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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 1998
Commission file number 1-416
SEARS, ROEBUCK AND CO.
(Exact name of registrant as specified in its charter)
New York 36-1750680
(State of Incorporation) (I.R.S. Employer Identification No.)
3333 Beverly Road, Hoffman Estates, Illinois 60179
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 286-2500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ----------------------------------------- ------------------------
Common Shares, par value $0.75 per share New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Extendable Notes due April 15, 1999 New York Stock Exchange
9-1/2% Notes due June 1, 1999 New York Stock Exchange
On January 30, 1998 Registrant had 390,862,644 common shares outstanding. Of
these, 352,632,488 common shares, having an aggregate market value (based on
the closing price of these shares as reported in a summary of composite
transactions in The Wall Street Journal for stocks listed on the New York
Stock Exchange on January 30, 1998) of approximately $16.2 billion, were
owned by shareholders other than directors and executive officers of the
Registrant, The Sears 401(k) Profit Sharing Plan and any other person known
by the Registrant as of the date hereof to beneficially own five percent or
more of Registrant's common shares.
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<PAGE>
Registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months and (2) has been subject to such filing requirements for the past 90
days.
Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Documents Incorporated By Reference
Parts I and II of this Form 10-K incorporate by reference certain
information from the registrant's 1997 Annual Report to Shareholders (the
"1997 Annual Report"). Part III of this Form 10-K incorporates by reference
certain information from the registrant's definitive Proxy Statement dated
March 26, 1998, for its Annual Meeting of Shareholders to be held on May 14,
1998 (the "1998 Proxy Statement").
<PAGE>
PART I
Item 1. Business
Sears, Roebuck and Co. ("Sears") originated from an enterprise
established in 1886. It was incorporated under the laws of New York in 1906.
Its principal executive offices are located at 3333 Beverly Road, Hoffman
Estates, Illinois. Sears and its consolidated subsidiaries (the "Company")
is a multi-line retailer which provides a wide array of merchandise and
services through two segments - Domestic Operations and International
Operations. The Company is among the largest retailers of merchandise and
services in the world.
The Domestic Operations segment includes the Company's operations in
the United States and Puerto Rico and consist of Retail (comprised of Full-
line Stores and Specialty Stores), Services (comprised of Home Services and
Direct Response Marketing), Credit and Corporate (comprised of the activities
which are of a holding company nature).
The International Operations segment consists of similar retail,
services and credit operations conducted through a majority-owned subsidiary
in Canada.
For further information, see "Domestic Operations" and "International
Operations" below and "Analysis of Consolidated Operations" and "Analysis of
Consolidated Financial Condition" beginning on pages 21 and 27, respectively,
of the 1997 Annual Report, incorporated herein by reference in response to
Item 7 hereof.
________________________________
Information regarding revenues, operating income, net income and
assets of the Company's Domestic Operations segment and International
Operations segment for each of the three fiscal years ended January 3, 1998,
December 28, 1996 and December 30, 1995 is in Note 16 of the Notes to
Consolidated Financial Statements on page 39 of the 1997 Annual Report,
incorporated herein by reference in response to Item 8 hereof. Information
on the components of revenues is included in the "Analysis of Consolidated
Operations" beginning on page 21 of the 1997 Annual Report, incorporated
herein by reference in response to Item 7 hereof.
The Company employs approximately 334,000 people worldwide.
<PAGE>
DOMESTIC OPERATIONS
The Company's Domestic Operations consists of the following:
Retail
At January 3, 1998, Retail consisted of:
- - Full-line Stores, which consist primarily of mall-based
retail stores selling the following categories of
merchandise:
- Softlines, which consist of women's, children's and
men's apparel and home fashions, and are positioned
as the price/value leader among mall-based stores.
- Hardlines, which consist of appliances, electronics
and computers for the home, home improvement
products, sporting goods, lawn and garden equipment
and seasonal items. The Hardlines departments
compete with off-the-mall competitors, which are
typically specialty stores in the same product
category.
- Licensed Businesses, which consist of third party
concessions primarily operated within the Full-line
Stores, and include portrait studios, optical and
other licensees.
- - Specialty Stores, which consist of:
- Home Stores, which consists of specialty store
formats designed to offer the Company's hardlines
merchandise to outlets outside of the Full-line
Stores. The specific store formats are as follows:
- 576 Sears Dealer Stores that are primarily
independently owned and operated and offer
Kenmore and major national brand appliances
and electronics for the home, CRAFTSMAN
tools, DIEHARD batteries and lawn and
garden equipment. Dealer Stores are
primarily located in smaller, rural
markets.
- 255 free-standing Hardware stores,
operating under the name of Sears Hardware
and Orchard Supply Hardware, that offer
convenient neighborhood locations and Sears
proprietary brands such as CRAFTSMAN tools,
as well as a wide assortment of national
brands and other home repair products.
- 129 Sears HomeLife furniture stores which
offer popular furniture brands at value
prices and are located within select major
metropolitan markets. There are 101
freestanding HomeLife stores and an
additional 28 located within Sears Full-
line Stores.
- Commercial Sales, which primarily targets
home builders, remodelers and property
managers for appliance purchases, as well
as vocational schools, factory maintenance
and service companies for industrial tool
purchases. Commercial Sales has also
introduced the Appliance Select program in
52 Full-line Stores. This program targets
the new home buyer and offers a full
selection of KENMORE and major national
brand kitchen and home appliances.
<PAGE>
- - Auto Stores, which consist of two distinct groups,
the Tire Group and the Parts Group:
- The Tire Group is comprised of 780 Sears
Auto Centers primarily located at the mall-
based Full-line Stores and 326 NTB National
Tire & Battery stores. These stores sell
and install tires, automotive batteries and
related goods and services.
- The Parts Group is comprised of:
- 576 Parts America stores that sell
automotive replacement parts to
do-it-yourself customers.
- 808 independently owned and
operated stores that operate under
the Western Auto name and purchase
merchandise wholesale from Western
Auto Supply Company, a subsidiary
of the Company.
- 39 Western Auto stores, located
primarily in Puerto Rico, that
sell automotive parts and repair
services.
The Auto Stores, which are the country's largest seller of
tires and auto batteries, are positioned to compete
effectively with the strongest competitors that specialize
in selling automotive parts and tires, batteries and related
services.
Services
At January 3, 1998, Services consisted of:
- - Home Services, which included:
- Product Services (repair services), which provides
product repair on all major brands of appliances
and consumer electronics, regardless of where
purchased.
- Service Contracts, which provides extended warranty
coverage through maintenance agreements.
- Installed Home Improvements, which includes the
following services provided through Sears
associates and outside contractors:
- Home Improvement Services, which sells and
installs siding, windows, roofing, cabinet
refacing and other home improvements and
provides services such as pest control,
carpet cleaning and plumbing and electrical
services.
<PAGE>
- Air Conditioning and Heating Systems, which
sells and installs heating, ventilation and
air conditioning for homes.
- Installation Services which installs water
heaters, dishwashers and other products.
- Direct Response Marketing, which markets various goods and
services through multiple media, includes specialty
catalogs, insurance (credit protection and life), clubs and
services, and impulse and continuity merchandise. Sears
Shop at Home Services, Inc., a wholly-owned subsidiary of
the Company, licenses to third-party distributors of
specialty catalogs and merchandisers of shop-at-home
services use of the Sears name and customer lists.
------------
The pricing strategy for the Retail and Services businesses is to
offer customers good values every day, as well as to have special sales
events and promotions offering additional values. Through these operations,
the Company offers a mixture of national brands and high quality private
label merchandise.
Credit
The products offered by the Company's domestic credit operations
("Credit") make it more attractive for customers to purchase goods and
services from the Retail and Services businesses. As of December 1997,
Credit had approximately 27.0 million active customer credit accounts
(accounts with balances as of the beginning or end of December 1997) with an
average balance of $1,058. Sears Card, the traditional charge card,
accounted for approximately 90% of total receivables. There were
approximately 41 million Sears Card customers with accounts that were active
during any month in 1997.
Sears stores also accept third party credit and debit cards such as
VISA, MasterCard, American Express and Discover Card. Sears Card as a
percentage of total sales in the Full-line and the majority of the specialty
store formats was approximately 55.1%, 56.6% and 56.6% for fiscal years
1997, 1996 and 1995, respectively. Since August 1, 1993, when Sears began to
accept VISA, MasterCard and American Express cards at all Sears stores, the
Company has focused intensely on marketing and other initiatives that are
designed to maintain the penetration of Credit products in all sales and
service channels, as well as to increase the revenues of the Retail and
Services businesses.
Sears has an ongoing securitization program through which a portion
of domestic customer receivable balances are sold through SRFG, Inc., a
wholly-owned subsidiary, to a master trust (the "Master Trust") that issues
credit account pass-through certificates to public and private investors.
The receivables represented by the pass-through certificates sold to third
parties qualify as sales for financial statement purposes and as such the
receivables are removed from the consolidated balance sheet. The balance of
the receivables in the Master Trust, which are not sold to third parties, is
presented as retained interest in transferred credit card receivables.
Pursuant to contractual agreements, Sears remains the servicer on the
accounts and receives a fee for the services performed. See "Analysis of
Consolidated Operations," "Analysis of Consolidated Financial Condition" and
Notes 1 and 8 of the Notes to Consolidated Financial Statements beginning on
pages 21, 27, 31 and 36, respectively, of the 1997 Annual Report,
incorporated herein by reference in response to Items 7 and 8 hereof.
<PAGE>
Credit's operations are subject to federal and state legislation,
including the consumer credit laws of each state in which its customers
reside. From time to time, such legislation, as well as competitive
conditions, may affect, among other things, credit card finance charges.
While the Company cannot predict the effect of future competitive conditions
and legislation or the measures which the Company might take in response
thereto, a significant reduction in the finance charges imposed by Credit
could have an adverse effect on the Company. In addition, changes in general
U.S. economic conditions, including, but not limited to, higher interest
rates and continuing increases in delinquencies, charge-offs and personal
bankruptcies could have an adverse effect on the Company. As a result of
litigation arising in 1997 with respect to reaffirmations of amounts owed by
debtors seeking relief under Chapter 7 of the United States Bankruptcy Code,
and the related review of the Company's practices, future recoveries of
balances charged-off may be adversely affected.
Sears National Bank (the "Bank"), a wholly-owned subsidiary of the
Company acquired in 1994, is a credit card bank limited to engaging solely in
credit card operations and is subject to certain other restrictions
applicable to credit card banks under federal law. In 1994, the Bank became
the issuer of Sears Card accounts in Arizona. Beginning in May 1995, the
Company has transferred to the Bank and the Bank now originates Sears Card
accounts in all fifty states. Certain of the Company's other customer credit
accounts have also been transferred to or are being originated by the Bank.
For additional information regarding Credit, see "Analysis of
Consolidated Operations" beginning on page 21 of the 1997 Annual Report,
incorporated herein by reference in response to Item 7 hereof.
Corporate
Corporate operations include activities that are of an overall
holding company nature, primarily consisting of administrative activities,
the costs of which are not allocated to the Company's businesses.
Strategic Initiatives
The Company's objective is to be a compelling place for customers to
shop, associates to work and equity holders to invest. The Company strives
to achieve this objective by focusing on five priorities: focusing on core
businesses, serving the target customer, being market driven, achieving
consistent productivity improvement and driving organizational
transformation.
The Company strives to become a compelling place to shop by
strengthening its apparel offerings, converting non-selling space into
productive selling space, building underdeveloped merchandise categories,
investing in private brands, expanding into both urban and smaller markets
and leveraging expenses through cost control and productivity improvements.
The Company is also seeking to drive the growth of its services business
through technological innovations, increased marketing of the HomeCentral
brand and acquisition of additional home improvement capabilities; and its
direct response business by capitalizing on its extensive customer data base.
The Company strives to be a compelling place to work by tying
associate compensation to their performance, as well as the performance of
the business. The Company has extended stock option grants and introduced a
discount stock purchase plan for all full-time and part-time regular
associates.
<PAGE>
The Company believes that by making its stores compelling places to
shop and its workplace a compelling place to work, shareholder value will
follow, making Sears a compelling place to invest. The Company also remains
committed to its strategy of growing the business and creating value by
leveraging what the Company believes to be its strengths, its reputation for
trust, integrity and fair value, its broad array of private and national
brands and its proprietary credit card.
--------------------
For further information, see "Properties" below and "Analysis of
Consolidated Financial Condition" beginning on page 27 of the 1997 Annual
Report incorporated herein by reference in response to Item 7 hereof.
Sources of Merchandise
At January 3, 1998, Domestic Operations purchased goods primarily
from approximately 4,500 domestic suppliers, most of whom have been suppliers
for many years.
Seasonality
Due to holiday buying patterns, merchandise sales are traditionally
higher in the fourth quarter than in the other quarterly periods and a
disproportionate share of operating income is typically earned in the fourth
quarter. Similarly, traditional business patterns generally result in the
lowest sales and operating income in the first quarter.
Trademarks
The name "SEARS" is used extensively in the Company's Domestic
Operations and other businesses. The Company's right to the name "SEARS"
domestically continues so long as it uses the name. The name is also the
subject of numerous renewable United States and foreign trademark and service
mark registrations. This trade and service mark is material to the Company's
Domestic Operations and other related businesses.
The Company sells private label merchandise under a number of brand
names which are important to Domestic Operations. Sears KENMORE, CRAFTSMAN
and DIEHARD brands are among the strongest private label brands in retailing.
These names are the subject of numerous renewable United States and foreign
trademark and service mark registrations. Other important and well-
recognized Company trademarks and service marks include BRAND CENTRAL,
HOMELIFE, CIRCLE OF BEAUTY and CANYON RIVER BLUES. The Company's right to
all of its brand names continues so long as it uses the names.
Competition
The domestic retail, credit and services businesses are highly
competitive. Convenience of shopping facilities, quality of merchandise,
competitive prices, brand names and availability of services such as credit,
product delivery, repair and installation are the principal factors which
differentiate competitors. The Company believes it is able to compete very
effectively despite strong competitive pressures in recent years.
Employees
Domestic Operations employs approximately 296,000 people, including
part-time employees.
<PAGE>
Properties
The Company's principal executive offices are located on a 200-acre
site owned by the Company at Prairie Stone, in Hoffman Estates, Illinois.
The complex consists of six interconnected office buildings totaling
approximately two million gross square feet of office space.
The following table sets forth information concerning stores operated
by Domestic Operations.
<TABLE>
<CAPTION>
Full-line Auto Stores Home Stores
Stores Tire(a) Parts(b) HomeLife(c) Hardware Dealer Other(d) Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stores at January 3, 1998: 460 598 129 31 13 2 18 1,251
Leased(e)
Operating Leases 325 491 486 58 228 - 26 1,614
Capital Leases(f) 48 17 - 12 14 - - 91
Independently owned and
operated Dealer Stores - - - - - 574 - 574
Total Stores at Fiscal Year-End
1994 800 1,007 384 72 80 285 70 2,698
Stores opened during fiscal 1995 16 37 215 26 45 98 7 444
Stores closed during fiscal 1995 (10) (13) (17) (1) (17) (8) (6) (72)
1995 806 1,031 582 97 108 375 71 3,070
Stores opened during fiscal 1996 27 40 67 12 136(j) 120 9 411
Stores closed during fiscal 1996 (12) (13) (22) (2) (15) (26) (20) (110)
1996 821 1,058 627 107 229 469 60 3,371
Stores opened during fiscal 1997 21 68 90 3 33 124 - 339
Stores closed duting fiscal 1997 (9) (20) (102) (9) (7) (17) (16) (180)
1997 833 1,106 615 101 255 576 44 3,530
Gross Retail Area at
Fiscal Year End
(square feet in millions)
1997 110.3 15.9 6.6 3.6 8.2 4.7 1.7 151.0
1996 108.4 15.2 6.9 3.8 6.1 3.8 2.0 146.2
1995 105.6 15.0 6.4 3.4 2.0 2.9 2.0 137.3
Retail Selling Area at
Fiscal Year End
(square feet in millions)
1997 71.9 2.2 4.7 3.0 6.5 3.1 1.3 92.7
1996 69.9 2.1 4.7 3.2 5.6 2.6 1.5 89.8
1995 66.8 2.1 4.5 2.9 1.7 1.9 1.5 81.4
_____________________________________________________________________________________________
</TABLE>
<PAGE>
Retail Store Revenues per Selling Square Foot
1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$318
1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$321
1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$323
(a) 1994 Tire Group store totals exclude Sears Tire Group properties
owned or leased as part of Full-line Store properties.
(b) Excludes 808 independently owned and operated stores.
(c) Excludes 28 HomeLife Stores located in Full-line Stores.
(d) Other Stores consists of small-size appliance stores and retail
outlet stores. Excludes Other facilities owned or leased as part of
Full-line Store properties.
(e) Many of the leases contain renewal options.
(f) Leased for terms ranging from five to 75 years. The leases have
been capitalized as assets of Domestic Operations.
(g) Includes 61 Orchard Supply Hardware Stores which were acquired in
September 1996.
In addition, at January 3, 1998, there were 856 other sales offices
and service facilities, most of which are occupied under short-term leases or
are a part of other Sears facilities included in the above table; as well as
73 distribution facilities, most of which are leased for terms ranging from
one to 99 years.
Credit services its accounts principally at nine regional credit card
operations centers ("RCCOCs") and one national account authorization center
("NAAC") in ten states, at four Credit Processing Centers, at the
headquarters of the Bank in Phoenix, Arizona and at the Company's
headquarters at Prairie Stone. One of the RCCOCs is owned and eight are
leased for remaining terms ranging from four to ten years. The NAAC is
leased for a remaining term of three years. One of the Credit Processing
Centers is owned and three are leased for remaining terms ranging from one to
six years.
For Domestic Operations, the capital expenditures for expansion and
remodeling and other improvements (including $60 million of capitalized
financing leases but excluding amounts expended for administrative offices)
amounted to $1.4 billion for the fiscal year ended January 3, 1998. In
fiscal 1998, planned capital expenditures for Domestic Operations of
approximately $1.4 billion include the remodeling and upgrade of merchandise
presentations in approximately 90 to 100 existing Full-line Stores, the
opening of 20 to 30 new Full-line Stores and over 100 Specialty stores. The
Company's ability to attain this growth will depend on, among other things,
the availability of suitable store locations on appropriate terms. The
Company may also pursue selective strategic acquisitions.
For additional information, see "Analysis of Consolidated Financial
Condition" beginning on page 27 of the 1997 Annual Report, incorporated
herein by reference in response to Item 7 hereof.
<PAGE>
INTERNATIONAL OPERATIONS
The Company conducts similar retail, services and credit operations
in Canada through Sears Canada Inc., a consolidated, 54.8% owned subsidiary
of Sears ("Sears Canada"). Sears Canada is the largest single retailer of
general merchandise in Canada. Sears Canada operates 110 Full-line Stores,
eight Sears Whole Home Furniture Stores and eight outlet stores, and has
1,551 independent catalog merchant agents operating under local ownership, 79
independently operated dealer stores and 25 active warehouses. During fiscal
1997, Sears Canada opened four new Sears Whole Home Furniture Stores and 19
dealer stores, and closed one outlet store. Sears Canada currently has no
plans to open any new Full-line Stores during fiscal 1998, but does continue
to seek opportunities for expansion in desirable locations. Subject to the
availability of suitable store locations on appropriate terms, in 1998, Sears
Canada plans to open 14 Sears Whole Home Furniture Stores, 21 dealer stores
and 100 catalog merchant agent locations, as well as to renovate 13 Full-line
Stores. As of January 3, 1998, Sears Canada employed approximately 38,000
full and part-time employees.
Sears Canada has an ongoing securitization program pursuant to which
undivided co-ownership interests in its pool of credit card receivables are
sold to trusts established to issue debt and trust units (representing the
residual equity interest in the trust) to third parties. Effective January
1, 1997, these securitizations do not qualify as sales under United States
generally accepted accounting principles. Therefore, the credit card
receivables are maintained on the Company's balance sheet and related
proceeds are recorded as debt. Sears Canada acts as servicer of the credit
card receivables.
In 1997, the Company sold 60 percent of the outstanding shares of
Sears, Roebuck de Mexico, S.A. de C.V. ("Sears Mexico") to Grupo Carso S.A.
de C.V. for gross cash proceeds of $103 million. Sears Mexico results are no
longer included in the Company's consolidated operations.
<PAGE>
FINANCE SUBSIDIARIES
To meet certain capital requirements of its businesses, Sears borrows
on a short-term basis through the issuance of notes to, and from time to time
sells receivables balances to, Sears Roebuck Acceptance Corp. ("SRAC"), a
wholly-owned finance subsidiary. SRAC obtains funds primarily from the
issuance of commercial paper and through intermediate-term loans, medium-
term notes and discrete underwritten debt. Sears and SRAC have also borrowed
through Sears Overseas Finance N.V. ("SOFNV"), a wholly-owned international
finance subsidiary, which has obtained funds from the issuance of long-term
debt, primarily in Europe. SOFNV debt matures in 1998 and no future
borrowings are planned.
Sears DC Corp. ("SDCC"), a wholly-owned finance subsidiary of Sears,
was formed to borrow money and lend the proceeds of such borrowings to
certain former subsidiaries of the Company. These former subsidiaries have
repaid all of their indebtedness to SDCC. The only outstanding debt of SDCC
is one series of outstanding medium-term notes. Pending repayment of these
notes as they become due, SDCC from time to time loans such funds to Sears.
SDCC does not plan to issue additional debt.
Substantially all the debt and related interest expense of SDCC, SRAC
and SOFNV supports the credit card receivables portfolio.
In addition, various direct and indirect subsidiaries of Sears have
engaged in securitization programs in which credit card receivables are sold
in public or private transactions. See "Domestic Operations - Credit," and
"International Operations," beginning on pages 6 and 11 hereof, respectively,
and Notes 1 and 8 of the Notes to Consolidated Financial Statements beginning
on pages 31 and 36, respectively, in the 1997 Annual Report, incorporated
herein by reference to Item 8 hereof.
<PAGE>
Executive Officers of the Registrant
The following table sets forth the names of the executive officers
of the Company, the positions and offices with the Company held by them, the
date they first became officers of the Company and their current ages:
<TABLE>
<CAPTION>
Date First
Name Position Became Officer Age
<S> <C> <C> <C>
Arthur C. Martinez Chairman of the Board of
Directors, President and
Chief Executive Officer 1992 58
Paul A. Baffico President, Automotive Group 1992 51
John H. Costello Senior Executive Vice President,
General Manager, Marketing 1993 50
Gary L. Crittenden Executive Vice President and
Chief Financial Officer 1996 44
Alan J. Lacy President, Credit 1995 44
Michael D. Levin Senior Vice President, General
Counsel and Secretary 1996 55
Robert L. Mettler President, Merchandising -
Full-line Stores 1993 57
William G. Pagonis Executive Vice President,
Logistics 1993 56
Anthony J. Rucci Executive Vice President,
Administration 1993 47
William L. Salter President, Home Stores 1995 54
Joseph A. Smialowski Senior Vice President, Chief
Information Officer 1993 49
Allan B. Stewart President, Stores - Full-line
Stores 1984 55
Jane J. Thompson President, Home Services 1988 46
</TABLE>
Messrs. Martinez, Baffico, Mettler, Salter and Stewart and Ms.
Thompson have held the positions set forth in the above tables for at least
the last five years or have served the Company in various executive or
administrative capacities for at least that length of time. The positions
held by the remaining executive officers for such five year period are as
follows:
Mr. Costello joined Sears in April 1993 as Senior Executive Vice
President, General Manager, Marketing Division, of the Merchandise Group.
Prior to joining Sears, he had been President and Chief Operating Officer of
Nielsen Marketing Research USA.
Mr. Crittenden joined Sears as Executive Vice President, Strategy and
Business Development, in February 1996. From January 1997 to December 1997,
Mr. Crittenden served as President, Sears Hardware, and was not considered an
executive officer of the Company. Prior to joining Sears, he had been Senior
Vice President and Chief Financial Officer of Melville Corporation, a
diversified specialty retailer, since 1994 and Executive Vice President and
Chief Financial Officer of Filene's Basement from 1991 to 1994.
Mr. Lacy joined Sears in January 1995 as Senior Vice President,
Finance of the Merchandise Group. Prior to joining Sears, he had been Vice
President, Financial Services and Systems, of Philip Morris Companies Inc.
and President of Philip Morris Capital Corporation since September 1993.
From September 1989 to September 1993, he was Senior Vice President of Kraft
General Foods in charge of finance, strategy and development matters.
<PAGE>
Mr. Levin joined Sears in January 1996 as Senior Vice President and
General Counsel. Prior to joining Sears, he had been a partner in the law
firm of Latham & Watkins since 1982. Effective March 1, 1996, Mr. Levin also
became Secretary of the Company.
Mr. Pagonis joined Sears in November 1993 as Senior Vice President
of Logistics of the Merchandise Group. Prior to joining Sears, he had been
a Lieutenant General in the U.S. Army.
Mr. Rucci joined Sears in October 1993 as Executive Vice President,
Administration of the Merchandise Group. Prior to joining Sears, he had been
Senior Vice President, Strategy, Business Development and External Affairs
and previously Senior Vice President, Human Resources, of Baxter
International, Inc.
Mr. Smialowski joined Sears in September 1993 as Vice President.
Prior to joining Sears, he had been a partner at Price Waterhouse, which
provides public accounting, tax and management consulting services. Mr.
Smialowski joined Price Waterhouse in December 1984.
Item 2. Properties
Information regarding the principal properties of the Company is
incorporated herein by reference to pages 9 to 11 of Item 1 hereof.
Item 3. Legal Proceedings
On June 3, 1997, the Company entered into a settlement of the
consolidated debtor class action lawsuits filed in the United States
Bankruptcy and District Courts for the District of Massachusetts by certain
current and former credit card holders of the Company who had declared
personal bankruptcy (the "Settlement"). These lawsuits alleged that the
Company had violated the United States Bankruptcy Code and consumer
protection laws in various states through activities related to certain debt
reaffirmation agreements. During the second quarter of 1997, the Company
entered into consent decrees with Attorneys General in all fifty states and
with the Federal Trade Commission relating to these matters. The consent
decrees with the States' Attorneys General require the Company, among other
things, to establish funds aggregating $40 million to be shared among the
states and used in part for consumer education. A federal civil and criminal
investigation of these matters is ongoing.
On October 28, 1997, at a joint fairness hearing before the United
States Bankruptcy and the District Courts for the District of Massachusetts,
the courts approved the Settlement. The Settlement required among other
things, the Company to pay the debtors the amounts collected pursuant to
reaffirmation agreements that were not filed with the bankruptcy courts,
including finance charges, plus 10% interest, and to undergo a review of its
credit bankruptcy reaffirmation procedures. In addition, outstanding
balances relating to unfiled debt reaffirmation agreements were written off.
The Company will also establish a $25 million fund to be distributed to the
debtors participating in the Settlement.
Six purported shareholders derivative actions have been filed on
behalf of the Company against its directors and certain of its officers,
alleging breach of fiduciary duty for failing to prevent the improper
handling of certain of the Company's debt reaffirmation agreements. The
complaints seek unspecified damages and attorneys' fees and expenses. Five
of the six, which were filed May 14, 1997, June 11, 1997, June 27, 1997,
September 11, 1997 and November 5, 1997, have been consolidated in the
Supreme Court of the State of New York for the County of New York. The
remaining case, which was filed on December 17, 1997 in the Chancery Court of
the State of Illinois, Cook County, has been stayed pending resolution of the
New York consolidated action. The Company has reached an agreement in
principle to settle all six of these derivative actions, subject to court
approval at a hearing which has been set for May 7, 1998.
<PAGE>
On October 9, 1997, the Company reached an agreement in principle to
settle several consolidated securities class action lawsuits against the
Company and one of its officers in the United States District Court for the
Northern District of Illinois. The amended consolidated complaint alleges
violations of the Securities Exchange Act of 1934 for failure to disclose the
bankruptcy collection practices described above in periodic filings with the
Securities and Exchange Commission prior to April 10, 1997.
The Company recorded a pretax charge of $475 million ($320 million
on an after-tax basis) in the second quarter for the estimated cost of the
matters referred to above, including other related expenses. This estimate
is based on management's assumptions as to the ultimate outcome of future
events and actual results could differ from this estimate. As such, it is
possible that additional costs relating to the civil and criminal investigation
referred to above could be incurred that are material to operating results
for the period in which such investigation is resolved. However, in the
opinion of management, such possible additional costs are not expected to have
a material effect on the financial position, liquidity or capital resources of
the Company.
The Company is subject to various other legal and governmental
proceedings 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 of the Company after consulting with legal counsel, the
ultimate liability in excess of reserves currently recorded is not expected
to have a material effect on annual results of operations, financial
position, liquidity or capital resources of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
DESCRIPTION OF SEARS COMMON SHARES
The summary contained herein of certain provisions of the Restated
Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), of Sears does not purport to be complete and is qualified in
its entirety by reference to the provisions of such Certificate of
Incorporation filed as Exhibit 3.(i) hereto and incorporated by reference
herein.
The Certificate of Incorporation authorizes the issuance of
1,000,000,000 common shares, par value $0.75 per share, and 50,000,000
preferred shares, par value $1.00 per share. As of January 30, 1998, there
were no preferred shares outstanding. Preferred shares may be issued in
series with rights and privileges as authorized by the Board of Directors.
Subject to the restrictions on dividends mentioned below and the
rights of the holders of any preferred shares which may hereafter be issued,
each holder of common shares is entitled to one vote per share, to vote
cumulatively for the election of directors, to dividends declared by the
Board of Directors, and, upon liquidation, to share in the assets of Sears
pro rata in accordance with his, her or its holdings after payment of all
liabilities and obligations. The holders of common shares have no
preemptive, redemption, subscription or conversion rights.
Sears Board of Directors is divided into three classes serving
staggered three-year terms. Because the Board is classified, shareholders
wishing to exercise cumulative voting rights to assure the election of one or
more directors must own approximately three times as many shares as would be
required if the Board were not classified. Directors may be removed only for
cause upon the affirmative vote of at least 75% of the shares entitled to
vote. Such a vote is also required to alter, amend or repeal, or to adopt
any provision inconsistent with, Article 5 of the Certificate of
Incorporation concerning directors, or to fix the number of directors by
shareholder vote.
There are no restrictions on repurchases or redemption of shares by
Sears which do not impair its capital, except that the indentures relating to
certain of Sears long-term debt and an agreement pursuant to which Sears has
provided a credit facility in support of certain tax increment revenue bonds
issued by the Village of Hoffman Estates, Illinois, in connection with the
construction of its headquarters facility, provide that Sears will not take
certain actions, including the declaration of cash dividends and the
repurchase of shares, which would cause Unencumbered Assets plus certain
Capitalized Rentals to drop below 150% of Liabilities plus such Capitalized
Rentals (as such terms are defined in the indentures and the agreement). The
amount by which such Unencumbered Assets plus Capitalized Rentals exceeds
150% of such Liabilities plus Capitalized Rentals, as computed under certain
of the indenture provisions and those of the credit facility agreement
referred to above, is set forth in Note 14 of the Notes to Consolidated
Financial Statements beginning on page 38 of the 1997 Annual Report.
Information regarding the principal market for Sears common shares,
the number of shareholders and the prices of, and dividends paid on, Sears
common shares is incorporated herein by reference to the section headed
"Common Stock Market Information and Dividend Highlights" on page 42 of the
1997 Annual Report and to the information under the heading "Shareholders'
equity - Dividend payments" contained in Note 14 of the Notes to Consolidated
Financial Statements on page 38 of the 1997 Annual Report.
<PAGE>
Item 6. Selected Financial Data
The material under the caption "Five-Year Summary of Consolidated
Financial Data" on page 41 of the 1997 Annual Report is incorporated herein
by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information contained under the captions "Analysis of
Consolidated Operations" on pages 21 - 25 and "Analysis of Consolidated
Financial Condition" on pages 27 and 29, of the 1997 Annual Report, is
incorporated herein by reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The information contained under the caption "Market Risk" on page 42
of the 1997 Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company, including the
notes to all such statements, and other information on pages 20 - 42 (other
than that incorporated by reference to Item 7 hereof) of the 1997 Annual
Report is incorporated herein by reference.
Item 9. Changes in and Disagreements with Independent Auditors on
Accounting and Financial Disclosure
None
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors and executive officers of the Company
is incorporated herein by reference to the descriptions under "Item 1:
Election of Directors" on pages 2 - 8 of the 1998 Proxy Statement and to Item
1 of this Report under the caption "Executive Officers of the Registrant" on
pages 14 - 15.
Item 11. Executive Compensation
Information regarding executive compensation is incorporated by
reference to the material under the captions "Item 1: Election of Directors,"
"Directors' Compensation and Benefits," "Executive Compensation," "Stock
Options," "Long-Term Performance Plan," "Pension Plan Table," "Employment
Contracts, Termination and Change in Control Arrangements" and "Compensation
Committee Interlocks and Insider Participation" on pages 2 - 8, 9 - 10, 11,
12, 13, 13 - 14, 14 - 17 and 22, respectively, of the 1998 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information regarding security ownership of certain beneficial owners
and management is incorporated herein by reference to the material under the
heading "Item 1: Election of Directors" on pages 2 - 8 of the 1998 Proxy
Statement.
Item 13. Certain Relationships and Related Transactions
None.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)1 and 2 - An "Index to Financial
Statements and Financial
Statement Schedules" has
been filed as a part of
this Report beginning on
page S-1 hereof.
(a)3 - Exhibits:
An "Exhibit Index" has been filed as a part
of this Report beginning on page E-1 hereof
and is incorporated herein by reference.
(b) - Reports on Form 8-K:
A Current Report on Form 8-K dated October
16, 1997 was filed with the Securities and
Exchange Commission (the "Commission") on
October 16, 1997 to report, under Item 5,
that the Company issued a press release to
report its third quarter earnings and to
file, under Item 7, a copy of such press
release.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SEARS, ROEBUCK AND CO.
(Registrant)
*/S/James A. Blanda
By: James A. Blanda
Vice President and
Controller
March 13, 1998
Pursuant to the requirements of the Exchange Act, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature Title Date
/S/Arthur C. Martinez* Director, Chairman of the )
Arthur C. Martinez Board of Directors, President )
and Chief Executive Officer )
)
/S/Gary L. Crittenden* Executive Vice President and )
Gary L. Crittenden Chief Financial Officer )
(Principal Financial Officer) )
)
/S/James A. Blanda* Vice President )
James A. Blanda and Controller (Principal )
Accounting Officer) )
)
/S/Hall Adams, Jr.* Director )
Hall Adams, Jr. )
)
)
/S/Brenda C. Barnes* Director )
Brenda C. Barnes )
)
)
/S/Warren L. Batts* Director )
Warren L. Batts )
)
/S/Alston D. Correll, Jr.* Director )
Alston D. Correll, Jr. )
)
/S/Michael A. Miles* Director )
Michael A. Miles )
)
/S/Richard C. Notebaert* Director March 24, 1997
Richard C. Notebaert )
)
/S/Hugh B. Price* Director )
Hugh B. Price )
)
/S/Clarence B. Rogers* Director )
Clarence B. Rogers )
)
/S/Donald H. Rumsfeld* Director )
Donald H. Rumsfeld )
)
)
)
/S/Patrick G. Ryan* )
Patrick G. Ryan )
)
)
/S/Dorothy A. Terrell* Director )
Dorothy A. Terrell )
*By: /S/James A. Blanda Individually and as Attorney-in-fact
James A. Blanda
SEARS, ROEBUCK AND CO.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Year Ended January 3, 1998
The following consolidated financial statements, notes thereto and related
information of Sears, Roebuck and Co., are incorporated herein by reference
to the Company's 1997 Annual Report.
Page*
Incorporated by reference in Item 8 herein:
Consolidated Statements of Income 20
Consolidated Balance Sheets 26
Consolidated Statements of Cash Flows 28
Consolidated Statements of Shareholders' Equity 30
Notes to Consolidated Financial Statements 31
Independent Auditor's Report 40
Five-Year Summary of Consolidated Financial Data 41
Quarterly Results 42
Incorporated by reference in Item 5 herein:
Common Stock Market Information and Dividend Highlights 42
Incorporated by reference in Item 7a herein:
Market Risk 42
* Refers to page number in Company's Annual Report.
S-1
<PAGE>
SEARS, ROEBUCK AND CO.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Year Ended January 3, 1998
The following additional financial statement schedules, Independent Auditors'
Report and Consent of Independent Auditors are furnished herewith pursuant
to the requirements of Form 10-K.
Page
Schedules required to be filed under the provisions
of regulation S-X Article 5:
Schedule II - Valuation and Qualifying Accounts S-3
Schedules required to be filed under the provisions
of Regulation S-X Article 7:
None.
Report of Independent Certified Public Accountants S-4
Consent of Independent Certified Public Accountants S-5
All other schedules are omitted because they are not applicable or not
required.
S-2
<PAGE>
SEARS, ROEBUCK AND CO.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(millions)
Additions
Description Balance at Charged Deductions(A) Balance
Beginning to Costs (Describe) at End
of Period and Expenses of Period
----------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
Year Ended January 3, 1998
Allowance for uncollectible accounts $ 801 $ 1,532 $ 1,220 $ 1,113
Year Ended December 28, 1996
Allowance for uncollectible accounts $ 819 $ 971 $ 989 $ 801
Year Ended December 30, 1995
Allowance for uncollectible accounts $ 808 $ 589 $ 578 $ 819
Certain prior year reclassifications have been made to conform with current
year presentation.
(A) Represents uncollectible credit card receivable accounts which have been
charged-off.
</TABLE>
S-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Sears, Roebuck and Co.
We have audited the consolidated balance sheets of Sears, Roebuck and Co. as
of January 3, 1998 and December 28, 1996, and the related consolidated
financial statements for each of the three years in the period ended January
3, 1998, as set forth in the Index to Financial Statements and Financial
Statement Schedules on page S-1, and have issued our report thereon dated
February 20, 1998; such consolidated financial statements and report are
included in your 1997 Annual Report to Shareholders and are incorporated
herein by reference. Our audits also included the financial statement
schedule of Sears, Roebuck and Co., listed in item 14(a)1 and 2. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We have also previously audited, in accordance with generally accepted
auditing standards, the Consolidated Statements of Financial Position of
Sears, Roebuck and Co. as of December 30, 1995, December 31, 1994 and
December 31, 1993, and the related Consolidated Statements of Income,
Shareholders' Equity and Cash Flows for the years ended December 31, 1994 and
December 31, 1993 (none of which are presented herein); and we expressed
unqualified opinions on those consolidated financial statements.
Our audits were conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The additional
information set forth under "Operating Results" and "Financial Position" and
on the lines captioned "Book value per common share (year end)", "Average
common and equivalent shares outstanding", and "Earnings (loss) per common
share - diluted" for each of the five years in the period ended January 3,
1998, appearing under the caption "Five Year Summary of Consolidated
Financial Data" on page 41 of your 1997 Annual Report to Shareholders is
presented for the purpose of additional analysis and is not a required part
of the basic consolidated financial statements. This additional information
is the responsibility of the Company's management. Such information has been
subjected to the auditing procedures applied in our audits of the basic
consolidated financial statements and, in our opinion, is fairly stated in
all material respects when considered in relation to the basic consolidated
financial statements taken as a whole.
