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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For Annual and Transition Reports pursuant to Sections 13 or
15(d) of the Securities Exchange Act of 1934
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 1999
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 on
Title of each class Which Registered
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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
Securities registered pursuant to Section 12(g) of the Act: None
On January 29, 1999, the Registrant had 383,478,878 common
shares outstanding. Of these, 324,906,480 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 29, 1999) of approximately $13.04 billion,
were owned by shareholders other than (i) directors and executive
officers of the Registrant and (ii) any person known by the
Registrant as of the date thereof to beneficially own five
percent or more of Registrant's common shares. (Information
relating to five percent owners is based upon most recent filings
made by such owners with the Securities and Exchange Commission.)
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Indicate by check mark whether the 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 the 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. [ ]
Documents Incorporated By Reference
Parts I and II of this Form 10-K incorporate by reference
certain information from the Registrant's 1998 Annual Report to
Shareholders (the "1998 Annual Report"). Part III of this Form
10-K incorporates by reference certain information from the
Registrant's definitive Proxy Statement, dated
March 26, 1999, for its Annual Meeting of Shareholders to be held
on May 13, 1999 (the "1999 Proxy Statement").
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PART I
Item 1. Business
Sears, Roebuck and Co. ("Sears") originated from an
enterprise established in 1886 and was incorporated under the
laws of New York in 1906. Its principal executive offices are
located at 3333 Beverly Road, Hoffman Estates, Illinois. Sears
(together with its consolidated subsidiaries, the "Company") is a
multi-line retailer that provides a wide array of merchandise and
services through five segments - Retail, Services, Credit,
Corporate and International. The Company is among the largest
retailers of merchandise and services in the world.
The Company's domestic segments in the United States
and Puerto Rico are Retail (comprised of Full-line Stores and
Specialty Stores), Services (comprised of Home Services and Sears
Direct), Credit (comprised of the domestic credit operations) and
Corporate (comprised of activities which are of a holding company
nature).
The International segment consists of similar retail,
services, credit and corporate operations conducted through a
majority-owned subsidiary in Canada.
For further information, see "Retail," "Services,"
"Credit," "Corporate" and "International" below and "Management's
Analysis of Consolidated Operations" and "Management's Analysis
of Consolidated Financial Condition" beginning on pages 19 and
27, respectively, of the 1998 Annual Report, incorporated herein
by reference in response to Item 7 hereof.
________________________________
Information regarding revenues, operating income and
assets of the Company's Retail, Services, Credit, Corporate and
International segments for each of the three fiscal years ended
January 2, 1999, January 3, 1998 and December 28, 1996 is in Note
15 of the Notes to Consolidated Financial Statements on page 41
of the 1998 Annual Report, incorporated herein by reference in
response to Item 8 hereof. Information on the components of
revenues is included in the "Management's Analysis of
Consolidated Operations" beginning on page 19 of the 1998 Annual
Report, incorporated herein by reference in response to Item 7
hereof.
The Company employs approximately 324,000 people
worldwide.
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RETAIL
The Company's Retail operations consist of the
following:
Full-line Stores
At January 2, 1999, the Full-line Store operations
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,
include portrait studios, optical and other licensees.
Specialty Stores
At January 2, 1999, the Specialty Store operations
consist of:
- Home Stores, which are comprised of specialty
store formats designed to offer the Company's hardlines
merchandise through outlets other than the Full-line Stores. The
specific store formats are as follows:
- 653 Sears Dealer Stores that are
primarily independently owned and operated and offer KENMORE and
other major national brand appliances and electronics for the
home, CRAFTSMAN tools, lawn and garden equipment and DIEHARD
batteries. Dealer Stores are primarily located in smaller, rural
markets.
- 265 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.
- 128 Sears HomeLife furniture stores which
offer popular furniture brands at value prices and are located
within select major metropolitan markets. There are 100
freestanding HomeLife stores and an additional 28 located within
Sears Full-line Stores. Effective January 30, 1999, Sears sold
its HomeLife business.
- - The Great Indoors, which currently has
one test store in operation, is a home decorating and remodeling
superstore.
- - Commercial Sales, which primarily targets home
builders, remodelers and property managers for appliance
purchases, as well as vocational schools,
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factory maintenance and service companies for industrial tool
purchases. Commercial Sales has also introduced the Appliance
Select program in 64 Full-line Stores. This program targets the
new home buyer and offers a full selection of KENMORE and other
major national brand kitchen and home appliances.
- Auto Stores, which consists of 789 Sears Auto
Centers primarily located at the mall-based Full-line Stores and
347 NTB National Tire & Battery stores. These stores sell and
install tires, DIEHARD and other automotive batteries and related
goods and 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 tires, batteries and related services. In November
1998, Sears sold its Parts Group, consisting primarily of the
Company's Western Auto and Parts America stores.
SERVICES
At January 2, 1999, the Services operations consist of:
Home Services, which includes:
- Product Services (repair services), which
provides product repair on all major brands of appliances,
consumer electronics and heating and air conditioning systems,
regardless of where purchased.
- Service Contracts, which provide extended
warranty coverage through maintenance agreements.
- Installed Home Improvements, which includes the
following services provided by 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, home security and plumbing services.
- 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 purchased at Sears
retail stores.
Sears Direct, which includes:
- Direct Response, which markets various goods and
services through multiple media, includes specialty catalogs,
insurance (credit protection and traditional life and health
products), clubs and services and impulse and continuity
merchandise. Sears Shop at Home Services, Inc., a wholly-owned
subsidiary of Sears, licenses to third-party distributors of
specialty catalogs and merchandisers of shop-at-home services use
of the Sears name and customer lists for use in marketing
products to Sears customers.
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- Sears Online, which consists of the Company's online
businesses.
