------------------------------
Domestic operations $ 897 $ 744 $ 229
International operations (7) 8 29
Corporate (33) (127) (324)
Restructuring -- -- (1,745)
Cumulative effect of accounting changes -- -- (1,511)
Discontinued operations 402 1,960 (610)
Extraordinary gain (loss) 195 (211) --
- -------------------------------------------------------------------------
Total $ 1,454 $ 2,374 $(3,932)
- -------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------
Domestic operations $27,035 $24,995 $24,405
International operations 2,527 2,691 2,564
Corporate 527 1,974 2,910
Intergroup eliminations and reclassifications (8) (450) (1,070)
Net assets of discontinued operations 7,231 8,701 10,731
- -------------------------------------------------------------------------
Total $37,312 $37,911 $39,540
- -------------------------------------------------------------------------
</TABLE>
22
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
Five-year SUMMARY
of CONSOLIDATED FINANCIAL DATA
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
$ millions, except per
common share data 1994 1993 1992 1991 1990
.........................................................................................
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
.........................................................................................
Revenues $ 33,025 $ 30,444 $32,943 $ 32,250 $ 32,769
Costs and expenses 30,320 28,307 31,752 30,481 30,890
Restructuring -- -- 2,782 -- 265
Interest 1,279 1,318 1,389 1,568 1,651
Operating income (loss) 1,426 819 (2,980) 201 (37)
Other income (loss) 45 135 129 85 (21)
Income (loss) before
income taxes (benefit) 1,471 954 (2,851) 286 (58)
Income taxes (benefit) 614 329 (1,039) 126 (13)
Income (loss) from
continuing operations 857 625 (1,812) 160 (45)
Income (loss) from
discontinued operations 402 1,960 (247) 1,119 947
Extraordinary gain (loss) 195 (211) -- -- --
Cumulative effect of
accounting changes -- -- (1,873) -- --
Net income (loss) 1,454 2,374 (3,932) 1,279 902
.........................................................................................
FINANCIAL POSITION
.........................................................................................
Retail customer
receivables $ 18,201 $ 15,906 $13,878 $ 13,537 $ 15,230
Property and equipment,
net 4,253 4,401 4,574 4,898 4,646
Merchandise inventories 4,044 3,518 4,048 4,459 4,074
Net assets of
discontinued
operations 7,231 8,701 10,731 11,038 9,707
Total assets 37,312 37,911 39,540 38,636 36,907
Short-term borrowings 6,190 4,636 4,469 1,775 7,322
Long-term debt 9,985 10,790 12,432 16,398 10,782
Total debt 16,175 15,426 16,901 18,173 18,104
Percent of debt to
equity 150% 154% 157% 128% 141%
Shareholders' equity $ 10,801 $ 11,664 $10,773 $ 14,188 $ 12,824
.........................................................................................
SHAREHOLDERS' COMMON
STOCK INVESTMENT
.........................................................................................
Book value per common
share (year-end) $ 26.91 $ 29.58 $ 27.89 $ 40.29 $ 37.38
Shareholders 262,387 291,320 337,892 342,851 345,071
Average common shares
outstanding (millions) 389 383 370 344 343
Earnings (loss) per
common share
Income (loss) from
continuing operations $ 2.13 $ 1.56 $ (4.98) $ 0.45 $ (0.13)
Income (loss) from
discontinued
operations 1.03 5.12 (0.67) 3.26 2.76
Extraordinary gain
(loss) 0.50 (0.55) -- -- --
Cumulative effect of
accounting changes -- -- (5.07) -- --
Net income (loss) 3.66 6.13 (10.72) 3.71 2.63
Cash dividends declared
per common share $1.60 $1.60 $2.00 $2.00 $2.00
Cash dividend payout
percent 43.7% 26.1% N/M 53.9% 76.0%
Market price--common
stock (high-low) 55 1/8-42 1/8 60 1/8-39 7/8 48-37 43 1/2-24 3/8 41 7/8-22
Closing market price at
year-end 46 52 7/8 45 1/2 37 7/8 25 3/8
Price/earnings ratio
(high-low) 15-12 10-7 N/M 12-7 16-8
.........................................................................................