/S/Deloitte & Touche LLP
Deloitte & Touche LLP
Chicago, Illinois
February 20, 1998
S-4
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
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, 33-55825,
33-58851, 33-64345, 333-8141, 333-38131 of Sears, Roebuck and Co.;
Registration Statement Nos. 33-58139, 333-9817, 33-64215, 333-30879 of Sears,
Roebuck and Co. and Sears Roebuck Acceptance Corp.; Registration Statement
Nos. 33-64775 and 333-18591 of Sears, Roebuck and Co. and Sears, Roebuck and
Co. Deferred Compensation Plan; Registration Statement Nos. 33-57205 and
333-11973 of Sears Roebuck and Co. and the Sears 401(k) Profit Sharing Plan
(formerly, 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 20, 1998, incorporated by reference in
the Annual Report on Form 10-K of Sears, Roebuck and Co. for the year ended
January 3, 1998.
/S/Deloitte & Touche LLP
Chicago, Illinois
March 12, 1998
S-5
<PAGE>
EXHIBIT INDEX
Sears, Roebuck and Co. Form 10-K
For the Year Ended January 3, 1998
3.(i) Restated Certificate of Incorporation, as amended to May 13,
1996 (incorporated by reference to Exhibit 3(a) to Registration
Statement No. 333-8141).
*3.(ii) By-Laws as amended to February 3, 1998.
4.(i) Forms of restricted stock grants under Registrant's 1990
Employees Stock Plan (incorporated by reference to Exhibit 4.(i)
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993).**
4.(ii) Form of restricted stock grants under Registrant's 1994
Employees Stock Plan (incorporated by reference to Exhibit 4(ii)
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994).**
*4.(iii) Forms of Performance-Based Stock Options granted under the 1994
Employees Stock Plan.
*4.(iv) Forms of Performance-Based Restricted Stock grants under the
1994 Employees Stock Plan.
4.(v) Registrant hereby agrees to furnish to the Commission, upon
request, with the instruments defining the rights of holders of
each issue of long-term debt of the Registrant and its
consolidated subsidiaries.
10.(i)(a) Separation Agreement dated February 20, 1995 between Registrant
and The Allstate Corporation (incorporated by reference to
Exhibit 10(a) to The Allstate Corporation's Current Report on
Form 8-K dated February 22, 1995).***
10.(i)(b) Marketing File Separation Agreement dated February 20, 1995
between Registrant and The Allstate Corporation (incorporated by
reference to Exhibit 10(b) to The Allstate Corporation's Current
Report on Form 8-K dated February 22, 1995).***
10.(i)(c) Research Services Agreement dated February 20, 1995 between
Registrant and The Allstate Corporation (incorporated by
reference to Exhibit 10(c) to The Allstate Corporation's Current
Report on Form 8-K dated February 22, 1995).***
10.(i)(d) Tax Sharing Agreement dated May 14, 1993 between Registrant and
its subsidiaries (incorporated by reference to Exhibit 10.6 to
Amendment No. 3 to The Allstate Corporation's Registration
Statement No. 33-59676).
10.(i)(e) Supplemental Tax Sharing Agreement dated January 27, 1995
between Registrant and The Allstate Corporation (incorporated by
reference to Exhibit 10(d) to The Allstate Corporation's Current
Report on Form 8-K dated February 22, 1995).***
10.(i)(f) Supplemental Human Resources Allocation Agreement dated January
27, 1995 between Registrant and The Allstate Corporation
(incorporated by reference to Exhibit 10(e) to The Allstate
Corporation's Current Report on Form 8-K dated February 22,
1995).***
10.(i)(g) Profit Sharing and Employee Stock Ownership Plan Allocation
Agreement dated January 27, 1995 between Registrant and The
Allstate Corporation (incorporated by reference to Exhibit 10(f)
to The Allstate Corporation's Current Report on Form 8-K dated
February 22, 1995).***
10.(iii)(1) Registrant's 1979 Incentive Compensation Plan (incorporated by
reference to Exhibit 10.(iii)(1) to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31,
1985).** ****
10.(iii)(2) Registrant's 1978 Employes Stock Plan, as amended (incorporated
by reference to Exhibit 10.(iii)(2) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1989).** ****
10.(iii)(3) Registrant's Deferred Compensation Plan for Directors, as
amended and restated on October 9, 1996 (incorporated by
reference to Exhibit 10(a) to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended September 28,
1996).** ****
10.(iii)(4) Registrant's Annual Incentive Compensation Plan, amended and
restated as of January 1, 1994 (incorporated by reference to
Appendix B to the Registrant's Proxy Statement dated March 23,
1994).** ****
10.(iii)(5) Registrant's Long-Term Incentive Compensation Plan, amended and
restated as of January 1, 1994 (incorporated by reference to
Appendix C to the Registrant's Proxy Statement dated March 23,
1994).** ****
10.(iii)(6) Registrant's 1982 Employees Stock Plan (incorporated by
reference to Exhibit 4(a)(1) to Registration Statement No.
2-80037 of the Registrant).****
10.(iii)(7) Description of Registrant's Supplemental Life Insurance Plan,
amended as of December 31, 1986 (incorporated by reference to
the second and third full paragraphs on page 10 of the
Registrant's Proxy Statement dated March 26, 1987).** ****
10.(iii)(8) Registrant's Non-Employee Directors' Retirement Plan, as amended
and restated to March 13, 1996 (incorporated by reference to
Exhibit 10.(iii)(8) to Registrant's Annual Report on Form 10-K
for the year ended December 30, 1995).** ****
10.(iii)(9) Description of Registrant's Non-Employee Director Life Insurance
Plan (incorporated by reference to the eighth paragraph on page
4 of the Registrant's Proxy Statement dated March 26, 1986).**
****
10.(iii)(10) Registrant's 1990 Employees Stock Plan, amended as of May 12,
1994 (incorporated by reference to Exhibit 10.20 to The Allstate
Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994).*** ****
10.(iii)(11) Registrant's Supplemental Retirement Income Plan, as amended
effective February 6, 1996 (incorporated by reference to Exhibit
10.(iii)(11) to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 30, 1995).** ****
*10.(iii)(12) Amendment to Registrant's Supplemental Retirement Income Plan,
adopted by the Registrant's Board of Directors on December 23,
1997.
10.(iii)(13) Registrant's 1986 Employees Stock Plan, amended as of May 12,
1994 (incorporated by reference to Exhibit 10.19 to The
Allstate Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994).*** ****
10.(iii)(14) Registrant's Transferred Executives Pension Supplement
(incorporated by reference to Exhibit 10.(iii)(13) to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988).** ****
10.(iii)(15) Amendment to Registrant's Transferred Executives Pension
Supplement adopted on March 13, 1996 (incorporated by reference
to Exhibit 10.(iii)(14) to Registrant's Annual Report on Form
10-K for the year ended December 30, 1995).** ****
10.(iii)(16) Registrant's Supplemental Long-Term Disability Plan
(incorporated by reference to Exhibit 10.d to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1995).** ****
10.(iii)(17) Registrant's Deferred Compensation Plan, as amended and
restated on October 9, 1996 (incorporated by reference to
Exhibit 10(b) to Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended September 28, 1996).** ****
10.(iii)(18) Registrant's Management Supplemental Deferred Profit Sharing
Plan (incorporated by reference to Exhibit 10(b) to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended October 1, 1994).** ****
10.(iii)(19) Registrant's Non-Employee Director Stock Plan (incorporated by
reference to Appendix B of the Registrant's Proxy Statement
dated March 20, 1996).** ****
10.(iii)(20) Registrant's 1994 Employees Stock Plan (incorporated by
reference to Appendix A to the Registrant's Proxy Statement
dated March 23, 1994).** ****
*10.(iii)(21) Registrant's Associate Stock Ownership Plan.
10.(iii)(22) Employment Agreement between Registrant and Arthur C. Martinez
dated August 10, 1992 (incorporated by reference to Exhibit
10.(a) to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1992).** ****
10.(iii)(23) Agreement dated November 13, 1995 amending employment contract
of Arthur C. Martinez dated August 10, 1992 (incorporated by
reference to Exhibit 10.(iii)(21) to Registrant's Annual Report
on Form 10-K for the year ended December 30, 1995).** ****
10.(iii)(24) Extension of employment contract of Arthur C. Martinez, dated
August 9, 1995 (incorporated by reference to Exhibit 10(c) to
the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995).** ****
10.(iii)(25) Employment Agreement between the Registrant and John H.
Costello, dated April 1, 1993 (incorporated by reference to
Exhibit 10(a) to the Registrant's Current Report on Form 8-K
dated June 20, 1995).** ****
10.(iii)(26) Employment Agreement between the Registrant and Robert L.
Mettler, dated February 1, 1993 (incorporated by reference to
Exhibit 10(b) to the Registrant's Current Report on Form 8-K
dated June 20, 1995).** ****
10.(iii)(27) Letter from the Registrant to Alan J. Lacy dated December 14,
1994 relating to employment (incorporated by reference to
Exhibit 10(d) to the Registrant's Current Report on Form 8-K
dated June 20, 1995).** ****
10.(iii)(28) Letter from the Registrant to William G. Pagonis dated August
15, 1993 relating to employment (incorporated by reference to
Exhibit 10(e) to the Registrant's Current Report on Form 8-K
dated June 20, 1995).** ****
10.(iii)(29) Letter from the Registrant to Anthony J. Rucci dated September
21, 1993 relating to employment (incorporated by reference to
Exhibit 10(f) to the Registrant's Current Report on Form 8-K
dated June 20, 1995).** ****
10.(iii)(30) Letter from the Registrant to Michael D. Levin dated November
27, 1995 relating to employment (incorporated by reference to
Exhibit 10(iii)(32) to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 30, 1995).** ****
10.(iii)(31) Letter from the Registrant to Gary L. Crittenden dated January
2, 1996 relating to employment (incorporated by reference to
Exhibit 10(iii)(33) to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 30, 1995).** ****
10.(iii)(32) Form of severance and non-compete agreement for executive
officers of the Registrant (incorporated by reference to
Exhibit 10(c) to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended September 28, 1996).** ****
10.(iii)(33) Sears Executive Retirement Plan Arrangements (incorporated by
reference to Exhibit 10(iii)(34) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 30,
1995).** ****
*12.(a) Computation of ratio of income to fixed charges for Registrant
and consolidated subsidiaries.
*12.(b) Computation of ratio of income to combined fixed charges and
preferred share dividends for Registrant and consolidated
subsidiaries.
*13. Portions of Registrant's Annual Report incorporated by
reference into Part I or Part II of Registrant's Annual Report
on Form 10-K for the fiscal year ended January 3, 1998.
*21. Subsidiaries of the Registrant.
*23. Consent of Deloitte & Touche LLP.
*24. Power of Attorney of certain officers and directors of the
Registrant.
*27. Financial Data Schedules.
*99.(i) Amendment to the Sears, Roebuck and Co. Pension Plan adopted by
the Board of Directors of the Registrant on December 23, 1997.
*99.(ii) Amendment No. 3 to the text of The Savings and Profit Sharing
Fund of Sears Employees adopted by the Board of Directors of
the Registrant on December 23, 1997.
*99.(iii) Amendment to The Savings and Profit Sharing Fund of Sears
Employees Trust Agreement adopted by the Board of Directors of
the Registrant on December 23, 1997.
* Filed herewith
** SEC File No. 1-416
*** SEC File No. 1-11840
**** A management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report
pursuant to Item 14(c) of Form 10-K.
Exhibit 3(ii)
Sears, Roebuck and Co.
______________
By-Laws
As Amended and Restated
February 3, 1998
Incorporated
New York
1906
Article I
MEETINGS OF SHAREHOLDERS
Section 1. Place of Meetings. All meetings of the shareholders
shall be held at such place within or without the State of New York as shall
be fixed by the Board of Directors from time to time.
Section 2. Annual Meetings. The annual meeting of the
shareholders for the election of directors and for the transaction of such
other business as may properly be brought before the meeting shall be held at
such time as is specified in the notice of the meeting on either the second
Wednesday in May of each year or on such other date as may be fixed by the
Board of Directors prior to the giving of the notice of such meeting. The
Board of Directors acting by resolution may postpone and reschedule any
previously scheduled annual meeting of shareholders.
Nominations of persons for election to the Board of Directors of the
Company and the proposal of business to be considered by the shareholders may
be made at an annual meeting of shareholders (a) pursuant to the Company's
notice of meeting, (b) by or at the direction of the Board of Directors or
(c) by any shareholder of the Company who was a shareholder of record at the
time of giving of notice provided for in this By-Law, who is entitled to vote
at the meeting and who complied with the notice procedures set forth in this
By-Law.
For nominations or other business to be properly brought before an
annual meeting by a shareholder pursuant to clause (c) of the foregoing
paragraph of this By-Law, the shareholder must have given timely notice
thereof in writing to the Secretary of the Company. To be timely, a
shareholder's notice shall be delivered to the Secretary at the principal
executive offices of the Company not less than 60 days nor more than 90 days
prior to the first anniversary of the preceding year's annual meeting;
provided, however, that in the event that the date of the annual meeting is
advanced by more than 30 days or delayed by more than 60 days from such
anniversary date, notice by the shareholder to be timely must be so delivered
not earlier than the 90th day prior to such annual meeting and not later than
the close of business on the later of the 60th day prior to such annual
meeting or the 10th day following the day on which public announcement of the
date of such meeting is first made. Such shareholder's notice shall set
forth (a) as to each person whom the shareholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
(including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); (b) as to
any other business that the shareholder proposes to bring before the meeting,
a brief description of the business desired to be brought before the meeting,
the reasons for conducting such business at the meeting and any material
interest in such business of such shareholder and the beneficial owner, if
any, on whose behalf the proposal is made; (c) as to the shareholder giving
the notice and the beneficial owner, if any, on whose behalf the nomination
or proposal is made (i) the name and address of such shareholder, as they
appear on the Company's books, and of such beneficial owner and (ii) the
class and number of shares of the Company which are owned beneficially and of
record by such shareholder and such beneficial owner.
Notwithstanding anything in the second sentence of the preceding
paragraph to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Company is increased and there is no
public announcement naming all of the nominees for Director or specifying the
size of the increased Board of Directors made by the Company at least 70 days
prior to the first anniversary of the preceding year's annual meeting, a
shareholder's notice required by this By-Law shall also be considered timely,
but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the Secretary at the principal
executive offices of the Company not later than the close of business on the
10th day following the day on which such public announcement is first made by
the Company.
Only such persons who are nominated in accordance with the procedures
set forth in these By-Laws shall be eligible to serve as directors and only
such business shall be conducted at an annual meeting of shareholders as
shall have been brought before the meeting in accordance with the procedures
set forth in this By-Law. The chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made in accordance with the procedures set
forth in this By-Law and, if any proposed nomination or business is not in
compliance with this By-Law, to declare that such defective proposal shall be
disregarded.
For purposes of this By-Law, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document
publicly filed by the Company with the Securities and Exchange Commission
pursuant to Sections 13, 14 or 15(d) of the Exchange Act.
Notwithstanding the foregoing provisions of this By-Law, a
shareholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this By-Law. Nothing in this By-Law shall be deemed to
affect any rights (i) of shareholders to request inclusion of proposals in
the Company's proxy statement pursuant to Rule 14a-8 under the Exchange Act
or (ii) of the holders of any series of Preferred Stock to elect directors
under specified circumstances.
Section 3. Special Meetings. Special meetings of the
shareholders for any purpose or purposes shall be called to be held at any
time upon the request of the Chairman of the Board of Directors, the
President or a majority of the members of the Board of Directors or of the
Executive Committee then in office. Business transacted at all special
meetings shall be confined to the specific purpose or purposes of the persons
authorized to request such special meeting as set forth in this Section 3 and
only such purpose or purposes shall be set forth in the notice of such
meeting. The Board of Directors acting by resolution may postpone and
reschedule any previously scheduled special meeting of shareholders.
Nominations of persons for election to the Board of Directors may be
made at a special meeting of shareholders at which directors are to be
elected (a) pursuant to the Company's notice of meeting (b) by or at the
direction of the Board of Directors or (c) by any shareholder of the Company
who is a shareholder of record at the time of giving of notice provided for
in this By-Law, who shall be entitled to vote at the meeting and who complies
with the notice procedures set forth in this By-Law. Nominations by
shareholders of persons for election to the Board of Directors may be made at
such a special meeting of shareholders if the shareholder's notice required
by the third paragraph of Section 2 of Article I of these By-Laws shall be
delivered to the Secretary at the principal executive offices of the Company
not earlier than the 90th day prior to such special meeting and not later
than the close of business on the later of the 60th day prior to such special
meeting or the 10th day following the day on which public announcement is
first made of the date of the special meeting and of the nominees proposed by
the Board of Directors to be elected at such meeting.
Only such persons who are nominated in accordance with the procedures
set forth in these By-Laws shall be eligible to serve as directors and only
such business shall be conducted at a special meeting of shareholders as
shall have been brought before the meeting in accordance with the procedures
set forth in this By-Law. The chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made in accordance with the procedures set
forth in this By-Law and, if any proposed nomination or business is not in
compliance with this By-Law, to declare that such defective proposal shall be
disregarded.
Notwithstanding the foregoing provisions of this By-Law, a
shareholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this By-Law.
Section 4. Notice of Meetings. Written notice of the time,
place, and purpose or purposes of each annual and special meeting of
shareholders shall be signed by the Secretary and served by mail upon each
shareholder of record entitled to vote at such meeting not less than ten nor
more than fifty days before the date of the meeting. Notice of an annual or
special meeting of shareholders shall be deemed to be served when deposited
in the United States mail, postage prepaid, addressed to each shareholder at
his address as it appears on the stock records of the Company or at such
other address as he may have filed with the Secretary of the Company for such
purpose.
Section 5. Quorum. At any meeting of the shareholders, the
holders of record of one-third of the total number of shares of the Company
entitled to vote, present in person or represented by proxy, shall constitute
a quorum for the purpose of transacting business.
Section 6. Organization and Adjournment. The Chairman of the
Board of Directors or in the Chairman's absence, the President, or, if both
of such officers are absent, an officer designated by the Executive
Committee, shall act as chairman of the meeting. The Secretary, or in the
Secretary's absence an Assistant Secretary, or if neither the Secretary nor
any Assistant Secretary be present, any person designated by the chairman of
the meeting, shall act as secretary of the meeting. Any annual or special
meeting of shareholders may be adjourned by the chairman of the meeting or
pursuant to resolution of the Board of Directors without notice other than by
announcement at the meeting. At any adjourned meeting at which a quorum is
present, any business may be transacted that might have been transacted at
the meeting as originally convened.
Section 7. Voting. At each meeting of the shareholders, each
holder of shares entitled to vote at such meeting shall be entitled to vote
in person or by proxy appointed by an instrument in writing signed by such
shareholder or by the shareholder's duly authorized attorney and, except as
provided in the Certificate of Incorporation of the Company with respect to
cumulative voting, shall have one vote for each share standing in the
shareholder's name on the books of the Company upon each matter submitted to
a vote at the meeting. The vote upon the election of directors shall be by
ballot. If a quorum is present at any meeting of shareholders, the vote of
the holders of a majority of the shares cast by the holders of shares
entitled to vote on the matter shall be sufficient for the transaction of any
business, except that directors shall be elected by a plurality of shares
cast by the holders of shares entitled to vote in the election, unless, in
either case, otherwise provided by law or by the Certificate of
Incorporation.
Section 8. Inspectors of Election. Prior to each meeting of
shareholders, the Board of Directors shall appoint three Inspectors, who
shall not be directors or officers of the Company or candidates for the
office of director. Such Inspectors shall count and report to the meeting
the votes cast on all matters submitted to a vote at such meeting. In the
case of failure of the Board of Directors to make such appointments, or in
the case of failure of any Inspector so appointed to act, the chairman of the
meeting may, and at the request of a shareholder entitled to vote thereat,
shall, make such appointments or fill such vacancies. Each Inspector shall
be entitled to a reasonable compensation from the Company for his services.
The Inspectors appointed to act at any meeting of the shareholders, before
entering upon the discharge of their duties, shall be sworn faithfully to
execute the duties of Inspectors at such meeting with strict impartiality and
according to the best of their ability, and the oath so taken shall be
subscribed by them.
Article II
BOARD OF DIRECTORS
Section 1. Number, Qualification and Term of Office. The
business of the Company shall be managed under the direction of a Board of
Directors, each of whom shall be at least 25 years of age. The number of
directors of the Company shall be fixed and may from time to time be
increased or decreased by the affirmative vote of a majority of the entire
Board of Directors, but in no event shall the number of directors be less
than 7 or more than 20.
Section 2. Vacancies. Any vacancies on the Board of Directors
may be filled by the affirmative vote of a majority of the remaining
directors then in office, even though less than a quorum of the Board of
Directors. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
Section 3. Resignations. Any director may resign at any time
by giving written notice to the Chairman of the Board of Directors, or to the
President, or to the Secretary of the Company. Such resignation shall take
effect on the date of receipt of such notice unless a later effective date is
specified therein. The acceptance of such resignation by the Board of
Directors shall not be necessary to make it effective.
Section 4. Place of Meetings. The Board of Directors may hold
its meetings at such place or places, within or without the State of New
York, as the Board of Directors may from time to time determine or as may be
specified in the notice of any meeting.
Section 5. Annual Meetings. A meeting of the Board of
Directors to be known as the annual meeting of the Board of Directors shall
be held following the meeting of the shareholders at which such Board of
Directors is elected, at such place as shall be fixed by the Board of
Directors, for the purpose of electing the officers of the Company and the
committees of the Board of Directors, and of transacting such other business
as may properly come before the meeting. It shall not be necessary to give
notice of this meeting.
Section 6. Other Meetings. Meetings of the Board of Directors
shall be held on such dates as from time to time may be determined by the
Board of Directors or whenever called upon the direction of the Chairman of
the Board of Directors or of the President or by the Secretary upon the
written request of one-third of the directors in office, which request shall
state the date, place and purpose of such meeting.
Section 7. Notice of Meetings. Written, telephonic,
telegraphic or facsimile transmission notice of each meeting except the
annual meeting shall be given by the Secretary to each director, by personal
delivery, by telephone, or by regular or express mail, or telegram or
facsimile transmission addressed to the director at his or her usual business
address, or to the address where the director is known to be, at least three
days (excluding Saturdays, Sundays, and holidays) prior to the meeting in
case of notice by regular mail and at least three hours prior to the meeting
in case of notice by personal delivery, express mail, telephone, telegram, or
facsimile transmission. All notices which are given by regular mail shall be
deemed to have been given when deposited in the United States mail, postage
prepaid. Any director may waive notice of any meeting before or after the
meeting, and the attendance of a director at any meeting, except for the sole
purpose of protesting the lack of notice thereof, shall constitute a waiver
of notice of such meeting. Any and all business may be transacted at any
meeting which need not be restricted to the purpose thereof specified in the
notice or waiver of notice of such meeting, if one is specified.
Section 8. Organization, Quorum, Written Consents and Meetings
by Telephone or Similar Equipment. Unless the Board of Directors shall by
resolution otherwise provide, the Chairman of the Board of Directors, or in
the Chairman's absence, the President, or, if both of such officers are
absent, a director chosen by a majority of the directors present, shall act
as chairman at meetings of the Board of Directors; and the Secretary, or in
the Secretary's absence an Assistant Secretary, or in the absence of an
Assistant Secretary, such person as may be designated by the chairman of the
meeting, shall act as secretary at such meetings.
A majority of the directors in office at the time (but not less than
one-third of the entire Board of Directors) shall constitute a quorum
necessary for the transaction of business, and, except as otherwise provided
in these By-Laws, the action of a majority of the directors present at any
meeting at which a quorum is present shall be the act of the Board of
Directors. If at any meeting of the Board of Directors a quorum is not
present, a majority of the directors present may adjourn the meeting from
time to time.
Any action required or permitted to be taken by the Board of
Directors or any committee thereof may be taken without a meeting if all
members of the Board of Directors or the committee consent in writing to the
adoption of a resolution authorizing the action. The resolution and the
written consent thereto by the members of the Board of Directors or committee
shall be filed with the minutes of the proceedings of the Board of Directors
or committee.
Any one or more members of the Board of Directors or any committee
thereof may participate in a meeting of such Board of Directors or committee
by means of a conference telephone or similar communications equipment
allowing all persons participating in the meeting to hear each other at the
same time. Participation by such means shall constitute presence in person
at a meeting.
Section 9. Compensation. Each director not an officer of the
Company, or of any subsidiary or affiliated company, may receive such
compensation for his or her services as a director and as a committee member
as shall be fixed from time to time by resolution of the Board of Directors
and shall be reimbursed for expenses of attendance at meetings of the Board
of Directors and of any committee of which he or she is a member.
Article III
COMMITTEES
Section 1. Creation and Organization. The Board of Directors,
at its annual meeting, or any adjournment thereof, shall, or at any other
meeting may, elect from among its members, by the vote of a majority of the
entire Board of Directors, an Audit Committee, a Compensation Committee, an
Executive Committee, and a Nominating Committee, which shall be the standing
committees of the Board of Directors, and such other committees as shall be
determined by the Board of Directors. The Board of Directors also shall
designate the chairman of each such committee.
The Secretary of the Company shall act as secretary of each committee
meeting or any person as may be designated by the chairman of the committee
shall act as secretary of the meeting and keep the minutes of such meeting.
The Board of Directors, by the vote of a majority of the entire Board
of Directors, may remove the chairman or any member of any committee, and may
fill from among the directors vacancies in any committee caused by the death,
resignation, or removal of any person elected thereto.
The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee.
Each committee may determine its own rules of procedure, consistent
with these By-Laws. Meetings of any committee may be called upon direction
of the Chairman of the Board of Directors, the President, or the chairman of
the committee. Notice of each meeting shall be given to each member of the
committee, by personal delivery, telephone, telegram, facsimile transmission,
or regular or express mail addressed to the member at his or her usual
business address, or to the address where the member is known to be, at least
three days (excluding Saturdays, Sundays, and holidays) prior to the meeting
in case of notice by regular mail, and at least three hours prior to the
meeting in case of notice by personal delivery, express mail, telephone,
telegram, or facsimile transmission. All notices which are given by regular
mail shall be deemed to have been given when deposited in the United States
mail, postage prepaid. Notice of meetings of any committee may be waived by
any member of the committee before or after the meeting. At meetings of each
committee, the presence of a majority of such committee shall be necessary to
constitute a quorum for the transaction of business, and, if a quorum is
present at any meeting, the action taken by a majority of the members present
shall be the act of the committee. Each committee shall keep a record of
its acts and proceedings, and all action shall be reported to the Board of
Directors at the next meeting of the Board of Directors following such
action. Each committee shall annually consider whether amendments to the
section of Article III of these By-Laws relating to the composition and
function of such committee appear to be in the best interests of the Company.
Each committee shall report on such recommendations to the Nominating
Committee annually, no later than December. The Nominating Committee shall
report on such recommendations to the Board of Directors at its first regular
meeting each year.
Section 2. Executive Committee. The Executive Committee shall
consist of the Chairman of the Board of Directors and of such number of other
directors, a majority of whom shall not be officers or employees of the
Company or its affiliates, not less than four, as shall from time to time be
prescribed by the Board of Directors.
The Executive Committee, unless otherwise provided by resolution of
the Board of Directors, shall between meetings of the Board of Directors have
all the powers of the Board of Directors and may perform all of the duties
thereof, except that the Executive Committee shall have no authority as to
the following matters: (i) submission to shareholders of any action that
requires shareholders' authorization under the New York Business Corporation
Law; (ii) compensation of directors; (iii) amendment or repeal of these By-
Laws or the adoption of new By-Laws; (iv) amendment or repeal of any
resolution of the Board of Directors that by its terms may not be so amended
or repealed; (v) action in respect of dividends to shareholders; (vi)
election of officers, directors or members of committees of the Board of
Directors. Any action taken by the Executive Committee shall be subject to
revision or alteration by the Board of Directors, provided that rights or
acts of third parties vested or taken in reliance on such action prior to
their receipt of written notice of any such revision or alteration shall not
be adversely affected by such revision or alteration.
Section 3. Audit Committee. The Audit Committee shall consist
of such number of directors, who shall not be officers or employees of the
Company or any of its affiliates, not less than three, as shall from time to
time be prescribed by the Board of Directors.
The Committee shall review, with management, the Company's
independent public accountants and its internal auditors, upon completion of
the audit, the annual financial statements of the Company, the independent
public accountants' report thereon, the other relevant financial information
to be included in the Company's Annual Report on Form 10-K and its annual
report to shareholders. The Committee shall also periodically review the
Company's policies with respect to compliance with laws and regulations.
After such reviews, the Committee shall report thereon to the Board of
Directors.
The Committee shall:(1) review recommendations made by the
Company's independent public accountants and internal auditors with respect
to the accounting methods and the system of internal control used by the
Company, and shall advise the Board of Directors with respect thereto; (2)
examine and make recommendations to the Board of Directors with respect to
the scope of audits conducted by the Company's independent public accountants
and internal auditors; (3) review reports from the Company's independent
public accountants, internal auditors, and compliance office concerning
compliance by management with governmental laws and regulations and with the
Company's policies relating to business practices and procedures, ethics,
conflicts of interest, perquisites and use of corporate assets.
The Committee shall meet with the Company's independent public
accountants, internal auditors or compliance officer, without management
present, whenever the Committee shall deem it appropriate. The Committee
shall review with the General Counsel of the Company the status of legal
matters that may have a material impact on the Company's financial
statements.
The Committee shall each year make a recommendation, based on a
review of qualifications, to the Board of Directors for the appointment of
independent public accountants to audit the financial statements of the
Company and to perform such other duties as the Board of Directors may from
time to time prescribe. As part of such review of qualifications, the
Committee shall consider management's plans for engaging the independent
public accountants for management advisory services to determine whether such
services could impair the public accountants' independence.
The Committee shall have the power to conduct or authorize special
projects or investigations which the Committee considers necessary to
discharge its duties and responsibilities. It shall have the power to retain
independent outside counsel, accountants or others to assist it in the
conduct of any investigations and may utilize the Company's General Counsel,
internal auditors or compliance officer for such purpose.
Section 4. Compensation Committee. The Compensation Committee
shall consist of such number of directors, who shall not be officers or
employees of the Company or any of its affiliates, not less than three, as
shall from time to time be prescribed by the Board of Directors. As
authorized by the Board of Directors, the Compensation Committee shall make
recommendations to the Board of Directors with respect to the compensation of
directors and the administration of the salaries, bonuses, and other
compensation to be paid to the officers of the Company, including the terms
and conditions of their employment, shall review the compensation of the
Chief Executive Officer, and shall administer all stock option and other
benefit plans (unless otherwise specified in or pursuant to plan documents or
resolutions of the Board of Directors) affecting officers' direct and
indirect remuneration.
The Compensation Committee shall review the design, funding and
investment policies of the employee benefit plans of the Company and its
subsidiaries, as appropriate. The Committee shall, on its own initiative or
upon referral from the Board of Directors, investigate, analyze and consider
the current and future financial practices of such benefit plans and report
and make such recommendations to the Board of Directors as deemed
appropriate.
Section 5. Nominating Committee. The Nominating Committee
shall consist of such number of directors, who shall not be officers or
employees of the Company or any of its affiliates, not less than three, as
shall from time to time be prescribed by the Board of Directors.
The Nominating Committee shall review and recommend to the Board of
Directors prior to the annual shareholders' meeting each year: (a) the
appropriate size and composition of the Board of Directors; (b) a proxy
statement and form of proxy; (c) policies and practices on shareholder
voting; (d) plans for the annual shareholders' meeting; and (e) nominees:
(i) for election to the Board of Directors for whom the Company should
solicit proxies; (ii) to serve as proxies in connection with the annual
shareholders' meeting; (iii) for election to all committees of the Board of
Directors; and (iv) for election as executive officers of the Company.
The Nominating Committee shall annually review the Company's
Corporate Governance Guidelines, assess the performance of the Board,
evaluate the performance of the Chairman and Chief Executive Officer of the
Company, and review the management organization of the Company and succession
plans for the Chairman and Chief Executive Officer of the Company, including
consultation with the Chairman of the Board of Directors regarding persons
considered qualified to fill any vacancy that may occur in the position of
Chairman and Chief Executive Officer. In the event of any such vacancy, the
Nominating Committee shall recommend to the Board of Directors a nominee to
fill such vacancy.
Article IV
OFFICERS
Section 1. Officers. The Board of Directors shall, at its
annual meeting, and may at any other meeting, or any adjournment thereof,
elect from among its members a Chairman of the Board of Directors and a
President. The Board of Directors may also elect at such meeting one or more
Vice Chairmen and one or more Vice Presidents, who may have special
designations, and may elect at such meeting a Treasurer, a Controller and a
Secretary, who also may have special designations.
The Board of Directors may elect or appoint such other officers and
agents as it shall deem necessary, or as the business of the Company may
require, each of whom shall hold office for such period, have such authority
and perform such duties as the Board of Directors may prescribe from time to
time.
Any two or more offices, except the offices of Chairman of the Board
of Directors and Secretary, the offices of President and Secretary and the
offices of Chief Financial Officer (regardless of title) and Controller, may
be held by the same person, but no officer shall execute, acknowledge or
verify any instrument in more than one capacity.
Section 2. Term of Office. Each officer elected by the Board
of Directors shall hold office until the annual meeting of the Board of
Directors following the next annual meeting of shareholders and until his or
her successor is elected, or until such earlier date as shall be prescribed
by the Board of Directors at the time of his or her election. Any officer
may be removed at any time, with or without cause, by the vote of a majority
of the members of the Board of Directors.
Section 3. Vacancies. A vacancy in any office caused by the
death, resignation, retirement, or removal of the person elected thereto, or
by any other cause, may be filled for the unexpired portion of the term by
election of the Board of Directors at any meeting. In case of the absence or
disability, or refusal to act of any officer of the Company, or for any other
reason that the Board of Directors shall deem sufficient, the Board of
Directors may delegate, for the time being, the powers and duties, or any of
them, of such officer to any other officer or to any director, consistent
with the limitations in Section 1.
Section 4. The Chairman of the Board of Directors. The
Chairman of the Board of Directors shall be the chief executive officer of
the Company and shall have general direction over the affairs of the Company,
subject to the control and direction of the Board of Directors. The Chairman
shall, when present, preside as chairman at all meetings of the shareholders
and of the Board of Directors. The Chairman may call meetings of the
shareholders and of the Board of Directors and of the committees whenever he
or she deems it necessary. The Chairman shall, in the absence or incapacity
of the President, perform all duties and functions and exercise all the
powers of the President. The Chairman shall have such other powers and
perform such other duties as from time to time may be prescribed by the Board
of Directors.
Section 5. The President. The President shall have general
direction over the day-to-day business of the Company, subject to the control
and direction of the Chairman of the Board of Directors. The President shall
keep the Chairman of the Board of Directors fully informed concerning the
activities of the Company under his supervision. The President shall, in the
absence or incapacity of the Chairman of the Board of Directors, perform all
duties and functions and exercise all the powers of the Chairman of the Board
of Directors. In the absence of the Chairman of the Board of Directors, the
President shall preside at meetings of the shareholders and of the Board of
Directors. The President shall have such other powers and perform such other
duties as are incident to the office of President and as from time to time
may be prescribed by the Board of Directors.
Section 6. Vice Chairmen and Vice Presidents. Each Vice
Chairman and each Vice President shall have such powers and perform such
duties as from time to time may be assigned to him or her by the Board of
Directors or be delegated to him or her by the Chairman of the Board of
Directors or by the President. The Board of Directors may assign to any Vice
Chairman or Vice President general supervision and charge over any
territorial or functional division of the business and affairs of the
Company. In the absence or incapacity of the Chairman of the Board of
Directors and the President, the powers, duties, and functions of the
President shall be temporarily performed and exercised by such one of the
Vice Chairmen or Vice Presidents as shall be designated by the Board of
Directors or, if not designated by the Board of Directors, by the Executive
Committee or, if not designated by the Executive Committee, by the President.
Section 7. Chief Financial Officer. The Chief Financial
Officer shall keep and maintain, or cause to be kept and maintained, adequate
and correct books and records of accounts of the properties and business
transactions of the Company, including accounts of its assets, liabilities,
receipts, disbursements, gains, losses, capital, retained earnings, and
shares. The books of account shall at all reasonable times be open to
inspection by any director.
The Chief Financial Officer shall deposit all money and other
valuables in the name and to the credit of the Company with such depositaries
as may be designated by the Board of Directors. He or she shall disburse the
funds of the Company as may be ordered by the Board of Directors, shall
render to the Board of Directors, the Chairman of the Board of Directors, or
the President, whenever they request it, an account of all of his or her
transactions as Chief Financial Officer and of the financial condition of the
Company, and shall have such other powers and perform such other duties as
may be prescribed by the Board of Directors, the Chairman of the Board of
Directors, the President or these By-Laws.
Section 8. Controller. The Controller shall have general
charge, control, and supervision over the accounting and auditing affairs of
the Company. The Controller or such persons as the Controller shall
designate shall have responsibility for the custody and safekeeping of all
permanent records and papers of the Company. The Controller shall have
responsibility for the preparation and maintenance of the books of account
and of the accounting records and papers of the Company; shall supervise the
preparation of all financial statements and reports on the operation and
condition of the business; shall have responsibility for the establishment of
financial procedures, records, and forms used by the Company; shall have
responsibility for the filing of all financial reports and returns, except
tax returns, required by law; shall render to the Chairman of the Board of
Directors, the President, or the Board of Directors, whenever they may
require, an account of the Controller's transactions; and in general shall
have such other powers and perform such other duties as are incident to the
office of Controller and as from time to time may be prescribed by the Board
of Directors, the Chairman of the Board of Directors, or the President.
Section 9. Secretary. The Secretary shall attend and keep the
minutes of meetings of the shareholders, of the Board of Directors, and of
all committees of the Company in books of the Company provided for that
purpose; may sign with the Chairman of the Board of Directors, the President,
any Vice Chairman or any Vice President, or the Manager of any Department, in
the name of the Company, contracts and other instruments authorized by the
Board of Directors or by the Executive Committee, and in proper cases shall
affix the corporate seal thereto; shall see that notices are given and
corporate records and reports are properly kept and filed by the Company as
required by these By-Laws or as required by law; and in general shall have
such other powers and perform such other duties as are incident to the office
of Secretary and as from time to time may be prescribed by the Board of
Directors, the Chairman of the Board of Directors, or the President.
Section 10. Compensation. The salaries and other compensation
of all officers elected by the Board of Directors shall be fixed from time to
time by or under the direction of the Board of Directors.
Article V
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. Indemnification. Any person (hereinafter called an
"Indemnitee") made, or threatened to be made, a party to, or who is otherwise
involved in, any action, suit or proceeding whether civil, criminal,
administrative or investigative, by reason of the fact that such Indemnitee,
or his or her testator or intestate, is or was a director or officer of the
Company, or, while a director or officer of the Company and at the request of
the Company, is or was serving another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise in any capacity,
shall be indemnified by the Company to the full extent permitted by
applicable law, against judgments, fines, amounts paid in settlement and all
expenses, including attorneys' fees, actually incurred as a result of such
action, suit or proceeding, or any appeal therein.