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 the Company's domestic credit operations
("Credit") offer make it more attractive for customers to
purchase goods and services from the Retail and Services
businesses. As of January 2, 1999, Credit had approximately 26
million active customer credit accounts (accounts with balances
as of the beginning or end of December 1998) with an average
balance of $1,076. Sears Card, the traditional credit card,
accounted for approximately 90% of total receivables. There were
approximately 42 million Sears Card customers with accounts that
carried a balance during any month in 1998.
Sears stores also accept third party credit and debit cards
such as VISA, MasterCard, American Express and Discover Card.
Sears Card sales as a percentage of total sales in Full-line
Stores and the majority of the Specialty Store formats was
approximately 51.6%, 55.1% and 56.6% for fiscal years 1998, 1997
and 1996, 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
wholly-owned subsidiary of Sears transfers a portion of the
Company's domestic customer receivable balances to a master trust
(the "Master Trust") that issues credit account pass-through
certificates to public and private investors. To the extent the
pass-through certificates are sold to third parties, the related
transferred balances qualify as sales for financial statement
purposes and as such the receivables are removed from the
Company's consolidated balance sheet. The balance of the
receivables in the Master Trust for which pass-through
certificates 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
"Management's Analysis of Consolidated Operations," "Management's
Analysis of Consolidated Financial Condition" and Notes
1 and 8 of the Notes to Consolidated Financial Statements
beginning on pages 19, 27, 32 and 38, respectively, of the 1998
Annual Report, incorporated herein by reference in response to
Items 7 and 8 hereof.
Credit's operations are subject to federal and state
legislation and regulation. 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 the Company might take in response
thereto, a significant reduction in the finance charges imposed
by Credit would 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
increases in delinquencies, charge-offs and personal bankruptcies
could have an adverse effect on the Company.
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Sears National Bank (the "Bank"), a wholly-owned subsidiary
of Sears based in Arizona, is a limited purpose credit card bank
engaging in credit card operations. The Bank is subject to
certain other restrictions applicable to credit card banks under
federal law, as well as Arizona credit card lending guidelines.
The Bank 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.
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.
INTERNATIONAL
The Company conducts similar retail, services, credit and
corporate operations in Canada through Sears Canada Inc., a
consolidated, 54.7% owned subsidiary of Sears ("Sears Canada").
Sears Canada is the largest single full-line retailer of general
merchandise and home-related services in Canada. Sears Canada
operates 109 Full-line Stores, 20 Sears Furniture Stores and 12
outlet stores, and has 1,898 independent catalog merchant agents
operating under local ownership, 93 independently operated dealer
stores and seven active warehouses. During fiscal 1998, Sears
Canada opened 12 new Sears Furniture Stores and 14 dealer stores
and opened four new and relocated two outlet stores. Sears
Canada currently plans to open one new and relocate one Full-line
Store during fiscal 1999, and continues to seek opportunities for
expansion in desirable locations. In 1999, subject to the
availability of suitable store locations on appropriate terms,
Sears Canada plans to open ten new and relocate two Sears
Furniture Stores, open 17 dealer stores and open 113 catalog
merchant agent locations, as well as renovate 17 Full-line
Stores. As of January 2, 1999, Sears Canada employed
approximately 42,000 full and part-time employees.
Sears Canada has an ongoing securitization program pursuant
to which undivided co-ownership interests in its pool of customer
charge account 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
customer charge account receivables are maintained on the
Company's balance sheet and related proceeds are recorded as
debt. Sears Canada acts as servicer of the customer charge
account receivables.
Strategic Initiatives
The Company's strategic initiatives form the framework for
competing in the continually changing retail landscape. The
Company's objective is to implement five strategic initiatives.
First, make the Company a compelling place to shop anytime
and anywhere. The Company will position its businesses to create
a multi-channel retailer of merchandise and services, reaching
customers through its Full-line Stores, Specialty Stores,
catalogs and the Internet. The Company will strive to serve all
customers throughout all stages of their lives via any delivery
channel they select. The Company's ability to sell, finance,
deliver, install and service a wide array of consumer products
help make it a compelling place to shop anytime and anywhere.
Second, the Company will focus on winning with the
customers by communicating and delivering the Company's unique
value proposition. The Company offers a competitive price and
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strong assortment of national brands complemented with
outstanding proprietary brands such as KENMORE and CRAFTSMAN.
The Company combines this value with a high level of customer
service, excellent credit offerings, installation and service.
This value proposition should retain existing customers and also
attract new customers into a long-term relationship with Sears.
Third, the Company will continue to stress a localized
focus via the utilization of its customer data warehouse. With
nearly 60 million households in the data warehouse, the Company
can execute merchandising and marketing programs on a highly
targeted basis.
Fourth, the Company will further emphasize cost and asset
productivity. This initiative involves ongoing improvements in
cost containment and inventory leverage throughout the Company.
It also involves the allocation and redeployment of assets to
uses that enhance shareholder value.
Fifth, the Company will continue to build a winning
culture. This will be accomplished by focusing on associate
satisfaction, reducing turnover and increasing diversity in the
workforce.
Sources of Merchandise
At January 2, 1999, the Retail and Services businesses
purchased goods primarily from approximately 4,800 domestic
suppliers, most of whom have been suppliers for many years. For
further information concerning the Company's requirements of Year
2000 readiness for its sources, see "Management's Analysis of
Financial Condition - Year 2000" beginning on page 29 of the 1998
Annual Report incorporated herein by reference in response to
Item 7 hereof.
Seasonality
Due to holiday buying patterns, merchandise sales are
traditionally higher in the fourth quarter than in the other
quarterly periods and the Company typically earns a
disproportionate share of operating income in the fourth quarter.
Similarly, sales and operating income are generally lowest 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 registrations. This trademark 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 its domestic operations.
Sears KENMORE(r), CRAFTSMAN(r) and DIEHARD(r) 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(r), CIRCLE OF BEAUTY(tm), CANYON RIVER BLUES(r),
WISHBOOK(r), NTB(r), ORCHARD(r) and the "SIDES" family of marks
(e.g. The Softer Side of Sears). The Company's right to all of
its brand names continues so long as it uses the names.