</TABLE>
Operating results and financial position reflect Allstate Insurance Group,
Homart Development Co. and affiliated entities, Dean Witter, Discover & Co.
and the Coldwell Banker residential services businesses and commercial
division as discontinued operations. See note 4 to the consolidated financial
statements.
Operating results and financial position for 1994, 1993 and 1992 reflect the
adoption of new accounting rules for postretirement and postemployment
benefits. See note 2 to the consolidated financial statements.
Series A Mandatorily Exchangeable Preferred Shares are considered common
shares for purposes of calculating book value per common share, average common
shares outstanding and earnings (loss) per common share. See note 1 to the
consolidated financial statements.
The percent of debt to equity for 1994 and 1993 is calculated using equity
excluding unrealized net capital gains.
N/M--Not meaningful.
23
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
MANAGEMENT'S Report
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The financial statements, including the financial analysis and all other
information, were prepared by management which is responsible for their
integrity and objectivity. Management believes the financial statements, which
require the use of certain estimates and judgments, fairly and accurately
reflect the Company's financial position and operating results, in accordance
with generally accepted accounting principles. All financial information is
consistent with the financial statements.
Management maintains a system of internal controls which it believes provides
reasonable assurance that, in all material respects, assets are maintained and
accounted for in accordance with management's authorizations and transactions
are recorded accurately in the books and records. The concept of reasonable
assurance is based on the premise that the cost of internal controls should not
exceed the benefits derived. To assure the effectiveness of the internal
control system, the organizational structure provides for defined lines of
responsibility and delegation of authority. The Company's formally stated and
communicated policies demand of employees high ethical standards in their
conduct of its business. These policies address, among other things, potential
conflicts of interest; compliance with all domestic and foreign laws, including
those related to financial disclosure; and the confidentiality of proprietary
information. As a further enhancement of the above, the Company's comprehensive
internal audit program is designed for continual evaluation of the adequacy and
effectiveness of its internal controls and measures adherence to established
policies and procedures.
Deloitte & Touche LLP, independent certified public accountants, have audited
the financial statements of the Company and their report is presented below.
Their audit also includes a study and evaluation of the Company's control
environment, accounting systems and control procedures. The independent
accountants and internal auditors advise management of the results of their
reviews, and make recommendations to improve the system of internal controls.
Management evaluates the audit recommendations and takes appropriate action.
The Audit Committee of the Board of Directors is comprised entirely of
directors who are not employees of the Company. The committee reviews audit
plans, internal control reports, financial reports and related matters and
meets regularly with the Company's management, internal auditors and
independent accountants. The independent accountants and the internal auditors
advise the committee of any significant matters resulting from their audits of
our financial statements and internal controls and have free access to the
committee without management being present.
Edward A. Brennan
Chairman and Chief Executive Officer
James M. Denny
Vice Chairman and Acting Chief Financial Officer
James A. Blanda
Vice President and Controller
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Sears, Roebuck and Co.
We have audited the accompanying Consolidated Balance Sheets of Sears,
Roebuck and Co. as of December 31, 1994 and 1993, and the related Consolidated
Statements of Income, Shareholders' Equity and Cash Flows for each of the three
years in the period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sears, Roebuck and Co. as of
December 31, 1994 and 1993, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1994 in
conformity with generally accepted accounting principles.
As discussed in note 2 to the consolidated financial statements, the Company
changed its method of accounting for postretirement benefits in 1992.
February 24, 1995 DELOITTE & TOUCHE LLP
(May 10, 1995 as to Note 4) Chicago, Illinois
24
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Quarterly RESULTS (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter Year
............................................................................................................
millions, except per
common share data 1994 1993 1994 1993 1994 1993 1994 1993 1994 1993
............................................................................................................
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues, prior basis $12,266 $11,298 $13,008 $12,157 $13,206 $12,719 $15,440 $14,664 $53,920 $50,838
Discontinued operations 5,384 5,163 5,380 5,283 5,457 5,371 5,504 5,350 21,725 21,167
Reclassification of
Corporate revenues to
other income 22 30 23 27 26 24 2 25 73 106
Reclassification of
revenues of licensed
departments 235 211 205 208 203 192 260 268 903 879
As restated 7,095 6,316 7,810 7,055 7,926 7,516 10,194 9,557 33,025 30,444
............................................................................................................