Without limitation of the foregoing, the Company shall be deemed to
have requested an Indemnitee to serve an employee benefit plan where the
performance by such person of his or her duties to the Company also imposes
duties on, or otherwise involves services by, such person to the plan or
participants or beneficiaries of the plan. Excise taxes assessed on an
Indemnitee with respect to an employee benefit plan pursuant to applicable
law shall be considered fines.
Section 2. Partial Indemnity. If an Indemnitee is entitled
under any provision of this Article V to indemnification by the Company for
some or a portion of the amounts indemnified against, but not for the total
amount thereof, the Company shall nevertheless indemnify such Indemnitee for
the portion thereof to which such Indemnitee is entitled.
Section 3. Advancement of Expenses. Except as prohibited by
applicable law, the Company shall, from time to time, reimburse or advance to
any Indemnitee the funds necessary for payment of expenses incurred in
connection with any action, suit or proceeding referred to in Section 1, upon
receipt of a written undertaking by or on behalf of such Indemnitee to repay
such amounts if and to the extent that such repayment is required pursuant to
applicable law.
Section 4. Corporate Action; Judicial Review. Upon receipt of
a request to be indemnified, or for the reimbursement or advancement of
expenses, the Company shall promptly proceed in good faith to take all
actions necessary to a determination of whether or not the Indemnitee is
entitled to such payment pursuant to this Article V. If such a request is
not paid in full by the Company within thirty days after receipt of a written
claim therefor, the Indemnitee may at any time thereafter bring suit against
the Company to recover the unpaid amount of the claim and, if successful in
whole or in part, the Indemnitee also shall be entitled to be reimbursed by
the Company for the expenses actually incurred, including attorneys' fees, of
prosecuting such claim. Neither a determination that such payments are
improper under the circumstances, nor the failure of the Company (including
its Board of Directors, Independent Counsel (as hereinafter defined) or
shareholders) to have made a determination, prior to the commencement of such
action, that such payments are proper under the circumstances, shall be a
defense to the action or shall create a presumption that the Indemnitee is
not entitled to the payment requested. Notwithstanding any other provision
of this Article V, in any action hereunder by the Indemnitee against the
Company to secure indemnification or reimbursement or advancement of
expenses, to the extent permitted by applicable law, the Company shall bear
the burden of proof that the Indemnitee is not entitled to such payments.
Section 5. Contract Right. The right to indemnification and to
the reimbursement or advancement of expenses pursuant to this Article V (a)
is a contract right provided in consideration of services to the Company,
with respect to which an Indemnitee may bring suit as if the provisions of
this Article V were set forth in a separate written contract between the
Company and such Indemnitee, (b) is intended to be retroactive and shall, to
the extent permitted by applicable law, be available with respect to events
occurring prior to the adoption hereof, and (c) shall continue to exist after
any future rescission or restrictive modification hereof with respect to any
alleged cause of action that accrues, or any other incident or matter that
occurs, prior to such rescission or modification. It is the intent of the
Company to irrevocably establish hereby the right of Indemnitees to all
indemnification that is not prohibited by applicable law.
Section 6. Change in Control. If there has been a Change in
Control of the Company (as hereinafter defined) within five years prior to
any request for indemnification or reimbursement or advancement of expenses
pursuant to this Article V, then with respect to all matters thereafter
arising concerning the rights of Indemnitees to payments pursuant to this
Article V or under any other agreement not inconsistent with this Article V
now or hereafter in effect, the Company shall seek legal advice as specified
below only from Independent Counsel (as hereinafter defined) selected by the
Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld). Such Independent Counsel shall determine whether and
to what extent the Indemnitee would be permitted to be indemnified under
applicable law, which determination shall include an opinion as to whether
any requisite standard of conduct under applicable law has been met, and
shall render a written opinion to the Company and the Indemnitee to such
effect. To the extent permitted by applicable law, the Company shall be
required by this Section 6 to authorize indemnification to the extent such
opinion of Independent Counsel indicates that indemnification is permitted
under applicable law; provided, however, that nothing in this Section 6 shall
be deemed to abrogate the duties of any director of the Company to
participate in any determination required to be made under applicable law as
to whether such payments shall be made. The Company agrees to pay the
reasonable fees of such Independent Counsel and to indemnify such counsel
fully against any and all expenses, claims, liabilities and damages arising
out of or relating to this Article V or the engagement of such Independent
Counsel pursuant hereto.
A "Change in Control of the Company" shall be deemed to have occurred
if (a) any "person" (as such term is used in Section 13(d) of the Securities
Exchange Act of 1934) is or becomes the beneficial owner (as defined in Rule
13d-3 under such Act), directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the Company's then
outstanding voting shares, or (b) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board of
Directors of the Company cease for any reason to constitute at least a
majority thereof unless the election of each director who was not a director
at the beginning of the period was approved by a vote of a least 75% of the
directors then still in office who were directors at the beginning of the
period.
"Independent Counsel" shall refer to an attorney-at-law who at the
time of his or her selection shall not have otherwise performed services for
the Company or the Indemnitee within the previous five years. Independent
Counsel shall not be any person who, under the standards of professional
conduct to which he or she is legally subject, would have a conflict of
interest in representing either the Company or the Indemnitee in connection
with the determination of the Indemnitee's rights under this Article V; nor
shall Independent Counsel be any person who has been sanctioned or censured
for ethical violations of such standards of professional conduct.
Section 7. Period of Limitations. To the extent such
limitation is permitted by applicable law, no legal action shall be brought
and no cause of action shall be asserted by or in the right of the Company or
any affiliate of the Company against an Indemnitee, Indemnitee's spouse,
heirs, testators, intestates, executors, administrators or personal or legal
representatives after the expiration of three years from the date of accrual
of such cause of action, and any claim or cause of action of the Company or
any affiliate shall be extinguished and deemed released unless asserted by
the timely filing of a legal action within such three year period; provided,
however, that if any shorter period of limitations is otherwise applicable to
any such cause of action, such shorter period shall govern.
Section 8. Non-exclusivity. The rights of Indemnitees under
the foregoing provisions of this Article V shall be in addition to any other
rights such persons may have under a resolution of the shareholders of the
Company, a resolution of its directors, the Certificate of Incorporation of
the Company as amended or restated from time to time, the New York Business
Corporation Law, the common law, any insurance policy, any agreement or
otherwise. In addition to the foregoing provisions of this Article V,
indemnification and reimbursement and advancement of expenses may be
authorized pursuant to this Article V by a resolution of the shareholders of
the Company, a resolution of its directors or an agreement providing for such
indemnification. The Company shall not be liable under this Article V to
make any payment to an Indemnitee to the extent that such person has
otherwise actually received payment of the amounts otherwise indemnifiable
hereunder.
Section 9. Applicable Law. Any Indemnitee entitled to
indemnification or to the reimbursement or advancement of expenses as a
matter of right pursuant to this Article V may elect, to the extent permitted
by law, to have the right of indemnification (or reimbursement or advancement
of expenses) interpreted on the basis of the applicable law in effect at the
time of the occurrence of the event or events giving rise to the action, suit
or proceeding, or on the basis of the applicable law in effect at the time
indemnification (or reimbursement or advancement of expenses) is sought.
Article VI
STOCK CERTIFICATES AND TRANSFER OF STOCK
Section 1. Certificates of Stock. Certificates representing
shares of the Company shall be in such form, consistent with law, as shall be
approved by the Board of Directors. They shall be signed by the Chairman of
the Board of Directors or President or a Vice Chairman or a Vice President,
and by the Secretary or Treasurer or by an Assistant Secretary or Assistant
Treasurer, and shall be sealed with the corporate seal of the Company. Such
seal may be an engraved or printed facsimile, and the signature of such
officers of the Company, or any of them, may be printed facsimiles if such
certificates are countersigned by a Transfer Agent or registered by a
Registrar other than the Company itself or an employee thereof. In case any
officer who shall have signed any such certificate, or whose facsimile
signature shall have been used thereon, shall cease to be such officer before
such certificate shall have been issued by the Company, such certificate may
be issued by the Company with the same effect as if such officer had not
ceased to be such at the date of the issuance of such certificate. The
signature of the Transfer Agent and Registrar on a certificate representing
shares of the Company may also be a printed facsimile when the same entity
acts in the dual capacity.
Section 2. Transfer of Certificated Stock. Certificated shares
of the Company shall be transferred on the books of the Company only upon
surrender of the certificate or certificates therefor to the Treasurer of the
Company, or to any authorized Transfer Agent, properly endorsed or
accompanied by proper assignments duly executed by the registered holder
thereof in person or by his or her attorney duly authorized in writing;
except that with respect to certificates alleged to have been lost, stolen,
or destroyed, a new certificate may be issued without cancellation of the
original certificate, but only upon production of such evidence of the loss,
theft, or destruction of the original certificate, and upon delivery to the
Company of a bond of indemnity in such amount and upon such terms as the
Board of Directors, in its discretion, may require. Until so transferred on
the books of the Company, the Company shall deem and treat the registered
holder of each certificate for shares as the owner of such shares for all
purposes.
Section 3. Transfer Agent and Registrar; Regulations. The
Company shall maintain one or more transfer offices or agencies, each under
control of a Transfer Agent, where the shares of the Company may be
transferable, and also one or more registry offices or agencies, each under
control of a Registrar, where such shares may be registered, and no
certificate for shares of the Company shall be valid unless countersigned by
such Transfer Agent and registered by such Registrar. The Board of Directors
may make such additional rules and regulations as it may deem expedient
concerning the issue, transfer, and registration of certificates for shares
of the Company.
Section 4. Record Date of Shareholders. The Board of Directors
may from time to time fix in advance a date, not more than fifty nor less
than ten days preceding the date of any meeting of shareholders, and not more
than fifty days prior to the date for the payment of any dividend, or the
date for the allotment of any rights, or the date when any change or
conversion or exchange of shares shall become effective, or the date for any
other action by the shareholders, as a record for the determination of the
shareholders entitled to notice of, and to vote at, any such meeting and any
adjournment thereof, or entitled to receive payment of any such dividend, or
to any such allotment of rights, or to exercise the rights in respect of any
such change, conversion, or exchange of shares, or to take any other action,
and only such shareholders as shall be shareholders of record on the date so
fixed shall be entitled to such notice of, and to vote at, such meeting and
any adjournment thereof, or to receive payment of such dividend, or to
receive such allotment of rights, or to exercise such rights, or to take such
other action, as the case may be, notwithstanding any transfer of any shares
on the books of the Company after any such record date so fixed.
Section 5. Uncertificated Shares. The Board of Directors may
in its discretion authorize the issuance of shares which are not represented
by certificates and provide for the registration and transfer thereof on the
books and records of the Company or any Transfer Agent or Registrar so
designated.
Section 6. Shareholder Records. The names and addresses of the
persons to whom shares are issued, and the number of shares and the dates of
issue and any transfer thereof, whether in certificated or uncertificated
form, shall be entered on records kept for that purpose. The stock transfer
records and the blank stock certificates shall be kept by the Transfer Agent,
or by the Treasurer, or such other officer as shall be designated by the
Board of Directors for that purpose. Every certificate surrendered for
transfer or exchange shall be cancelled.
Article VII
FISCAL YEAR
The fiscal year of the Company shall begin on January 1 in 1994, and
thereafter shall begin on the day after the Saturday closest to December 31
in each year, and shall end on the Saturday closest to December 31 in 1994
and each year thereafter.
Article VIII
SEAL
The corporate seal of the Company shall be circular in form and shall
contain the name of the Company and the words "New York," "1906," and "Seal."
The Secretary shall have custody of the seal, and a duplicate of the seal may
be kept and used by any Assistant Secretary.
Article IX
AMENDMENTS
These By-Laws may be amended or repealed by the vote of a majority
of the directors present at any meeting of the Board of Directors at which a
quorum is present or by the vote of the holders of the shares of the Company
at the time entitled to vote in the election of directors at any meeting of
the shareholders at which a quorum is present.
This document constitutes part of a prospectus covering securities
that have been registered under the Securities Act of 1933.
SEARS, ROEBUCK AND CO.
Hoffman Estates, Illinois
Name: Date: March 12, 1997
ssn: Total Number of Shares:
Price per Share: $56.13
Pursuant to action taken by Sears, Roebuck and Co. (the "Company") under the
1994 Employees Stock Plan (the "Plan"), you are hereby granted the option
(herein called "this option") to purchase, at the price per share shown
above, upon and subject to the provisions and conditions hereinafter set
forth, the total number of common shares of the Company shown above, in three
installments, with this option becoming exercisable for one-half of said
total number of shares on the 12th day of March, 2002 and for one-quarter of
said total number of shares on the 12th day of March in each of the years
2003 and 2004. This option will not become exercisable for any common shares
of the Company unless the average mean (adjusted to the next higher full cent
to eliminate any fractional cent) between the high and low prices per share
for the Company's common shares as reported in a summary of composite
transactions for stocks listed on the New York Stock Exchange (such mean
being the "Mean Common Share Price") is at least equal to the amount or
amounts specified in the following paragraph for the period or periods
specified therein.
With respect to each of the three installments specified above, this option
will become exercisable for one-half of the number of shares specified in the
above paragraph for such installment only if (i) for any period of twenty
consecutive trading days occurring within three years from the date of grant
the average of the Mean Common Shares Price during such period is at least
$75, or (ii) for any period of twenty consecutive trading days occurring
within five years from the date of grant the average of the Mean Common Share
Prices is at least $100 (the "50% Condition"). With respect to each of the
three installments specified above, this option will become exercisable for
the remaining one-half of the number of shares specified in the above
paragraph for such installment only if for any period of twenty consecutive
trading days occurring within five years from the date of grant the average
of the Mean Common Share Prices during such period is at least $100 (the
"100% Condition"). You may exercise your right to purchase all or any of the
shares included in any such installment on or after the date of such
installment, provided such option has become exercisable, but in any event
not later than February 28, 2007 (the "Expiration Date"), by making payment
in full for the shares which you so elect to purchase, at the price per share
herein prescribed, by check, made payable to "Sears, Roebuck and Co." Please
submit your payment to:
Stock Option Office
Sears, Roebuck and Co.
Hoffman Estates, IL 60179
The exercise of this option shall be effective on the date when payment in
full for the shares being purchased is actually received in the Stock Option
Office; provided that no payment shall be accepted which is received in the
Stock Option Office after the Expiration Date. You will receive a stock
certificate representing the shares for which you have made payment, except
that the Company shall not be obligated to deliver any stock certificates
unless and until (i) there has been compliance with any federal or state laws
or regulations or national securities exchange requirements which the Company
may deem applicable; (ii) all legal matters in connection with the sale and
delivery of the shares have been approved by the Company's counsel; and (iii)
your check in payment for the shares has cleared.
Upon the occurrence from time to time prior to the Expiration Date of a
Change of Control (as defined in Appendix A), notwithstanding any other
provision of this option, during the sixty-day period from and after the
Change of Control, you are hereby granted the right ("limited stock
appreciation rights") to elect to surrender, in whole or in part, any
exercisable option right which has become exercisable under this option upon
or prior to the date of such election and receive payment therefor, from the
Company or one of its subsidiaries, in cash, with respect to each share
subject to the surrendered option right in an amount equal to the excess of
the fair market value of such share on the date of surrender over the option
price. The fair market value of common shares of the Company on the date of
surrender shall be the Mean Common Share Price on the date the Stock Option
Office receives the notice referred to below of your election to exercise
such right or, if the New York Stock Exchange is not open for trading on such
date, the average of the Mean Common Share Price on the nearest date before
and the nearest date after such date on which the New York Stock Exchange is
open for trading (adjusted to the next higher full cent to eliminate any
fractional cent). You may exercise such election by notifying the Stock
Option Office, in writing, of the number of shares with respect to which you
wish to exercise limited stock appreciation rights. Notification of your
election must be received in the Stock Option Office no later than the end of
the aforesaid sixty-day period and prior to the Expiration Date. In no event
may any such election be made until six months after the date of grant of
this option, provided, however, that in the case of a limited stock
appreciation right which is exercisable, solely as a result of a Change of
Control due to approval by the shareholders of the Company of a Business
Combination (as defined in Appendix A) or the option to purchase Company
common shares which has become exercisable solely due to your termination (as
specified below) following a Change of Control due to approval by the
shareholders of the Company of a Business Combination, any exercise by you
shall be conditioned upon, and deemed effective immediately prior to,
consummation of the Business Combination (except that the fair market value
of common shares of the Company shall continue to be determined, in
accordance with the provisions set forth above, on the date the Stock Option
Office receives the election to exercise all or any portion of such limited
stock appreciation rights), and provided further, that notwithstanding the
provisions of this paragraph, you may at any time exercise any option rights
in accordance with the other provisions of this option.
This option will not be treated as an incentive stock option for federal
income tax purposes. Therefore, under existing laws and regulations, the
difference between the price paid for the shares purchased hereunder and the
market value thereof on the date this option is exercised, or any amounts
received in cash upon the exercise of limited stock appreciation rights or
otherwise with respect to this option, will be subject to federal income tax
at ordinary rates and to social security tax and to their respective
withholding requirements, and may be subject to state and local taxes and
withholding requirements. The payment of all such federal, state and local
taxes is your personal responsibility. However, the Company, at its
discretion, may require you to deposit with it an amount equal to any
required withholding. You may elect that all or any portion of any such
withholding required to be deposited upon exercise of this option shall be
satisfied by having the Company withhold a portion of the whole shares
issuable pursuant to your exercise of this option. Such shares shall be
valued at their fair market value on the date of exercise.
The Company reserves and shall have the right, by written notice to you, to
change the provisions of this option in any manner that it may deem necessary
or advisable to carry out the purpose of its grant as a result of any change
in applicable laws or regulations or any future regulation, ruling or
judicial decision; provided that any such change shall be applicable only to
shares for which payment or limited stock appreciation rights elections shall
not then have been made as herein provided.
If you cease to be employed by the Company or any of its subsidiaries for any
of the following reasons: (i) death, (ii) total and permanent disability or
(iii) normal or, with Company approval, early retirement, then this option
shall be exercisable (but only to the extent that the conditions specified by
the following provisos are satisfied) by you (or in the case of your death,
your executor, administrator, legal representative or beneficiary) during the
five-year period commencing on the date of your termination of employment,
but in no event later than the Expiration Date, for the number of Company
common shares determined by multiplying the total number of Company common
shares first shown above by a fraction, the numerator of which is the number
of calendar months which have elapsed since and including the date of grant
of this option through the date of such termination of employment (rounded up
to the nearest whole number, but in no event shall such numerator be greater
than 84) and the denominator of which is 84 ("Prorated Shares"); provided,
however, that this option shall be exercisable for one-half of such Prorated
Shares only when and if the 50% Condition is satisfied; and provided further,
that this option shall be exercisable for the remaining one-half of such
Prorated Shares only when and if the 100% Condition is satisfied.
Except as provided below, if you cease to be employed by the Company or any
of its subsidiaries because of voluntary termination of your employment by
you, involuntary termination of your employment by the Company or by mutual
agreement of you and the Company, then this option shall terminate as to the
shares for which you shall not then have made payment or limited stock
appreciation rights elections as aforesaid, except that within three months
after the date you cease to be so employed, but in no event later than the
Expiration Date, you or in the case of your death, your executor,
administrator, legal representative or beneficiary, may pay for and receive
all or any of the shares for which this option had become exercisable on or
prior to the date you cease to be so employed and for which you shall not
then have made payment or limited stock appreciation rights elections as
aforesaid.
Following a Change of Control, if you cease to be employed by the Company or
any of its subsidiaries due to (i) the involuntary termination of your
employment by the Company for any reason other than Cause (as defined below),
(ii) termination of your employment for Good Reason (as defined below) or
(iii) termination of your employment by mutual agreement between you and the
Company, then this option shall terminate as to the shares for which you
shall not then have made payment or limited stock appreciation rights
elections as aforesaid, except that within the three-month period commencing
on the date of your termination of employment, but in no event later than the
Expiration Date, this option shall be exercisable by you for the total number
of Company common shares first shown above, in the case of clause (i), and
for the number of Prorated Shares, in the case of clause (ii) or (iii) (but
only to the extent that the conditions specified by the following provisos
are satisfied); provided, however, that this option shall be exercisable for
one-half of such shares only if the 50% Condition has been satisfied prior to
your date of termination; and provided further, that this option shall be
exercisable for the remaining one-half of such shares only if the 100%
Condition has been satisfied prior to your date of termination.
For the purpose of this Agreement, (a) "Cause" shall mean (1) a material
breach by you of those duties and responsibilities which do not differ in any
material respect from your duties and responsibilities during the 90-day
period immediately prior to a Change of Control (other than due to incapacity
due to physical or mental illness) which is demonstrably willful and
deliberate on your part, which is committed in bad faith or without
reasonable belief that such breach is in the best interests of the Company
and which is not remedied in a reasonable period of time after receipt of
written notice from the Company specifying such breach or (2) the commission
by you of a felony involving moral turpitude, and (b) "Good Reason" shall
mean a significant reduction in your responsibilities, title or annual base
salary, or your mandatory relocation to an office outside of the greater
Chicago metropolitan area.
Notwithstanding anything to the contrary set forth herein, this option shall
not become exercisable to purchase any shares until six months after the date
of grant of this option.
In the event that the Company (in connection with the disposition of all or
a portion of the stock of any subsidiary of the Company, the sale of stock by
any subsidiary or otherwise) no longer includes, or anticipates that it will
no longer include, your employer in the Company's consolidated federal income
tax return, the Company may in its discretion either terminate your rights
under this option as to shares or rights not theretofore purchased or
exercised or make such other provision with respect thereto as it shall deem
appropriate and equitable or in the interest of the Company. In either such
case, the Company shall use reasonable efforts to provide you with sufficient
notice of such termination or other provision so as to afford you a
reasonable opportunity prior to the effectiveness thereof during which you
may elect to exercise any of your then-exercisable rights under this option.
In the event of a stock dividend or stock split of issued common shares of
the Company, the Company shall, and in the event of a combination or other
reduction in the number of issued common shares of the Company, or spin-off
or other distribution of any assets of the Company or any subsidiary or all
or any portion of the interest of the Company in any subsidiary to the
shareholders of the Company, the Company may make such adjustments, if any,
in the number of unpurchased shares subject to this option, the exercise
price per share and the limited stock appreciation rights with respect
thereto, and the closing price or prices for the Company common shares which
are conditions for this option becoming exercisable, as it may in good faith
determine to be appropriate and equitable.
In the event of a merger, consolidation, reorganization, sale or exchange of
substantially all assets, or dissolution of the Company (an "extraordinary
corporate transaction"):
(i) your rights under this option shall terminate as to shares
or rights not theretofore purchased or exercised except to the extent
provided by the Company or in the terms of the merger, consolidation,
reorganization, or plan for dissolution or sale or exchange of the assets;
(ii) appropriate and equitable provision shall be made, by the
Company, in the terms of the merger, consolidation, reorganization or plan
for dissolution or sale or exchange of the assets, or otherwise, with respect
to your rights under this option; and
(iii) for purposes of the foregoing clause (ii), in the case of any
extraordinary corporate transaction which is consummated six months or more
after the date of grant of this option, such appropriate and equitable
provision shall mean that either (a) appropriate and equitable provision
shall be made for the continuation and adjustment of the rights under this
option or (b) the Company shall be obligated to make adequate provision
(including without limitation (1) to the extent required, obtaining any
necessary approvals or consents by the shareholders, the Board of Directors
or any committee of the Board of Directors of the Company or any governmental
authority, and (2) if you are subject to Section 16(b) of the Exchange Act,
such action as may be required to assure that any amounts received by you are
not subject to recovery pursuant to Section 16(b)) to assure that either (x)
each installment of this option shall have accrued and been exercisable for
such period of time prior to consummation of such extraordinary corporate
transaction so as to afford you a reasonable opportunity prior to such
consummation during which you may elect to exercise any of your rights under
each installment of this option, or (y) upon consummation of such
extraordinary corporate transaction, you shall receive an amount, in cash,
with respect to each share subject to this option (whether or not the right
to purchase such share has then accrued) and for which you have not then made
payment or limited stock appreciation rights elections as aforesaid, at least
equal to the excess of the fair market value of such share, on the date of
such extraordinary corporate transaction, over the option price. The fair
market value of common shares of the Company on the date of an extraordinary
corporate transaction shall be the simple arithmetic average of the mean
(adjusted to the next higher cent to eliminate any fractional cent) between
the high and low prices for the Company's common shares, as reported in a
summary of composite transactions for stocks listed on the New York Stock
Exchange, for each of the most recent ten days preceding such date for which
there were such reported transactions.
This option and the limited stock appreciation rights provided for herein
shall be exercisable during your lifetime only by you or your guardian or
legal representative and may not be sold, transferred, pledged or otherwise
assigned by you, expressly or by operation of law, except in the event of
your death, and then only to the extent and subject to the provisions and
conditions herein set forth. Any attempted sale, transfer, pledge or other
disposition thereof by you shall be void and shall constitute valid grounds
for cancellation of this option and the limited stock appreciation rights
provided for herein by the Company.
You are also prohibited from selling your option shares if you are in
possession of "confidential, material, non-public information" about Sears or
its affiliated companies.
This option is granted for the purpose of affording selected key employees an
opportunity to acquire a proprietary interest in the Company through stock
ownership. However, any shares purchased pursuant hereto will be your sole
property, and the Company recognizes that you may find it necessary to sell
all or part of such shares for various reasons.
This option and the limited stock appreciation rights provided for herein
shall be of no force or effect and no rights hereunder shall exist after the
Expiration Date.
Sears, Roebuck and Co.
Arthur C. Martinez
Chairman and Chief Executive Officer
Appendix A
Certain Definitions
A "Change of Control" shall mean:
(a) The acquisition by any individual, entity or group
(within the meaning of Section 13 (d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended [the "Exchange Act"] (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (i) the then outstanding common shares
of the Company (the "Outstanding Company Common Shares") or (ii) the combined
voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "Outstanding
Company Voting Securities");provided, however, that the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company (excluding an acquisition by virtue of the exercise
of a conversion privilege); (ii) any acquisition by the Company or any of its
subsidiaries; (iii) any acquisition by any employee benefit plan (or any
related trust) sponsored or maintained by the Company of any of its
subsidiaries; or (iv) any acquisition by any corporation pursuant to a
reorganization, merger or consolidation, if, following such reorganization,
merger or consolidation, the conditions described in clauses (i), (ii) and
(iii) of (c) below are satisfied; or
(b) Individuals who, as of the date hereof, constitute the
Board of Directors of the Company (the "Board")(as of the date hereof, the
"Incumbent Board") cease for any reason to constitute at least a majority of
the Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by
the Company's shareholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board, but excluding,
for this purpose, any such individual whose initial assumption of office
occurs as a result of either an actual or threatened election contest (as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Approval by the shareholders of the Company of a
"Business Combination", which shall mean a reorganization, merger or
consolidation, in each case, unless, following such reorganization, merger or
consolidation, (i) more than 60% of, respectively, the then outstanding
common shares of the corporation resulting from such reorganization, merger
of consolidation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Shares and
Outstanding Company Voting Securities immediately prior to such
reorganization, merger or consolidation in substantially the same proportions
as their ownership, immediately prior to such reorganization, merger or
consolidation, of the Outstanding Company Common Shares and Outstanding
Company Voting Securities, as the case may be, (ii) no Person (excluding the
Company, any of its subsidiaries, any employee benefit plan (or related
trust) sponsored or maintained by the Company, any of its subsidiaries or
such corporation resulting from such reorganization, merger or consolidation
and any Person beneficially owning, immediately prior to such reorganization,
merger or consolidation, directly or indirectly, 20% or more of the
Outstanding Company Common Shares or Outstanding Company Voting Securities,
as the case may be) beneficially owns, directly or indirectly, 20% or more
of, respectively, the then outstanding common shares of the corporation
resulting from such reorganization, merger or consolidation or the combined
voting power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors and (iii) at least a
majority of the members of the board of directors of the corporation
resulting from such reorganization, merger or consolidation were members of
the Incumbent Board at the time of the execution of the initial agreement
providing for such reorganization, merger or consolidation: or
(d) Approval by the shareholders of the Company of (i) a
complete liquidation or dissolution of the Company or (ii) the sale or other
disposition of all or substantially all of the assets of the Company, other
than to a corporation, with respect to which following such sale or other
disposition, (A) more then 60% of, respectively, the then outstanding common
shares of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally
in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Shares and Outstanding Company Voting Securities immediately prior to such
sale or other disposition in substantially the same proportion as their
ownership, immediately prior to such sale or other disposition, of the
Outstanding Company Common Shares and Outstanding Company Voting Securities,
as the case may be, (B) no Person (excluding the Company, any of its
subsidiaries, and any employee benefit plan (or related trust) sponsored or
maintained by the Company, any of its subsidiaries or such corporation and
any Person beneficially owning, immediately prior to such sale or other
disposition, directly or indirectly, 20% or more of the Outstanding Company
Common Shares or Outstanding Company Voting Securities, as the case may be)
beneficially owns, directly or indirectly, 20% or more of, respectively, the
then outstanding common shares of such corporation and the combined voting
power of the then outstanding voting securities of such corporation entitled
to vote generally in the election of directors and (C) at least a majority of
the members of the board of directors of such corporation were members of the
Incumbent Board at the time of the execution of the initial agreement or
action of the Board providing for such sale or other disposition of assets of
the Company.
For purposes of the foregoing definition of "Change of Control", a
"subsidiary" of the Company shall mean any corporation in which the Company,
directly or indirectly, holds a majority of the voting power of such
corporation's outstanding shares of capital stock.
SUMMARY EXPLANATION - RESTRICTED STOCK
Restricted shares may not be sold, transferred, pledged or otherwise assigned
and shall, except to the extent exchangeable for unrestricted common shares
of the Company as hereinafter provided, be automatically canceled upon
termination of your employment with the Company and its wholly-owned (except
for directors' qualifying shares) subsidiaries. One-half of your restricted
shares will become exchangeable for unrestricted shares on the date specified
below only if (i) for any period of twenty consecutive trading days occurring
within three years from the date of grant the average of the high and low
prices for the Company's common shares on each date is at least $75, or (ii)
for any period of twenty consecutive trading days occurring within five years
from the date of grant the average of the high and low prices for the
Company's shares on each date is at least $100. The remaining one-half of
your restricted shares will become exchangeable for unrestricted shares on
the date specified below only if for any period of twenty consecutive trading
days occurring within five years from the date of grant the average of the
high and low prices for the Company's common shares on each date is at least
$100. For shares that have met the above specified stock price performance
test, your restricted shares shall be exchangeable for unrestricted common
shares of the Company and certificates shall be issued to you on March 12,
2007 or, if earlier, upon, (i) your normal retirement, (ii) early retirement
with Company approval after attaining age 60, (iii) death, or (iv) a Change
of Control (as defined in Appendix A); provided, however, that, if any such
event shall occur less than six months after the date of grant of your
restricted shares, your restricted shares shall become exchangeable for
unrestricted common shares of the Company and certificates shall be issued to
you at the end of such six months, but only if you are still employed by the
Company or any of its wholly-owned (except for directors' qualifying shares)
subsidiaries. If neither of the above specified stock price performance
tests are met then all of the restricted shares shall be automatically
canceled.
Until your restricted shares become unrestricted as set forth above, no
certificates for your restricted shares will be issued to you, and your
restricted shares will be evidenced by certificates held by or on behalf of
the Company, in book-entry form, or otherwise, as determined by the Company.
As a holder of restricted shares, you are otherwise entitled to all the
rights (including voting and dividend rights) of a holder of an equivalent
number of unrestricted common shares of the Company.
Under existing laws and regulations, in general, the fair market value of the
shares granted hereunder on the date such shares become exchangeable for
unrestricted common shares of the Company will be subject to federal income
tax at ordinary rates and to social security tax and their respective
withholding requirements, and may be subject to state and local taxes and
withholding requirements. The payment of all federal, state and local taxes
is your personal responsibility. However, the Company, at its discretion,
may require you to deposit with it an amount equal to any required
withholding. You may elect that all or a portion of any such withholding
required to be deposited when the shares granted hereunder become
exchangeable for unrestricted common shares of the Company shall be satisfied
by having the Company withhold a portion of the whole shares granted
hereunder, subject to the provisions set forth below. Such shares shall be
valued at their fair market value on the date of exercise. Fair market valu
shall be determined as the mean (adjusted to the next higher full cent to
eliminate any fractional cent) between the high and low prices per share for
the Company's common shares as reported in a summary of composite
transactions for stocks listed on the New York Stock Exchange on such date
or, if the New York Stock Exchange is not open for trading on such date, the
average of the means between the high and low prices per share for the
Company's common shares, as so reported, on the nearest date before the
nearest date after such date on which the New York Stock Exchange is open for
trading (adjusted to the next higher full cent to eliminate any fractional
cent).
APPENDIX A
Certain Definitions
A "Change of Control" shall mean:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended {the "Exchange Act"}) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20%
or more of either (i) the then outstanding common shares of the Company (the
"Outstanding Company Common Shares") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally
in the election of directors (the "Outstanding Company Voting Securities");
provided, however, that the following acquisitions shall not constitute a
Change of Control: (i) any acquisition directly from the Company (excluding
an acquisition by virtue of the exercise of a conversion privilege); (ii) any
acquisition by the Company or any of its subsidiaries; (iii) any acquisition
by any employee benefit plan (or any related trust) sponsored or maintained
by the Company or any of its subsidiaries; or (iv) any acquisition by any
corporation pursuant to a reorganization, merger or consolidation, if,
following such reorganization, merger or consolidation, the conditions
described in clauses (i), (ii) and (iii) of (c) below are satisfied; or
(b) Individuals who, as of the date hereof, constitute the Board of
Directors of the Company (the "Board") (as of the date hereof, the "Incumbent
Board") cease for any reason to constitute at least a majority of the Board;
provided, however, that any individual becoming a director subsequent to the
date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board; or
(c) Approval by the shareholders of the Company of a "Business
Combination", which shall mean a reorganization, merger or consolidation, in
each case, unless, following such reorganization, merger or consolidation,
(i) more than 60% of, respectively, the then outstanding common shares of the
corporation resulting from such reorganization, merger or consolidation and
the combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners, respectively, of
the Outstanding Company Common Shares and Outstanding Company Voting
Securities immediately prior to such reorganization, merger or consolidation
in substantially the same proportions as their ownership, immediately prior
to such reorganization, merger or consolidation, of the Outstanding Company
Common Shares and Outstanding Company Voting Securities, as the case may be,
(ii) no Person (excluding the Company, any of its subsidiaries, any employee
benefit plan (or related trust) sponsored or maintained by the Company, any
of its subsidiaries or such corporation resulting from such reorganization,
merger or consolidation and any Person beneficially owning, immediately prior
to such reorganization, merger or consolidation, directly or indirectly, 20%
or more of the Outstanding Company Common Shares or Outstanding Company
Voting Securities, as the case may be) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding common shares
of the corporation resulting from such reorganization, merger or
consolidation or the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors and (iii) at least a majority of the members of the board of
directors of the corporation resulting from such reorganization, merger or
consolidation were members of the Incumbent Board at the time of the
execution of the initial agreement providing for such reorganization, merger
or consolidation; or
(d) Approval by the shareholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other
disposition of all or substantially all of the assets of the Company, other
than to a corporation, with respect to which following such sale or other
disposition, (A) more than 60% of, respectively, the then outstanding common
shares of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally
in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Shares and Outstanding Company Voting Securities immediately prior to such
sale or other disposition in substantially the same proportion as their
ownership, immediately prior to such sale or other disposition, of the
Outstanding Company Common Shares and Outstanding Company Voting Securities,
as the case may be, (B) no Person (excluding the Company, any of its
subsidiaries, and any employee benefit plan (or related trust) sponsored or
maintained by the Company, any of its subsidiaries or such corporation and
any Person beneficially owning, immediately prior to such sale or other
disposition, directly or indirectly, 20% or more of the Outstanding Company
Common Shares or Outstanding Company Voting Securities, as the case may be)
beneficially owns, directly or indirectly, 20% or more of, respectively, the
then outstanding common shares of such corporation and the combined voting
power of the then outstanding voting securities of such corporation entitled
to vote generally in the election of directors and (C) at least a majority of
the members of the board of directors of such corporation were members of the
Incumbent Board at the time of the execution of the initial agreement or
action of the Board providing for such sale or other disposition of assets of
the Company.
For purposes of the foregoing definition of "Change of Control", a
"subsidiary" of the Company shall mean any corporation in which the Company,
directly or indirectly, holds a majority of the voting power of such
corporation's outstanding shares of capital stock.
Exhibit 10.(iii)(12)
The Supplemental Retirement Income Plan was amended by adding the
following paragraph at the end thereof:
Notwithstanding any other provision of this Supplemental Retirement Income
Plan to the contrary, no participant in the Sears Pension Plan eligible for
a benefit under Supplement K thereto shall receive a benefit under this plan
unless such participant was (1) eligible to participate in the NOVUS Credit
Services Inc. Supplemental Retirement Income Plan prior to June 30, 1993 and
(2) received compensation from SMC/SSB (as defined in Supplement K to the
Sears Pension Plan) that would have been taken into account under Supplement
K were it not for the limit on compensation under section 401(a)(17) of the
Internal Revenue Code. Furthermore, the benefit payable from this plan to
any such participant in Supplement K shall be paid in a lump sum as soon as
practicable after November 1, 1997.
Exhibit 10.(iii)(21)
Associate Stock Ownership Plan
(Amended and Restated
as of December 31, 1997)
1. Purpose. The purpose of the Associate Stock Ownership
Plan (the "Plan") is to provide employees of Sears, Roebuck and Co., a New
York corporation (the "Company"), and its Subsidiary Companies (as defined
below) added incentive to remain employed by such companies and to
encourage increased efforts to promote the best interests of such companies
by permitting eligible employees to purchase common shares, par value $0.75
per share, of the Company ("Common Shares") at below-market prices. The
Plan is intended to qualify as an "employee stock purchase plan" under
section 423 of the Internal Revenue Code of 1986, as amended (the "Code").
For purposes of the Plan, the term "Subsidiary Companies" shall mean all
corporations which are subsidiary corporations (within the meaning of
section 424(f) of the Code) and of which the Company is the common parent.
The Company and its Subsidiary Companies that, from time to time, adopt the
Plan are sometimes hereinafter called collectively the "Participating
Companies." The Plan is an amendment and restatement, effective as of
December 31, 1997, of the Sears, Roebuck and Co. 1997 Employee Stock
Purchase Plan.