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Competition
The domestic retail, services and credit businesses are
highly competitive. The principal factors which differentiate
competitors include convenience of shopping facilities, quality
of merchandise, competitive prices, brand names and availability
of services such as credit, product delivery, repair and
installation. The Company believes it is able to compete very
effectively despite strong competitive pressures in recent years.
Employees
The Company employs approximately 282,000 people in the
United States and Puerto Rico, and 42,000 people in Canada,
including part-time employees.
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 receivable balances to, Sears
Roebuck Acceptance Corp. ("SRAC"), a wholly-owned finance
subsidiary. SRAC obtains funds primarily by issuing 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. All of the
remaining SOFNV debt matured in 1998 and no future borrowings are
planned.
Sears DC Corp. ("SDC"), a wholly-owned finance subsidiary
of Sears, was formed to borrow in domestic and foreign debt
markets and lend the proceeds of such borrowings to Sears and
certain of its direct and indirect subsidiaries in exchange for
their unsecured notes. SDC raised funds through the sale of its
medium-term notes and direct placement of commercial paper with
corporate and institutional investors. The only outstanding debt
of SDC is two series of outstanding medium-term notes. SDC does
not plan to issue additional debt.
Substantially all the debt and related interest expense of
SDC, SRAC and SOFNV support the Company's 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
"Credit," and "International," beginning on pages 6 and 7
hereof, respectively, and "Management's Analysis of Consolidated
Operations," "Management's Analysis of Consolidated Financial
Condition" and Notes 1 and 8 of the Notes to Consolidated
Financial Statements beginning on pages 19, 27, 32 and 38,
respectively, in the 1998 Annual Report, incorporated herein by
reference to Items 7 and 8 hereof.
RECENT DEVELOPMENTS
On March 16, 1999, the Company announced the realignment of
certain of its businesses. The Auto Stores will become part of
the Home Stores group. Additionally, the Sears Direct business
will be divided and realigned; The specialty catalog business
will move to the Marketing organization, the direct response
business will move to the Credit organization and the Sears
Online business will move to the Home Services organization. For
additional information concerning the realignment, see Exhibit
99. (iv) hereto, which is incorporated herein by reference.
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
Certain statements made in this Annual Report on Form 10-K
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 North American economic conditions (such as interest
rates and consumer confidence) 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.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names of the executive
officers of the Company, the current positions and offices with
the Company held by them, the date they first became officers of
the Company and their current ages:
Date First
Became
Name Position Officer Age
- ---- -------- ---------- -----
Arthur C. Martinez Chairman of
the Board of
Directors, President
and Chief Executive
Officer 1992 59
Paul A. Baffico President,
Automotive Group 1992 52
James R. Clifford President and Chief
Operating Officer,
Full-Line Stores 1993 53
Mark A. Cohen Executive Vice
President, Marketing 1998 50
Anastasia D. Kelly Executive Vice President,
General Counsel
and Secretary 1999 49
Alan J. Lacy Chief Financial Officer
and President, Credit 1994 45
Robert L. Mettler President, Merchandising
- Full Line Stores 1993 58
Gerald N. Miller Senior Vice President,
Chief Information
Officer 1995 51
William G. Pagonis Executive Vice President,
Logistics 1993 57
William L. Salter President, Home Stores 1995 55
John T. Sloan Senior Vice President,
Human Resources 1996 47
Richard J. Srednicki President, Sears
Home Services 1998 51
Allan B. Stewart President, Stores -
Full Line Stores 1984 56
Jane J. Thompson President, Sears Direct 1988 47
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Messrs. Martinez, Baffico, Clifford, Mettler, Miller,
Pagonis, 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. Cohen has been Executive Vice President, Marketing
since January 1999. He joined Sears in February 1998 as Senior
Vice President, Cosmetics, Accessories, Fine Jewelry, Footwear
and Home Fashions. Prior to Sears, he had been Chairman and
Chief Executive Officer of Bradlees, Inc., which through its
subsidiary operates discount department stores, since 1994 and
Chairman and Chief Executive Officer of Lazarus Department
Stores, Inc., a division of Federated Department Stores, Inc.,
from 1988-1994.
Ms. Kelly joined Sears as Executive Vice President, General
Counsel and Secretary in March 1999. Prior to Sears, she had
been Senior Vice President of Fannie Mae, a financial services
company, since 1995 and had been Fannie Mae's General Counsel and
Secretary since 1996. Prior to Fannie Mae, she was a partner in
the law firm of Wilmer, Cutler & Pickering.
Mr. Lacy has been Chief Financial Officer since August 1998
and President, Credit since December 1997. Effective March 22,
1999, the Registrant has named Julian Day its Executive Vice
President and Chief Financial Officer. From September 1995 until
December 1997, Mr. Lacy was Executive Vice President and Chief
Financial Officer. He joined Sears in December 1994 as Senior
Vice
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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 1993.
Mr. Sloan has been Senior Vice President, Human Resources
since April 1998. He joined Sears in September 1996 as Vice
President, Human Resources, Mall Store Operations. Prior to
joining Sears, he had been Senior Vice President, Administration,
of Tribune Company, a diversified media company, since 1993.
Mr. Srednicki joined Sears in June 1998 as President, Sears
Home Services. Prior to joining Sears, he had been President and
Chief Executive Officer, Universal Card Services, of AT&T Corp.
from 1997 to 1998. From 1983 to 1996, he was a Business Manager
of Citicorp with responsibility for Citibank Germany.
Sears recently announced the following executive changes:
Effective March 22, 1999, Julian Day has been named Executive
Vice President and Chief Financial Officer. Prior to joining
Sears, he had been executive vice president and chief financial
officer of Safeway, Inc. Mr. Lacy will continue as President,
Credit. On March 16, 1999, the Company announced that Ms.