Operating income (loss),
prior basis (389) 318 786 599 470 518 753 671 1,620 2,106
Discontinued operations (575) 330 469 437 155 298 129 194 178 1,259
Reclassification of
Sears Tower operations
to other income 2 14 3 6 9 5 2 3 16 28
As restated 184 (26) 314 156 306 215 622 474 1,426 819
............................................................................................................
Income (loss) from
continuing operations,
prior basis (98) 317 503 1,093 364 454 490 545 1,259 2,409
Discontinued operations (216) 312 312 989 172 256 134 227 402 1,784
As restated:
Income (loss) from
continuing operations 118 5 191 104 192 198 356 318 857 625
Net income (loss) $ (98) $ 435 $ 503 $ 1,006 $ 364 $ 388 $ 685 $ 545 $ 1,454 $ 2,374
............................................................................................................
Earnings (loss) per
common share, prior
basis
Continuing operations $ (0.27) $ 0.82 $ 1.27 $ 2.86 $ 0.91 $ 1.15 $ 1.24 $ 1.39 $ 3.16 $ 6.22
Discontinued operations (0.56) 0.82 0.80 2.60 0.44 0.66 0.34 0.58 1.03 4.66
As restated:
Income (loss) from
continuing operations 0.29 -- 0.47 0.26 0.47 0.49 0.90 0.81 2.13 1.56
Net income (loss) $ (0.27) $ 1.13 $ 1.27 $ 2.63 $ 0.91 $ 0.98 $ 1.74 $ 1.39 $ 3.66 $ 6.13
............................................................................................................
</TABLE>
Revenues, operating income, net income and related per common share amounts for
1994 and 1993 have been restated to reflect Allstate Insurance Group and Homart
Development Co. and affiliated entities as discontinued operations.
The fourth quarter pretax LIFO adjustments were credits of $58 and $31 million
in 1994 and 1993, compared with charges of $24 and $36 million for the first
nine months of the respective years.
Fourth quarter 1994 results included an extraordinary gain of $195 million
related to the early extinguishment of debt. Second and third quarter 1993
results included extraordinary losses related to early extinguishment of debt
of $145 and $66 million, respectively. See note 8 to the consolidated financial
statements.
Second quarter 1993 discontinued operating results included a $635 million gain
on the initial public offering of The Allstate Corporation.
Total of quarterly earnings per common share may not equal the annual amount as
net income per common share is calculated independently for each quarter.
25
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AND CASH FLOWS INCLUDED IN
EXHIBIT 99 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1994
<PERIOD-END> DEC-31-1994 OCT-1-1994
<CASH> 548 779
<SECURITIES> 0 0
<RECEIVABLES> 19,013 17,497
<ALLOWANCES> 812 795
<INVENTORY> 4,044 4,505
<CURRENT-ASSETS> 24,415 24,398
<PP&E> 8,418 9,085
<DEPRECIATION> 4,165 4,501
<TOTAL-ASSETS> 37,312 38,042
<CURRENT-LIABILITIES> 13,913 14,492
<BONDS> 8,844 9,085
<COMMON> 294 294
1,236 1,236
325 325
<OTHER-SE> 8,946 8,833
<TOTAL-LIABILITY-AND-EQUITY> 37,312 38,042
<SALES> 29,451 20,168
<TOTAL-REVENUES> 33,025 22,831
<CGS> 21,568 14,848
<TOTAL-COSTS> 21,568 14,848
<OTHER-EXPENSES> 8,054 5,712
<LOSS-PROVISION> 698 502
<INTEREST-EXPENSE> 1,279 965
<INCOME-PRETAX> 1,471 847
<INCOME-TAX> 614 346
<INCOME-CONTINUING> 857 501
<DISCONTINUED> 402 268
<EXTRAORDINARY> 195 769
<CHANGES> 0 0
<NET-INCOME> 1,454 769
<EPS-PRIMARY> 3.66 1.92
<EPS-DILUTED> 3.66 0<F1>
<FN>
<F1>Not applicable
</FN>
</TABLE>