2. Eligibility. Participation in the Plan shall be open
to each employee of the Participating Companies who has been continuously
employed by the Participating Companies for at least sixty days (an
"Eligible Employee"). No right to purchase Common Shares hereunder shall
accrue under the Plan in favor of any person who is not an Eligible
Employee as of the first day of a Purchase Period (as defined in Section
3). For purposes of the Plan, the term "employee" shall not include any
individual for any period during which such individual's services are
performed pursuant to the terms of a contract, either with such individual
himself or herself or with a leasing organization or agency, that purports
to treat the individual as either an independent contractor or an employee
of such agency or leasing organization, even if such individual is later
determined (by judicial action or otherwise) to have been a common law
employee of a Participating Company rather than an independent contractor
or an employee of such agency or leasing organization. Notwithstanding
anything contained in the Plan to the contrary, no Eligible Employee shall
acquire a right to purchase Common Shares hereunder to the extent that (i)
immediately after receiving such right, such employee would own 5% or more
of the total combined voting power or value of all classes of stock of the
Company or any Subsidiary Company (including any stock attributable to such
employee under section 424(d) of the Code), or (ii) for any calendar year
such right would permit such employee to purchase Common Shares under any
employee stock purchase plan, which qualifies under section 423 of the
Code, of the Company and its Subsidiary Companies which, when aggregated,
would have a fair market value (as determined on the first day of the
Purchase Period (as hereinafter defined)) in excess of $25,000 or such
other amount as may be specified under section 423 of the Code. Further
notwithstanding anything contained in the Plan to the contrary, the maximum
contributions that can be made by any Eligible Employee during any calendar
year shall not exceed the lesser of (i) $13,600 and (ii) 10% of the
Eligible Employee's compensation paid during the calendar year. In
addition, the number of Common Shares which may be purchased by any
Eligible Employee during any Purchase Period shall not exceed 850, subject
to adjustment in the same manner described in Section 12, in the case of
the occurrence of any of the events described in Section 12.
3. Effective Date of Plan; Purchase Periods. The Plan
shall become effective on July 1, 1997 or on such later date as may be
specified by the Board of Directors (the "Board") of the Company or the
Committee (as defined in Section 11). The Plan shall cease to be effective
unless, within 12 months before or after the date of its adoption by the
Board, it has been adopted by the shareholders of the Company at a duly-
called meeting of such shareholders.
A "Purchase Period" shall consist of the three month
period, beginning on each July 1, October 1, January 1, and April 1, each
commencing on or after the effective date and prior to termination of the
Plan.
4. Basis of Participation. (a) Payroll Deduction.
Subject to compliance with applicable rules prescribed by the Committee,
each Eligible Employee shall be entitled to enroll in the Plan as of the
first day of any Purchase Period which begins on or after such employee has
become an Eligible Employee.
To enroll in the Plan, an Eligible Employee shall make a
request to the Company or its designated agent, at the time and in the
manner prescribed by the Committee, specifying the amount of payroll
deduction to be applied to the compensation paid to the employee by the
employee's employer while the employee is a participant in the Plan. The
amount of each payroll deduction specified in such request for each such
payroll period shall be a whole percentage amount, unless otherwise
determined by the Committee to be a whole dollar amount, in either case not
to exceed 10%, or such lesser percentage as may be determined by the
Committee, of the participant's compensation (before withholding or other
deductions) paid to him or her during the Purchase Period by any of the
Participating Companies. Subject to compliance with applicable rules
prescribed by the Committee, the request shall become effective on the
first day of the Purchase Period following the day the Company or its
designated agent receives such request.
Payroll deductions (and any other amount paid under the
Plan) shall be made for each participant in accordance with such
participant's request until such participant's participation in the Plan
terminates, such participant makes a new request which changes the amount
of payroll deductions, the Participant elects to suspend his or her
participation in the Plan or the Plan terminates, all as hereinafter
provided.
A participant may change the amount of his or her payroll
deduction effective as of the first day of any Purchase Period by so
directing the Company or its designated agent at the time and in the manner
specified by the Committee. A participant may not change the amount of his
or her payroll deduction effective as of any date other than the first day
of a Purchase Period, except that a participant may elect to suspend his or
her participation in the Plan as provided in Section 7.
Payroll deductions for each participant shall be credited
to a purchase account established on behalf of the participant on the books
of the participant's employer or such employer's designated agent (a
"Purchase Account"). At the end of each Purchase Period, the amount in
each participant's Purchase Account will be applied to the purchase of the
number of Common Shares determined by dividing such amount by the Purchase
Price (as defined in Section 5) for such Purchase Period. No interest
shall accrue at any time for any amount credited to a Purchase Account of a
participant.
(b) Other Methods of Participation. The Committee may,
in its discretion, establish additional procedures whereby Eligible
Employees may participate in the Plan by means other than payroll
deduction, including, but not limited to, delivery of funds by participants
in a lump sum or automatic charges to participants' bank accounts. Such
other methods of participating shall be subject to such rules and
conditions as the Committee may establish. The Committee may at any time
amend, suspend or terminate any participation procedures established
pursuant to this paragraph without prior notice to any participant or
Eligible Employee.
5. Purchase Price. The purchase price (the "Purchase
Price") per Common Share hereunder for any Purchase Period shall be the
lesser of 85% of the fair market value of a Common Share on the first day
of such Purchase Period and 85% of the fair market value of a Common Share
on the last day of such Purchase Period. If such sum results in a fraction
of one tenth of one cent, the Purchase Price shall be increased to the next
higher tenth of one cent. For purposes of the Plan, the fair market value
of a Common Share on a given day shall be the mean between the high and low
sale prices per share for the Common Shares on such date, as reported in a
summary of composite transactions for stock listed on the New York Stock
Exchange or, if the New York Stock Exchange is not open for trading on such
date, the fair market value of a Common Share shall be the average of the
means between the high and low sale prices per share for the Common Shares,
as so reported, on the nearest date before and the nearest date after such
date on which the New York Stock Exchange is open for trading. In no
event, however, shall the Purchase Price be less than the par value of the
Common Shares.
6. Purchase Accounts and Certificates. The Common Shares
purchased by each participant shall be posted to such participant's
Purchase Account as soon as practicable after, and credited to such
participant's Purchase Account as of, the last day of each Purchase Period.
Except as provided in Section 7 and Section 8, a participant will be issued
his or her shares when his or her participation in the Plan is terminated,
the Plan is terminated or upon request, but only in denominations of at
least 25 shares.
After the close of each Purchase Period, information will
be made available to each participant regarding the entries made to such
participant's Purchase Account, the number of Common Shares purchased and
the applicable Purchase Price. In the event that the maximum number of
Common Shares are purchased by the participant for the Purchase Period and
cash remains credited to the participant's Purchase Account, such cash
shall be delivered as soon as practicable to such participant. For
purposes of the preceding sentence, the maximum number of Common Shares
that may be purchased by a participant for a Purchase Period shall be
determined under Section 2.
7. Suspension or Termination of Participation. A
participant may elect at any time, in the manner prescribed by the
Committee, to suspend his or her participation in the Plan, provided such
election is received by the Company or its designated agent prior to the
date specified by the Committee for suspension of participation during the
Purchase Period for which such suspension is to be effective.
Upon any suspension of participation, the participant's
payroll deductions shall cease and, if the participant elects, the cash
credited to such participant's Purchase Account on the date of such
suspension shall be delivered as soon as practicable to such participant.
If the participant does not elect to receive such cash, such cash shall be
applied to the purchase of Common Shares, as described in Section 4(a)
hereof. A participant who elects to suspend participation in the Plan
shall be permitted to resume participation in the Plan by making a new
request at the time and in the manner described in Section 4 hereof.
If the participant dies, terminates employment with the
Participating Companies for any reason, or otherwise ceases to be an
Eligible Employee, such participant's participation in the Plan shall
immediately terminate. Except as provided below, upon such terminating
event, the cash credited to such participant's Purchase Account on the date
of such termination shall be delivered as soon as practicable to such
participant or his or her legal representative, as the case may be and,
upon request, the number of full Common Shares and the cash equivalent for
any fractional share held for such participant's benefit shall be issued to
him or her. The cash equivalent for any fractional share held for the
benefit of a participant shall be determined by multiplying the fractional
share by the fair market value of a Common Share on the day immediately
preceding such election to receive such shares determined as provided in
Section 5. Notwithstanding the preceding sentences, in lieu of having the
Common Shares held for the participant's benefit issued to him or her, such
participant may direct the Company or its designated agent to continue to
maintain his or her account with the same entity that acts as the Company's
designated agent under the Plan, subject to any conditions imposed by such
entity and provided such terminating participant may no longer participate
in the Plan.
8. Termination or Amendment of the Plan. The Plan shall
automatically terminate on June 30, 2002, unless terminated earlier by the
Company or as otherwise provided herein. The Company, by action of the
Board or the Committee, may terminate the Plan at any time prior to June
30, 2002, in which case notice of such termination shall be given to all
participants, but any failure to give such notice shall not impair the
effectiveness of the termination.
Without any action being required, the Plan shall
terminate in any event when the maximum number of Common Shares to be sold
under the Plan (as provided in Section 12) has been purchased. Such
termination shall not impair any rights which under the Plan shall have
vested on or prior to the date of such termination. If at any time the
number of Common Shares remaining available for purchase under the Plan are
not sufficient to satisfy all then-outstanding purchase rights, the Board
or Committee may determine an equitable basis of apportioning available
Common Shares among all participants.
The Board or the Committee may amend the Plan from time to
time in any respect for any reason; provided, however, no such amendment
shall (a) materially adversely affect any purchase rights outstanding under
the Plan during the Purchase Period in which such amendment is to be
effected, (b) increase the maximum number of Common Shares which may be
purchased under the Plan, (c) decrease the Purchase Price of the Common
Shares for any Purchase Period below the lesser of 85% of the fair market
value thereof on the first day of such Purchase Period and 85% of such fair
market value on the last day of such Purchase Period or (d) adversely
affect the qualification of the Plan under section 423 of the Code.
Except as provided below, upon termination of the Plan,
the number of full Common Shares held for each participant's benefit shall
be issued as soon as practicable to such participant and the cash
equivalent of any fractional share so held determined as provided in
Section 7, and, except as otherwise provided in Section 14, the cash, if
any, credited to the such participant's Purchase Account, shall be
distributed as soon as practicable to such participant. Notwithstanding
the preceding sentence, in lieu of having the Common Shares held for the
participant's benefit issued to him or her, a participant may direct the
Company or its designated agent to continue to maintain his or her account
with the same entity that acts as the Company's designated agent under the
Plan, subject to any conditions imposed by such entity and provided such
terminating participant may no longer participate in the Plan.
9. Non-Transferability. Rights acquired under the Plan
are not transferable and may be exercised only by a participant.
10. Shareholder's Rights. No Eligible Employee or
participant shall by reason of the Plan have any rights of a shareholder of
the Company until he or she shall acquire Common Shares as herein provided.
11. Administration of the Plan. The Plan shall be
administered by the Administrative Committee for Sears Benefit Plans (the
"Committee"). In addition to the power to amend or terminate the Plan
pursuant to Section 8, the Committee shall have full power and authority
to: (i) interpret and administer the Plan and any instrument or agreement
entered into under the Plan; (ii) establish such rules and regulations and
appoint such agents as it shall deem appropriate for the proper
administration of the Plan; and (iii) make any other determination and take
any other action that the Committee deems necessary or desirable for
administration of the Plan. Decisions of the Committee shall be final,
conclusive and binding upon all persons, including the Company, any
participant and any other employee of the Company. A majority of the
members of the Committee may determine its actions and fix the time and
place of its meetings.
The Plan shall be administered so as to ensure that all
participants have the same rights and privileges as are provided by section
423(b)(5) of the Code.
12. Maximum Number of Shares. The maximum number of
Common Shares which may be purchased under the Plan is 10,000,000, subject
to adjustment as hereinafter set forth. Common Shares sold hereunder shall
be purchased for participants in the open market (on an exchange or in
negotiated transactions) or, if the Company's Chief Financial Officer, in
his or her discretion, deems it to be necessary or advisable, Common Shares
sold hereunder may be previously acquired treasury shares, authorized and
unissued shares, or any combination of shares purchased in the open market,
previously acquired treasury shares or authorized and unissued shares. If
the Company shall, at any time after the effective date of the Plan, change
its issued Common Shares into an increased number of shares, with or
without par value, through a stock dividend or a stock split, or into a
decreased number of shares, with or without par value, through a
combination of shares, then, effective with the record date for such
change, the maximum number of Common Shares which thereafter may be
purchased under the Plan and the maximum number of shares which thereafter
may be purchased during any Purchase Period shall be the maximum number of
shares which, immediately prior to such record date, remained available for
purchase under the Plan and under any Purchase Period proportionately
increased, in case of such stock dividend or stock split, or
proportionately decreased in case of such combination of shares.
13. Miscellaneous. Except as otherwise expressly
provided herein, (i) any request, election or notice under the Plan from an
Eligible Employee or participant shall be transmitted or delivered to the
Company or its designated agent and, subject to any limitations specified
in the Plan, shall be effective when received by the Company or its
designated agent and (ii) any request, notice or other communication from
the Company or its designated agent that is transmitted or delivered to
Eligible Employees or participants shall be effective when so transmitted
or delivered. The Plan, and the Company's obligation to sell and deliver
Common Shares hereunder, shall be subject to all applicable federal and
state laws, rules and regulations, and to such approval by any regulatory
or governmental agency as may, in the opinion of counsel for the Company,
be required.
14. Change in Control. In order to maintain the
participants' rights in the event of any Change in Control of the Company,
as hereinafter defined, upon such Change in Control the then current
Purchase Period shall thereupon end, and the cash credited to all
participants' Purchase Accounts shall be applied to purchase shares
pursuant to Sections 5 and 6, and the Plan shall immediately thereafter
terminate. For purposes of this Section 14, "Change in Control" shall
mean:
(a) The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of 20% or more of either (i) the then outstanding common
shares of the Company (the "Outstanding Company Common Shares") or (ii) the
combined voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided, however, that the
following acquisitions shall not constitute a Change of Control: (i) any
acquisition directly from the Company (excluding an acquisition by virtue
of the exercise of a conversion privilege); (ii) any acquisition by the
Company or any of its subsidiaries (as defined below); (iii) any
acquisition by any employee benefit plan (or any related trust) sponsored
or maintained by the Company or any of its subsidiaries; or (iv) any
acquisition by any corporation pursuant to a reorganization, merger or
consolidation, if, following such reorganization, merger or consolidation,
the conditions described in clauses (i), (ii) and (iii) of (c) below are
satisfied; or
(b) Individuals who, as of the date hereof, constitute the
Board (as of the date hereof, the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of either
an actual or threatened election contest (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act) or other
actual or threatened solicitation of proxies or consents by or on behalf of
a Person other than the Board; or
(c) Approval by the shareholders of the Company of a
"Business Combination", which shall mean a reorganization, merger or
consolidation, in each case, unless, following such reorganization, merger
or consolidation, (i) more than 60% of, respectively, the then outstanding
common shares of the corporation resulting from such reorganization, merger
or consolidation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in the
election of directors is then beneficially owned, directly or indirectly,
by all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company Common Shares
and Outstanding Company Voting Securities immediately prior to such
reorganization, merger or consolidation in substantially the same
proportions as their ownership, immediately prior to such reorganization,
merger or consolidation, of the Outstanding Company Common Shares and
Outstanding Company Voting Securities, as the case may be, (ii) no Person
(excluding the Company, any of its subsidiaries, any employee benefit plan
(or related trust) sponsored or maintained by the Company, any of its
subsidiaries or such corporation resulting from such reorganization, merger
or consolidation and any Person beneficially owning, immediately prior to
such reorganization, merger or consolidation, directly or indirectly, 20%
or more of the Outstanding Company Common Shares or Outstanding Company
Voting Securities, as the case may be) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding common
shares of the corporation resulting from such reorganization, merger or
consolidation or the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election
of directors and (iii) at least a majority of the members of the board of
directors of the corporation resulting from such reorganization, merger or
consolidation were members of the Incumbent Board at the time of the
execution of the initial agreement providing for such reorganization,
merger or consolidation; or
(d) Approval by the shareholders of the Company of (i) a
complete liquidation or dissolution of the Company or (ii) the sale or
other disposition of all or substantially all of the assets of the Company,
other than to a corporation, with respect to which following such sale or
other disposition, (A) more than 60% of, respectively, the then outstanding
common shares of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly
or indirectly, by all or substantially all of the individuals and entities
who were the beneficial owners, respectively, of the Outstanding Company
Common Shares and Outstanding Company Voting Securities immediately prior
to such sale or other disposition in substantially the same proportion as
their ownership, immediately prior to such sale or other disposition, of
the Outstanding Company Common Shares and Outstanding Company Voting
Securities, as the case may be, (B) no Person (excluding the Company, any
of its subsidiaries, and any employee benefit plan (or related trust)
sponsored or maintained by the Company, any of its subsidiaries or such
corporation and any Person beneficially owning, immediately prior to such
sale or other disposition, directly or indirectly, 20% or more of the
Outstanding Company Common Shares or Outstanding Company Voting Securities,
as the case may be) beneficially owns, directly or indirectly, 20% or more
of, respectively, the then outstanding common shares of such corporation
and the combined voting power of the then outstanding voting securities of
such corporation entitled to vote generally in the election of directors
and (C) at least a majority of the members of the board of directors of
such corporation were members of the Incumbent Board at the time of the
execution of the initial agreement or action of the Board providing for
such sale or other disposition of assets of the Company.
For purposes of the foregoing definition of "Change of
Control", a "subsidiary" of the Company shall mean any corporation in which
the Company, directly or indirectly, holds a majority of the voting power
of such corporation's outstanding shares of capital stock.
EXHIBIT 12(a)
COMPUTATION OF RATIO OF INCOME TO FIXED CHARGES
SEARS, ROEBUCK AND CO. AND CONSOLIDATED SUBSIDIARIES
<TABLE>
<CAPTION>
(millions, except ratios) Year Ended
--------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Fixed Charges
Interest and amortization of debt discount
and expense on all indebtedness $1,409 $1,365 $1,373 $1,279 $1,318
Add interest element implicit in rentals 147 121 119 114 105
------ ------ ------ ------ ------
1,556 1,486 1,492 1,393 1,423
Interest capitalized 3 5 4 1 3
------ ----- ----- ----- ------
Total fixed charges $1,559 $1,491 $1,496 $1,394 $1,426
Income (loss)
Income (loss) from continuing operations $1,188 $1,271 $1,025 $857 $625
Deduct undistributed net income (loss)
of unconsolidated companies 13 8 9 (7) 6
------ ------ ------ ------- ------
1,175 1,263 1,016 864 619
Add
Fixed charges
(excluding interest capitalized) 1,556 1,486 1,492 1,393 1,423
Income taxes (benefit) 912 834 703 614 329
Income (loss) before fixed charges and
income taxes $3,643 $3,583 $3,211 $2,871 $2,371
Ratio of income to fixed charges 2.34 2.40 2.15 2.06 1.66
</TABLE>
EXHIBIT 12(b)
COMPUTATION OF RATIO OF INCOME TO COMBINED FIXED CHARGES
AND PREFERRED SHARE DIVIDENDS
SEARS, ROEBUCK AND CO. AND CONSOLIDATED SUBSIDIARIES
<TABLE>
<CAPTION>
(millions, except ratios) Year Ended
--------------------------------------
1997 1996 1995 1994 1993
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Fixed Charges
Interest and amortization of debt discount
and expense on all indebtedness $1,409 $1,365 $1,373 $1,279 $1,318
Add interest element implicit in rentals 147 121 119 114 105
------ ------ ------ ------ -------
1,556 1,486 1,492 1,393 1,423
Preferred dividend factor - 41 89 234 209
Interest capitalized 3 5 4 1 3
----- ----- ----- ------ -------
Total fixed charges $1,559 $1,532 $1,585 $1,628 $1,635
Income (loss)
Income (loss) from continuing operations $1,188 $1,271 $1,025 $857 $625
Deduct undistributed net income (loss)
of unconsolidated companies 13 8 9 (7) 6
------ ------ ------ ------- ------
1,175 1,263 1,016 864 619
Add
Fixed charges (excluding interest
capitalized and preferred
dividend factor) 1,556 1,486 1,492 1,393 1,423
Income taxes (benefit) 912 834 703 614 329
Income (loss) before fixed charges and
income taxes $3,643 $3,583 $3,211 $2,871 $2,371
Ratio of income to combined fixed charges
and preferred share dividends 2.34 2.34 2.03 1.76 1.45
</TABLE>
In 1996, all the 8.88% Preferred Shares, First Series were redeemed and
therefore in 1997 the Company made no other preferred share dividend
payments.
Exhibit 13
<PAGE>
- --------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- --------------------------------------------------------------------------------
Consolidated Statements of Income
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
millions, except per common share data 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Merchandise sales and services $36,371 $33,751 $31,133
Credit revenues 4,925 4,313 3,702
- ---------------------------------------------------------------------------------------------
Total revenues 41,296 38,064 34,835
- ---------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales, buying and occupancy 26,769 24,889 23,160
Selling and administrative 8,331 8,059 7,428
Provision for uncollectible accounts 1,532 971 589
Depreciation and amortization 786 697 580
Interest 1,409 1,365 1,373
Reaffirmation charge 475 -- --
- ---------------------------------------------------------------------------------------------
Total costs and expenses 39,302 35,981 33,130
- ---------------------------------------------------------------------------------------------
Operating income 1,994 2,083 1,705
Other income 106 22 23
- ---------------------------------------------------------------------------------------------
Income before income taxes 2,100 2,105 1,728
Income taxes 912 834 703
- ---------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 1,188 1,271 1,025
Discontinued operations -- -- 776
- ---------------------------------------------------------------------------------------------
NET INCOME $ 1,188 $ 1,271 $ 1,801
- ---------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE - BASIC:
Income from continuing operations,
after allowing for dividends on preferred shares $ 3.03 $ 3.18 $ 2.56
Discontinued operations -- -- 1.99
- ---------------------------------------------------------------------------------------------
Net income $ 3.03 $ 3.18 $ 4.55
- ---------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE - DILUTED:
Income from continuing operations,
after allowing for dividends on preferred shares $ 2.99 $ 3.12 $ 2.53
Discontinued operations -- -- 1.97
- ---------------------------------------------------------------------------------------------
Net income $ 2.99 $ 3.12 $ 4.50
- ---------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
20 SEARS ANNUAL REPORT 1997
<PAGE>
- --------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- --------------------------------------------------------------------------------
Analysis of Consolidated Operations
- --------------------------------------------------------------------------------
Sears, Roebuck and Co. ("the Company") is a multi-line retailer providing a
wide array of merchandise and services in the United States and Canada.
Operating results for the Company are reported for two business segments.
The domestic operations segment includes the Company's operations in the
United States and Puerto Rico. The Company's domestic operations are comprised
of the following:
- - Retail - consisting of:
- Full-line Stores, located principally in shopping malls, which
sell apparel, home fashions and hardlines merchandise.
- Specialty stores consisting of:
- Home Stores, which are comprised of Hardware, Sears Dealer and
HomeLife furniture stores and Commercial Sales.
- Auto Stores, which consist of two divisions: the Sears Tire Group,
which sells and installs tires, batteries and related goods and
services through Sears Auto Centers and the NTB National Tire &
Battery stores; and the Parts Group, which sells automotive parts
through Parts America stores.
- - Services - consisting of:
- Home Services, which provides product repair services, service
contracts, and installed home improvements, which are provided by the
Company's associates and licensee partners.
- Direct Response Marketing, which provides specialty catalogs, insurance
(credit protection and life), clubs and services memberships, and
impulse and continuity merchandise.
- - Credit - which manages the Company's portfolio of receivables arising
from purchases of merchandise and services from domestic operations. The
domestic credit card receivables portfolio consists primarily of Sears
Card account balances.
- - Corporate - includes activities that are of an overall holding company
nature, primarily consisting of administrative activities, the costs of
which are not allocated to the Company's businesses.
The international operations segment consists of similar retail, services
and credit operations conducted in Canada through Sears Canada Inc. ("Sears
Canada"), a 54.8% owned subsidiary. On Dec. 9, 1996, the Company's ownership
percentage was reduced from 61.1% as Sears Canada issued approximately ten
million previously unissued shares of stock. International operations were also
conducted through Sears Roebuck de Mexico, S.A. de C.V. ("Sears Mexico"), a
previously 75.5% owned subsidiary. In 1997, the Company sold 60% of the
outstanding shares of Sears Mexico to Grupo Carso S.A. de C.V. Thereafter,
Sears Mexico's results are no longer included in the Company's consolidated
operations.
In 1995, the Company divested its insurance (The Allstate Corporation)
and real estate (Homart Development Co.) subsidiaries. The consolidated
financial statements present these results as discontinued operations, as
discussed in note 2 to the consolidated financial statements.
Throughout the analyses of consolidated operations and financial
condition, certain prior year information has been reclassified to conform with
current year presentation. Also, all references to earnings per share relate to
diluted earnings per common share.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
Income from continuing operations was as follows:
- ---------------------------------------------------------------------------------------
millions 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic operations $1,203 $1,276 $1,055
International operations (15) (5) (30)
- ---------------------------------------------------------------------------------------
Total income from continuing operations $1,188 $1,271 $1,025
- ---------------------------------------------------------------------------------------
</TABLE>
Income from continuing operations in 1997 declined 6.6% to $1.19 billion,
or $2.99 per share, from $1.27 billion, or $3.12 per share for 1996. Results for
1997 were impacted by several significant noncomparable items, which in the
aggregate lowered net income by $115 million. The most notable of these items
include the cost relating to the Company's handling of certain credit
reaffirmation agreements, the gain on the sale of the Advantis data services
business, and the positive effect from the adoption of Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," effective Jan. 1, 1997.
The effect of these and other noncomparable items is summarized
as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Earnings
millions, except per share After-tax per share
- ---------------------------------------------------------------------
<S> <C> <C> <C>
1997 Net income before noncomparable items $1,303 $ 3.27
Reaffirmation charge (320) (0.80)
SFAS No. 125 accounting change 136 0.35
Sale of Advantis 91 0.23
Other (22) (0.06)
- ---------------------------------------------------------------------
1997 Net income as reported $1,188 $ 2.99
- ---------------------------------------------------------------------
</TABLE>
The reaffirmation charge of $475 million ($320 million after-tax)
represents the estimated cost of the settlement of certain lawsuits and
investigations by regulatory agencies that alleged that the Company had
violated the United States Bankruptcy Code and consumer protection laws in
various states through activities related to certain debt reaffirmation
agreements. This estimate is based on management's assumptions as to the
ultimate outcome of future events and uncertainties. Actual results could
differ from this estimate and there can be no assurance that additional
costs will not be incurred.
ANNUAL REPORT 1997 SEARS 21
<PAGE>
- --------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- --------------------------------------------------------------------------------
Analysis of Consolidated Operations (continued)
- --------------------------------------------------------------------------------
SFAS No. 125 requires the recognition of gains and losses on credit card
securitizations that qualify as sales. The statement also indicates that
an allowance for uncollectible accounts should not be maintained for
securitized receivables that are sold. Implementation of SFAS No. 125 provided
incremental net income of $136 million in 1997 and reduced reported credit
revenues, selling and administrative expense and the provision for
uncollectible accounts by $321 million, $126 million and $417 million,
respectively.
In 1997, the Company sold its 30% equity interest in Advantis, a joint
venture between IBM and the Company, to IBM, which resulted
in a pretax gain of $150 million ($91 million after-tax) recorded in
other income.
Other noncomparable items in 1997 include a loss on the sale
of Sears Mexico, which is further discussed in the international segment,
a one-time gain related to postretirement life insurance benefit plan changes,
and a charge to complete the conversion of the Western Auto operations to the
Parts America format.
In 1997, the Company announced changes to its postretirement
life insurance benefit plan. Retiree life insurance benefits were eliminated
for all active associates not retired by Dec. 31, 1997. This plan change
resulted in a one-time gain of $61 million ($37 million after-tax) recorded as
a reduction of selling and administrative expense. In connection with the
elimination of retirement life insurance benefits for active associates, the
Company also announced the reduction over a ten year period in
the death benefit for certain retirees, which will generate annual after-tax
savings of approximately $35 million.
The Company accelerated its plan to complete the conversion of Western
Auto operations to the new Parts America format in 1997 and, as a result,
recorded a charge of $38 million ($23 million after-tax) related to this
initiative. As of year-end, the Company has substantially completed its
conversion to the parts-only format consisting of 576 domestic Parts America
stores.
In 1997, net income before noncomparable items was $1.30 billion, an
increase of 4.8% per share to $3.27, from 1996. The improved profitability of
the domestic retail and services businesses, coupled with strong Sears Canada
performance, was largely offset by a decline in credit results due to an
increase in the domestic provision for uncollectible accounts, reflecting the
continuing trend of increased delinquencies and charge-offs.
Net income in 1996 was $1.27 billion, an increase of 23.3% per share to
$3.12, compared to income from continuing operations of $1.03 billion, or $2.53
per share, for 1995. The increase was a result of strong merchandise sales and
improved margins coupled with higher credit operating income.
DOMESTIC OPERATIONS
Domestic operating results for 1997 were significantly impacted by the
following noncomparable items as previously discussed:
- Reaffirmation charge
- Implementation of SFAS No. 125
- Postretirement life insurance gain
- Charge for conversion to Parts America format
In order to present a discussion of 1997 domestic operating results on a
consistent basis with prior years, the effect of these noncomparable items will
be excluded from the domestic operations discussion as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1997 Effect of
excluding non- non- As Reported
comparable comparable ------------------------------
millions items items 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Merchandise sales and services $33,159 $ -- $33,159 $30,681 $28,117
Credit revenues 4,970 (321) 4,649 3,995 3,351
- -------------------------------------------------------------------------------------
Total domestic revenues 38,129 (321) 37,808 34,676 31,468
- -------------------------------------------------------------------------------------
Cost of sales,
buying and occupancy 24,407 14 24,421 22,584 20,865
Gross margin % 26.4% 26.4% 26.4% 25.8%
Selling and administrative 7,722 (171) 7,551 7,261 6,650
% of total revenues 20.3% 20.0% 20.9% 21.1%
Provision for
uncollectible accounts 1,910 (417) 1,493 916 528
Depreciation and amortization 718 8 726 630 513
Interest 1,290 -- 1,290 1,191 1,183
Reaffirmation charge -- 475 475 -- --
- -------------------------------------------------------------------------------------
Total costs and expenses 36,047 (91) 35,956 32,582 29,739
- -------------------------------------------------------------------------------------
Operating income $ 2,082 $ (230) $ 1,852 $ 2,094 $ 1,729
- -------------------------------------------------------------------------------------
</TABLE>
MERCHANDISE SALES AND SERVICES revenues and related information are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
millions, except number of stores 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Full-line Stores revenues $22,839 $21,581 $20,049
Specialty store revenues 7,247 6,281 5,360
- -------------------------------------------------------------------------------------
Total retail revenues 30,086 27,862 25,409
Services revenues 3,073 2,819 2,708
- -------------------------------------------------------------------------------------
Merchandise sales and services* $33,159 $30,681 $28,117
- -------------------------------------------------------------------------------------
Number of Full-line Stores 833 821 806
Number of specialty stores 2,697 2,550 2,264
- -------------------------------------------------------------------------------------
Total retail stores 3,530 3,371 3,070
- -------------------------------------------------------------------------------------
Retail store revenues per selling square foot** $ 318 $ 321 $ 323
- -------------------------------------------------------------------------------------
Comparable store sales percentage increase 2.3% 5.8% 4.7%
- -------------------------------------------------------------------------------------
</TABLE>
* Excluding the 53rd week in 1997, total merchandise sales and services
increased 6.1%.
** 1997 revenues per square foot calculation excludes the 53rd week.
22 SEARS ANNUAL REPORT 1997
<PAGE>
- --------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- --------------------------------------------------------------------------------
Analysis of Consolidated Operations (continued)
- --------------------------------------------------------------------------------
Retail revenues increased 8.0% in 1997 to $30.09 billion, compared to a
9.7% increase in 1996.
Full-line Stores revenues increased 5.8% in 1997 and continue to benefit
from the Company's ongoing remodeling and modernization program. In 1997,
revenues also benefited from the net addition of 12 Full-line Stores as 21
stores were opened and nine were closed. In 1996, 27 Full-line Stores were
opened and 12 were closed.
In Full-line Stores, apparel sales gains in 1997 were led by increases in
women's ready-to-wear, children's and men's fashions and footwear. The Company
has continued its initiatives to grow the apparel business, which include
remodeling the Full-line Stores, offering more varied national brand-name
merchandise, and developing private brand fashion merchandise for select lines.
Hardlines merchandise had a solid revenue increase in 1997 led by strong sales
growth in home appliances and electronics merchandise, partially offset by a
decline in home improvement merchandise sales.
COMPARABLE STORE
SALES GROWTH [ BAR GRAPH ]
SEARS
95 96 97
4.7% 5.8% 2.3%
In 1996, the increase in Full-line Stores revenues was led by significant
gains in apparel sales. Sales increases were strongest in women's
ready-to-wear, children's and men's fashions and footwear. Hardlines
merchandise had solid revenue growth in 1996 led by sales of Craftsman tools,
hardware and lawn and garden merchandise. Also contributing to the hardlines
sales increase were sales growth in home appliances and electronics merchandise.
In addition to solid growth in the Full-line Stores revenues, specialty
store revenues increased sharply to $7.25 billion in 1997 from $6.28 billion in
1996 due to the strong revenue performance in Home Stores, slightly offset by
a decline in Auto Stores revenues.
The revenue increase in Home Stores for 1997 as compared to 1996 primarily
resulted from a full year of sales from the Orchard Supply Hardware Stores
compared to the prior year, which included only fourth quarter sales. In
addition, 33 new Hardware stores were opened in 1997. Sears Dealer stores
revenues improved as 124 new stores were added and comparable store sales
increases over 1996 remained strong. In 1997, the HomeLife business focused on
high concentration markets in order to better leverage logistics and
advertising costs. As such, 23 locations were closed and three new stores were
opened.
The Auto Stores 1997 revenues declined slightly from 1996 as comparable
store sales decreased from prior year levels. Results were adversely affected
by the store conversions in both the Sears Tire Group and Parts Group. In the
Sears Tire Group, Tire America and NTW stores were converted into a single
format, NTB National Tire & Battery, and in the Parts Group, Western Auto
stores were converted into the new Parts America format. As the conversion
process took place, stores were either closed or operated while under
construction resulting in a loss of revenues. As of year end, the Company has
substantially completed both conversion plans and operates 326 NTB National
Tire & Battery stores and 576 Parts America stores in addition to its 780
Sears Auto Centers.
Specialty store revenues increased $921 million, or 17.2%, in 1996 over
1995 due to the addition of new stores and solid revenue performance from
existing stores. Home Stores revenues improved over 1995 through expansion of
Hardware stores as 61 Orchard Supply Hardware Stores were acquired in Sept.
1996. Sears Dealer stores and HomeLife furniture stores also helped increase
revenues due to openings of 120 and 12 new stores, respectively.
Auto Stores experienced solid revenue growth in 1996 as compared to 1995
as the Sears Tire Group added 40 new stores. The Parts Group opened 67 new
stores throughout 1996 and converted 50 Western Auto stores to the new Parts
America format.
Because of their diverse products and design, the Company's various store
formats have different sales productivity (revenue per selling square foot). In
1997, the decrease in overall retail store revenues per selling square foot is
attributable to the changing store mix.
Services revenues, generated primarily by the Home Services business,
increased 9.0% in 1997. Home Services revenues improved due to increased
in-home repair services and growth in major home improvement services. The
Company has undertaken several initiatives in 1997 to grow the Home Services
business, including the introduction of a national marketing program and
investment in repair service technology. The Company plans future growth in the
Home Services business through market expansion, improved marketing
effectiveness, and strengthening of licensee partners. Direct Response
Marketing revenues in 1997 increased substantially from 1996 due to continued
strength of its insurance programs.
In 1996, Services revenues improved primarily due to growth in Home
Services, as revenue gains on service contract sales and in-store installation
sales were partially offset by a decline in installed home improvements due to
the termination of a significant licensee. Direct Response Marketing revenues
in 1996 achieved strong improvement over the prior year due to increased member-
ships in its insurance programs.
CREDIT REVENUES in 1997, increased 24.4% to $4.97 billion, reflecting
higher receivable balances and increased late fees as new pricing initiatives
took effect. A summary of credit information is as follows (all amounts relate
to managed receivables unless otherwise noted and have been restated to include
Puerto Rico credit results and balances):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Sears Card as a % of sales* 55.1% 56.6% 56.6%
Average account balance (dollars) $ 1,058 $ 977 $ 914
Average managed credit card receivables (millions) $27,150 $24,631 $21,989
- -----------------------------------------------------------------------------
</TABLE>
* Sears Card as a % of sales has been restated to include Full-line Stores,
Home Stores, Home Services, Sears Auto Centers and Retail Outlet Stores.
The percentage of merchandise sales and services transacted with the Sears
Card in 1997 declined to 55.1% compared to 56.6% in 1996, due to fewer new
accounts. In 1996, credit revenues increased 19.2% to $4.00 billion as
receivables balances continued to grow resulting from strong merchandise sales.
The uniform pricing initiative that began in 1995 also had a positive effect
on 1996 credit revenue growth.
ANNUAL REPORT 1997 SEARS 23
<PAGE>
- --------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- --------------------------------------------------------------------------------
Analysis of Consolidated Operations (continued)
- --------------------------------------------------------------------------------
GROSS MARGIN as a percentage of merchandise sales and services
in 1997 remained flat with 1996 at 26.4%. Retail gross margin rate
declined due to higher promotional activity, but was offset by margin
improvement in the Company's services businesses. In 1996, gross margin as a
percentage of merchandise sales and services improved substantially to 26.4%
from 25.8% in 1995. The domestic gross margin rate benefited from a shift in
sales to higher margin apparel merchandise, improved logistics costs and
savings realized from merchandising sourcing initiatives.
DOMESTIC OPERATIONS [ BAR GRAPH ]
Selling and Administration Expense
Percent of Revenues
excluding noncomparable items
95 96 97
21.1% 20.9% 20.3%
SELLING AND ADMINISTRATIVE EXPENSE as a percentage of total domestic
revenues in 1997 improved 60 basis points to 20.3% from 20.9% in 1996. This
improvement was primarily attributable to leveraging payroll and other employee
related costs. The retail selling and administrative expense ratio improved
substantially in 1997, but was partially offset by increased marketing costs
in Services. In 1996, selling and administrative expense as a percentage of
revenues improved 20 basis points to 20.9% from 21.1% in 1995. The improvement
resulted from a decline in payroll and marketing costs as a percentage of
revenues.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS and related information is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
millions 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for uncollectible accounts $1,910 $ 916 $ 528
Delinquency rates* 7.00% 5.40% 4.16%
Net credit charge-offs to average
managed credit card receivables 6.48% 4.21% 3.13%
Allowance for uncollectible owned accounts $1,077 $ 753 $ 755
- -----------------------------------------------------------------------------
</TABLE>
* Under the Company's proprietary credit system, an account is generally
considered delinquent when the past due balance is three times the scheduled
minimum monthly payment.
The provision for uncollectible accounts increased 108.6% from 1996. The
increase is primarily attributable to the continued trend of increased
delinquencies and bankruptcies, growth in the credit card receivables
portfolio, and a reduced rate of credit reaffirmations. The provision
includes a $324 million addition to the allowance for uncollectible accounts
in 1997, bringing the allowance balance to $1.08 billion compared to $753
million in 1996. The Company continued to experience an increase in its
delinquency and charge-off rate throughout 1997, while a number of other
credit card issuers reported a flattening in their rates. If the Company's
delinquency and charge-off rate trend continues, the resulting increases in the
provision for uncollectible accounts could have a significant adverse effect on
the Company's overall operating results in future periods. The provision for
uncollectible accounts in 1996 was 73.5% above 1995, reflecting balance growth
and the increase in the bankruptcy, charge-off and delinquency rates of the
credit card portfolio.