Thompson is leaving the Company and Mr. Baffico is retiring from
the Company.
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Item 2. 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 the Company's domestic Retail operations.
<TABLE>
<CAPTION>
Full-line Auto Stores Home Stores
Stores Tire Parts HomeLife(a)(b) Hardware Dealer Other(c) Total
--------- ---- ----- -------- -------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stores at
January 2, 1999
Owned 470 637 - 32 14 1 18 1,172
Leased (d) 375 499 - 68 251 - 26 1,219
Independently
Owned and
Operated Dealer
Stores - - - - - 652 - 652
Total Stores at
Fiscal Year-End
1995 806 1,031 582 97 108 375 71 3,070
Stores opened during
Fiscal 1996 27 40 67 12 136(e) 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 during
Fiscal 1997 (9) (20) (102) (9) (7) (17) (16) (180)
1997 833 1,106 615 101 255 576 44 3,530
Stores opened during
Fiscal 1998 23 50 43 4 18 101 1 240
Stores closed during
Fiscal 1998 (11) (20) (658)(f) (5) (8) (24) (1) (727)
1998 845 1,136 0 100 265 653 44 3,043
Gross Retail Area at
Fiscal Year-End
(square feet in
millions)
1998 112.4 16.2 0.0 3.6 8.8 5.4 1.9 148.3
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
Retail Selling Area at
Fiscal Year-End
(square feet in
millions)
1998 73.3 2.3 0.0 3.0 6.9 3.6 1.3 90.4
1997 71.9 2.2 4.7 3.0 6.5 3.1 1.3 92.7
1996 69.9 2.1 4.9 3.2 5.6 2.6 1.5 89.8
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</TABLE>
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Retail Store Revenues per Selling Square Foot
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $317
1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$318
1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$321
(a) Excludes 28 HomeLife Stores located in Full-line Stores.
(b) Effective January 30, 1999, Sears sold its HomeLife
business.
(c) Consists of small-size appliance stores, retail outlet
stores and The Great Indoors store. Excludes other facilities
owned or leased as part of Full-line Store properties.
(d) Many of the leases contain renewal options and contingent
rentals (for additional information, see Note 7 of the Notes to
Consolidated Financial Statements beginning on page 37 of the
1998 Annual Report, incorporated herein by reference to Item 8
hereof).
(e) Includes 61 Orchard Supply Hardware Stores which were
acquired in September 1996.
(f) Includes 652 Western Auto stores which were sold in
November 1998.
In addition, at January 2, 1999, there were 859 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. There were also 86 distribution
facilities, most of which are leased for terms ranging from one
to 20 years.
Credit principally services its accounts at nine regional
credit card operations centers ("RCCOCs"), one national account
authorization center ("NAAC"), four Credit Processing Centers,
the headquarters of the Bank in Phoenix, Arizona and at the
Company's headquarters at Prairie Stone. The Company owns one of
the RCCOCs and leases eight for remaining terms ranging from four
to ten years. The Company leases the NAAC for a remaining term
of three years. The Company owns one of the Credit Processing
Centers and leases three for remaining terms ranging from one to
six years.
For the Company's operations, the capital expenditures for
expansion and remodeling and other improvements (excluding
capitalized financing leases) amounted to $1.2 billion for the
fiscal year ended January 2, 1999. In fiscal 1999, planned
capital expenditures of approximately $1.2 billion include the
remodeling and upgrading of merchandise presentations in
approximately 55 existing Full-line Stores and the opening of 18
to 25 new Full-line Stores and over 250 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 "International" above and
"Management's Analysis of Consolidated Financial Condition"
beginning on page 27 of the 1998 Annual Report, incorporated
herein by reference in response to Item 7 hereof.
14
<PAGE>
Item 3. Legal Proceedings
The Company has been subject to a federal civil and
criminal investigation in connection with activities relating to
certain debt reaffirmation agreements with current and former
credit card holders of the Company who had declared personal
bankruptcy. Under the reaffirmation provisions of the United
States Bankruptcy Code, a debtor seeking Chapter 7 protection may
agree to repay his or her debts to creditors. This reaffirmation
agreement must be filed with the bankruptcy court to be valid.
On February 19, 1999, Sears Bankruptcy Recovery Management
Services, Inc., a subsidiary of Sears, pleaded guilty in federal
district court to one count of bankruptcy fraud and was fined $60
million. The fine will have no effect on the Company's earnings
because the Company recorded a pretax charge of $475 million
against earnings for the settlement of lawsuits, fines and
related matters stemming from the improper handling of certain
debt reaffirmation agreements and other related matters in the
second quarter of 1997. The plea agreement does not require any
change in the day-to-day operations of Sears or the subsidiary.
In a separate civil action related to the reaffirmation
matter dating from April 17, 1997, Sears reached a settlement
agreement with the U.S. Attorney for the District of
Massachusetts, which was approved by the federal district court
on February 23, 1999. Under the terms of that agreement, the
Company will continue to file all reaffirmation agreements
obtained in Chapter 7 bankruptcies as required by the United
States Bankruptcy Code.
On March 9, 1999, the Company reached an agreement to
settle a class action lawsuit stemming from an increase in the
annual percentage rate assessed on certain balances of some Sears
credit customers. This settlement, which is subject to formal
approval by the United States District Court for the Northern
District of Illinois, is also expected to resolve related
lawsuits in Illinois and Washington. The lawsuit was brought on
behalf of a nationwide class of Sears credit customers who had
outstanding balances when their accounts were transferred to the
Bank during a period from 1994 through 1996, and who had not
fully paid off those balances as of the effective dates of an
April 1997 Notice of Change in Credit Terms. Under the terms of
the settlement, the Company will provide to the class members
cash and coupons with a face value totaling approximately $156
million. The Company previously reserved for the estimated cost
of the settlement; therefore, the settlement will not have a
material effect on the Company's annual results of operations,
financial position, liquidity or capital resources. The
settlement does not require any change in the Company's credit
practices.