DEPRECIATION AND AMORTIZATION EXPENSE increased 14.1% in 1997 from 1996
and 22.8% in 1996 as compared to 1995. These increases reflect the continuation
of the Company's store remodeling program and the growth in the number of
specialty stores in operation.
INTEREST EXPENSE, as presented on the statements of income, is combined
with the funding cost on receivables sold through securitizations to represent
total funding costs. The Company uses securitizations of credit card
receivables as a significant funding source and therefore, for purposes of this
analysis, the interest paid on securitizations is considered a funding cost.
The total funding costs were:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
millions 1997 1996 1995
- ---------------------------------------------------------------
<S> <C> <C> <C>
Interest expense $1,290 $1,191 $1,183
Funding cost of securitized receivables 437 348 326
- ---------------------------------------------------------------
Total funding costs $1,727 $1,539 $1,509
- ---------------------------------------------------------------
% of total revenues 4.5% 4.4% 4.8%
- ---------------------------------------------------------------
</TABLE>
Total domestic funding costs as a percentage of revenues were
4.5% in 1997 compared to 4.4% in 1996. The increase in funding costs reflects
higher funding requirements due to a larger credit card receivable portfolio
and the redemption of the Preferred Shares in the fourth quarter of 1996,
partially offset by lower effective funding rates resulting from the
refinancing of higher rate debt. In 1996, funding cost as a percentage of
revenues improved to 4.4% from 4.8% in 1995. The slight increase in funding
costs reflects higher funding requirements due to the growth in the credit card
receivable portfolio, largely offset by lower effective funding rates.
DOMESTIC OPERATIONS
Operating Income Percent to Revenues [ BAR GRAPH ]
excluding noncomparable items
95 96 97
5.5% 6.0% 5.5%
OPERATING INCOME in 1997 declined slightly from 1996. The improved
performance in the retail and services businesses on strong revenue growth and
selling and administrative expense leverage was more than offset by a decline
in credit results due to the increase in the provision for uncollectible
accounts. In 1996, operating income increased 21.1% from 1995 due to improved
performance from the retail, services and credit businesses.
<TABLE>
<CAPTION>
Operating income by business format:
- -------------------------------------------------------------
millions 1997 1996 1995
- -------------------------------------------------------------
<S> <C> <C> <C>
Retail $ 946 $ 867 $ 703
Services 345 279 221
Credit 1,005 1,164 1,001
Corporate (214) (216) (196)
- -------------------------------------------------------------
Total operating income $2,082 $2,094 $1,729
- -------------------------------------------------------------
</TABLE>
24 SEARS ANNUAL REPORT 1997
<PAGE>
- --------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- --------------------------------------------------------------------------------
Analysis of Consolidated Operations (continued)
- --------------------------------------------------------------------------------
INTERNATIONAL OPERATIONS
International operations in 1997 include full year results for Sears Canada,
but only first quarter operating results of Sears Mexico due to the sale of the
Company's majority interest in Sears Mexico. The sale was recorded in the first
quarter, resulting in a pretax loss of $21 million reflected in other income
and tax expense of $15 million, for an after-tax loss of $36 million.
Despite the sale of Sears Mexico, revenues improved 2.9% in 1997 due to
Sears Canada revenues increasing 13.5% on strong retail store and catalog
performance.
Gross margins as a percentage of merchandise sales and services increased
to 26.9% in 1997 from 24.9% in 1996. Sears Canada gross margin rate improved
substantially in 1997, reflecting savings realized from merchandise sourcing
initiatives.
Selling and administrative expense as a percentage of total revenues
improved to 22.4% in 1997 from 23.5% in 1996. Sears Canada's selling and
administrative rate improvement was substantially due to cost containment
initiatives coupled with revenue growth and a favorable comparison to the prior
year which included a restructuring charge.
Operating income improved $153 million in 1997 as compared to 1996 on
strong Sears Canada performance. Sears Canada benefited from the improving
economic environment in 1997 as well as the favorable response to the
remodeling of its full-line stores and expansion of its furniture and dealer
network.
Revenues in 1996 remained unchanged from 1995. Sears Canada revenues
improved 2.6% in 1996 due to a modest recovery in consumer spending. Offsetting
this improvement was a decline in revenues of 11.8% at Sears Mexico, resulting
primarily from decreased credit revenues.
Gross margins as a percentage of merchandise sales and services increased
to 24.9% in 1996 from 23.9% in 1995. Sears Canada gross margin rates improved
in 1996, reflecting decreased markdowns and a favorable comparison against 1995
occupancy expense. This was partially offset by a decline in gross margin rates
at Sears Mexico.
Selling and administrative expense as a percentage of total revenues
increased to 23.5% in 1996 from 23.1% in 1995. Selling and administrative
expense at Sears Canada increased primarily due to a restructuring charge. In
1996, Sears Canada announced a plan to eliminate certain positions and close a
warehouse and other support facilities as part of its ongoing cost containment
initiative. The Company recorded a $27 million pretax restructuring charge
(before minority interest) related to this initiative. Selling and
administrative expense as a percentage of revenues decreased at Sears Mexico in
1996 due to reduced promotional expenses and lower benefit costs.
Operating income improved $13 million in 1996 as compared to 1995, due
primarily to the improved performance at Sears Canada.
<TABLE>
<CAPTION>
OTHER INCOME
Consolidated other income consists of:
- -------------------------------------------------------------
millions 1997 1996 1995
- -------------------------------------------------------------
<S> <C> <C> <C>
Gain on sale of Advantis $150 $-- $--
Loss on sale of Sears Mexico (21) -- --
Gain on sales of property and investments 7 36 35
Minority interest (primarily Sears Canada) (38) (8) (4)
Miscellaneous 8 (6) (8)
- -------------------------------------------------------------
Total $106 $22 $23
- -------------------------------------------------------------
</TABLE>
INCOME TAX EXPENSE
Income tax expense as a percentage of pretax income was 43.4% in 1997, 39.6% in
1996 and 40.7% in 1995. The increase in 1997 was primarily due to certain
components of the reaffirmation charge that are not tax deductible and the tax
expense from the sale of Sears Mexico. Excluding these items, the consolidated
effective tax rate would have been 40.6% in 1997. The increased rate in 1997
as compared to 1996 was due to higher tax expense on international operations,
partially offset by a lower effective tax rate on domestic operations. The
decrease in 1996 from 1995 was primarily attributable to a lower effective tax
rate on international earnings.
INFLATION
The moderate rate of inflation over the past three years has not had a
significant effect on the Company's sales and profitability.
OUTLOOK
In 1998, the Company expects operating income to continue to grow in
its retail and services businesses. Improvement in the retail and services
businesses is expected to exceed the anticipated decline in credit operating
income. The Company anticipates mid-single digit earnings growth for the full
year of 1998; however, it is likely that first quarter profits will decline
substantially from 1997 levels due to the expected decrease in credit income
and the effect of a later Easter holiday selling season on retail results.
CAUTIONARY STATEMENT REGARDING
FORWARD LOOKING INFORMATION
All of the statements made in this Annual Report, other than historical facts,
are forward looking statements made in reliance on the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. As such, they involve
risks and uncertainties that could cause actual results to differ materially.
The Company's forward looking statements are based on assumptions about many
important factors, including ongoing competitive pressures in the retail
industry, changes in consumer spending, general United States economic
conditions (such as higher interest rates and consumer confidence), the
anticipated decline in credit results from historical levels and normal business
uncertainty. While the Company believes that its assumptions are reasonable, it
cautions that it is impossible to predict the impact of certain factors which
could cause actual results to differ materially from expected results.
ANNUAL REPORT 1997 SEARS 25
<PAGE>
- --------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
millions 1997 1996
- --------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 358 $ 660
Retained interest in transferred credit
card receivables 3,316 2,260
Credit card receivables 20,956 20,104
Less: Allowance for uncollectible accounts 1,113 801
- --------------------------------------------------------------------------------
19,843 19,303
Other receivables 335 335
Merchandise inventories 5,044 4,646
Prepaid expenses and deferred charges 956 348
Deferred income taxes 830 895
- --------------------------------------------------------------------------------
Total current assets 30,682 28,447
Property and equipment
Land 487 445
Buildings and improvements 5,420 5,080
Furniture, fixtures and equipment 4,919 4,279
Capitalized leases 498 433
- --------------------------------------------------------------------------------
11,324 10,237
Less accumulated depreciation 4,910 4,359
- --------------------------------------------------------------------------------
Total property and equipment, net 6,414 5,878
Deferred income taxes 666 905
Other assets 938 937
- --------------------------------------------------------------------------------
TOTAL ASSETS $38,700 $36,167
- --------------------------------------------------------------------------------
LIABILITIES
Current Liabilities
Short-term borrowings $ 5,208 $ 3,533
Current portion of long-term debt and
capitalized lease obligations 2,561 2,737
Accounts payable and other liabilities 6,637 7,225
Unearned revenues 830 840
Other taxes 554 615
- --------------------------------------------------------------------------------
Total current liabilities 15,790 14,950
Long-term debt and capitalized lease
obligations 13,071 12,170
Postretirement benefits 2,564 2,748
Minority interest and other liabilities 1,413 1,354
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 32,838 31,222
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Common shares ($.75 par value, 1,000 shares
authorized, 390.9 and 391.4 shares outstanding) 323 323
Capital in excess of par value 3,598 3,618
Retained income 4,158 3,330
Treasury stock-at cost (1,702) (1,655)
Minimum pension liability (217) (277)
Deferred ESOP expense (204) (230)
Cumulative translation adjustments (94) (164)
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 5,862 4,945
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $38,700 $36,167
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
26 SEARS ANNUAL REPORT 1997
<PAGE>
- --------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- --------------------------------------------------------------------------------
Analysis of Consolidated Financial Condition
- --------------------------------------------------------------------------------
ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
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 owned credit card receivables balance of $20.96 billion excludes
credit card receivables transferred to a securitization Master Trust ("Trust").
Through its subsidiary, SRFG, Inc., the Company sells securities backed by a
portion of these receivables to provide a funding source. In addition to the
receivables sold to third parties, the Company transfers additional receivables
to the securitization Trust in order to enhance the credit worthiness of the
sold securities and to have receivables readily available for future
securitizations.
A summary of these balances at year end is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
millions 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic:
Managed credit card receivables $28,945 $27,063 $24,065
Securitized balances sold (6,404) (6,330) (4,549)
Retained interest in transferred
credit card receivables (3,316) (2,260) (5,579)
Other customer receivables 161 172 184
- --------------------------------------------------------------------------------
Domestic owned credit card receivables 19,386 18,645 14,121
International owned credit card receivables* 1,570 1,459 1,225
- --------------------------------------------------------------------------------
Consolidated owned credit card receivables $20,956 $20,104 $15,346
- --------------------------------------------------------------------------------
</TABLE>
* International owned credit card receivables are net of sold balances of $0,
$267 and $527 million in 1997, 1996 and 1995, respectively.
The credit card receivable balances are geographically diversified
within the United States and Canada. The Company grants retail consumer credit
based on extensive use of proprietary and commercially available credit
histories and scoring models. The Company promptly recognizes uncollectible
accounts and maintains an adequate allowance for uncollectible accounts to
reflect losses inherent in the owned portfolio as of the balance sheet date.
Merchandising inventories are primarily valued on the last-in, first-out
or LIFO method. Inventories would have been $713 million higher if valued on the
first-in, first-out or FIFO method at Jan. 3, 1998. Inventories on a FIFO basis
totaled $5.76 billion at Jan. 3, 1998 as compared to $5.38 billion at Dec. 28,
1996. The increase in inventory levels reflects the additional inventory needed
to support higher sales volume and the addition of new Full-line and specialty
stores.
1997 ASSETS [PIE CHART]
[] Net Receivables 61%
[] Property & Equipment 16%
[] Inventory 13%
[] Other 10%
CAPITAL RESOURCES
Total net funding for the Company at Jan. 3, 1998 was $27.24 billion compared
with $25.04 billion at Dec. 28, 1996, and was used primarily to fund the managed
credit card receivables portfolio. Net funding includes debt reflected on the
balance sheet and investor certificates related to credit card receivables sold
through securitizations as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
millions 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-term borrowings $ 5,208 $ 3,533 $ 5,349
Long-term debt and capitalized lease obligations 15,632 14,907 11,774
Securitized balances sold 6,404 6,597 5,076
- --------------------------------------------------------------------------------
Total funding $27,244 $25,037 $22,199
- --------------------------------------------------------------------------------
</TABLE>
In 1997, the Company utilized more short-term borrowings and long-term
debt in its funding mix as interest rate conditions were favorable in the
unsecured debt markets. 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 financial instruments, such as interest
rate swaps and caps. The Company has policies that centrally govern the use of
such off-balance sheet financial instruments.
FUNDING SOURCES AT YEAR-END 1997 [PIE CHART]
[] Medium-Term Notes 31%
[] Securitization 26%
[] Senior Unsecured 22%
[] Unsecured
Commercial Paper 19%
[] Other 2%
The current debt ratings of the Company appear in the table below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Moody's Duff &
Investors Phelps Fitch
Services, Standard Credit IBCA,
Inc. & Poor's Rating Co. Inc.
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unsecured long-term debt A2 A- A A
Unsecured commercial paper P-1 A-2 D-1 F-1
Term securitization Aaa AAA AAA AAA
- --------------------------------------------------------------------------------
</TABLE>
The Company utilizes Sears Roebuck Acceptance Corp. ("SRAC"), a
wholly-owned subsidiary, to issue commercial paper, to maintain a continuously
offered medium-term note program, to issue intermediate-term notes and to issue
long-term underwritten debt. SRAC issued term debt securities totaling $3.47
billion in 1997. SRAC commercial paper outstandings were $5.25 billion and $3.32
billion at Jan. 3, 1998 and Dec. 28, 1996, respectively. SRAC commercial paper
is supported by a $5.0 billion syndicated credit agreement which expires in 2002
and $540 million in other credit agreements.
ANNUAL REPORT 1997 SEARS 27
<PAGE>
- --------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
millions 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,188 $ 1,271 $ 1,801
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Depreciation, amortization and other noncash items 807 774 631
Provision for uncollectible accounts 1,532 971 589
Gain on sales of property and investments (122) (36) (35)
Change in (net of acquisitions):
Deferred income taxes 273 (31) 50
Retained interest in transferred credit card receivables (1,056) 3,318 (2,036)
Credit card receivables (2,285) (5,739) (534)
Merchandise inventories (475) (475) 30
Other operating assets (160) 111 (106)
Other operating liabilities (258) 1,025 801
Discontinued operations -- -- (776)
- --------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (556) 1,189 415
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (138) (296) (53)
Proceeds from sales of property and investments 394 42 41
Purchases of property and equipment (1,328) (1,189) (1,183)
Discontinued operations -- -- 483
- --------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,072) (1,443) (712)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 3,920 4,683 2,588
Repayments of long-term debt (3,299) (1,832) (1,124)
Increase (decrease) in short-term borrowings, primarily 90 days or less 1,834 (1,814) (637)
Termination of interest rate swap agreements (633) -- --
Repayments of ESOP loan 16 21 44
Preferred stock redemption -- (325) --
Common shares purchased for employee stock plans (170) (164) --
Common shares issued for employee stock plans 103 134 97
Dividends paid to shareholders (441) (394) (607)
- --------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,330 309 361
- --------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (4) (1) (6)
- --------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (302) 54 58
- --------------------------------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR 660 606 548
- --------------------------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 358 $ 660 $ 606
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
28 SEARS ANNUAL REPORT 1997
<PAGE>
- --------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- --------------------------------------------------------------------------------
Analysis of Consolidated Financial Condition (Continued)
- --------------------------------------------------------------------------------
In 1997, the weighted average interest rate on SRAC debt was 6.78%
compared to 6.26% for 1996. The increase in rate is due to the lengthening of
the average maturity. The following issuances were placed during 1997:
* $1.62 billion fixed-rate medium-term notes, weighted average coupon of
6.58% and average term of 5.0 years
* $50 million medium-term variable-rate notes, weighted average maturity of
1.0 years
* $1.80 billion discrete underwritten notes, weighted average coupon of 6.96%
and average term of 12.8 years
The Company, through its subsidiary SRFG, Inc., securitizes domestic
credit card receivables to access intermediate-term funding in a cost-effective
manner. In 1997, the Company issued $523 million of fixed-rate term
securitizations as compared to $2.09 billion of fixed-rate term securitizations
and $525 million of variable-rate term securitizations issued in 1996. As of
Jan. 3, 1998, there were $6.40 billion of sold investor certificates outstanding
that were backed by sold domestic credit card receivables.
During 1997, the Company paid $633 million to terminate two interest
rate swaps that hedged variable rate debt. The payment was for the market value
of the swap contracts at the date of termination and the related accrued
interest payable. As a result, a deferred loss of $466 million was recorded and
is being amortized as interest expense over the remaining lives of the original
swap period. The additional interest expense was not material to 1997 operating
results, nor is it expected to be material to operating results of future
periods.
On Nov. 12, 1996, all the outstanding 8.88% Preferred Shares, First
Series were redeemed at a redemption price of $25 per depository share plus
accrued dividends to the redemption date.
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 did not dilute earnings per share as the
PERCS were reflected in the Company's earnings per share calculation in prior
years.
CAPITAL SPENDING
The Company has completed approximately 75% of a capital expenditure program to
renovate and update the Full-line Stores. In addition, the Company increased
the number of its specialty stores. Capital expenditures during the past three
years were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
millions 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Full-line Stores, primarily
remodeling and expansion efforts $ 812 $ 848 $ 868
Specialty stores 320 181 111
Other - distribution centers/support functions 196 160 204
- --------------------------------------------------------------------------------
Total capital expenditures $1,328 $1,189 $1,183
- --------------------------------------------------------------------------------
</TABLE>
The Company plans capital expenditures of $1.4 billion for 1998, which
includes remodeling and expansion of approximately 95 existing Full-line Stores,
the opening of 20 to 30 new Full-line Stores and more than 100 specialty stores.
The Company may also pursue selective strategic acquisitions.
LIQUIDITY
Based upon the expected cash flow to be generated from future operations and
the Company's ability to cost-effectively access multiple sources of funding,
the Company believes sufficient resources will be available to maintain its
planned level of operations, capital expenditures and dividends in the future.
YEAR 2000
The Company has developed and is currently implementing plans to address the
potential problems related to the impact on its computer systems of the Year
2000. Key financial, information and operation systems, including those that
interact with customers, suppliers and other constituents, are being assessed
and are currently on target to be Year 2000 compliant by Dec. 31, 1999. If
necessary modifications and conversions by the Company and by those with which
it conducts business are not completed on time, the Year 2000 issue may have a
material adverse effect on the Company's consolidated results of operations. The
costs of making the required systems changes is not expected to be material to
the Company's consolidated financial position, results of operations or cash
flows.
ANNUAL REPORT 1997 SEARS 29
<PAGE>
- --------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- --------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
dollars in millions shares in thousands
<S> <C> <C> <C> <C> <C> <C>
8.88% PREFERRED SHARES, FIRST SERIES
Balance, beginning of year $ -- $ 325 $ 325 -- 3,250 3,250
Retired during year -- (325) -- -- (3,250) --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ -- $ -- $ 325 -- -- 3,250
- ------------------------------------------------------------------------------------------------------------------------------------
SERIES A MANDATORILY EXCHANGEABLE
PREFERRED SHARES (PERCS)
Balance, beginning of year $ -- $ -- $ 1,236 -- -- 7,188
Issued during year -- -- -- -- -- --
Exchanged to common shares during year -- -- (1,236) -- -- (7,188)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ -- $ -- $ -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON SHARES
Balance, beginning of year $ 323 $ 322 $ 294 430,615 429,683 392,310
Conversion of PERCS -- -- 27 -- -- 35,673
Stock options exercised and other changes -- 1 1 -- 932 1,700
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 323 323 322 430,615 430,615 429,683
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL IN EXCESS OF PAR VALUE
Balance, beginning of year 3,618 3,634 2,385
Stock options exercised and other changes (20) (16) 40
Conversion of PERCS -- -- 1,209
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 3,598 3,618 3,634
- ------------------------------------------------------------------------------------------------------------------------------------
RETAINED INCOME
Balance, beginning of year 3,330 2,444 8,918
Net income 1,188 1,271 1,801
Preferred share dividends -- (25) (53)
Common share dividends ($.92, $.92 and $1.26 per share) (360) (360) (475)
Distribution of The Allstate Corporation shares -- -- (7,747)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 4,158 3,330 2,444
- ------------------------------------------------------------------------------------------------------------------------------------
TREASURY STOCK--AT COST
Balance, beginning of year (1,655) (1,634) (1,690) (39,221) (39,195) (40,570)
Repurchased for employee stock plans (170) (164) -- (3,442) (3,449) --
Reissued under compensation plans and other changes 123 143 56 2,936 3,423 1,375
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year (1,702) (1,655) (1,634) (39,727) (39,221) (39,195)
- ------------------------------------------------------------------------------------------------------------------------------------
MINIMUM PENSION LIABILITY
Balance, beginning of year (277) (285) --
Net decrease (increase) 60 8 (285)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year (217) (277) (285)
- ------------------------------------------------------------------------------------------------------------------------------------
DEFERRED ESOP EXPENSE
Balance, beginning of year (230) (253) (558)
Reductions 26 23 305
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year (204) (230) (253)
- ------------------------------------------------------------------------------------------------------------------------------------
UNREALIZED NET CAPITAL GAINS
Balance, beginning of year -- -- 32
Net unrealized gain during the year -- -- 1,176
Distribution of The Allstate Corporation shares -- -- (1,208)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance, beginning of year (164) (168) (141)
Net decrease (increase) 70 4 (7)
Distribution of The Allstate Corporation shares -- -- (20)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year (94) (164) (168)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON SHAREHOLDERS' EQUITY
AND SHARES OUTSTANDING $ 5,862 $ 4,945 $ 4,060 390,888 391,394 390,488
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $ 5,862 $ 4,945 $ 4,385
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
30 SEARS ANNUAL REPORT 1997
<PAGE>
- -------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- -------------------------------------------------------------------------------
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. ("the Company") 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")
and Homart Development Co. and affiliated entities ("Homart") are presented as
discontinued operations in 1995.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Certain
reclassifications have been made in the 1996 and 1995 financial statements to
conform with current year presentation.
FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest Dec. 31. Unless
otherwise stated, references to years in this report relate to fiscal years
rather than to calendar years.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Fiscal year Ended Weeks
- -------------------------------------------------------------------------------
<S> <C> <C>
1997 January 3, 1998 53
1996 December 28, 1996 52
1995 December 30, 1995 52
- -------------------------------------------------------------------------------
</TABLE>
MERCHANDISE SALES AND SERVICES
Revenues from merchandise sales and services are net of returns and allowances
and exclude sales tax. Included in merchandise sales and services are gross
revenues from licensees of $1.39, $1.32 and $1.25 billion for 1997, 1996 and
1995, respectively.
SERVICE CONTRACTS
The Company sells extended service contracts with terms of coverage generally
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 incurred.
STORE PRE-OPENING EXPENSES
Costs associated with the opening of new stores are expensed as incurred.
EARNINGS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." The
statement is effective for financial statements for periods ending after Dec.
15, 1997 and as such has been implemented in this annual report. All earnings
per share data presented in these financial statements have been restated to
conform with SFAS No. 128.
Basic earnings per common share is computed based on the weighted average
number of common shares outstanding and income less dividends of $25 million in
1996 and $29 million in 1995 on the 8.88% Preferred Shares, First Series.
Diluted earnings per common share also includes the effect of potential common
shares (dilutive stock options) outstanding during the period.
CASH AND CASH EQUIVALENTS
Cash equivalents include all highly liquid investments with maturities
of three months or less at date of purchase.
RETAINED INTEREST IN TRANSFERRED
CREDIT CARD RECEIVABLES
As part of its domestic credit card securitizations, the Company
transfers credit card receivables to a Master Trust ("Trust") in exchange for
certificates representing undivided interests in such receivables. Effective
Jan. 3, 1998 the Company reclassified, for all periods presented, its retained
interest in transferred credit card receivables to a separate balance sheet
account and presented the related charge-offs of transferred credit card
receivables as a reduction of credit revenues. The retained interests consist
of investor certificates held by the Company and the seller's certificate,
which represents both contractually required seller's interest and excess
seller's interest in the credit card receivables in the Trust. Retained
interests are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
millions 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Investor certificates held by the Company $ 545 $ 522 $ 295
Contractually required seller's interest 697 684 495
Excess seller's interest 2,074 1,054 4,789
- -------------------------------------------------------------------------------
Retained interest in transferred
credit card receivables $3,316 $2,260 $5,579
- -------------------------------------------------------------------------------
</TABLE>
The Company intends to hold the investor certificates and contractually
required seller's interest to maturity. The excess seller's interest is
considered available for sale. Due to the short-term revolving nature of the
underlying credit card receivables, the carrying value of the Company's
retained interest in transferred credit card receivables approximates fair
value and is classified as a current asset.
CREDIT CARD RECEIVABLES
Credit card receivables arise primarily under open-end revolving credit
accounts used to finance purchases of merchandise and services offered
by the Company. These accounts have various billing and payment structures,
including varying minimum payment levels and finance charge rates. Based on
historical payment patterns, the full receivable balance will not be realized
within one year.
Credit card receivables are shown net of an allowance for uncollectible
accounts. The Company provides an allowance for uncollectible accounts based on
impaired accounts, historical charge-off patterns,
and management judgment.
ANNUAL REPORT 1997 SEARS 31
<PAGE>
- -------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
Uncollectible accounts are generally charged off automatically when the
customer's past due balance is eight times the scheduled minimum monthly
payment, except that accounts may be charged off sooner in the event of
customer bankruptcy. Finance charge revenue is recorded until such time as an
account is charged off. Finance charges on charged-off accounts are presented
as a reduction of credit revenues.
Effective for fiscal year 1997, the Company adopted SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS No. 125 requires that the Company recognize gains on its
domestic credit card securitizations which qualify as sales and that an
allowance for uncollectible accounts not be maintained for receivable balances
which are sold. Prior to adoption of SFAS No. 125, the Company maintained an
allowance for uncollectible sold accounts as a recourse liability and did not
recognize gains on securitizations. Adoption of SFAS No. 125 increased net
income $136 million in 1997.
MERCHANDISE INVENTORIES
Approximately 83% of merchandise inventories are valued at the lower
of cost (using the last-in, first-out or LIFO method) or market using
the retail method. To estimate the effects of inflation on inventories,
the Company utilizes internally developed price indices.
The LIFO adjustment to cost of sales was a credit of $17 million in
1997 and a charge of $19 million in 1996 and 1995. Partial liquidation of
merchandise inventories valued under the LIFO method resulted in credits of $2
million and $15 million in 1997 and 1995. No layer liquidation credits
resulted in 1996. If the first-in, first-out (FIFO) method of inventory
valuation had been used instead of the LIFO method, merchandise inventories
would have been $713 and $730 million higher at Jan. 3, 1998 and Dec. 28, 1996,
respectively.
Merchandise inventories of international operations, the Parts Group,
certain Sears Tire Group formats and Puerto Rico, which represent approximately
17% of merchandise inventories, are recorded at the lower of cost or market
based on the FIFO method.
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 furniture, fixtures and equipment, 40 to 50 years for buildings
and building improvements, and over the expected term of the lease or estimated
useful lives, whichever is shorter, for leasehold improvements.
GOODWILL
Included in other assets is the excess of purchase price over net assets
of businesses acquired ("goodwill"), which is amortized using the
straight-line method over 40 years.
INCOME TAXES
The consolidated federal income tax return of the Company includes results of
both the continuing businesses and discontinued operations. Tax liabilities and
benefits are allocated among the respective businesses, regardless of whether
or not such benefits would be currently available on a separate return basis.
ADVERTISING Costs for newspaper, television, radio and other media advertising
are expensed as incurred. Specialty catalog book preparation and other direct
response advertising costs (printing costs and advertising inserts) are charged
to expense over the expected period of future benefits. For specialty catalogs,
amortization of costs occurs over the life of the catalog, not to exceed one
year. For advertising inserts and other direct response advertising, the
amortization period ranges from six months to five years depending on the
period of future benefits. In 1997, the total cost of advertising charged to
expense was $1.33 billion, compared with $1.28 billion in 1996, and $1.22
billion in 1995. The consolidated balance sheets include deferred
direct-response advertising costs of $68 million at Jan. 3, 1998 and $59
million at Dec. 28, 1996, which are included in other assets.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company utilizes various off-balance sheet financial instruments
to manage the interest rate and foreign currency risk associated with its
borrowings. The counterparties to these instruments are major financial
institutions with credit ratings primarily of 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 is 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.
Gains or losses on terminations of interest rate swaps are deferred and
amortized to interest expense over the remaining life of the original swap
period to the extent the related debt remains outstanding.
Financial instruments used as hedges must be effective at reducing the
type of risk associated with the exposure being hedged and must be designated
as a hedge at inception of the hedge contract. Accordingly, changes in market
values of hedge instruments must be highly correlated with changes in market
values of the underlying items being hedged. Any financial instrument
designated but ineffective as a hedge would be marked to market and recognized
in earnings immediately.
EFFECT OF NEW ACCOUNTING STANDARDS
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which
requires that an enterprise report the change in its net assets during the
period from nonowner sources, and SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes annual and interim
reporting and disclosure standards for an enterprise's operating segments.
Adoption of these statements will not impact the Company's consolidated
financial position, results of operations or cash flows, and will be limited to
the form and content of its disclosures. Both statements are effective for
fiscal years beginning after Dec. 15, 1997.
32 SEARS ANNUAL REPORT 1997
<PAGE>
- -------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
2. DISCONTINUED OPERATIONS
Income from discontinued operations was $776 million (net of income tax expense
of $249 million) on revenues of $11.5 billion in 1995 and represents the
Company's income from Allstate and Homart that were previously owned. In June
1995, the Company distributed in a tax-free dividend to the Company's common
shareholders its 80% ownership interest in The Allstate Corporation. This
transaction resulted in a noncash dividend to Sears shareholders totaling $8.98
billion.
In July 1995, the Company completed the sale of Homart's commercial
office building portfolio, and in Dec. 1995, the Company completed the sale of
the retail shopping center and community development businesses of Homart. No
gain or loss to the Company resulted from these transactions.
3. RESTRUCTURING
In 1996, international operations selling and administrative expense included a
$27 million pretax restructuring charge (before minority interest) related to
Sears Canada cost containment initiatives that included elimination of certain
positions and the closing of a warehouse and other support facilities.
Included in domestic operations selling and administrative expense in
1995 was a $51 million pretax restructuring charge associated with the
Company's organizational realignment. This initiative better aligned the
Company's structure with its current strategy, particularly the creation of
separate tire and auto parts divisions and the consolidation of certain
distribution facilities.
In 1995, the Company also reversed $62 million of pretax reserves
related to the $2.65 billion domestic restructuring announced in 1993. The
reserves which were released were no longer needed due to the settlement of
obligations and the adjustment of the carrying values of certain properties to
be disposed of in connection with that restructuring.
4. INCOME TAXES
Income before income taxes was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
millions 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $1,980 $2,091 $1,727
Foreign 120 14 1
- -------------------------------------------------------------------------------
Total $2,100 $2,105 $1,728
- -------------------------------------------------------------------------------
</TABLE>
Federal, state and foreign taxes were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
millions 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax
Current $ 468 $ 720 $ 571
Deferred 256 (12) 31
State income tax
Current 75 133 93
Deferred 18 (8) 10
Foreign income tax
Current 97 25 23
Deferred (2) (24) (25)
- -------------------------------------------------------------------------------
Income tax provision $ 912 $ 834 $ 703
- -------------------------------------------------------------------------------
</TABLE>
A reconciliation of the statutory federal income tax rate to the
effective rate was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit 2.9 3.9 3.9
Reaffirmation charge 1.3 -- --
Sale of Sears Mexico 1.3 -- --
Other 2.9 .7 1.8
- -------------------------------------------------------------------------------
Effective income tax rate 43.4%% 39.6% 40.7%
- -------------------------------------------------------------------------------
</TABLE>
Deferred taxes based upon differences between the financial statement and
tax bases of assets and liabilities and available tax carryforwards consists
of:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
millions 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Unearned maintenance income $ 435 $ 445
Allowance for uncollectible accounts 493 437
Self insurance reserves 35 169
Postretirement benefit liability 1,059 1,143
Minimum pension liability 120 155
Other deferred tax assets 713 670
- -------------------------------------------------------------------------------
Gross deferred tax assets 2,855 3,019
Less valuation allowance -- --
- -------------------------------------------------------------------------------
Total deferred tax assets 2,855 3,019
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Property and equipment 394 336
Prepaid pension 96 153
LIFO 132 131
Deferred swap termination loss 193 --
Other deferred tax liabilities 544 599
- -------------------------------------------------------------------------------
Total deferred tax liabilities 1,359 1,219
- -------------------------------------------------------------------------------
Net deferred taxes $1,496 $1,800
- -------------------------------------------------------------------------------
</TABLE>
Management believes that the realization of the deferred tax assets
is more likely than not, based on the expectation that the Company will
generate the necessary taxable income in future periods.
U.S. income and foreign withholding taxes were not provided on certain
unremitted earnings of international affiliates that the Company considers to
be permanent investments. The cumulative amount of unremitted income for which
income taxes have not been provided totaled $375 million at Jan. 3, 1998. If
these earnings were to be remitted, taxes of $94 million would be due.
Income taxes of $886, $386, and $616 million were paid in 1997, 1996, and
1995, respectively.
ANNUAL REPORT 1997 SEARS 33
<PAGE>
- -------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
5. BENEFIT PLANS
Expenses for retirement and savings-related benefit plans were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
millions 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Sears 401(k) Profit Sharing Plan $ 33 $ 31 $ 42
Pension plans 106 99 38
Retiree insurance benefits (41) 76 185
Other plans 6 8 10
- -------------------------------------------------------------------------------
Total $ 104 $214 $275
- -------------------------------------------------------------------------------
</TABLE>
SEARS 401(k) PROFIT SHARING PLAN
Most domestic employees are eligible to become members of the Sears 401(k)
Profit Sharing Plan ("the Plan"), previously The Savings and
Profit Sharing Fund of Sears Employees. Under the terms of the Plan,
the Company matches a portion of the employee contributions. The Company
matching contribution is based on 6% of consolidated income, as defined, for
the participating companies and is limited to 70% of eligible employee
contributions. The Company's matching contributions were $71, $64, and
$61 million in 1997, 1996, and 1995, respectively.
The Plan includes an Employee Stock Ownership Plan ("the ESOP") to prefund
a portion of the Company's anticipated contribution through 2004. The Company
provided the ESOP with a loan that was used to purchase Sears common shares in
1989. The purchased shares represent deferred compensation expense, which is
presented as a reduction of shareholders' equity and recognized as expense when
the shares are allocated to employees to fund the Company contribution. The per
share cost of Sears common shares purchased by the ESOP in 1989 is $15.27. The
Company uses the ESOP shares to fund the Company contribution, which thereby
reduces expense.
The ESOP loan bears interest at 9.2% and is repaid from dividends
on the ESOP shares and additional cash payments provided by the Company. The
Company has contributed cash to the ESOP annually in the amount equal to the
ESOP's required interest and principal payments on the loan, less dividends
received on the ESOP shares. The cash payments amounted to $23, $29, and $62
million in 1997, 1996, and 1995, respectively. The balance of the ESOP loan was
$290 million and $306 million at Jan. 3, 1998, and Dec. 28, 1996, respectively.
The reported expense is determined as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
millions 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense recognized by ESOP $ 27 $ 29 $ 45
Less dividends on ESOP shares (20) (21) (31)
Cost of shares allocated to
employees and plan expenses 26 23 28
- -------------------------------------------------------------------------------
Sears 401(k) Profit Sharing Plan expense $ 33 $ 31 $ 42
- -------------------------------------------------------------------------------
</TABLE>
At Dec. 31, 1997, total committed to be released, allocated and remaining
unallocated ESOP shares were 1.7, 10.8 and 13.4 million, respectively. All ESOP
shares are considered outstanding in the calculation of earnings per share.
PENSION PLANS
Certain domestic full-time and 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 is determined using various actuarial cost
methods, and amounted to $35, $172 and $76 million for 1997, 1996 and 1995,
respectively.
Pension expense was comprised of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
millions 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Benefits earned during the period $ 74 $ 72 $ 68
Interest on projected benefit obligation 190 189 181
Actual return on plan assets (484) (322) (383)
Net amortization and deferral 326 160 172
- -------------------------------------------------------------------------------
Pension expense $ 106 $ 99 $ 38
- -------------------------------------------------------------------------------
</TABLE>
The Company uses Oct. 31 as the measurement date for purposes
of determining pension plan assets and obligations. The weighted average
discount rate and rate of increase in compensation used in determining
the actuarial present value of the projected benefit obligations were 7.25% and
4.00% in 1997, 7.75% and 4.25% in 1996 and 7.75% and 3.75% in 1995. The
expected long-term rate of return on plan assets used in determining net
periodic pension cost was 9.5% in 1997, 1996 and 1995.
The plans' funded status were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Assets Accumulated Assets Accumulated
exceed benefits exceed benefits
accumulated exceed accumulated exceed
millions benefits assets benefits assets
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of
Vested benefit obligation $490 $2,087 $478 $1,787
- -------------------------------------------------------------------------------
Accumulated benefit
obligation $491 $2,123 $479 $1,984
- -------------------------------------------------------------------------------
Projected benefit
obligation (PBO) $556 $2,268 $554 $2,123
Plan assets at fair value,
primarily publicly traded
stocks and bonds 782 1,928 714 1,776
- -------------------------------------------------------------------------------
PBO less than (in excess of)
plan assets 226 (340) 160 (347)
Unrecognized net loss (gain) (45) 540 37 636
Unrecognized prior service
cost (benefit) 1 (58) 1 (65)
Unrecognized transitional asset (8) -- (17) --
Minimum pension liability -- (337) -- (432)
- -------------------------------------------------------------------------------
Prepaid (accrued) pension
cost in the Balance Sheet at
year end $174 $ (195) $181 $ (208)
- -------------------------------------------------------------------------------
</TABLE>
34 SEARS ANNUAL REPORT 1997
<PAGE>
- -------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
The provisions of SFAS No. 87, "Employers' Accounting For Pensions,"
require the recognition of a minimum pension liability for each defined benefit
plan for which the accumulated benefit obligation exceeds plan assets. The
amount of minimum pension liability was $337 million at Jan. 3, 1998 and $432
million at Dec. 28, 1996. The minimum pension liability in excess of
unrecognized prior service cost is recorded as a reduction to shareholders'
equity, net of tax, of $217 million at Jan. 3, 1998 and $277 million at Dec.
28, 1996.
RETIREE INSURANCE BENEFITS
The Company provides certain medical and life insurance benefits for retired
employees. Employees may become eligible for medical benefits
if they retire in accordance with the Company's established retirement policy
and are continuously insured under the Company's group medical plans or other
approved plans for ten or more years immediately prior to retirement. The
Company shares the cost of the retiree medical benefits with retirees based on
years of service. Generally, the Company's share of these benefit costs will be
capped at the Company contribution calculated during the first year of
retirement. The Company's postretirement benefit plans are not funded. The
Company has the right to modify or terminate these plans.
In 1997, the Company announced changes to its postretirement
life insurance benefit plan. Retiree life insurance benefits were eliminated
for all active associates not retired by Dec. 31, 1997. This plan change
resulted in a one-time pretax gain of $61 million. In connection with the
elimination of retirement life insurance benefits for active associates, the
Company also announced the reduction in life insurance over a ten year period
to a maximum coverage of $5,000 for all post-1977 retirees.
Postretirement benefit expense was comprised of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
millions 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Benefits earned during the period $ 13 $ 18 $ 24
Interest on accumulated postretirement
benefit obligation 105 125 188
Net amortization and deferral (98) (67) (27)
Elimination of postretirement
life insurance for active associates (61) -- --
- -------------------------------------------------------------------------------
Postretirement benefit expense $ (41) $ 76 $185
- -------------------------------------------------------------------------------
</TABLE>
The plans' funded status were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
millions 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees $1,211 $1,495
Fully eligible active plan participants 48 107
Other active plan participants 11 114
- -------------------------------------------------------------------------------
Accumulated postretirement benefit obligation 1,270 1,716
Unrecognized gain 414 441
Unrecognized prior service benefits 880 591
- -------------------------------------------------------------------------------
Accrued postretirement benefit cost in the Balance
Sheet at year end $2,564 $2,748
- -------------------------------------------------------------------------------
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% in 1997 and 7.75% in 1996.
The weighted average health care cost trend rate used in measuring
the postretirement benefit expense is 6.0% for 1998, declining to 5.0%
in 1999, and remaining at that level thereafter. A one percentage point
increase in the assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation by $25 million and would increase
the annual postretirement benefit expense by $4 million.
6. BORROWINGS
Short-term borrowings consisted of:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
millions 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper $5,100 $3,208
Bank loans 106 97
Agreements with bank trust departments -- 82
Other loans (principally foreign) 2 146
- -------------------------------------------------------------------------------
Total short-term borrowings $5,208 $3,533
Weighted average interest rate at year end 5.9% 6.4%
Weighted average interest rate at year end, including
effects of swaps and caps 6.7% 7.3%
- -------------------------------------------------------------------------------
</TABLE>
At Jan. 3, 1998, the Company had credit agreements totaling
$6.10 billion. SRAC's credit facilities totaled $5.0 billion in a syndicated
credit agreement and $540 million in other credit agreements. Sears Canada had
credit agreements totaling $562 million. These syndicated and other credit
agreements provide for loans at prevailing interest rates and mature at various
dates through April, 2002. The Company pays commitment fees in connection with
these credit agreements.
The Company had interest rate swap agreements that established fixed rates
on $1.49 billion and $996 million of short-term variable rate debt at Jan. 3,
1998 and Dec. 28, 1996, resulting in weighted average interest rates of 6.9%
and 8.5%, respectively. The weighted average maturity of agreements in effect
on Jan. 3, 1998 was approximately 14 years. The Company had no interest rate
caps as of Jan. 3, 1998. In 1996, due to interest rate caps, the Company had a
maximum weighted average interest rate of 9.0% on $200 million of debt at Dec.
28, 1996.
ANNUAL REPORT 1997 SEARS 35
<PAGE>
- -------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
Long-term debt was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
millions Issue 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
SEARS, ROEBUCK AND CO.
6.25% to 9.5% Notes, due 1998 to 2004 $ 1,250 $ 1,550
8.2% Extendable Notes, due 1999 31 31
6% Debentures, $300 million face value, due 2000,
effective rate 14.8% 250 233
9.375% Debentures, due 2011 300 300
5.47% to 10.0% Medium-Term Notes,
due through 2021 2,045 3,236
Capitalized lease obligations 279 211
SEARS ROEBUCK ACCEPTANCE CORP.
6.18% Term Loan, due 1999 50 715
6.13% and 7.5% Notes, due 2000 to 2027 3,099 1,298
5.47% to 7.26% Medium-Term Notes, due 1998 to 2007 6,033 4,834
SEARS DC CORP.
7.81% to 9.26% Medium-Term Notes,
due through 2012 444 779
SEARS OVERSEAS FINANCE N.V. (GUARANTEED BY
SEARS, ROEBUCK AND CO.)
Zero Coupon Bonds, $500 million face value,
due 1998, effective rate 12.0% 471 421
SEARS CANADA INC.
6.55% to 11.70% Debentures, due 1999 to 2007 421 420
Notes, mortgages, bonds and capitalized leases 127 135
SEARS CANADA RECEIVABLES TRUST
3.25% to 9.18% Receivables Trusts,
due 1998 to 2006 678 541
SEARS ROEBUCK DE MEXICO, S.A. DE C.V.
Notes payable to bank due 1998 -- 50
OTHER SUBSIDIARIES
Notes, mortgage and capitalized leases 154 153
- -------------------------------------------------------------------------------
15,632 14,907
Less current maturities 2,561 2,737
- -------------------------------------------------------------------------------
Total long-term debt $13,071 $12,170
- -------------------------------------------------------------------------------
</TABLE>
As of Jan. 3, 1998, long-term debt maturities for the next five years were
as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
millions
- -------------------------------------------------------------------------------
<S> <C>
1998 $2,561
1999 1,420
2000 2,151
2001 2,471
2002 1,603
- -------------------------------------------------------------------------------
</TABLE>
The Company paid interest of $1.4 billion for the year ended Jan. 3, 1998
and $1.3 billion for the years ended Dec. 28, 1996 and Dec. 30, 1995. Interest
capitalized was $3, $5 and $4 million for the years ended Jan. 3, 1998, Dec.
28, 1996, and Dec. 30, 1995, respectively.
7. LEASE AND SERVICE AGREEMENTS
The Company leases certain stores, office facilities, warehouses, computers and
transportation 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 $439, $365 and $357
million, including contingent rentals of $57, $66 and $66 million, for the
years ended Jan. 3, 1998, Dec. 28, 1996, and Dec. 30, 1995, respectively.
Minimum lease obligations, excluding taxes, insurance and other expenses
payable directly by the Company, for leases in effect as of Jan. 3, 1998, were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Capital Operating
millions leases leases
- -------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 59 $ 340
1999 58 311
2000 58 268
2001 57 235
2002 53 210
After 2002 765 1,102
- -------------------------------------------------------------------------------
Total minimum payments $1,050 $2,466
Less imputed interest 626
- -------------------------------------------------------------------------------
Present value of minimum lease payments 424
Less current maturities 14
- -------------------------------------------------------------------------------
Long-term obligation $ 410
- -------------------------------------------------------------------------------
</TABLE>
The Company has committed to purchase from a third party provider data and
voice networking and information processing services of at least $216 million
annually through 2004. Total expenses incurred by the Company for these
services during the years 1997, 1996 and 1995 were $361, $327 and $270 million,
respectively.
8. 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 Company's financial
assets and liabilities are recorded in the consolidated balance sheets at
historical cost, which approximates fair value.
To determine fair value, credit card receivables are valued by discounting
estimated future cash flows. The estimated cash flows reflect the historical
cardholder payment experience and are discounted at market rate. 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.
The Company is a party to off-balance sheet financial instruments
to manage interest rate and foreign currency risk. These financial instruments
involve, to varying degrees, elements of market, credit, foreign exchange and
interest rate risk in excess of amounts recognized in the balance sheet. The
Company generally does not require collateral or other security
to support the off-balance sheet financial instruments with credit risk.
Debt-related
The Company had the following off-balance sheet financial instruments related
to its outstanding borrowings at Jan. 3, 1998 and Dec. 28, 1996:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1997
- -------------------------------------------------------------------------------
Contract or
Notional Fair Carrying
millions Amount Value Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate swap agreements:
Pay floating rate, receive fixed rate $ 805 $ 12 $ --
Pay fixed rate, receive floating rate 1,492 (84) --
Foreign currency hedge agreements 10 (3) --
- -------------------------------------------------------------------------------
</TABLE>
36 SEARS ANNUAL REPORT 1997
<PAGE>
- -------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1996
- -------------------------------------------------------------------------------
Contract or
Notional Fair Carrying
millions Amount Value Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate swap agreements:
Pay floating rate, receive fixed rate $ 805 $ 16 $ --
Pay fixed rate, receive floating rate 996 (394) --
Interest rate cap agreement 200 -- --
Foreign currency hedge agreements 110 (4) --
- -------------------------------------------------------------------------------
</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 5.62% and received a weighted
average rate of 6.80% in 1997. For pay fixed rate, receive floating rate
swaps, the Company paid a weighted average rate of 8.53% and received a weighted
average rate of 5.44% in 1997. The fair values of interest rate swaps and caps
are based on prices quoted from dealers. 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.
Maturity dates of the off-balance sheet financial instruments outstanding
at Jan. 3, 1998 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Notional amount
- -------------------------------------------------------------------------------
Over
millions 1 year 2-5 years 5 years
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate swap agreements $ -- $1,145 $1,152
Foreign currency hedge agreements -- 10 --
- -------------------------------------------------------------------------------
</TABLE>
During 1997, the Company paid $633 million to terminate two interest rate
swaps. The deferred loss related to these terminations was $464 million at Jan.
3, 1998 and will be amortized over the remaining lives of the original swap
period.
Credit-related
The Company had outstanding domestic securitized credit card receivables sold
of $6.40 and $6.33 billion at Jan. 3, 1998 and Dec. 28, 1996, respectively, for
which the Company's credit risk exposure is contractually limited to the
investor certificates held by the Company.
Other
The Company had a financial guaranty of $87 million at Jan. 3, 1998. 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. No amounts were accrued in the balance sheet for any potential loss
associated with this guaranty at Jan. 3, 1998 and Dec. 28, 1996.
9. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The Company grants credit to customers throughout North America. The five
states in which the Company had the largest amount of managed credit
card receivables were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
millions 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
California $2,966 $2,680
Texas 2,368 2,191
Florida 2,114 1,982
New York 1,706 1,552
Pennsylvania 1,522 1,478
- -------------------------------------------------------------------------------
</TABLE>
10. LEGAL PROCEEDINGS
On Jun. 3, 1997, the Company entered into a settlement of the consolidated
debtor class action lawsuits filed in the United States Bankruptcy and District
Courts for the District of Massachusetts by certain current and former credit
card holders of the Company who had declared personal bankruptcy (the
"Settlement"). These lawsuits alleged that the Company had violated the United
States Bankruptcy Code and consumer protection laws in various states through
activities related to certain debt reaffirmation agreements. During the second
quarter of 1997, the Company entered into consent decrees with Attorneys General
in all fifty states and with the Federal Trade Commission relating to these
matters. The consent decrees with the States' Attorneys General require the
Company, among other things, to establish funds aggregating $40 million to be
shared among the states and used in part for consumer education. A federal civil
and criminal investigation of these matters is ongoing.
On Oct. 28, 1997, at a joint fairness hearing before the United States
Bankruptcy and the District Courts for the District of Massachusetts, the
courts approved the Settlement. The Settlement required, among other things,
the Company to pay the debtors the amounts collected pursuant to reaffirmation
agreements that were not filed with the bankruptcy courts, including finance
charges, plus 10% interest, and to undergo a review of its credit bankruptcy
reaffirmation procedures. In addition, outstanding balances relating to unfiled
debt reaffirmation agreements were written off. The Company will also establish
a $25 million fund to be distributed to the debtors participating in the
Settlement.
Six purported shareholders' derivative actions have been filed on behalf
of the Company against its directors and certain of its officers, alleging
breach of fiduciary duty for failing to prevent the improper handling of certain
of the Company's debt reaffirmation agreements. The complaints seek unspecified
damages and attorneys' fees and expenses. Five of the six, which were filed May
14, 1997, Jun. 11, 1997, Jun. 27, 1997, Sept. 11, 1997, and Nov. 5, 1997 have
been consolidated in the Supreme Court of the State of New York for the County
of New York. The remaining case, which was filed on Dec. 17, 1997 in the
Chancery Court of the State of Illinois, Cook County, has been stayed pending
resolution of the New York consolidated action. The Company has reached an
agreement in principle to settle all six of these derivative actions, subject to
court approval at a hearing which has been set for May 7, 1998.
On Oct. 9, 1997, the Company reached an agreement in principle
to settle several consolidated securities class action lawsuits against the
Company and one of its officers in the United States District Court for
ANNUAL REPORT 1997 SEARS 37
<PAGE>
- -------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
the Northern District of Illinois. The amended consolidated complaint alleges
violations of the Securities Exchange Act of 1934 for failure to disclose the
bankruptcy collection practices described above in periodic filings with the
Securities and Exchange Commission prior to Apr. 10, 1997.
The Company recorded a pretax charge of $475 million ($320 million on
an after-tax basis) in the second quarter for the estimated cost for the
matters referred to above, including other related expenses. This estimate is
based on management's assumptions as to the ultimate outcome of future events
and actual results could differ from this estimate. As such, it is possible
that additional costs relating to the civil and criminal investigation referred
to above could be incurred that are material to operating results for the period
in which such investigation is resolved. However, in the opinion of management,
such possible additional costs are not expected to have a material effect on
financial position, liquidity or capital resources of the Company.
The Company is subject to various other legal and governmental
proceedings pending against the Company, many involving routine litigation
incidental to the businesses. Other matters contain allegations that are
nonroutine and involve compensatory, punitive or antitrust treble damages
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 of the Company after consulting with legal counsel, the
ultimate liability in excess of reserves currently recorded is not expected to
have a material effect on annual results of operations, financial position,
liquidity or capital resources of the Company.
11. ACQUISITION OF BUSINESS
During 1996, the Company acquired all the outstanding stock of Orchard Supply
Hardware Stores Corporation ("Orchard") for $309 million. Orchard is engaged in
the operation of more than 60 hardware stores in California. The acquisition
was recorded using the purchase method of accounting and resulted in goodwill
of approximately $220 million, which is included in other assets. Orchard's
results of operations are not material to the Company's consolidated results of
operations.
12. OTHER INCOME
In 1997, the Company sold its 30% equity interest in Advantis, a joint venture
between IBM and the Company, to IBM. This transaction resulted in a pretax gain
of $150 million and is recorded in other income.
Also in 1997, the Company completed the sale of 60% of the outstanding
shares of Sears, Roebuck de Mexico, S.A. de C.V. to Grupo Carso S.A. de C.V.
The sale resulted in a pretax loss of $21 million and is reflected in other
income.
13. EARNINGS PER SHARE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
millions, except earnings per share 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations $1,188 $1,271 $1,025
Less: dividends on preferred shares -- 25 29
- -------------------------------------------------------------------------------
Income available to common shareholders* $1,188 $1,246 $ 996
- -------------------------------------------------------------------------------
Average common shares outstanding 391.6 391.8 389.4
Earnings per share - basic $ 3.03 $ 3.18 $ 2.56
Dilutive stock options 6.2 7.3 4.6
- -------------------------------------------------------------------------------
Average common and common
equivalent shares outstanding 397.8 399.1 394.0
- -------------------------------------------------------------------------------
Earnings per share - diluted $ 2.99 $ 3.12 $ 2.53
- -------------------------------------------------------------------------------
</TABLE>
* Income available to common shareholders is the same for purposes of
calculating basic and diluted EPS.
Options to purchase 4.7 million and .7 million shares of common stock
at prices ranging from $47 to $64 and $48 to $52 per share were outstanding at
Jan. 3, 1998 and Dec. 28, 1996, respectively, but were not included in the
computation of diluted EPS because the options exercise prices were greater
than the average market price of the common shares. In 1995, all options
outstanding were included in the computation of diluted EPS.
14. 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, that would cause its consolidated
unencumbered assets, as defined, to fall below 150% of its consolidated
liabilities, as defined. At Jan. 3, 1998, approximately $3.3 billion could be
paid in dividends to shareholders under the most restrictive indentures.
PREFERRED SHARES
In Nov. 1996, the Company redeemed all the 8.88% Preferred Shares at a
redemption price of $25 per depository share plus accrued dividends to the
redemption date.
The Company exchanged the Series A Mandatorily Exchangeable Preferred
Shares for common shares on Mar. 20, 1995. Holders of depository shares
received 1.24 common shares for each depository share. The total number of
common shares delivered upon exchange was 35.7 million.
SHARE REPURCHASE PROGRAM
On Mar. 13, 1996, the Board of Directors approved a two-year common share
repurchase program for the purpose of acquiring shares for distribution
under employee stock-based incentive plans. The program was extended by
the Board of Directors on Feb. 3, 1998 for an additional two years
and authorizes the Company to cumulatively acquire up to 20 million Sears
common shares on the open market. Through Jan. 3, 1998, 6.9 million common
shares have been acquired under the repurchase program.
15. STOCK BASED COMPENSATION
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. Options are generally exercisable in not
more than four equal, annual installments beginning one year after the date of
grant, and generally expire in 10 or 12 years.
Additionally, certain options were granted with performance-based features
that require the Company share price to reach specified targets at three- and
five-year intervals from the grant date to be earned. The Company had 1.4
million performance based options outstanding at the end of 1997, all of which
were granted in 1997. Subject to the satisfaction of the performance-based
features, these performance based options vest 50% in year five, 25% in year six
and 25% in year seven. No compensation expense has been recognized because the
exercise price exceeded the Company share price at year end.
38 SEARS ANNUAL REPORT 1997
<PAGE>
- -------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
The Company measures compensation cost under APB Opinion No. 25.
Accordingly, no compensation cost has been recognized for its fixed stock
option plans. In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," the fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. The following assumptions
were used during the respective years to estimate the fair value of options
granted:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 1.59% 1.86% 3.08%
Expected volatility 28% 28% 28%
Risk-free interest rate 6.19% 6.23% 6.43%
Expected life of options 6 years 6 years 6 years
- --------------------------------------------------------------------------------
</TABLE>
Had compensation cost for the Company's stock option plans been determined
consistent with SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
millions, except earnings per share 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income - as reported $1,188 $1,271 $1,801
Net income - pro forma 1,174 1,264 1,798
Earnings per share - basic
As reported 3.03 3.18 4.55
Pro forma 3.00 3.16 4.54
Earnings per share - diluted
As reported 2.99 3.12 4.50
Pro forma 2.95 3.10 4.49
- --------------------------------------------------------------------------------
</TABLE>
Changes in stock options were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
shares in thousands 1997 1996 1995
- --------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance 14,389 $25.00 18,721 $22.83 11,523 $40.08
Granted 4,165 58.23 750 48.65 3,018 27.52
Exercised (2,832) 23.67 (4,358) 19.71 (3,121) 25.14
Canceled or expired (567) 31.17 (724) 25.12 (1,319) 30.13
Adjustment due to
Allstate distribution -- -- -- -- 8,620 21.84
- --------------------------------------------------------------------------------
Ending balance 15,155 $34.16 14,389 $25.00 18,721 $22.83
- --------------------------------------------------------------------------------
Reserved for future
grant at year end 12,840 16,655 16,795
Exercisable 7,524 $23.89 6,560 $22.65 6,812 $19.43
- --------------------------------------------------------------------------------
Fair value of options
granted during the year $17.98 $16.33 $10.63
- --------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options
outstanding at Jan. 3, 1998:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------
Weighted-Avg.
Range of Number Remaining Weighted-Avg. Number Weighted-Avg.
Exercise Outstanding Contractual Life Exercise Exercisable Exercise
Prices at 01/03/98 in Years Price at 01/03/98 Price
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10.00 to $20.00 1,719 6.0 $15.88 1,614 $15.63
20.01 to 30.00 7,467 8.4 24.22 4,906 24.16
30.01 to 40.00 1,179 9.7 31.92 770 31.92
40.01 to 50.00 1,277 9.1 48.40 230 48.65
50.01 to 64.00 3,513 9.5 59.80 4 50.85
- ----------------------------------------------------------------------------------------------
$10.00 to $64.00 15,155 8.5 $34.16 7,524 $23.89
- ----------------------------------------------------------------------------------------------
</TABLE>
ASSOCIATE STOCK PURCHASE PLAN
On May 8, 1997, the shareholders approved the Company's Associate Stock
Ownership Plan (ASOP). The ASOP allows eligible employees the right to elect to
use up to 10% of their eligible compensation to purchase Sears common stock on
a quarterly basis at the lower of 85% of the fair market value at the beginning
or end of each calendar quarter. The maximum number of shares of Sears common
stock available under the ASOP is ten million. The first purchase period began
Jan. 1, 1998, and accordingly no shares were issued under the ASOP in 1997.
16. SUMMARY OF SEGMENT DATA
The Company operates primarily in the retailing industry. A summary by segment
is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
millions 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Domestic operations $37,808 $34,676 $31,468
International operations 3,488 3,388 3,367
- --------------------------------------------------------------------------------
Total $41,296 $38,064 $34,835
- --------------------------------------------------------------------------------
OPERATING INCOME
Domestic operations $ 1,852 $ 2,094 $ 1,729
International operations 142 (11) (24)
- --------------------------------------------------------------------------------
Total $ 1,994 $ 2,083 $ 1,705
- --------------------------------------------------------------------------------
NET INCOME (LOSS)
Domestic operations $ 1,203 $ 1,276 $ 1,055
International operations (15) (5) (30)
Discontinued operations -- -- 776
- --------------------------------------------------------------------------------
Total $ 1,188 $ 1,271 $ 1,801
- --------------------------------------------------------------------------------
ASSETS
Domestic operations $35,899 $33,228 $30,519
International operations 2,801 2,939 2,611
- --------------------------------------------------------------------------------
Total $38,700 $36,167 $33,130
- --------------------------------------------------------------------------------
</TABLE>
ANNUAL REPORT 1997 SEARS 39
<PAGE>
- -------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- -------------------------------------------------------------------------------
Management's Report
- -------------------------------------------------------------------------------
The financial statements, financial analyses 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 financial
position and operating results of Sears, Roebuck and Co. ("the Company") in
accordance with generally accepted accounting principles. All financial
information is consistent with the financial statements.
Management maintains a system of internal controls that 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 to the extent necessary
to conclude that the financial statements present fairly the company's financial
position and results of operations. The independent accountants and internal
auditors advise management of the results of their audits, 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 and have free
access to the committee without management being present.
/s/ Arthur C. Martinez
- -------------------------------------
Arthur C. Martinez
Chairman and Chief Executive Officer
/s/ Gary L. Crittenden
- -------------------------------------
Gary L. Crittenden
Executive Vice President and Chief Financial Officer
/s/ James A. Blanda
- -------------------------------------
James A. Blanda
Vice President and Controller
- -------------------------------------------------------------------------------
Independent Auditors' Report
- -------------------------------------------------------------------------------
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 January 3, 1998 and December 28, 1996, and the
related Consolidated Statements of Income, Shareholders' Equity, and Cash Flows
for each of the three years in the period ended January 3, 1998. 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 January 3, 1998 and December 28, 1996, and the results of its operations and
its cash flows for each of the three years in the period ended January 3, 1998
in conformity with generally accepted accounting principles.
As described in Note 1 to the consolidated financial statements,
effective January 1, 1997 the Company changed its method of accounting for
sales of securitized accounts receivable as required by Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities."
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Chicago, Illinois
February 20, 1998
40 SEARS ANNUAL REPORT 1997
<PAGE>
- -------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- -------------------------------------------------------------------------------
Five-Year Summary of Consolidated Financial Data
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
millions, except per common share and shareholder data 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Revenues $ 41,296 $ 38,064 $ 34,835 $ 33,021 $ 30,427
Costs and expenses 39,302 35,981 33,130 30,288 28,265
Interest 1,409 1,365 1,373 1,279 1,318
Operating income 1,994 2,083 1,705 1,454 844
Other income 106 22 23 17 110
Income before income taxes 2,100 2,105 1,728 1,471 954
Income taxes 912 834 703 614 329
Income from continuing operations 1,188 1,271 1,025 857 625
Income from discontinued operations -- -- 776 402 1,960
Extraordinary gain (loss) -- -- -- 195 (211)
Net income 1,188 1,271 1,801 1,454 2,374
FINANCIAL POSITION
Retained interest in transferred
credit card receivables $ 3,316 $ 2,260 $ 5,579 $ 3,543 $ 2,947
Credit card receivables, net 19,843 19,303 14,527 14,658 12,959
Property and equipment, net 6,414 5,878 5,077 4,253 4,401
Merchandise inventories 5,044 4,646 4,033 4,044 3,518
Net assets of discontinued operations -- -- -- 7,231 8,701
Total assets 38,700 36,167 33,130 37,312 37,911
Short-term borrowings 5,208 3,533 5,349 6,190 4,636
Long-term debt 15,632 14,907 11,774 9,985 10,790
Total debt 20,840 18,440 17,123 16,175 15,426
Percent of debt to equity 356% 373% 391% 453% 521%
Shareholders' equity $ 5,862 $ 4,945 $ 4,385 $ 10,801 $ 11,664
SHAREHOLDERS' COMMON SHARE INVESTMENT
Book value per common share (year end) $ 15.00 $ 12.63 $ 10.40 $ 29.78 $ 32.32
Shareholders 235,336 243,986 256,624 262,387 291,320
Average common and equivalent
shares outstanding 398 399 394 389 383
Earnings per common share - diluted
Income from continuing operations $ 2.99 $ 3.12 $ 2.53 $ 2.13 $ 1.56
Income from discontinued operations -- -- 1.97 1.03 5.12
Extraordinary gain (loss) -- -- -- 0.50 (0.55)
Net income 2.99 3.12 4.50 3.66 6.13
Cash dividends declared per common share $ .92 $ .92 $ 1.26 $ 1.60 $ 1.60
Cash dividend payout percent 30.8% 29.5% 28.0% 43.7% 26.1%
Market price - common share (high-low) 65 1/4 - 38 3/4 53 7/8 - 38 1/4 60 - 30 55 1/8 - 42 1/8 60 1/8 - 39 7/8
- ------------------------------------------------------------------------------------------------------------------------------------
Closing market price at December 31 45 1/4 46 39 46 52 7/8
- ------------------------------------------------------------------------------------------------------------------------------------
Price/earnings ratio (high-low) 22 - 13 17 - 12 16 - 12 15 - 12 10 - 7
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Operating results and financial position reflect as discontinued operations
the following entities and the year of disposition: Allstate - 1995, Homart -
1995, Dean Witter, Discover & Co. - 1993, Coldwell Banker residential services
businesses - 1993.
The percent of debt to equity is calculated using equity from continuing
operations.
The 1995 price/earnings ratio was calculated on a continuing operations basis.
Stock prices have not been restated to reflect the Allstate and Dean Witter
distributions.
Certain prior year information has been reclassified to conform with current
year presentation.
ANNUAL REPORT 1997 SEARS 41
<PAGE>
- -------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
- -------------------------------------------------------------------------------
Quarterly Results (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter Year
- ----------------------------------------------------------------------------------------------------------------------------------
millions, except per common share data 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $8,733 $7,946 $9,701 $9,083 $9,781 $9,025 $13,081 $12,010 $41,296 $38,064
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income 357 246 121 436 592 446 924 955 1,994 2,083
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 182 151 117 274 353 279 536 567 1,188 1,271
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings per common share - diluted 0.46 0.36 0.29 0.67 0.89 0.68 1.35 1.42 2.99 3.12
- ----------------------------------------------------------------------------------------------------------------------------------
Excluding impact of noncomparable items
Operating income 294 246 538 436 508 446 884 955 2,224 2,083
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 179 151 311 274 301 279 512 567 1,303 1,271
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings per common share - diluted 0.45 0.36 0.78 0.67 0.76 0.68 1.29 1.42 3.27 3.12
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1997 noncomparable items consist of the credit reaffirmation charge,
implementation of SFAS No. 125, the sales of the Company's interests in Sears
Mexico and Advantis, the Parts America conversion, and the postretirement life
insurance gain.
The fourth quarter pretax LIFO adjustments were credits of $47 and $27
million in 1997 and 1996, compared with charges of $30 and $46 million for
the first nine months of the respective years.
Total of quarterly earnings per common share may not equal the annual amount
because net income per common share is calculated independently for each
quarter.
Certain quarterly information has been reclassified to conform with year-end
presentation.
- --------------------------------------------------------------------------------
Common Stock Market Information and Dividend Highlights (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter Year
- ------------------------------------------------------------------------------------------------------------------------
dollars 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock price range
High 56 3/4 51 7/8 54 3/4 53 7/8 65 1/4 49 1/8 57 3/8 51 3/4 65 1/4 53 7/8
Low 44 1/2 38 1/4 45 46 1/4 54 39 7/8 38 3/4 44 38 3/4 38 1/4
Close 50 1/8 48 3/4 53 3/4 48 5/8 56 15/16 44 3/4 46 3/16 47 3/8 46 3/16 47 3/8
Cash dividends
declared 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.92 0.92
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Stock price ranges are for the New York Stock Exchange (trading symbol - S),
which is the principal market for the Company's common stock.
The number of registered common shareholders at Feb. 28, 1998 was 231,129.
In addition to the New York Stock Exchange, the Company's common stock is
listed on the following exchanges: Chicago; Pacific, San Francisco; London,
England; Amsterdam, The Netherlands; and Swiss, EBS.
- -------------------------------------------------------------------------------
Market Risk (Unaudited)
- -------------------------------------------------------------------------------
The following table provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in the interest rates in the United States. The Company's policy is
to manage interest rate risk through the strategic use of fixed rate debt,
variable rate debt, and interest rate derivatives. The counterparties to the
derivative agreements are major financial institutions with credit ratings
primarily of AA, thereby minimizing the risk of credit loss. For interest
rate derivatives, the table presents notional amounts and weighted-average
interest rates by contractual maturity dates. Weighted average variable rates
are based on rates in effect at the most recent reset date. All items
described in the table below are non-trading.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
There- Fair
dollars in millions, except percent 1998 1999 2000 2001 2002 after Total Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Commercial paper 5,100 -- -- -- -- -- 5,100 5,100
Average interest rate 5.89% -- -- -- -- --
Bank loans 108 -- -- -- -- -- 108 108
Average interest rate 5.92% -- -- -- -- --
Long-term debt, including current portion
Fixed rate amount 2,297 1,321 2,108 2,453 1,588 5,086 14,853 15,501
Average interest rate 8.91% 7.61% 7.67% 6.76% 6.94% 7.05%
Variable rate amount 250 80 25 -- -- -- 355 355
Average interest rate 5.71% 5.66% 5.89% -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Interest rate derivative financial instruments related to debt:
Pay floating rate, receive fixed rate -- 555 250 -- -- -- 805 12
Average pay rate -- 5.72% 5.72% -- -- --
Average receive rate -- 6.85% 6.87% -- -- --
Pay fixed rate, receive floating rate -- 70 200 -- 70 1,152 1,492 (84)
Average pay rate -- 9.40% 7.05% -- 9.54% 6.50%
Average receive rate -- 4.01% 5.81% -- 4.01% 5.81%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
42 SEARS ANNUAL REPORT 1997
Exhibit 21
Subsidiaries
The Significant subsidiaries of Sears, Roebuck and Co., the names under which
such subsidiaries do business, and the states or countries in which each was
organized, were as follows as January 3, 1998:
Place of
Names Organization
Consolidated Subsidiaries:
All American Florida
Florida Builders Florida
Maxserv Inc. Delaware
Orchard Supply Hardware Corporation Delaware
Sears Canada Inc. Canada
Sears Acceptance Company Inc. Canada
Sears Logistics Services, Inc. Delaware
Sears National Bank United States
Sears Overseas Finance N.V. Netherlands,
Antilles
SRFG, Inc. Delaware
Sears Roebuck Acceptance Corp. Delaware
Sears, Roebuck de Puerto Rico, Inc. Delaware
Sears Wishbook, Inc. Delaware
Western Auto Supply Company Delaware
Tire America Inc. Delaware
NTW Incorporated Delaware
87 other companies Various
The Company owns 20% to 50% if the outstanding voting securities of
31 companies which are accounted for on an equity method.
The Company has investments in a number of other corporations
representing substantial percentages (but not more than 20 percent ) of their
outstanding capital stock. The Company disclaims control of any such
companies.
Exhibit 23.
CONSENT OF INDEPENDENT AUDITORS
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, 33-55825,
33-58851, 33-64345, 333-8141, 333-38131 of Sears, Roebuck and Co.;
Registration Statement Nos. 33-58139, 333-9817, 33-64215, 333-30879 of Sears,
Roebuck and Co. and Sears Roebuck Acceptance Corp.; Registration Statement
Nos. 33-64775 and 333-18591 of Sears, Roebuck and Co. and Sears, Roebuck and
Co. Deferred Compensation Plan; Registration Statement Nos. 33-57205 and
333-11973 of Sears Roebuck and Co. and the Sears 401(k) Profit Sharing Plan
(formerly, 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 20, 1998, incorporated by reference in
the Annual Report on Form 10-K of Sears, Roebuck and Co. for the year ended
January 3, 1998.
/S/Deloitte & Touche LLP
Chicago, Illinois
March 12, 1998
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being
a director or officer, or both, of SEARS, ROEBUCK AND CO., a New York
corporation (the "Company"), does hereby constitute and appoint ARTHUR C.
MARTINEZ, GARY L. CRITTENDEN, MICHAEL D. LEVIN AND JAMES A. BLANDA, with
full power to each of them to act alone, as the true and lawful attorneys and
agents of the undersigned, with full power of substitution and resubstitution
to each of said attorneys, to execute, file and deliver any and all
instruments and to do any and all acts and things which said attorneys and
agents, or any of them, deem advisable to enable the Company to comply with
the Securities Exchange Act of 1934, as amended, and any requirements of the
Securities and Exchange Commission in respect thereto, relating to annual
reports on Form 10-K, including specifically, but without limitation of the
general authority hereby granted, the power and authority to sign his or her
name in the name and on behalf of the Company or as a director or officer, or
both, of the Company, as indicated below opposite his or her signature, to
annual reports on Form 10-K or any amendment or papers supplemental thereto;
and each of the undersigned does hereby fully ratify and confirm all that
said attorneys and agents, or any of them, or the substitute of any of them,
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has subscribed these
presents, as of this 12th day of March, 1998.
NAME TITLE
/S/Arthur C. Martinez Director, Chairman of the
Arthur C. Martinez Board of Directors, President
and Chief Executive Officer
(Principal Executive Officer)
/S/Gary L. Crittenden Executive Vice President and
Gary L. Crittenden Chief Financial Officer
(Principal Financial Officer)
/S/James A. Blanda Vice President and Controller
James A. Blanda (Principal Accounting Officer)
/S/Hall Adams, Jr. Director
Hall Adams, Jr.
/S/Brenda C. Barnes Director
Brenda C. Barnes
/S/Warren L. Batts Director
Warren L. Batts
/S/Alston D. Correll, Jr. Director
Alston D. Correll, Jr.
/S/Michael A. Miles Director
Michael A. Miles
/S/Richard C. Notebaert Director
Richard C. Notebaert
/S/Hugh B. Price Director
Hugh B. Price
/S/Clarence B. Rogers, Jr. Director
Clarence B. Rogers, Jr.
/S/Donald J. Rumsfeld Director
Donald H. Rumsfeld
/S/Patrick G. Ryan Director
Patrick G. Ryan
/S/Dorothy A. Terrell Director
Dorothy A. Terrell
The Sears Pension Plan was amended by adding the following Supplements K, L
and M at the end thereof:
SUPPLEMENT K
TO
SEARS PENSION PLAN
RELATING TO SMC/SSB EMPLOYEES
K-1. Application. This Supplement K to the Sears Pension Plan (the
"Plan") applies to employees (hereinafter referred to as "SMC/SSB Eligible
Employees") of Sears Mortgage Corporation and Sears Savings Bank (together,
"SMC/SSB") who were active employees on November 30, 1993 (the date SMC/SSB
was sold to PNC Mortgage Corp. of America) and who had been active
participants in the Sears Consumer Financial Corporation Pension Plan (the
"SCFC Plan") on June 30, 1993 when Dean Witter, Discover & Co. was spun off
from the Company's controlled group.
K-2. Effective Date. This Supplement K shall be effective as of
November 30, 1993.
K-3. Definitions. Unless the context clearly implies or indicates the
contrary, a word, term or phrase used or defined in the Plan is similarly
used or defined for purposes of this Supplement K.
K-4. Accrued Benefits. A SMC/SSB Eligible Employee who was vested
in his accrued benefit under the SCFC Plan on November 30,
1993 will have an accrued benefit under this Supplement K equal to the amount
he would have earned under subparagraph 5.2(a)(iii) of thePlan had he become
a participant in the Plan on July 1, 1993 and terminated employment with the
employers on November 30, 1993; provided, however that if any such SMC/SSB
Eligible Employee would have been entitled to have his benefit prorated with
reference to the Allstate Pension Plan in accordance with the terms of the
SCFC Plan, the Allstate Pension Plan formula will be substituted for the
formula set forth in subparagraph 5.2(a)(iii). A SMC/SSB Eligible Employee
who was not vested in his accrued benefit under the SCFC Plan on November 30,
1993 will have an accrued benefit under this Supplement K (expressed as a single
life annuity payable as of age 65) equal to the amount he would have earned
under subparagraph 5.2(a)(iii) of the Plan (including the proviso at the end
of paragraph 5.2(a)) had he (a) become a participant in the Plan on the day
he began accruing benefit service under the SCFC Plan and (b) terminated
employment with the employers on November 30, 1993. A SMC/SSB Eligible
Employee will be fully vested in his accrued benefit under this
Supplement K regardless of the number of years of continuous service he had
earned by November 30, 1993.
K-5. Early Retirement Factors. A SMC/SSB Eligible Employee will be
entitled to commence payment of his accrued benefit under
this Supplement K as of November 1, 1997 or such subsequent date the
participant elects that is no later than the first day of the month following
the participant's attainment of age 65, provided the Eligible Employee is
not then employed by an employer. The accrued benefit of a SMC/SSB Eligible
Employee who commences payment prior to attaining age 65 will be reduced in
accordance with the provisions of Section 5 of the Plan.
K-6. Forms of Payment. An Eligible Employee will be entitled to receive
his benefit under this Supplement K in any of the annuity forms available
under Section 7, or in a lump sum payment. For purposes of determining the
actuarially-equivalent amount of any form of payment, the assumptions set
forth in subsection 7.8 will apply, except that the amount of a lump
sum payment will be determined using the Applicable Interest Rate for the
second month preceding the month in which the Eligible Employee's benefit
commencement date occurs and the Applicable Mortality Table
K-7. Distribution Election. Benefits payable under this Supplement K will
be subject to the normal distribution election provisions
of the Plan, including the requirements for spousal consent. For this
purpose, the rules of clause 7.4(b)(iii) (requiring a simultaneous
offering of an annuity in the normal form with the offer of an early lump
sum for an accrued benefit not in excess of $150 per month)
shall apply to any lump sum payment offered to an Eligible Employee under
this Supplement K who has not yet attained age 55 and whose
benefit exceeds the mandatory cash out limit of the Plan.
SUPPLEMENT L
TO
SEARS PENSION PLAN
RELATING TO CIRCLE OF BEAUTY
L-1. Application. This Supplement L to the Sears Pension Plan (the
"Plan") describes the special provisions relating to
employees of Circle of Beauty ("CoB") that have been adopted by the Company
as part of its extension of the Plan to employees of CoB.
L-2. Effective Date. The Effective Date of this Supplement L is
September 1, 1997.
L-3. Definitions. Unless the context clearly implies or indicates the
contrary, a word, term or phrase used or defined in
the Plan is similarly used or defined for purposes of this Supplement L.