On January 13, 1999, ten "Doe" plaintiffs filed a putative
class action in the United States District Court for the Central
District of California against eighteen domestic clothing
retailers, including the Company, and eleven foreign clothing
suppliers (the "Federal Action"). The Doe plaintiffs allege that
they have worked in garment factories on the island of Saipan in
the Commonwealth of the Northern Mariana Islands, and they
purport to represent a class of other current and former workers.
The plaintiffs allege that class members were forced to work
under illegal labor conditions in the Saipan factories used by
the suppliers, and they assert against the Company claimed
violations of the Racketeering Influenced Corrupt Organizations
Act, the Anti-Peonage Act, the Thirteenth Amendment to the U.S.
Constitution and the Law of Nations. The central allegation of
the Federal Action is that the Company and the other retailer
defendants who purchased garments manufactured in the Saipan
factories used by suppliers are liable to the plaintiff class for
any alleged unlawful working conditions imposed upon them by
their employers. The case seeks injunctive and declaratory
relief, unspecified treble damages, interest and attorneys' fees
and expenses. On January 13, 1999, a related case was also filed
against seventeen named domestic clothing retailers, including
the Company, and additional unnamed
15
<PAGE>
retailers, in San Francisco County Superior Court (the "State
Action"), alleging violations of the California Business and
Professions Code. The named Plaintiffs in the State Action are
the Union of Needletrades Industrial and Textile Employees, AFL-
CIO, Global Exchange, Sweatshop Watch and the Asian Law Caucus,
who purport to bring the action on behalf of the general public
of the State of California. The central allegation in the State
Action is that the Company and the other defendants engaged in
unlawful and unfair business practices in the selling and
advertising in California of garments that had been manufactured
under allegedly illegal labor conditions on Saipan. The case
seeks injunctive relief, restitution and disgorgement of profits,
interest and attorneys' fees and costs. The Company intends to
vigorously defend these cases. The consequences of these actions
are not presently determinable but, in the opinion of management
of the Company, the ultimate liability is not expected to have a
material effect on the annual results of operations, 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
16
<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 the
date hereof, there are 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 preemption, 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, is set forth
in Note 13 of the Notes to Consolidated Financial Statements on
page 40 of the 1998 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 46 of the 1998 Annual Report and
to the information under the heading "Shareholders' equity -
Dividend payments" contained in Note 13 of the Notes to
Consolidated Financial Statements on page 40 of the 1998 Annual
Report.
17
<PAGE>
Item 6. Selected Financial Data
The material under the caption "Five-Year Summary of
Consolidated Financial Data" on page 44 of the 1998 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 "Management's
Analysis of Consolidated Operations" on pages 19 - 25 and
"Management's Analysis of Consolidated Financial Condition" on
pages 27, 29 and 31, of the 1998 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 45 of the 1998 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 18 - 46 (other than that incorporated by reference to
Item 7 hereof) of the 1998 Annual Report is incorporated herein
by reference.
Item 9. Changes in and Disagreements with Independent
Auditors on Accounting and Financial Disclosure
None
18
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors and executive officers of
Sears is incorporated herein by reference to the descriptions
under "Item 1: Election of Directors" on pages 5 - 7 of the 1999
Proxy Statement and to Item 1 of this Report under the caption
"Executive Officers of the Registrant" on pages 12 - 13.
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," "Termination and Change
in Control Arrangements" and "Compensation Committee Interlocks
and Insider Participation" on pages 5 - 7, 9, 12 - 13, 14 - 15,
15, 16, 17 - 18 and 22, respectively, of the 1999 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 "Beneficial
Ownership" on pages 10 - 11 of the 1999 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
None
19
<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 22, 1998
was filed with the Securities and Exchange Commission (the
"Commission") on October 23, 1998 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.
A Current Report on Form 8-K dated December 2, 1998
was filed with the Commission on December 2, 1998 to report,
under Item 5, that the Company issued a press release to announce
its November domestic revenues and to file, under Item 7, a copy
of such press release.
20
<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/Jeffrey N. Boyer
By: Jeffrey N. Boyer
Vice President and
Controller
March 18, 1999
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
Arthur C. Martinez Director, Chairman
of the Board of
Directors, President
and Chief Executive
Officer
*/S/Alan J. Lacy
Alan J. Lacy Chief Financial
Officer and President,
Credit (Principal
Financial Officer)
*/S/Jeffrey N. Boyer
Jeffrey N. Boyer Vice President and
Controller(Principal
Accounting Officer)
*/S/Hall Adams, Jr.
Hall Adams, Jr. Director March 18, 1999
*/S/Brenda C. Barnes
Brenda C. Barnes Director
*/S/Warren L. Batts
Warren L. Batts Director
*/S/Alston D. Correll, Jr.
Alston D. Correll, Jr. Director
*/S/Michael A. Miles
Michael A. Miles Director
*/S/Richard C. Notebaert
Richard C. Notebaert Director
*/S/Hugh B. Price
Hugh B. Price Director
*/S/Clarence B. Rogers
Clarence B. Rogers, Jr. Director
*/S/Patrick G. Ryan
Patrick G. Ryan Director
*/S/Dorothy A. Terrell
Dorothy A. Terrell Director
*By: /S/Jeffrey N. Boyer Individually and as Attorney-in-fact
-------------------
Jeffrey N. Boyer
<PAGE>
SEARS, ROEBUCK AND CO.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Year Ended January 2, 1999
The following consolidated financial statements, notes thereto
and related information of Sears, Roebuck and Co., are
incorporated herein by reference to the Company's 1998 Annual
Report.