L-4. Credited Service for Circle of Beauty Employees. Notwithstanding
any other provision of the Plan to the contrary, for
purposes of determining the credited service of an employee of CoB,
the following rules shall govern:
(a) no period of service with CoB prior to April 14, 1995 shall be
included in the participant's period of credited service;
(b) in the case of any individual employed by CoB on September 1, 1997,
any period of service for CoB during the period beginning on April 14, 1995
and ending on August 31, 1997 shall be included in the individual's credited
service to the same extent that it would have been included had CoB been a
participating employer during that same period; and
(c) in the case of any individual who was employed by CoB prior to
September 1, 1997, who is not described in paragraph (b) above but who is
subsequently reemployed by CoB after September 1, 1997, no service before
September 1, 1997 shall be counted as credited service (unless such
individual had earned credited service for a period prior to such date
through employment with a participating employer other than CoB.)
SUPPLEMENT M
TO
SEARS PENSION PLAN
RELATING TO SEARS TIRE GROUP
M-1. Application. This Supplement M to the Sears Pension Plan (the
"Plan") describes the special provisions relating to employees of Sears Tire
Group ("STG") that have been adopted by the Company as part of its extension
of the Plan to employees of STG.
M-2. Effective Date. The Effective Date of this Supplement M is
December 15, 1997.
M-3. Definitions. Unless the context clearly implies or indicates the
contrary, a word, term or phrase used or defined in
the Plan is similarly used or defined for purposes of this Supplement M.
M-4. Eligibility Rules for Sears Tire Group Employees. The following
rules shall modify the normal provisions of Section 2 in determining whether
an employee of the Company or another participating employer who performs
services for Sears Auto Centers ("SAC") or National Tire and Battery ("NTB")
is eligible to participate in the Plan:
(a) generally, of the employees who perform services for SAC or NTB, only
those who are salaried employees and who are on a participating employer's
payroll as such on or after December 15, 1997 are eligible to participate in
the Plan;
(b) notwithstanding the general limitation set forth in paragraph (a)
above, an hourly employee who performs services for SAC or
NTB shall be eligible to participate in the Plan while performing such
services if he (i) performed services for SAC in any capacity
prior to April 1, 1997 or as a salaried employee on or after April 1, 1997,
or (ii) has been (and remains) credited with continuous service for a
participating employer that is not attributable to services performed for
SAC or NTB.
M-5 Credited Service for Sears Tire Group Employees. Notwithstanding
any other provision of the Plan to the contrary, for
purposes of determining the credited service of an individual performing
services for SAC or NTB, the following rules shall govern:
(a) a salaried employee described in paragraph M-4(a) shall receive credited
service for any period of employment between January 1, 1997 and December 15,
1997 to the same extent that it would have been included had eligibility in the
Plan been extended to that group of employees on January 1, 1997, and
(b) an hourly employee described in paragraph M-4(b) shall receive credited
service in accordance with the rules of subsection 4.3 except that service
prior to January 1, 1997 for NTB shall not count as credited service.
Exhibit 99.(ii)
The last sentence of subsection 2.4 of the Savings and Profit Sharing
Fund of Sears Employees was deleted and replaced in its entirety with the
following:
Notwithstanding the foregoing, for purposes of determining their eligibility
to participate in the Fund, employees of each of Sears Termite & Pest Control
Inc. ("STPCI") and Florida Builder Appliances, Inc. ("FBA") shall have all of
their service with STPCI and FBA, respectively, counted as continuous
service, including any period of service prior to the date STPCI and FBA each
became a member of the Sears controlled group.
Exhibit 99.(iii)
THE SEARS 401(k) PROFIT SHARING
TRUST AGREEMENT
(As amended and restated effective as of January 1, 1998)
This agreement (the "Trust Agreement") is made as of January 1, 1998,
by and between Sears, Roebuck and Co, a corporation organized and existing
under the laws of New York with its principal place of business at Hoffman
Estates, Illinois and State Street Bank and Trust Company, a Massachusetts
trust company with its principal place of business at Boston, Massachusetts.
WITNESSETH:
WHEREAS, the Company maintains a tax-qualified plan known as the
Sears 401(k) Profit Sharing Plan (formerly known as The Savings and Profit
Sharing Fund of Sears Employees) for the exclusive benefit of certain of its
employees and the employees of certain of its affiliates and subsidiaries;
WHEREAS, the Plan is intended to meet the requirements of sections
401(a) of the Code and the Trust evidenced by this Trust Agreement implements
and forms a part of the Plan;
WHEREAS, the Company previously established two trusts to serve as
the funding vehicles for the Plan;
WHEREAS, the Company has appointed State Street Bank and Trust
Company as successor trustee to The Northern Trust Company of New York and
United States Trust Company effective January 1, 1998; and
WHEREAS, the Company and the Trustee desire to amend and restate the
said trusts in their entirety in the form of this Trust Agreement.
NOW, THEREFORE, the Company and the Trustee do hereby amend and
restate the said trusts upon the terms and conditions hereinafter set forth:
1. DEFINITIONS.
When used herein, the following terms shall have the following
meanings. Unless otherwise specified, other terms used herein shall have the
same definitions as provided in the Plan.
"Administrator" or "Plan Administrator" means the Company and such
other person, persons or committee to whom responsibility for the
administration of the Plan has been delegated by the Company in accordance
with the terms of the Plan.
"Allstate" means The Allstate Corporation.
"Allstate Group" means Allstate and its subsidiaries.
"Business Day" means a day when the New York Stock Exchange is open
for business.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" or "Investment Committee" means the committee responsible
for the investment of the Trust Fund in accordance with the terms of the Plan
and this Trust Agreement, the members of which are appointed by the Company.
"Company" means Sears, Roebuck and Co., a New York corporation, and
any successor thereto that adopts this Trust Agreement as provided in
subsection 10.6 hereof.
"Common Stock" means common stock of the Company.
"Controlled Group Member" means a corporation, trade, or business if
it and the Company are (a) members of a controlled group of corporations as
defined in Section 414(b) of the Code, (b) under common control as defined in
Section 414(c) of the Code, or (c) members of an affiliated service group as
defined in Section 414(m) of the Code.
"DWDC" means Morgan Stanley, Dean Witter, Discover & Co. (formerly
Dean Witter, Discover and Co.).
"Employer" or "Employers" means the Company and each Controlled Group
Member that adopts the Plan and this Trust Agreement for the benefit of its
employees in accordance with the provisions of the Plan.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"ESOF" means a tax credit employee stock ownership plan.
"ESOP" means an employee stock ownership plan.
"Investment Manager" means an investment manager as defined in
Section 3(38) of ERISA who is appointed pursuant to the provisions of this
Trust Agreement to manage part or all of the Trust Fund.
"Plan" means the Sears 401(k) Profit Sharing Plan (formerly known as
The Savings and Profit Sharing Fund of Sears Employees) or such other name as
may be adopted by the Company in the future.
"Plan Year" means the fiscal year of the Plan, commencing January 1
of each year and ending December 31 of the same year.
"Recordkeeper" means State Street Bank and Trust Company, which,
pursuant to an Administrative Services Agreement, the Company has appointed
to provide recordkeeping and other administrative services other than those
the Plan Administrator continues to perform for the Plan, and any other
person or entity engaged by the Company or State Street Bank and Trust
Company to provide such services.
"Rollover Contribution" means a contribution to the Plan of an
eligible rollover distribution, as described in Section 402(c)(4) of the Code
or any other rollover contribution permitted under the terms of the Plan.
"Securities or Other Property" means any property, real or personal,
or part interest therein, wherever situated, including, without limitation,
governmental, corporate or personal obligations, trust and participation
certificates, partnership interests, annuity or investment contracts issued
by an insurance company, leaseholds, fee titles, mortgages and other
interests in realty, preferred and common stocks, certificates of deposit,
financial options and futures or any other form of option, evidences of
indebtedness or ownership in foreign corporations or other enterprises or
indebtedness of foreign governments, and any other evidences of indebtedness
or ownership, including securities or other property of the Company, even
though the same may not be legal investment for trustees under any law other
than ERISA.
"Separate Investment Account" means the portion of the Trust Fund
invested at the direction of an Investment Manager, as described in Section
5.1 hereof.
"SIMCO" means Sears Investment Management Company, a wholly owned
subsidiary of the Company, which is a registered investment advisor under the
Investment Advisors Act of 1940.
"SSgA" means State Street Global Advisors, the asset management
division of State Street Bank and Trust Company.
"Trust" means the trust established and maintained for the purposes
of the Plan, which is administered by the Trustee in accordance with the
provisions of this Trust Agreement.
"Trust Agreement" means this agreement between the Company and the
Trustee, as amended from time to time.
"Trust Fund" means, as of any date, all assets of the Plan held by
the Trustee under this Trust Agreement as of such date.
"Trustee" means State Street Bank and Trust Company, and any
successor bank or trust company which shall accept the appointment to execute
the duties of the Trustee as set forth herein.
"Valuation Date" means each Business Day of each Plan Year.
2. HISTORY AND BACKGROUND.
2.1 In General. This Trust Agreement constitutes an amendment,
restatement and continuation, effective as of January 1, 1998, of the
previous trust agreements entered into by and between the Company and The
Northern Trust Company of New York and United States Trust Company under the
Plan. The Plan consists of both a profit sharing plan intended to qualify
under Sections 401(a) and 401(k) of the Code and an employee stock ownership
plan intended to qualify as a stock bonus plan under Section 401(a) of the
Code and as an employee stock ownership plan under Section 4975(e)(7) of the
Code. The parties intend the Trust to be a long-term investor in Common
Stock, and that, regardless of the short-term effects of a continuing
investment in the Common Stock, the Trustee shall not dispose of any such
Shares except to the extent required for the day-to-day administration of the
Plan and except as provided in accordance with Section 7 of this Trust
Agreement or as otherwise required by ERISA.
Prior to December 20, 1989, the Plan consisted solely of a profit
sharing plan. Effective as of that date, the Plan was amended to add a
leveraged employee stock ownership feature in order to permit employees to
participate more fully in shareholder decisions and the enhancement of
shareholder value and to thereby assure an employee work force motivated by
the long-term interests of the Company. Common Stock acquired with the
proceeds of the employee stock ownership loan are held under this Trust
Agreement both prior to and after such Shares are released for allocation to
the accounts of Plan participants.
2.2 Split Up of Plan. Prior to June 30, 1995, the Plan included
assets attributable to a profit sharing and stock bonus plan feature, a
leveraged ESOP feature and an ESOF feature. As of June 30, 1995, the Plan
was split into two separate plans: (1) a profit sharing and stock bonus plan
and leveraged ESOP providing benefits to eligible employees of the Company
and its affiliates (exclusive of the Allstate Group), which continued to hold
the assets attributable to the profit sharing and stock bonus plan, ESOF and
ESOP features of the Plan which were allocable to employees and former
employees of the Company and its affiliates other than the Allstate Group and
certain of the assets held in the ESOP suspense account, and which continued
to be known as the Plan; and (2) a profit sharing and stock bonus plan and
leveraged ESOP providing benefits to eligible employees of the Allstate
Group, to which were transferred the assets attributable to the profit
sharing and stock bonus plan, ESOF and ESOP features of the Plan which were
allocable to employees and former employees of the Allstate Group, and which
is known as The Savings and Profit Sharing Fund of Allstate Employees.
3 THE PLAN AND TRUST FUND.
3.1 The Trust. The Company intends that the Trust maintained
pursuant to this Agreement shall form a part of the Plan and shall qualify
under Section 401(a) of the Code for tax-exempt status under Section 501(a)
of the Code; until advised to the contrary, the Trustee may assume the Trust
is so qualified.
3.2 The Plan. The Company shall be responsible for verifying that
while any assets of the Plan are held in the Trust Fund, the Plan is
"qualified" with the meaning of Section 401(a) of the Code and is intended to
qualify under Section 404(c) of ERISA and the accompanying regulations.
3.3 Plan Administration, Identification of Fiduciaries. The Plan
is administered by the Plan Administrator or by any duly authorized delegate
thereof. The Plan provides that all directions to the Trustee with respect
to the investment of the Trust Fund shall be made by the Investment
Committee. Pursuant to an investment management agreement (amended and
restated effective as of January 1, 1987), the Committee has appointed SIMCO
as the investment manager for the Trust Fund. Under this agreement, SIMCO
has the exclusive discretionary authority to manage the assets of the Trust
Fund subject to any investment limitations and restrictions imposed by the
Committee from time to time. While such investment management agreement is
in effect, the Trustee may follow and rely on SIMCO's direction as though
SIMCO were the Committee with respect to the authority granted to it by the
Committee under such investment management agreement.
As of the effective date of this Trust Agreement, the Company, the
Committee and, to the extent it has the responsibility to appoint, retain and
terminate investment managers and to direct investments, SIMCO, are "named
fiduciaries" of the Plan as described in Section 402 of ERISA. In addition,
to the extent permitted under ERISA, the term "named fiduciary" shall include
each person entitled to benefits under the Plan to the extent of his
authority to (i) exercise shareholder rights, including voting, tender and
exchange rights, in accordance with Section 7 with respect to Common Stock,
shares of DWDC and shares of Allstate allocated to his account under the Plan
and with respect to a proportionate share of the unallocated Common Stock and
the allocated Common Stock, shares of DWDC and shares of Allstate for which
other participants do not give timely voting instructions to the Trustee in
accordance with Section 7, (ii) elect either the continued holding of DWDC
shares or Allstate shares or the sale of such shares and reinvestment of
proceeds in Common Stock, as set forth in the Plan, or (iii) direct the
investment of his accounts under the Plan.
3.4 Plan Recordkeeping. The Company is the Plan Administrator and,
as such, is the fiduciary responsible for executing participants' investment
elections under the Plan. The Company has appointed the Recordkeeper to
perform certain recordkeeping and related services for the Plan, including,
but not limited to, maintaining participant accounts for all contributions,
rollovers, and other deposits; determining requirements for disbursements
from or transfers among Investment Funds in accordance with the terms of the
Plan; maintaining participant records for the purpose of voting or tendering
shares as described in Section 7 herein; distributing information about the
Investment Funds provided for under the Plan; and distributing participant
statements at periodic intervals.
3.5 Plan Documents and Use of Plan Definitions. All terms defined
in the Plan shall have the same meaning whenever used in this Trust unless
the context clearly indicates otherwise or the term has been specifically
defined otherwise in this Trust. The Company shall deliver to the Trustee a
certified or executed copy of the Plan and of any amendments thereto for
convenience of reference, but the rights, powers and duties of the Trustee
shall be governed solely by the terms of this Trust Agreement.
4. MANAGEMENT AND INVESTMENT OF THE TRUST FUND.
4.1 Receipt of Assets. The Trustee shall receive and accept for the
purposes hereof all sums of money and other property paid to it by or at the
direction of the Company, and shall hold, invest, reinvest, manage,
administer and distribute such monies and other property and the increments,
proceeds, earnings and income thereof pursuant to the terms of this Trust
Agreement and for the exclusive benefit of participants in the Plan and their
beneficiaries. Notwithstanding the foregoing, (1) participants'
contributions shall be paid in cash, (2) Employers' contributions shall be
paid in cash or Common Stock, except that the Trustee may agree in writing to
accept other specific non-cash Employers' contributions, and (3) if any
Rollover Contribution includes property other than cash or Common Stock, the
Trustee may in its sole discretion refuse to accept such Rollover
Contribution, or may condition its acceptance of such Rollover Contribution
upon such terms and conditions as the Trustee may deem reasonable. The
Trustee shall also receive and hold as part of the Trust Fund shares of DWDC
in the DWDC Shares Account of the Trust and shares of Allstate in the
Allstate Shares Account of the Trust. The Trustee need not inquire into the
source of any money or property transferred to it nor into the authority or
right of the transferor of such money or property to transfer such money or
property to the Trustee. The Trustee shall not be required to determine that
any contributions or deposits are in compliance with the Plan and shall be
accountable only for the funds and other property actually received by it.
At the direction of the Committee, the Trustee shall accept and hold as part
of the Trust Fund the assets held by any trustee acting under any other trust
which forms a part of a plan intended to meet the requirements of Section
401(a) of the Code, and shall transfer all or any part of the Trust
attributable to the Plan to any trustee acting under any other trust forming
a part of the Plan.
4.2 Employer Accounts. Except as specifically provided in Section
4.3, the Trustee shall not be required to maintain any separate account or
accounts for any group of employees under the Plan, nor does the Trustee need
to make any separate investment of the Trust Fund for the account of any
Employer and its employees. If, for any purpose, it becomes necessary as of
any date to determine the part of the Trust Fund allocable to any group of
employees employed or formerly employed by any Employer, such part shall be
determined by the Committee, taking into consideration the relative aggregate
benefits paid from the Trust Fund to or on behalf of such group of employees,
and such other factors as the Committee deems appropriate. Any such
determination by the Committee shall be binding upon all of the Employers,
employees and former employees of the Employers and all other persons. In
the event any Employer elects to terminate or fund separately all or any
portion of the benefits provided under the Plan for any group of employees
employed or formerly employed by it, the Trustee shall segregate and dispose
of the appropriate part of the Trust Fund as directed by the Committee in
writing or shall hold such part in a separate trust governed by the same
provisions as this Trust Agreement.
4.3 Investment Funds. The Committee, from time to time, may direct
the Trustee to establish one or more Investment Funds under which all or any
portion of the Trust Fund assets shall be invested. Except as otherwise
provided below, all interest, dividends and other income received with
respect to, and any proceeds received from the sale or other disposition of,
securities or other property held in an Investment Fund shall be credited to
and reinvested in such Investment Fund. The Trustee shall be under no duty
to review the investment guidelines, objectives and restrictions established
for any Investment Fund. Subject to the terms of the Plan, the Committee may
direct the Trustee to eliminate an Investment Fund or Funds, and the Trustee
shall thereupon dispose of or transfer the assets of such Investment Fund and
reinvest such assets or the proceeds thereof in accordance with the
Committee's directions. The Committee or the Recordkeeper shall direct the
Trustee regarding contributions to, transfer to, from or among, and
distributions from the Investment Funds, provided, however, the assets of the
ESOP portion of the Plan shall be invested primarily in Common Stock.
4.4 Participant-Directed Brokerage Accounts. The Trustee shall, if
so directed by the Committee, segregate all or a portion of the Trust Fund
held by it into one or more separate investment accounts to be known as
"Participant Directed Brokerage Accounts." Each participant shall be
entitled to give orders directly to the broker for the purchase and sale of
securities. The broker shall provide confirmation of each order to the
Recordkeeper which shall maintain all participant level accounts and records
so as to satisfy the reporting requirements of the Plan. The Recordkeeper
shall provide to the Trustee all information reasonably required by the
Trustee to fulfill its accounting and reporting obligations with respect to
assets held in the Participant Directed Brokerage Accounts.
4.5 General Powers. Subject to the provisions of Sections 4.3, 4.4
and 5, the Trustee shall have the following powers, rights and duties in
addition to those provided elsewhere in this Trust Agreement or, except to
the extent inconsistent herewith, by law, which shall be exercised on
direction of (i) an Investment Manager (including SSgA) or (ii) the
Committee:
(a) To invest the Trust Fund in bonds, notes, debentures,
certificates or other governmental, corporate, partnership, trust or personal
obligations or evidences of indebtedness, mortgages, equipment trust
certificates, certificates of deposit, money market securities, investment
trust certificates, forward contracts, options, index options, warrants,
rights, shares in mutual funds, commodities, derivative securities or
instruments, futures contracts, preferred or common stocks (including
"qualifying employer securities" as that term is defined in Section 407 of
ERISA to the extent permitted by ERISA), insurance and annuity contracts,
investment contracts or other investment arrangements with insurance
companies, banks or other financial institutions, common, group or collective
trust funds, partnerships, shares of limited liability companies or in such
other Securities or Other Property, real or personal (including "qualifying
employer real property" as that term is defined in Section 407 of ERISA to
the extent permitted by ERISA) or any interest therein.
(b) To purchase, retain, manage, sell, contract to purchase or sell,
grant options to purchase or sell, convert, redeem, convey, exchange,
transfer, abandon, improve, repair, insure, lease for any term event though
commencing in the future or extending beyond the term of the Trust, and
otherwise deal with all property, real or personal on such terms and
conditions as appropriate, and no person dealing with the Trustee shall be
required to see to the application of any money or property delivered to the
Trustee or to inquire into the validity or propriety of any transaction with
the Trustee; and to acquire, hold or dispose of property, real or personal,
in any form or manner including, without limitation, directly or indirectly
through general or limited partnerships, corporations, trusts, participating
or convertible mortgages or any other form.
(c) Subject to the provisions of Section 7, to exercise, with
respect to the Trust Fund, all of the rights of an individual owner,
including but not limited to the power to give proxies, to participate or
oppose participation in voting trusts, mergers, consolidations, foreclosures,
reorganizations or liquidations, to tender securities pursuant to tender
offers, to exercise, buy or sell any stock subscription or conversion rights
or privileges available in connection with any securities or other property
and to deposit any property with any protective, reorganization or similar
committee or with depositories designated thereby, to delegate power thereto,
and to pay or agree to pay part of the expenses and compensation of any such
committee and any assessments levied with respect to property so deposited.
(d) To hold any securities or other property in the name of the
Trustee or its nominee, or in the name of its agents or its agent's nominee,
or in such form as appropriate, with or without disclosing the trust
relationship and to hold any securities in bearer form.
(e) To engage in the lending of securities to banks, broker-dealers
and other borrowers pursuant to regulations of the Department of Labor and
any other applicable regulatory authority and in accordance with a written
agreement entered into with the Company containing any guidelines and
directions provided by the Company, and to receive and invest collateral
provided by the borrower.
(f) To deposit securities with a clearing corporation as defined in
Article 8 of the Massachusetts Uniform Commercial Code and to deposit or
pledge securities or other property with any broker-dealer or other person
(including the Trustee). The certificates representing securities, including
those in bearer form, may be held in bulk form with, and may be merged into,
certificates of the same class of the same issuer which constitute assets of
other accounts or owners, without certification as to the ownership attached.
Utilization of a book-entry system may be made for the transfer or pledge of
securities held by the Trustee or by a clearing corporation. The Trustee
shall at all times, however, maintain a separate and distinct record of the
securities owned by the Trust Fund.
(g) To purchase, sell, hold and generally deal in any manner in and
with interest rate, stock index, commodity, currency or other futures
contracts and to close any open futures contracts positions prior to or in
the contract's delivery month.
(h) To grant, purchase, sell, exercise, permit to exercise, permit
to be held in escrow and otherwise to acquire, dispose of, hold and generally
deal in any manner with or in all forms of options, including index options
and over-the-counter options, in any combination.
(i) To enter into and engage in any form of swap transaction.
(j) To purchase, sell and otherwise acquire, dispose of, hold and
generally deal in any manner with or in domestic or international currency or
currency contracts, including transactions entered into with the Trustee, its
agents or sub-custodians.
(k) To invest all or any portion of the assets of the Trust Fund in
any collective, combined, common or group investment trust or fund, including
any such trust or fund maintained by the Trustee, which then provides for the
pooling of the assets of plans described in Section 401(a) and exempt from
tax under Section 501(a) of the Code, or any comparable provisions of any
future legislation that amends, supersedes or supplements those sections,
provided that each such collective investment trust or fund is exempt from
tax under the Code or regulations or rulings issued by the Internal Revenue
Service; and provided further that the provisions of the documents governing
any such collective investment trust or fund, as amended from time to time,
shall govern any investment therein and are hereby incorporated by reference
and made a part of this Trust. The Trustee hereby acknowledges that it is a
fiduciary with respect to any such pooled trust or fund maintained by it.
(l) At the direction of the Committee (which may be either standing
directions in the form of a written agreement with the Trustee or a separate
letter of direction), to retain or invest any reasonable portion of the Trust
Fund (including cash balances held from time to time as part of a Separate
Investment Account as described in Sections 5.1 and 5.2) in cash or cash
equivalents (pending other investment, reinvestment or payment of expenses or
benefits), including, but not limited to, savings accounts, certificates of
deposit, repurchase agreements (including savings accounts, certificates of
deposit and repurchase agreements with the Trustee in its banking capacity or
its affiliates so long as such investments bear a reasonable rate of
interest), United States Treasury bills, commercial paper and similar types
of securities and any collective trust or mutual fund maintained by the
Trustee for the management of cash or cash equivalents; and to sell any such
cash equivalent instruments.
(m) At the direction of the Committee or of an Investment Manager
and, otherwise to the extent permitted by Section 6.1, to purchase Common
Stock in the open market or by private purchase from any source, including a
private purchase from the Company of treasury stock or newly-issued shares,
provided that any such purchase which is from a party-in-interest (as defined
in Section 3(14) of ERISA) or a disqualified person (as defined in Section
4975 of the Code) shall be without payment of any commissions and for an
amount which is no greater than adequate consideration for such Common Stock
(as defined in Section 3(18) of ERISA).
(n) To borrow money to cover any overdraft; to borrow or lend money
or otherwise extend credit from time to time, with or without security, from
or to any legally permissible source; to mortgage, encumber or pledge any
part of the Trust Fund to secure repayment of any indebtedness resulting from
such borrowing; to provide guarantees with respect to the extension of credit
or other benefits by any entity; to assume liens on property acquired by the
Trust and to acquire property subject to liens.
(o) At the direction of the Committee, to organize or acquire shares
of stock issued by one or more corporations each of which shall be intended
to be exempt from tax under Section 501(c)(2) of the Code.
(p) To form corporations and limited liability companies and to
create partnerships or trusts to acquire, dispose or hold title to any
securities or other property of the Trust.
(q) To settle, compromise, contest, submit to arbitration or abandon
any claims, debts, damages or demands by or against the Trust Fund; to
commence, maintain or defend suits or legal proceedings; provided that the
Trustee shall not settle, compromise or abandon any such matter relating to
the administration of the Plan or Trust without the Company's written
consent.
(r) To retain any funds or property subject to any dispute without
liability for payment of interest to any third party, and to withhold payment
or delivery thereof until final adjudication of the dispute by a court of
competent jurisdiction.
(s) To employ agents, experts, custodians (including but not limited
to affiliates of the Trustee), sub-custodians and counsel (which may be
counsel to the Company) and to delegate discretionary powers to, and
reasonably rely upon information and advice furnished by, such agents,
experts, custodians, sub-custodians and counsel;
(t) To appoint trustees, sub-trustees, custodians or sub-custodians
to hold title to property of the Trust in those jurisdictions in which the
Trustee is not authorized to do business or as may otherwise be reasonable
and necessary to carry out the purposes of the Trust, and, subject to the
provisions of this Trust, to define the scope of the responsibilities of each
such trustee, sub-trustee, custodian and sub-custodian.
(u) To grant powers of attorney to such individuals or organizations
as may be necessary or appropriate.
(v) If loans are permitted by the Plan, to lend to a Plan
participant from such participant's account such amounts and upon such terms
and conditions as the Committee or the Recordkeeper may direct and to hold
any promissory note given in connection with any such loan.
(w) To take all actions necessary to issue ESOP Loans (as defined
in Section 6.2), whether in the form of notes or other obligations, and, if
required under applicable Federal and state securities laws to register such
ESOP Loans under those laws, and to take such other actions, enter into such
agreements, and deliver such documents, instruments or certificates, in each
case as may be necessary or appropriate to issue and sell such ESOP Loans,
including but not limited to entering into agency agreements, trust
indentures, paying agent agreements and transfer agent agreements, all as
directed by the Committee; provided that the expenses of any such
registration shall be expenses of the Trust.
(x) To perform any and all other acts in its judgment necessary to
appropriate for the proper and advantageous management, investment and
distribution of the Trust Fund or to carry out any of the foregoing powers
and purposes of the Trust.
The Trustee shall transmit promptly to the Committee or an Investment
Manager, as the case may be, all notices of conversion, redemption, tender,
exchange, subscription, class action, claim in insolvency proceedings or
other rights or powers relating to any of the Securities or Other Property in
a Separate Investment Account managed by the Committee or such Investment
Manager, which notices are received by the Trustee from its agents or
custodians, from issuers of the Securities or Other Property in question and
from the party (or its agents) extending such rights. The Trustee shall have
no obligation to determine the existence of any conversion, redemption,
tender, exchange, subscription, class action, claim in insolvency proceedings
or other right or power relating to any of the Securities or Other Property
in the Trust Fund of which notice was given prior to the purchase of such
Securities or Other Property by the Trust Fund, or notice was not given
within an applicable notice period with respect to such Securities or Other
Property and shall have no obligation to exercise any such right or power
unless the Trustee is informed of the existence of the right or power.
The Trustee shall not be liable for any untimely exercise or assertion of
such rights or powers described in the paragraph immediately above in
connection with Securities or Other Property of the Trust Fund at any time
held in a Separate Investment Account managed by the Committee or an
Investment Manager unless (i) the Trustee or its agents or custodians are in
actual possession of such Securities or Other Property and (ii) the Trustee
receives the directions to exercise any such rights or powers from the
Committee or the Investment Manager, as the case may be, and both (i) and
(ii) occur at least three business days prior to the date on which such
rights or powers are to be exercised; provided, however, that the Trustee
shall not be relieved from liability under this paragraph for the untimely
assertion of such rights or powers due to failure to timely receive direction
with respect to any Securities or Other Property held in a Separate
Investment Account for which the Trustee (including SSgA) has been named the
Investment Manager.
4.6 Administrative Powers. Notwithstanding the appointment of an
Investment Manager, the Trustee shall have the following powers and authority
to be exercised in its sole discretion, with respect to the Trust Fund:
(a) To employ suitable agents, experts, custodians, sub-custodians
and counsel.
(b) To appoint ancillary trustees, sub-trustees, custodians or sub-
custodians to hold any portion of the assets of the Trust.
(c) To register any securities held by the Trustee hereunder in its
own name or in the name of a nominee or in the name of its agents or its
agent's nominee with or without the addition of words indicating that such
securities are held in a fiduciary capacity and to hold any securities in
bearer form and to deposit any securities or other property in a depository
or clearing corporation.
(d) To make, execute and deliver, as Trustee, any and all deeds,
leases, mortgages, conveyances, waivers, releases or other instruments in
writing necessary or desirable for the accomplishment of any of the foregoing
powers.
(e) To participate in and use the federal book-entry account system,
a service provided by the Federal Reserve Bank for its member banks for
deposit of Treasury securities.
(f) To pay minimum amounts to itself and others for expenses
associated with handling transactions.
(g) To determine the value of the assets of the Trust on each
Business Day. Such value shall be determined by the Trustee on the basis of
the following valuation rules:
(i) Securities or Other Property shall be valued at
their market values based on information and financial publications of
general circulation, statistical and valuation services, records of security
exchanges, appraisals by qualified persons, transactions and bona fide offers
in assets of the type in question and other information customarily used in
the valuation of assets ("Pricing Sources"), or if market values are not
available, at their fair values as provided to the Trustee by the party with
authority to trade such securities (Investment Manager or the Committee, as
applicable). The Trustee may rely on the prices provided by the Pricing
Sources or the Investment Manager or the Committee as a certification as to
value in performing any valuations or calculations required of the Trustee
under this Trust Agreement.
(ii) An investment purchased and awaiting payment against
delivery shall be included for valuation purposes as a security held.
Investments sold but not delivered pending receipt of proceeds shall be
valued at the net sales price.
(iii) For purposes of valuation with respect to (i) and
(ii) above, all securities and cash or cash equivalents will be quoted in the
local currency and then converted into U.S. dollars using the appropriate
exchange rate obtained by the Trustee.
The Trustee shall have no liability for any incorrect data provided
to it by a Pricing Source or Investment Manager or the Committee except as
may arise from the Trustee's lack of reasonable care in selecting such
Pricing Source or performing either any agreed- upon tolerance checks or its
customary tolerance checks as to the data furnished.
The Trustee, upon the Committee's request, may calculate the "Net
Asset Value" of the Trust assets in accordance with the following rules:
(i) The "Net Asset Value" of the assets of the Trust shall equal
the value of the assets of the Trust less the accrued liabilities incurred by
the assets of the Trust. The items carried as accrued liabilities shall be
identified in a written operating agreement between the parties hereto.
(ii) For an investment purchased and awaiting payment against
delivery the account payable shall be adjusted to reflect the purchase price,
including brokers' commissions and other expenses incurred in the purchase
thereof, but not disbursed as of the valuation date.
Notwithstanding anything to the contrary in this Trust Agreement, the
Trustee, at the direction of the Committee, or upon consultation with and
approval of the Committee, may suspend the valuation of the Account for the
whole or any part of any period when (a) any market or exchange on which a
significant portion of the investments of the Trust are quoted is closed
(other than for ordinary holidays) or during which dealings therein are
restricted or suspended; or (b) there has been a breakdown in the means of
communication, or in any software and/or hardware systems, normally employed
in determining the price or value of any of the investments of the Trust, or
of current prices on any market or exchange on which a significant portion of
the investments of the Account are quoted, or when for any reason the prices
or values of any investments owned by the Trust cannot reasonably be promptly
and accurately ascertained. The Trustee shall use reasonable efforts to
rectify any problems affecting its ability to value assets and shall begin
valuations as soon as practicable after such problems are resolved.
(h) Generally to do all ministerial acts, whether or not expressly
authorized, which the Trustee may deem necessary or desirable in carrying out
its duties under this Trust Agreement.
4.7 Trustee Records and Accounts. The Trustee shall maintain
accurate and detailed records and accounts of all investments, receipts,
disbursements and other transactions hereunder; and all accounts, books and
records relating hereto shall be open at all reasonable times to inspection
and audit by such person or persons as the Company may designate. The
Trustee shall submit to the auditors for the Company or to anyone the Company
designates, such valuations, reports or other information as they may
reasonably require. The Trustee and the Company acknowledge that cooperation
with such audits could exceed the scope of the usual Trustee services, in
which case the Trustee shall be entitled to reasonable compensation and
reimbursement of its reasonable expenses incurred in connection with such
audits. The Trustee shall establish and maintain for operations and
accounting purposes such other accounts or records as the Company and the
Trustee may from time to time agree upon. Within forty-five (45) days
following the close of each calendar year (or following the close of such
other period as may be agreed upon by the Trustee and the Company) and as
often as may reasonably be required by the Company and agreed by the Trustee,
the Trustee shall file with the Company a written account pursuant to
guidelines provided by the Company and agreed to by the Trustee setting forth
a description of all securities and other property purchased and sold, and
all receipts, disbursements and other transactions effected by it upon its
own authority or pursuant to the directions of any Investment Manger or the
Committee during such annual or shorter period, and showing the securities
and other properties held at the end of such period, and their current value.
Such securities and other property shall be valued at their fair values as
determined in good faith and pursuant to procedures established by the
Trustee. Fair values may be taken by the Trustee as of such times as the
Trustee determines to be appropriate, and from such financial publications,
pricing services, or other services or sources, including an Investment
Manager, as the Trustee reasonably believes appropriate. Notwithstanding the
foregoing, the Trustee shall provide comprehensive financial reporting for
the Plan Year which is in compliance with Generally Accepted Accounting
Principles and ERISA reporting standards. The Company may approve such
accounting by written notice of approval delivered to the Trustee or by
failure to express objection to such accounting in writing delivered to the
Trustee within twelve months from the date upon which the accounting was
delivered to the Company. Upon the receipt of a written approval of the
accounting, or upon the passage of the period of time within which objection
may be filed without written objections having been delivered to the Trustee,
such accounting shall be deemed to be approved, and the Trustee shall be
released and discharged as to all items, matters and things set forth in such
account.
4.8 Compensation and Expenses. The Trustee is authorized to pay
from the Trust Fund such compensation and expenses as shall be agreed upon by
the Company and the Trustee in writing from time to time and all reasonable
and proper expenses and charges (including fees of persons employed by the
Trustee in accordance with Sections 4.5(s), 4.5(t), 4.6(a) and 4.6(b)
incurred in connection with the collection, administration, management,
investment, protection and distribution of the Trust Fund, as shall be agreed
upon in writing by the Company and the Trustee and to the extent such
expenses and charges are not paid directly by the Employers. Such
compensation and expenses shall be paid by the Company if the same cannot by
operation of law be paid from the Trust Fund. In addition, the Trustee is
authorized to pay from the Trust Fund any tax or assessment levied against
the Trust Fund by any governmental authority. The Trustee shall notify the
Company as soon as reasonably practicable (but in any event no later than
five (5) business days) after the Trustee receives notice of such tax or
assessment and shall provide the Company with such information as the Trustee
has received concerning such tax or assessment. The Company may direct that
the Trustee refrain from paying the tax or assessment for a period of up to
120 days (or, if longer, such period as may be available until such tax or
assessment is due and payable under applicable law (the "Review Period")),
during which time the Trustee will provide all reasonable assistance to the
Company in determining the validity of such tax or assessment and will
cooperate in all reasonable efforts to have the tax or assessment waived or
mitigated if such tax or assessment is considered not to be owed by the
Trust. At the end of such 120 days (or the Review Period), if the tax or
assessment remains outstanding, the Trustee may pay the tax or assessment
unless otherwise directed in writing by the Company, upon the advice of
counsel satisfactory to both the Company and the Trustee. If the Trustee
engages in the lending of securities or the investment of cash or cash
equivalents pursuant to the terms of this Trust Agreement, the Trustee's
compensation shall include any additional compensation agreed to in writing
by the Company and the Trustee with respect to such activities. In addition,
the Trustee is authorized to pay from the Trust Fund all reasonable
investment manager or investment advisor fees, legal fees, actuarial fees,
accounting fees, and other reasonable administrative expenses incurred by the
Employers, at the direction of the Committee, to the extent that they are not
paid directly by the Employers. To the extent that the foregoing expenses
are paid directly by the Employers, the Trustee shall reimburse the Employers
from the Trust Fund to the extent directed by the Committee. Any payment
made pursuant to this Section shall be charged against the Trust Fund
generally, unless such payment is not properly chargeable proportionately
among all of the Investment Funds in which case the Committee shall designate
in writing (which designation may be in the form of standing instructions)
the Investment Fund or Funds to which such payment shall be charged, and if
more than one Investment Fund is to be charged, the proportionate share of
such payment to be charged to each such Investment Fund.
If the Trustee has advanced cash or securities for any proper purpose
under the Trust, such as the purchase or sale of foreign exchange to settle
trades, it shall be entitled to reimburse itself out of the Trust Fund for
such cash or securities advances.
4.9 Payments from the Trust Fund. The Trustee shall make payments
from the Trust Fund to such persons, in such manner, at such times and in
such amounts as the Committee or Recordkeeper shall direct. If any check for
any payment directed to be made from the Trust Fund that has been mailed by
the Trustee, by regular United States mail, to the last address of the payee
furnished to the Trustee by the Committee or Recordkeeper is returned
unclaimed, the Trustee shall notify the Committee or Recordkeeper of that
fact and shall destroy such check and take such further action as the
Committee or Recordkeeper shall direct.
4.10 Exercise of Trustee's Duties. The Trustee shall discharge its
duties hereunder solely in the interest of the participants and other persons
entitled to benefits under the Plan; and
(a) for the exclusive purpose of:
(i) providing benefits to participants and other persons
entitled thereto under the Plan; and
(ii) defraying reasonable expenses of administering the
Plan and Trust;
(b) with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a like capacity
and familiar with such matters would use in the conduct of an enterprise of
like character and with like aims; and
(c) subject to Section 6.1 and investment guidelines provided by the
Committee, to diversify the investments of that portion of the Trust Fund for
which the Trustee has been appointed Investment Manager, so as to minimize
the risk of large losses, unless under the circumstances it is clearly
prudent not to do so.