Incorporated by reference in Item 8 herein: Page*
Consolidated Statements of Income 18
Consolidated Balance Sheets 26
Consolidated Statements of Cash Flows 28
Consolidated Statements of Shareholder's Equity 30
Notes to Consolidated Financial Statements 32
Independent Auditors' Report 43
Five-Year Summary of Consolidated Financial Data 44
Quarterly Results 46
Incorporated by reference in Item 5 herein:
Common Stock Market Information and Dividend Highlights 46
Incorporated by reference in Item 7a herein:
Market Risk 45
*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 2, 1999
The following additional statement schedules, Independents
Auditors' Report and Consent of Independent Auditors are
furnished herewith pursuant to the requirements of Form 10-K.
Page
Schedule required to be filed under the provisions of
regulation S-X Article 5:
Schedule II - Valuation and Qualifying Accounts S-3
Independent Auditors' Report S-4
Consent of Independent Auditors 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>
Additions
Balance at Charged to Balance at
Beginning Cost and Deductions End of
(millions) of Period Expenses (Describe) Period
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended
January 2, 1999
Allowance for
uncollectible
accounts $ 1,113 $ 1,287 $ 1,426 (A) $ 974
Year Ended
January 3, 1998
Allowance for
uncollectible
accounts $ 801 $ 1,532 $ 1,220 (B) $ 1,113
Year Ended
December 28, 1996
Allowance for
uncollectible
accounts $ 819 $ 971 $ 989 (B) $ 801
<FN>
(A) Represents uncollectible credit card receivable accounts which have been
charged off and $106 million transferred to retained interest in transferred
credit card receivables related to receivables which were transferred to the
Master Trust in 1998.
(B) Represents uncollectible credit card receivable accounts which have been
charged off.
</FN>
</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 2, 1999 and January 3, 1998, and the
related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended
January 2, 1999, 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 11, 1999, except
for paragraphs 1 and 3 of Note 10, as to which the date is March
10, 1999; such consolidated financial statements and report are
included in your 1998 Annual Report to Shareholders and are
incorporated herein by reference. Our audits also included the
financial statement schedule of Sears, Roebuck and Co., listed on
page S-1. 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 28,
1996, December 30, 1995 and December 31, 1994, and the related
Consolidated Statements of Income, Shareholders' Equity and Cash
Flows for the years ended December 30, 1995 and December 31, 1994
(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", "Average common and equivalent shares
outstanding", and "Earnings per common share - diluted" for each
of the five years in the period ended January 2, 1999, appearing
under the caption "Five Year Summary of Consolidated Financial
Data" on page 44 of your 1998 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 11, 1999
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, and
333-38131 of Sears, Roebuck and Co.; Registration Statement Nos.
33-58139, 33-64215, 333-9817, 333-30879, and 333-62847 of Sears,
Roebuck and Co. and Sears Roebuck Acceptance Corp.; Registration
Statement Nos. 33-64775, 333-18591, and 333-43309 of Sears,
Roebuck and Co. and Sears, Roebuck and Co. Deferred Compensation
Plan; Registration Statement Nos. 33-57205, 333-11973, and 333-
53149 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 11, 1999, except for paragraphs 1 and 3 of Note 10, as
to which the date is March 10, 1999, incorporated by reference in
the Annual Report on Form 10-K of Sears, Roebuck and Co. for the
year ended January 2, 1999.
/S/Deloitte & Touche LLP
Deloitte & Touche LLP
Chicago, Illinois
March 10, 1999
S-5
<PAGE>
EXHIBIT INDEX
Sears, Roebuck and Co. Form 10-K
For the Year Ended January 2, 1999
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 2, 1999.
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 fiscal 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 fiscal year ended
December 31, 1994).**
4.(iii) Forms of Performance-Based Stock Options granted
under Registrant's 1994 Employees Stock Plan
(incorporated by reference to Exhibit 4.(iii) to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended January 3, 1998).**
4.(iv) Forms of Performance-Based Restricted Stock grants
under Registrant's 1994 Employees Stock Plan
(incorporated by reference to Exhibit 4.(iv) to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended January 3, 1998).**
*4.(v) Forms of stock options granted under Registrant's
1994 Employees Stock Plan.
4.(vi) 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.(ii)(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.(ii)(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.(ii)(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.(ii)(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.(ii)(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.(ii)(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.(ii)(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.(ii)(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.(ii)(9) Description of Registrant's Non-Employee Director
Life Insurance Plan (incorporated by reference to the
first paragraph on page 10 of the Registrant's Proxy
Statement dated March 26, 1998).** ****
10.(ii)(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.(ii)(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.(ii)(12) Amendment to Registrant's Supplemental Retirement
Income Plan, adopted by the Registrant's Board of
Directors on December 23, 1997 (incorporated
by reference to Exhibit 10.(iii)(12) to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended January 3, 1998).** ****
10.(ii)(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.(ii)(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.(ii)(15) Amendment to Registrant's Transferred Executives
Pension Supplement adopted on March 13, 1996
(incorporated by reference to Exhibit 10.(iii)(14)
to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 30, 1995).** ****
10.(ii)(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.(ii)(17) Registrant's Deferred Compensation Plan, as amended
and restated on October 14, 1998.
10.(ii)(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.(ii)(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.(ii)(20) Registrant's 1994 Employees Stock Plan (incorporated
by reference to Appendix A to the Registrant's Proxy
Statement dated March 23, 1994).** ****
10.(ii)(21) Registrant's Associate Stock Ownership Plan
(incorporated by reference to Exhibit 10.(iii)(21) to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended January 3, 1998).**
10.(ii)(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.(ii)(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
fiscal year ended December 30, 1995).** ****
10.(ii)(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.(ii)(25) 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.(ii)(26) 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.(ii)(27) 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.(ii)(28) Letter from the Registrant to Richard J. Srednicki
dated June 4, 1998 relating to employment.
10.(ii)(29) 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.(ii)(30) 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.(ii) 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 2, 1999.
*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) Sears 401(k) Profit Sharing Plan, as amended and
restated effective January 1, 1998.
*99.(ii) Amendment to the Sears 401(k) Profit Sharing Trust
dated June 26, 1998.
*99.(iii) Amendment to the Sears 401(k) Profit Sharing Trust
dated December 1, 1998.
*99.(iv) Press release of the Registrant dated March 16, 1999.
- ----------------
* 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
February 2, 1999
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 45 days nor more than 75 days prior
to the first anniversary of the date on which the Company first mailed its
proxy materials for 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 the anniversary
date of the preceding year's annual meeting, 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 Chairman of the Board of Directors, the President,
the Secretary, or a Vice President designated by the Chairman and served
by mail upon each shareholder of record entitled to vote at such meeting
not less than ten nor more than sixty 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 such shareholder in accordance with
applicable law 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. The Compensation Committee
shall approve the salaries, bonuses, and other compensation to be paid to
the officers of the Company, including the terms and conditions of their
employment, shall approve 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, make
recommendations to the Board of Directors with respect to the compensation
of directors, 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 sixty nor less than ten
days preceding the date of any meeting of shareholders, and not more than
sixty 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 canceled.
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.
Exhibit 4(v)
SEARS, ROEBUCK AND CO.
Hoffman Estates, Illinois
Name: Date: February 2, 1998
SSN: Total Number of Shares:
Price per Share: $40.07
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, each for one-third of said total number of shares, such
installments to accrue, respectively, on the second day of February in each
of the years 2000, 2001 and 2002.
You may exercise your right to purchase all or any of the shares included in
any such installment on or after the date on which such installment accrues,
but in any event not later than February 2, 2009 (the "Expiration Date"), by
making payment in full for the shares which you so elect to purchase, at the
price per share herein prescribed. Your payment may be made by check or by
tendering common shares of the Company, or by means of a combination of a
check and common shares of the Company, subject to the provisions set forth
herein. Only whole common shares (and not fractional shares) of the Company
may be tendered in payment of all or a portion of the purchase price, you
must have owned any such shares tendered in payment for at least six months
prior to the date of exercise and the certificate(s) for any such shares
tendered in payment must be accompanied by duly executed instruments of
transfer in a form acceptable to the Company. If all or part of the payment
is in the form of common shares of the Company, such shares shall be valued
at their fair market value on the date of exercise. The fair market value of
common shares of the Company on the date of exercise shall be 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 the date of exercise 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 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). The excess, if any,
of the purchase price for the shares which you elect to purchase under this
option over the fair market value of the shares, if any, which you tender in
payment of the purchase price must be paid 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.
You are also hereby granted additional installments to purchase common shares
of the Company under this option on the terms set forth in this paragraph
each time you elect to pay all or a portion of the purchase price upon any
exercise of this option prior to February 2, 2006 by tendering common shares
of the Company as set forth above. Such additional option rights permit you
to purchase, in the aggregate, a number of shares equal to the number of
shares so tendered in payment, at a price per share equal to the fair market
value of a common share of the Company on the date of your exercise of this
option (subject to a minimum price per share equal to the price per share
specified for the purchase of shares under this option in respect of which
such additional rights are granted). Such additional option rights shall be
exercisable in three annual installments (with the first installment accruing
one year from the date of exercise of this option, the number of shares
subject to each of the first two installments being equal to one-third of the
aggregate number of shares subject to such additional option rights (adjusted
to the next lower number of whole shares to eliminate any fractional shares)
and the number of shares subject to the third installment being equal to the
aggregate number of shares subject to such additional option rights less the
aggregate number of shares subject to the first two installments), shall
expire on the Expiration Date set forth herein, and shall otherwise be on
terms and conditions substantially similar to those set forth herein.
In addition, any gain related to any portion of this option exercised as set
forth in the previous paragraph by paying the purchase price by tendering
common shares of the Company, may be deferred in accordance with the terms of
the Sears, Roebuck and Co. Deferred Compensation Plan.
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:
(i) Each installment of this option which has not theretofore accrued shall
immediately accrue and become exercisable, provided however, that no
installment of this option may be exercised until six months after the
date of grant of this option.
(ii) 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 accrued under this option 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 (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 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 means between the high and low prices per share for the Company's
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 (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 any installment of this option which
has accrued, or 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), 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 FICA 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, subject to the provisions set forth below. Such
shares shall be valued at their fair market value on the date of exercise.
In addition, if you are an officer of the Company subject to Section 16(b) of
the Securities Exchange Act of 1934 (the "Exchange Act"), your election to
have shares withheld to satisfy such tax withholding requirements may be
subject to certain restrictions. Your Officers' Stock Manual will include a
detailed explanation of these restrictions.
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 (except
in the event of retirement, permanent and total disability ("Disability") or
death, as hereinafter provided), 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 may pay for and receive all or any of the shares comprising the
installment or installments that shall have accrued at 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. In the event of your
normal retirement or, with Company approval, early retirement, you may,
within five years of your retirement, but in no event later than the
Expiration Date, pay for and receive such number of Company shares as is
determined by multiplying the total number of Company common shares granted
pursuant to this option by a fraction, the numerator of which is the number
of calendar months which have elapsed from the date of grant of this option
through the date of your termination of employment (rounded up to the nearest
whole number, but in no event shall such numerator be greater than the
denominator) and the denominator of which is the number of calendar months
that have elapsed from the date of grant through the date on which this
option is scheduled to vest ("Prorated Shares") and for which you shall not
then have made payment or limited stock appreciation rights elections as
aforesaid. In the event of your Disability or death, while employed by the
Company or any of its subsidiaries, or during the period in which this option
continues to be exercisable after termination of employment, you, or in the
case of death, your legal representative (including any person designated in
your will to have the right), may within five years after the date of your
Disability or death, but in no event later than the Expiration Date, pay for
and receive such number of shares that shall have continued to vest during
such period; provided that in the event such Disability or death shall occur
within twelve months of the date of grant of this option, you shall receive
such number of Company shares as is determined by multiplying the total
number of Company common shares granted pursuant to this option by a
fraction, the numerator of which is the number of calendar months which have
elapsed from the date of grant of this option through the date of your
Disability or death (rounded up to the nearest whole number but in no event
shall such numerator be greater than the denominator) and the denominator of
which is 12 and for which you shall not then have made payment or limited
stock appreciation rights elections as aforesaid. Any shares so received
shall continue to vest in accordance with the terms of your option grant. In
lieu, in whole or in part, of any such exercise of your option rights, you
(or your legal representative as set forth above in the event of your death)
may make elections with respect to any limited stock appreciation rights
which were exercisable at the date you so ceased to be employed, or at the
date of such Disability, normal retirement or, with Company approval, early
retirement, or death, as the case may be, but in no event after the
expiration of the aforesaid sixty-day period from and after a Change of
Control or after the Expiration Date.