5. Investment Direction
5.1 Investment Managers.
(a) Notwithstanding anything in this Trust to the contrary, the
Committee or any other named fiduciary shall have the right from time to time
to appoint or remove an individual, partnership or corporation (which may be
a subsidiary of the Company or of any Employer) as an Investment Manager,
each of whom shall have the power to manage and to direct the Trustee with
respect to the acquisition and disposal of assets constituting all or a
portion of the Trust Fund, to be known as a "Separate Investment Account" or
"Account." Written notice of any such appointment and/or removal shall be
given to the Trustee and the Investment Manager so appointed or removed. As
long as an Investment Manager is acting, such investment manager shall direct
the Trustee to invest and the Trustee shall invest the applicable Separate
Investment Account in any property in which the Trustee could invest under
this Trust. Subject to the provisions of the investment management
agreement, the Investment Manager of any Separate Investment Account shall
have all of the investment powers and duties granted to or imposed on the
Trustee under the provisions of Section 4.5 (including the provisions of
Section 4.5(l)) . Subject to the provisions of Section 7, the Investment
Manager shall have full authority and the responsibility to direct the
Trustee with respect to the acquisition, retention, management, and
disposition of all of the assets from time to time comprising the Separate
Investment Account being managed by such Investment Manager and the voting of
proxies thereon, and the Trustee shall have no duty or obligation to review
the assets from time to time comprising such Separate Investment Account, to
make recommendations with respect to the investment, reinvestment, or
retention thereof, nor with respect to the voting of proxies thereon, except
as would otherwise be required to meet the Trustee's obligations under the
Trust, ERISA or any other applicable law. Generally, the Trustee shall
certify the value of any securities or other property held in the Separate
Investment Account managed by the Investment Manager; provided, however, that
if the securities or other property cannot be valued using the Trustee's
normal pricing sources, the Trustee may require the Investment Manager or the
Committee to provide a value. The Trustee shall inform the Company if the
Trustee uses an Investment Manager's valuation for a particular security or
other property.
(b) Cash received or held by the Trustee from time to time for any
Separate Investment Account shall be fully invested in accordance with the
directions of the Investment Manager for such Account; provided, however,
that in the absence of any affirmative directions from such Investment
Manager (which may be standing directions), the Trustee shall take all
reasonable steps to itself act under Section 4.5(l) in accordance with
directions (which may be standing directions) from the Committee.
(c) Any direction given to the Trustee by an Investment Manager with
respect to a Separate Investment Account shall either (1) be made in writing
or via facsimile or other electronic communications as shall be agreed upon
by the Investment Manager and the Trustee or (2) if oral, shall be confirmed
in writing or via facsimile or other electronic communications as shall be
agreed upon by the Investment Manager and the Trustee within a reasonable
period. The Trustee may issue to an Investment Manager security codes or
passwords in order that the Trustee may verify that certain transmissions of
information, including directions or instructions have been originated by the
Investment Manager. To the extent that directions or instructions using such
security codes or passwords constitute proper directions, Trustee liability
associated with such directions shall be governed by Section 5.3 of this
Trust Agreement. Except as otherwise provided in this Trust Agreement, the
Investment Manager of a Separate Investment Account shall have the power and
authority, to be exercised in its sole discretion at any time and from time
to time, to issue order for the purchase or sale of securities directly to a
broker. Written notification of the issuance of each such order shall be
given promptly to the Trustee by the Investment Manager and the confirmation
of each such order shall be confirmed to the Trustee by the broker. Unless
otherwise directed by the Investment Manager, such notification shall be
authority for the Trustee to pay for securities purchased or to deliver
securities sold as the case may be. Upon the direction of the Investment
Manager, the Trustee will execute and deliver appropriate trading
authorizations, but no such authorization shall be deemed to increase the
liability or responsibility of the Trustee under this Trust Agreement.
(d) The Trustee may assume that any Separate Investment Account
previously established and the appointment of any Investment Manager for such
Separate Investment Account continues in force until receipt of written
notice to the contrary from the Company or the Committee. In addition, the
Trustee shall have no responsibility to invest or manage any asset held in a
Separate Investment Account unless the Trustee itself has been appointed
Investment Manager for such Account pursuant to a separate written agreement,
in which case it shall have the powers and duties of an Investment Manager
with regard to such Account, in addition to its powers and duties as Trustee.
5.2 Committee Direction. The Committee may, by writing filed with
the Trustee, assume investment responsibility over any portion of the Trust
Fund designated by it as a Separate Investment Account. In addition, during
any time when there is no Investment Manager (including the Trustee if
appointed as an Investment Manager) appointed with respect to all or part of
an Investment Fund (including a Separate Investment Account), the Committee
shall direct the investment and reinvestment of such Account. With respect
to assets of Separate Investment Accounts over which the Committee has
assumed investment responsibility, the Committee shall direct the Trustee to
invest and the Trustee shall invest the applicable Separate Investment
Account in any property in which the Trustee could invest under this Trust.
With respect to any Separate Investment Account for which the Committee has
assumed investment responsibility, the Committee shall have all of the
investment powers and duties granted to or imposed on the Trustee under the
provision of Section 4.5. Subject to the provisions of Section 7, the
Committee shall have full authority and the responsibility to direct the
Trustee with respect to the acquisition, retention, management, and
disposition of all of the assets from time to time comprising the Separate
Investment Account being managed by the Committee and the voting of proxies
thereon, and the Trustee shall have no duty or obligation to review the
assets from time to time comprising such Separate Investment Account, to make
recommendations with respect to the investment, reinvestment or retention
thereof nor with respect to the voting of proxies thereon, except as would
otherwise be required to meet the Trustee's obligations under the Trust,
ERISA or any other applicable law. The Committee shall have the powers and
duties with regard to the manner of giving direction to the Trustee which an
Investment Manager would have under Section 5.1(c) and the Trustee shall be
protected to the same extent as if those directions came from an Investment
Manager.
5.3 Indemnification of Trustee. To the extent not prohibited by
applicable law, the Company agrees to indemnify the Trustee and hold it
harmless from any and all liability or expense (including any reasonable
legal fees and reasonable expenses incurred by the Trustee in its defense if
the Company fails to provide such defense) which the Trustee may sustain by
(a) following any proper direction of an Investment Manager, the
Recordkeeper, the Company, the Committee or the Plan Administrator made in
accordance with this Trust or (b) any failure to act in the absence of proper
directions from an Investment Manager, the Recordkeeper, the Company, the
Committee or the Plan Administrator, provided that the Trustee's action or
failure to act is otherwise consistent with its obligations under ERISA, any
other applicable law and the Trust, and provided further, that the Trustee
shall not be indemnified if such liability or expense results from the
Trustee's negligence (whether acting as a trustee, a recordkeeper, an
investment manager or in any other capacity) or if the Trustee (in any
capacity) knowingly participates in, or knowingly undertakes to conceal an
act or omission of such Investment Manager, the Recordkeeper, the Company,
the Committee or the Plan Administrator, knowing such act or omission to be
a breach.
5.4 Duty of Trustee with Respect to Tax Returns and Withholding.
The Company, each Investment Manager, and the Trustee shall file such
descriptions and reports and make such other publications, disclosures,
registrations and other filings as are required of them respectively by
ERISA. Until advised to the contrary by the Company or otherwise actually
notified, the Trustee shall assume that the Trust is exempt from Federal,
State and local income taxes, and shall act in accordance with that
assumption. If an investment in a Separate Investment Account directed by an
Investment Manager or the Committee creates taxable income including but not
limited to unrelated business taxable income, the Investment Manager
(including the Trustee if appointed as an Investment Manager) or the
Committee, whichever is applicable, shall notify the Trustee in writing and
direct the Trustee regarding preparation and filing of any tax returns and
payment of any income or other tax which may be due. In the absence of such
written notice and direction, the Trustee shall not be responsible for
failing to pay any taxes or failing to file any returns with respect to a
Separate Investment Account unless the Trustee has actual knowledge that an
investment creates taxable income. So long as State Street Bank and Trust
Company is the Plan's Recordkeeper, the Trustee shall withhold any tax which
by any present or future law is required to be withheld from any payment or
distribution under the Plan based upon direction provided to the Trustee by
the Company or the Recordkeeper, unless notified in writing by the Company
that another entity has assumed responsibility for tax withholding. The
Company or the Recordkeeper shall provide all information reasonably required
by the Trustee to enable the Trustee to so withhold.
6. Provisions Related to Company Stock Fund.
6.1 Investment of Cash. Subject to the provisions of Section 5.1
and the other provisions of this Section 6, the Trustee shall invest all
assets of the ESOP portion of the Plan, including earnings thereon, within a
reasonable time after receipt thereof, exclusively in Common Stock in
accordance with directions given under Section 4.5(d), subject to retention
in cash or cash equivalents of the following amounts: (i) the proceeds of any
ESOP Loan pending the use of such proceeds, within a reasonable period, to
acquire Common Stock or to repay all or any portion of that ESOP Loan or any
outstanding ESOP Loan; (ii) cash dividends received on Common Stock pending
the use of such dividends to make payments of principal or interest on an
ESOP Loan or pending their reinvestment in Common Stock or distribution to
participants, as directed by the Plan Administrator; (iii) Employer
contributions to the Trust pending the use thereof to make payments of
principal or interest on an ESOP Loan; (iv) such other amounts as may be
required to be transferred to other Investment Funds under the terms of the
Plan, as directed by the Plan Administrator; and (v) such other amounts as
may be required for the proper administration of the Trust, all of which
amounts shall be invested in accordance with Section 4.5(l).
6.2 ESOP Loans. The Committee may from time to time direct the
Trustee to incur debt (an "ESOP Loan") on terms specified by the Committee
for the purpose of acquiring Common Stock or for the purpose of repaying all
or any portion of any outstanding ESOP Loan, subject to the following:
(a) Each ESOP Loan shall be for a specific term.
(b) The interest rate with respect to an ESOP Loan may be fixed or
variable; provided, however, that in either case such rate shall not be in
excess of a reasonable rate of interest taking into account all relevant
factors, including the amount and duration of the ESOP Loan, the security and
the guarantee, if any, and the credit standing of the Plan and the guarantor,
if any.
(c) The only Trust assets which may be given as collateral for an
ESOP Loan are Common Stock acquired with the loan proceeds, or with the
proceeds of any prior ESOP Loan to the extent that such prior ESOP Loan is
repaid with the proceeds of the current ESOP Loan. Any such collateral shall
be released as provided in Section 6.3.
(d) Under the terms of the ESOP Loan, no person entitled to payment
thereunder shall have any right to any Plan assets other than (i) collateral,
if any, given for the ESOP Loan in accordance with subparagraph (c) above,
(ii) Employer contributions (other than contributions of employer securities)
that are made to enable the Trust to meet its obligations under the ESOP
Loan, and (iii) earnings attributable to such collateral and to the
investment of such contributions.
(e) Subject to paragraph (d) above, the ESOP Loan shall be without
recourse against the Plan.
(f) Subject to the use of the proceeds of a new ESOP Loan to
refinance (in whole or in part) an existing ESOP Loan, payments during any
Plan Year on all outstanding ESOP Loans shall not exceed an amount equal to
the sum for all Plan Years of all contributions described in Section
6.2(d)(ii) and earnings on assets of the ESOP, reduced by all prior payments
on ESOP Loans during all prior Plan Years.
(g) In the event of a default under the ESOP Loan, the value of Plan
assets transferred in satisfaction of the ESOP Loan shall not exceed the
amount of the default. If the lender is a disqualified person (as defined in
Section 4975(e) of the Code) or a party in interest to the Plan (as defined
in Section 3(14) of ERISA), the ESOP Loan shall provide for a transfer of
Plan assets upon default only upon and to the extent of the failure of the
Plan to meet the payment schedule of the ESOP Loan.
(h) The Trustee shall maintain adequate records to identify at any
time the ESOF shares and shares of Common Stock held under the Trust Fund
which were acquired with the proceeds of each ESOP Loan.
(i) The Trustee shall have the responsibility to determine whether
each ESOP Loan and purchase of Company Stock with the proceeds thereof meet
the fiduciary requirements of ERISA.
6.3 Release of Common Stock From Collateral. Subject to the
following provisions of this Section 6.3, for each Plan Year during the
duration of an ESOP Loan, the number of shares of Common Stock which shall be
released from encumbrance shall be determined by the Plan Administrator and
shall be equal to the product of the number of shares of Common Stock, if
any, which serve as collateral for such ESOP Loan multiplied by a fraction,
the numerator of which is the amount of principal and interest paid on the
loan for that year and the denominator of which is the numerator plus the
amount of principal and interest payable on the loan for all future years.
For purposes of determining the preceding fraction for any Plan Year, if the
interest rate under the ESOP Loan is variable, the interest rate to be paid
in future years shall be assumed to be equal to the interest rate applicable
as of the last day of that Plan Year. Notwithstanding the foregoing
provisions of this Section, any ESOP Loan may provide that Common Stock shall
be released from encumbrance in amounts proportionate to principal payments
only, provided that:
(a) the ESOP Loan provides for annual payments of principal and
interest at a cumulative rate that is not less rapid at any time than level
annual payments of such amounts for ten years;
(b) interest is disregarded for purposes of determining such release
only to the extent that it would be determined to be interest under standard
loan amortization tables; and
(c) the term of the ESOP Loan, together with any renewal, extension
or refinancing thereof, does not exceed ten years.
In the event that more than one ESOP Loan is outstanding at any time, the
number of shares of Common Stock that are released from encumbrance at any
time under this Section shall be based solely on the repayment of the ESOP
Loan to which such Common Stock are attributable. In addition, if an ESOP
Loan is refinanced, the numerator in the fraction described above shall not
include the proceeds from the second ESOP Loan used to make payments of
principal and interest on the first ESOP Loan.
6.4 Payments on ESOP Loans. All cash contributions made by an
Employer to enable the Trustee to make payments of principal or interest on
an ESOP Loan shall be promptly so applied by the Trustee. To the extent the
Trustee is so directed by the Company, cash dividends on Common Stock
received by the Trustee or transferred to the Trustee by the trustee acting
under any other trust which forms a part of the Plan shall be applied by the
Trustee as soon as practicable thereafter to make payments on outstanding
ESOP Loans.
6.5 Put Option and Independent Appraiser. If Common Stock is not
readily tradable on an established market (within the meaning of Section
409(h)(1)(B) of the Code), (i) any participant who is entitled to a
distribution of such Common Stock from the Plan shall have a right to require
the Company to repurchase such shares in accordance with Section 409(h)(1)(B)
of the Code and (ii) all valuations of such Common Stock with respect to
activities carried on by the Plan shall be by an independent appraiser within
the meaning of Section 401(a)(28) of the Code. Subject to the preceding
sentence, Common Stock acquired with the proceeds of an ESOP Loan shall not
be subject to a put, call or other option or a buy-sell or similar
arrangement either while held by the Plan or when distributed to or on
account of a participant whether or not any portion of the Plan is then an
ESOP.
6.6 Stock Dividends, Splits and Other Capital Reorganizations. Any
stock received by the Trustee as a stock split or dividend and any cash or
securities received as a result of a reorganization or other recapitalization
of the Company shall be allocated under the Plan in the same manner as the
Common Stock to which the payment is attributable are then allocated.
6.7 Disposition of Trades or Businesses. Notwithstanding the
foregoing provisions of this Section 6, in the event of the sale of an
Employer or the sale of substantially all of the assets used by an Employer
in a trade or business, the Trustee shall, if the Company so directs:
(a) transfer a pro rata portion of each outstanding ESOP Loan,
and the Common Stock acquired with the proceeds of such ESOP Loan which have
not been allocated to the accounts of participants under the Plan, to any
successor plan which is intended to qualify under Sections 401(a) and
4975(e)(7) of the Code and to be exempt from taxation under Section 501(a) of
the Code; or
(b) sell a pro rata portion of the Common Stock acquires with the
proceeds of each ESOP Loan which have not been allocated to the accounts of
participants under the Plan and use the proceeds thereof to prepay such ESOP
Loan;
provided, however, that no such action shall be taken by the Trustee unless
the Trustee has received a satisfactory opinion of counsel (which may be
counsel to the Company) that such action will not violate the applicable
provisions of any state or Federal securities laws or the requirements of the
Code applicable to plans qualified under Sections 401(a), 409, 501(a) and
4975(e)(7) of the Code, will not violate the terms of the ESOP Loan, and will
not cause the ESOP Loan to fail to qualify for the prohibited transaction
exemption provided by Section 4975(d)(3) of the Code and Section 408(b)(3) of
ERISA. For purposes of this Section 6.7, the pro rata portion of any ESOP
Loan attributable to an Employer or any trade or business will be determined
on the basis of the ratio of the portion of the Employers' contribution
allocated to such Employer or trade or business (as determined under the
terms of the Plan) for the Plan Year preceding the date as of which the
determination is made to the total Employers' contribution for such Plan
Year.
7. Voting, Tender and Exchange of Stock
7.1 Voting of Shares. Notwithstanding any other provision of the
Trust and to the extent consistent with the Trustee's fiduciary obligations
under ERISA, the Common Stock held in the Common Stock Fund shall be voted by
the Trustee as follows:
(a) Before each meeting of the Company's shareholders, the Trustee
shall furnish or cause each participant in the Plan to be furnished with a
proxy statement for the meeting, together with an appropriate form on which
the participant may provide voting instructions (including instructions on
matters not specified in the proxy statement which may come before the
meeting) for the Common Stock allocated to the participant's account under
the Plan on the latest Valuation Date preceding the record date for such
meeting for which the number of such shares has been provided to the Plan
Administrator. Upon timely receipt of such instructions, such Shares shall
be voted as instructed. The voting instructions received by the Trustee
shall be held by it in confidence.
(b) If the Trustee receives timely voting instructions with regard
to at least fifty percent of the total outstanding Common Stock allocated to
participants' accounts according to Section 7.1(a), then Common Stock of any
class for which the Trustee does not receive timely voting directions
(whether undirected allocated shares or unallocated shares) shall be voted in
the same proportion as all Common Stock of that class held under the Plan
with respect to which directions are received by the Trustee. If the Trustee
receives timely voting instructions with regard to less than fifty percent of
the total outstanding Common Stock allocated to participants' accounts
according to Section 7.1(a), then the Trustee shall vote unallocated and
undirected allocated shares in its sole discretion.
7.2 Tender and Exchange Rights. Notwithstanding any other provision
of the Trust and to the extent consistent with the Trustee's fiduciary
obligations under ERISA, tender and exchange rights with respect to Common
Stock held in the Company Stock Fund shall be exercised by the Trustee as
follows:
(a) The Trustee shall furnish each participant with a notice of any
tender or exchange offer for, or a request or invitation for tender of,
Common Stock, together with an appropriate form on which such participant may
instruct the Trustee with respect to the tender or exchange of Common Stock
allocated to his account. Common Stock as to which the Trustee receives
timely voting instructions shall be tendered or exchanged in accordance with
such instructions.
(b) Common Stock allocated to participants' accounts for which
directions are not received by the Trustee shall not be tendered or
exchanged.
(c) Common Stock which are not allocated to participants' accounts
shall be tendered or exchanged by the Trustee in its sole discretion.
(d) Notwithstanding the provisions of Sections 7.1(a) and 7.1(b) and
paragraphs (a) and (b) above, in the event that the Trustee determines that
any direction received by it with respect to the tender or voting of Common
Stock is not proper or is contrary to the provisions of ERISA, the Trustee
shall disregard such direction and assume responsibility for the voting or
tendering of Common Stock held in the Trust Fund.
(e) The Company and the Trustee shall take all steps reasonably
necessary to assure that participants' directions shall remain confidential.
Notwithstanding the foregoing, the Trustee shall provide such information
with respect to the tender or exchange of Common Stock as an independent
recordkeeper may require for operation of the Plan is such record keeper
agrees to keep such information confidential.
(f) The Trustee may request an independent auditor to provide within
120 days after any meeting of the Company's shareholders is held, a report
that certifies whether Common Stock allocated to Plan participants' accounts
were voted by the Trustee in accordance with the foregoing provisions of this
Section 7. The Plan Administrator shall promptly disclose the information
provided in such report to Plan participants in a manner that the Plan
Administrator deems appropriate.
7.3 Execution of Documents. The Trustee shall execute such ballots,
proxies or other instruments as may be necessary or desirable in order to
effectuate the provisions of this Section 7.
7.4 DWDC and Allstate Shares. Voting, tender and exchange rights
with respect to shares of DWDC and Allstate held by the Trustee shall be
exercised in the same manner as such rights are exercised with respect to
Common Stock as described in this Section 7, except that the provisions of
Section 7.2(f) shall not apply.
8. DWDC Shares Account and Allstate Shares Account
8.1 Establishment of DWDC Shares Account and Allstate Shares
Account. Because of the unique limitations which apply to the DWDC shares in
the Trust Fund, the Trustee shall establish a "DWDC Shares Account" in the
Trust which will hold all of the shares of DWDC that were received as
dividends with respect to Common Stock held by the Trust. There shall also
be established an "Allstate Shares Account" in the Trust which will hold all
of the shares of Allstate that were received as dividends with respect to
Common Stock held by the Trust.
8.2 Management of the DWDC Shares Account and Allstate Shares
Account. Except to the extent that an Investment Manager has been appointed
for the DWDC Shares Account or the Allstate Shares Accounts, the Trustee
shall have full power and authority to do all acts necessary to carry out its
duties hereunder with respect to the DWDC Shares Account and the Allstate
Shares Account. Subject to the following provisions of this Section 8,
(a) the Trustee shall have, with respect to the DWDC Shares
Account and the Allstate Shares Account, all of the powers (including,
without limitation, the investment powers, administrative powers and
discretionary powers) granted under this Trust Agreement to the Trustee with
respect to the Trust and the Trust Fund, provided, however, the Trustee may
exercise any such powers in its sole discretion without the receipt of a
direction from another fiduciary;
(b) the Trustee shall have the power to make the determinations
described in Section 1 hereof and subsections 5.3(a) or 5.3(b) of the Plan;
and
(c) all of the provisions of this Trust Agreement shall be deemed
to have been incorporated into this Section 8 as an agreement (the "DWDC
Shares Account and Allstate Shares Account Agreement") between the Company
and the Trustee governing the management and administration of the DWDC
Shares Account and the Allstate Shares Account.
8.3 DWDC Shares Account and Allstate Shares Account.
(a) Except as otherwise required by ERISA, the assets of the DWDC Shares
Account and the Allstate Shares Account shall consist solely of (i) shares of
DWDC or Allstate, respectively, received as dividends with respect to Common
Stock held by the Trust, (ii) any additional shares of DWDC or Allstate,
respectively, received by the Trustee as a result of any stock dividends or
stock splits and (iii) cash maintained for purposes of liquidity;
(b) All cash dividends received with respect to shares of DWDC held in
the DWDC Shares Account or shares of Allstate held in the Allstate Shares
Account shall be transferred from the DWDC Shares Account or Allstate Shares
Account and invested in Common Stock; and
(c) All cash or other proceeds received upon the disposition of shares
of DWDC held in the DWDC Shares Account or shares of Allstate held in the
Allstate Shares Account shall be transferred from the DWDC Shares Account or
Allstate Shares Account and invested in accordance with Participant
directions.
9. The Plan Administrator and the Committee.
9.1 The Committee. The members of the Investment Committee shall
be appointed by the Company and shall serve at the pleasure of the Company.
9.2 General Powers, Rights and Duties of the Investment Committee
and Investment Managers. Except as otherwise specifically provided, and in
addition to the powers, rights and duties specifically given to the
Investment Committee elsewhere herein, the Investment Committee shall have
the following rights, powers and duties:
(a) to determine the portion of the Plan assets that shall be held
in the ESOP portion and the non-ESOP portion of the Plan and, with respect to
that portion of the Trust Fund which is not invested or required to be
invested in Common Stock, DWDC shares or Allstate shares, to direct the
Trustee with respect to the acquisition, retention and disposition of Plan
assets, and to monitor the diversification of the investments of the Trust
Fund;
(b) to furnish the Trustee and the Company with such information as
may be required by them for any purpose related to the Plan;
(c) to adopt such rules of procedure and regulations as in the
Investment Committee's opinion may be necessary for the proper and efficient
performance of the Investment Committee's duties and responsibilities;
(d) to employ such other agents, attorneys, accountants, investment
advisors and other persons and to delegate to them and allocate among them
(or among members of the Investment Committee), in writing, such powers,
rights and duties as the Investment Committee may consider necessary or
advisable to properly carry out the Investment Committee's responsibilities,
and in the same manner to revoke such delegation and allocation; the
acceptance of such written delegation or allocation shall also be in writing;
any action of the delegate or person whom responsibilities have been
allocated shall have the same force and effect for all purposes hereunder as
if such action had been taken by the Investment Committee; neither the
Investment Committee nor any of its members (other than a member to whom
responsibilities have been allocated) shall be liable for the acts or
omissions of such delegates or persons to whom responsibilities have been
allocated except as required by law; and
(e) without limiting the generality of (d) above, to appoint an
Investment Manager to manage (with power to acquire and dispose of) a
Separate Investment Account, or to remove such person, which Investment
Manager may or may not be a subsidiary of the Company, and to delegate to any
such Investment Manager all of the powers, authorities and discretions
granted to the Trustee or the Investment Committee hereunder (including the
power to delegate and the power, with notice to the Investment Committee, to
appoint an Investment Manager), in which event the Trustee shall follow such
instructions and shall be under no duty to determine whether any direction
received from the Investment Manager is proper or within the terms of the
Trust Agreement; provided, however, that the power and authority to manage,
acquire, or dispose of any asset of the Plan shall not be delegated except to
an Investment Manager and, provided further that the acceptance by any
Investment Manager of such appointment and delegation shall be in writing,
and the Investment Committee shall give notice to the Trustee, in writing, of
any appointment of, delegation to or removal of an Investment Manager. An
Investment Manager so appointed shall furnish the Trustee with the name and
specimen signature of each individual who is authorized to act on behalf of
the Investment Manager. Thereafter, the Trustee shall have no authority,
responsibility or liability to the Investment Committee, the Company, any
other Employer or any participant in or beneficiary of the Trust for acting
upon any direction received from any such individual unless and until the
Investment Committee revokes the authority of such individual or of the
Investment Manager by written direction to the Trustee.
With respect to each Separate Investment Account, the Investment
Manager thereof shall direct the Trustee with respect to the exercise of the
investment powers granted to it under Section 5. Any limitations on an
Investment Manager's powers and discretionary authority shall be contained in
the written agreement appointing the Investment Manager. Except as modified
in this Section, the Trustee's powers and duties with respect to a Separate
Investment Account shall be the same as their powers and duties with respect
to other aspects of the Trust Fund. The fees and expenses of an Investment
Manager, except to the extent paid by an Employer, shall be paid from the
Trust Fund.
9.3 Investment Committee, Plan Administrator and Investment Manager
Instructions to the Trustee. The Company shall certify to the Trustee the
name of the person or persons empowered to act on behalf of the Plan
Administrator and the names of the members of the Investment Committee acting
from time to time, and the Trustee shall not be charged with knowledge of a
change in any such person or persons until so notified by the Company. The
Trustee may rely upon an instrument of designation signed by an officer of
the Company or by one or more of the Secretary or members of the Investment
Committee, or by such other person or persons as shall be designated by
either the Plan Administrator or the Investment Committee to act on its
behalf and filed with the Trustee and shall have no responsibility for any
action taken by them in accordance with any such written direction, or for
the failure to act in the absence of such written direction. Notwithstanding
the foregoing, the Trustee may act on directions given by telephone or
telephonic means, which directions shall be promptly confirmed in writing.
The Trustee shall be further protected in relying upon a
certification from any Investment Manager (other than SSgA) appointed by
SIMCO as to the person or persons authorized to give directions on behalf of
such Investment Manager and may continue to rely upon such certification
until a subsequent certification is filed with the Trustee.
10. Miscellaneous
10.1 Disagreement as to Acts. If there is a disagreement between
the Trustee and anyone as to any act or transaction reported in any
accounting, the Trustee shall have the right to have its account settled by
a court of competent jurisdiction.
10.2 Persons Dealing With Trustee. No person dealing with the
Trustee shall be required to see to the application of any money paid or
property delivered to the Trustee, or to determine whether or not the Trustee
is acting pursuant to any authority granted to it under this Trust Agreement.
10.3 Benefits May Not be Assigned or Alienated. The interests under
this Trust Agreement of participants and other persons entitled to benefits
under the Plan are not subject to the claims of their creditors and may not
be voluntarily or involuntarily assigned, alienated or encumbered except in
the case of a qualified domestic relations order which relates to the
provision of child support, alimony or marital rights of a spouse, child or
other dependent and which meets such other requirements as may be imposed by
Section 414(p) of the Code or regulations issued thereunder.
10.4 Evidence. Evidence required of anyone under this Trust
Agreement may be by certificate, affidavit, document or other instrument
which the person acting in reliance thereon reasonably considers pertinent
and reliable, and signed, made or represented by the proper party.
10.5 Wavier of Notice. Any notice required under this Trust
Agreement may be waived by the person entitled thereto.
10.6 Company Merger. In the event that any successor corporation
to the Company, by merger, consolidation, purchase or otherwise, shall elect
to adopt the Plan, such successor corporation shall be substituted hereunder
for the Company, upon the filing in writing of its election to do so with the
Trustee, the Investment Committee and the Plan Administrator.
10.7 Counterparts. This Trust Agreement may be executed in any
number of counterparts, each of which shall be deemed an original and no
other counterpart need be produced.
10.8 Governing Laws. This Trust Agreement shall be construed and
administered according to the laws of the Commonwealth of Massachusetts to
the extent that such laws are not preempted by the laws of the United States
of America; provided that in the event that an action is brought by the
Trustee on behalf of the Trust, the Company shall have the right to determine
that such action shall be brought in an appropriate state or federal forum in
the State of Illinois or elsewhere as the Company shall deem appropriate, and
the Trustee shall follow any direction of the Company to that effect; and
provided further, that in the event any action is brought by the Company
against the Trustee, the Company shall have the right to determine that such
action shall be brought in an appropriate state of federal forum either in
the Commonwealth of Massachusetts or in the State of Illinois, subject to any
right of the Trustee to remove such action from state court to an appropriate
federal court in that state.
10.9 Successors, Etc. The provisions of this Trust Agreement shall
be binding on the Company, the Employers, the Trustee and the Committee and
their successors and on all persons entitled to benefits under the Plan and
their respective heirs and legal representatives.
10.10 Successor Employer. If a successor to any Employer or a
purchaser of all or substantially all of any Employer's assets elects, with
the consent of the Company, to continue the Plan, such successor or purchaser
shall be substituted for that Employer under this Trust Agreement. If such
Employer is also the Company, such successor or purchaser shall be
substituted for the Company hereunder.
10.11 Service of Legal Process. If the Trustee receives service of
summons, subpoena or other legal process of any court with respect to any
action relating to the Plan or this Trust Agreement, it shall promptly inform
the Company of such service and, at the request of the Company, shall provide
it with a copy of the document served.
10.12 Action by Employers. Except as otherwise provided in this
Trust Agreement, any action required or permitted to be taken by an Employer
under the provisions of this Trust Agreement shall be by resolution of its
Board of Directors, or by written action of a duly authorized officer.
10.13 No Guarantees. Neither the Company, nor any Employer, nor the
Trustee guarantees the Trust Fund from loss or depreciation, nor the payment
of any amount which may become due to any person under the Plan or this Trust
Agreement.
10.14 Gender and Numbers. Where the context admits, words in the
masculine gender shall include the feminine, the singular shall include the
plural, and the plural shall include the singular.
10.15 Headings. The headings of Sections of this Trust Agreement
are for convenience of reference only and shall have no substantive effect on
the provisions of this Trust Agreement.
11. No Reversion to Employers.
Except as provided herein, no portion of the principal or the income
of the Trust Fund shall revert to or be recoverable by the Company or any
Employer or ever be used for or diverted to any purpose other than for the
exclusive benefit of participants in the Plan and persons claiming under or
through them pursuant to the Plan, provided, however, that:
(a) all contributions are conditioned upon the deductibility of the
contributions under Section 404(a) of the Code, and, to the extent determined
to be nondeductible, the Trustee shall, upon written request of the affected
Employer, return the amount of the contribution (to the extent disallowed),
reduced by the amount of losses thereon, to such Employer within one year
after the determination of nondeductibility or within such other period as is
permitted by applicable law; and
(b) if a contribution or any portion thereof is made by an Employer
by a mistake of fact, the Trustee shall, upon written request of the
Employer, return the amount of the contribution or portion, reduced by the
amount of any losses thereon, within one year after the date of payment to
the Trustee or within such other period as is permitted by applicable law;
and
(c) if a contribution is conditioned upon the qualification of the
Plan and Trust under Sections 401 and 501 of the Code, the contributions of
the Employers to the Trust for all Plan Years, with the gains and losses
thereon, shall be returned by the Trustee to the Employers, as appropriate,
within one year in the event that the Commissioner of Internal Revenue fails
to rule that the Plan and Trust were, as of such date, qualified and tax-
exempt (within the meaning of Sections 401 and 501 of the Code).
The Trustee shall be under no obligation to return any part of the
Trust Fund as provided in this Section 11 until the Trustee has received a
written certification from the Plan Administrator that such return is in
compliance with this Section 11, the Plan and the requirements of applicable
law. The Trustee shall rely conclusively on such written certification and
shall be under no obligation to investigate or otherwise determine its
propriety.
12. Change of Trustee
12.1 Resignation. The Trustee may resign at any time by giving
sixty (60) days' advance written notice to the Company.
12.2 Removal of Trustee. The Company may remove any Trustee by
giving ten (10) days' advance written notice to the Trustee. The Company
shall fill any vacancy in the office of the Trustee howsoever caused.
12.3 Duties of Resigning or Removed Trustee and of Successor
Trustee. Each successor Trustee shall succeed to the title to the Trust Fund
vested in its predecessor, without the signing or filing of any further
instrument, but any resigning or removed Trustee shall execute all documents
and do all acts necessary or appropriate to vest such title of record in any
successor Trustee. In the event of the resignation or removal of the
Trustee, the Trustee shall assign, transfer and pay over to the duly
appointed successor Trustee the assets then constituting the Trust Fund, and
only thereafter shall the resigning or removed Trustee be relieved of its
duties and responsibilities as Trustee hereunder. Within ninety (90) days,
the resigned or removed Trustee shall furnish to the Company and the
successor Trustee an account of its administration of the Trust from the date
of its last account. The Company and the successor Trustee may approve such
accounting by written notice of approval delivered to the Trustee or by
failure to express objection to such accounting in writing delivered to the
Trustee within twelve months from the date upon which the accounting was
delivered to the Company and the successor Trustee. Upon the receipt of a
written approval of the accounting, or upon the passage of the period of time
within which objection may be filed without written objections having been
delivered to the Trustee, such accounting shall be deemed to be approved, and
the Trustee shall be released and discharged as to all items, matters and
things set forth in such account. Each successor Trustees shall have all the
powers, rights and duties conferred by this Trust Agreement as if originally
named Trustee. Except as otherwise provided under ERISA or other applicable
law, neither the Trustee hereunder nor any successor Trustee shall be
personally liable for any act or failure to act of a predecessor Trustee.
13. Amendment and Termination
13.1 Amendment. Subject to the provisions of Section 11, the
Company reserves the right to amend the Trust Agreement at any time, except
that no amendment shall change the rights, duties and liabilities of the
Trustee under this Trust Agreement without its consent.
13.2 Termination. If the Plan is terminated, all of the provisions
of the Trust evidenced by this Trust Agreement, as applied to the Plan,
nevertheless shall continue in effect until the Trust Fund has been
distributed by the Trustee as directed by the Company under the Plan.
IN WITNESS WHEREOF, the Company and the Trustee have caused these presents to
be executed by their duly authorized officers on the date(s) indicated below,
to be effective as of the day and year first above written.
SEARS, ROEBUCK AND CO.
By /s/Michael D. Levin
Its: Senior Vice President, General Counsel
and Secretary
Date
STATE STREET BANK AND TRUST COMPANY
By /s/Stephen Nazzaro
Its: Vice President, Specialized Trust
Services
Date December 30,1997
INCUMBENCY CERTIFICATE
Sears, Roebuck and Co. (the "Company") hereby certifies that the persons
whose names appear below are authorized to act on its behalf, including the
authorization to give instructions, with respect to the Trust Agreement
between the Company and State Street Bank and Trust Company, as Trustee,
dated as of _______________. The Company further certifies that the true
signature of each such person is set forth below opposite his name, and that
the Trustee may rely upon this certificate until such time as it receives
another certificate bearing a later date.
NAME SIGNATURE
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
BY: ________________________________
TITLE: _____________________________
DATE: _____________________________
NOTICE OF APPOINTMENT
OF
INVESTMENT MANAGERS
Sears Investment Management Company, ("SIMCO"), as the Investment
Manager of the Trust Fund, hereby certifies to State Street Bank and Trust
Company (the "Trustee"), through the duly authorized person whose signature
appears below, that the firms whose names are set forth below have been
appointed by SIMCO as Investment Managers with respect to the Trust Agreement
between the Company and the Trustee dated as of January 1, 1998, with
authority over the portions of its assets indicated opposite their names.
SIMCO further certifies that the Trustee may rely upon this certificate until
such time as it receives another certificate bearing a later date.
DESCRIPTION OF PLAN ASSETS INVESTMENT MANAGER
S&P 500 Equity Index Fund State Street Bank and Trust Company
Domestic Equity Fund State Street Bank and Trust Company
International Equity Fund State Street Bank and Trust Company
Company Stock Fund State Street Bank and Trust Company
DWDC Shares Fund State Street Bank and Trust Company
Allstate Shares Fund State Street Bank and Trust Company
Balanced Fund Ark Asset Management Co., Inc.
Arnhold and S. Bleichroeder, Inc.
Chancellor LGT Asset Management
The Crabbe Huson Group, Inc.
Investment Advisers, Inc.
Jurika & Voyles, Inc.
Lincoln Capital Management Company
LSV Asset Management
State Street Bank and Trust Company
Bond Fund SIMCO
Money Market Fund SIMCO
SIMCO
BY: ______________________________
TITLE: ___________________________
DATE: ___________________________
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<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AND CASH
FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> JAN-03-1998
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<SECURITIES> 0
<RECEIVABLES> 20,956
<ALLOWANCES> 1,113
<INVENTORY> 5,044
<CURRENT-ASSETS> 30,682
<PP&E> 11,324
<DEPRECIATION> 4,910
<TOTAL-ASSETS> 38,700
<CURRENT-LIABILITIES> 15,790
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0
0
<COMMON> 323
<OTHER-SE> 5,539
<TOTAL-LIABILITY-AND-EQUITY> 38,700
<SALES> 36,371
<TOTAL-REVENUES> 41,296
<CGS> 26,769
<TOTAL-COSTS> 26,769
<OTHER-EXPENSES> 8,331
<LOSS-PROVISION> 1,532
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<INCOME-PRETAX> 2,100
<INCOME-TAX> 912
<INCOME-CONTINUING> 1,188
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<NET-INCOME> 1,188
<EPS-PRIMARY> 3.03
<EPS-DILUTED> 2.99
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