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, 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.
SEARS, ROEBUCK AND CO.
Hoffman Estates, Illinois
Date: February 2, 1998
Total Number of Shares:
Price per Share: $40.07
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, each for one-third of said total number of shares, such
installments to accrue, respectively, on the second day of February in each
of the years 2000, 2001 and 2002.
You may exercise your right to purchase all or any of the shares included in
any such installment on or after the date on which such installment accrues,
but in any event not later than February 2, 2009 (the "Expiration Date"), by
making payment in full for the shares which you so elect to purchase, at the
price per share herein prescribed. Your payment may be made by check or by
tendering common shares of the Company, or by means of a combination of a
check and common shares of the Company, subject to the provisions set forth
herein. Only whole common shares (and not fractional shares) of the Company
may be tendered in payment of all or a portion of the purchase price, you
must have owned any such shares tendered in payment for at least six months
prior to the date of exercise and the certificate(s) for any such shares
tendered in payment must be accompanied by duly executed instruments of
transfer in a form acceptable to the Company. If all or part of the payment
is in the form of common shares of the Company, such shares shall be valued
at their fair market value on the date of exercise. The fair market value of
common shares of the Company on the date of exercise shall be 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 the date of exercise 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 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). The excess, if any,
of the purchase price for the shares which you elect to purchase under this
option over the fair market value of the shares, if any, which you tender in
payment of the purchase price must be paid 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.
You are also hereby granted additional installments to purchase common shares
of the Company under this option on the terms set forth in this paragraph
each time you elect to pay all or a portion of the purchase price upon any
exercise of this option prior to February 2, 2006 by tendering common shares
of the Company as set forth above. Such additional option rights permit you
to purchase, in the aggregate, a number of shares equal to the number of
shares so tendered in payment, at a price per share equal to the fair market
value of a common share of the Company on the date of your exercise of this
option (subject to a minimum price per share equal to the price per share
specified for the purchase of shares under this option in respect of which
such additional rights are granted). Such additional option rights shall be
exercisable in three annual installments (with the first installment accruing
one year from the date of exercise of this option, the number of shares
subject to each of the first two installments being equal to one-third of the
aggregate number of shares subject to such additional option rights (adjusted
to the next lower number of whole shares to eliminate any fractional shares)
and the number of shares subject to the third installment being equal to the
aggregate number of shares subject to such additional option rights less the
aggregate number of shares subject to the first two installments), shall
expire on the Expiration Date set forth herein, and shall otherwise be on
terms and conditions substantially similar to those set forth herein.
In addition, any gain related to any portion of this option exercised as set
forth in the previous paragraph by paying the purchase price by tendering
common shares of the Company, may be deferred in accordance with the terms of
the Sears, Roebuck and Co. Deferred Compensation Plan.
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:
(i)Each installment of this option which has not theretofore accrued shall
immediately accrue and become exercisable, provided however, that no
installment of this option may be exercised until six months after the
date of grant of this option.
(ii)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
accrued under this option 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 (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 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 means between the high
and low prices per share for the Company's 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 (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 any installment of this option which
has accrued, or 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), 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 FICA 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, subject to the provisions set forth below. Such
shares shall be valued at their fair market value on the date of exercise.
In addition, if you are an officer of the Company subject to Section 16(b) of
the Securities Exchange Act of 1934 (the "Exchange Act"), your election to
have shares withheld to satisfy such tax withholding requirements may be
subject to certain restrictions. Your Officers' Stock Manual will include a
detailed explanation of these restrictions.
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 (except
in the event of retirement, permanent and total disability ("Disability") or
death, as hereinafter provided), 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 may pay for and receive all or any of the shares comprising the
installment or installments that shall have accrued at 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. In the event of your
normal retirement or, with Company approval, early retirement, you may,
within five years of your retirement, but in no event later than the
Expiration Date, pay for and receive such number of Company shares as is
determined by multiplying the total number of Company common shares granted
pursuant to this option by a fraction, the numerator of which is the number
of calendar months which have elapsed from the date of grant of this option
through the date of your termination of employment (rounded up to the nearest
whole number, but in no event shall such numerator be greater than the
denominator) and the denominator of which is the number of calendar months
that have elapsed from the date of grant through the date on which this
option is scheduled to vest ("Prorated Shares") and for which you shall not
then have made payment or limited stock appreciation rights elections as
aforesaid. In the event of your Disability or death, while employed by the
Company or any of its subsidiaries, or during the period in which this option
continues to be exercisable after termination of employment, you, or in the
case of death, your legal representative (including any person designated in
your will to have the right), may within five years after the date of your
Disability or death, but in no event later than the Expiration Date, pay for
and receive such number of shares that shall have continued to vest during
such period; provided that in the event such Disability or death shall occur
within twelve months of the date of grant of this option, you shall receive
such number of Company shares as is determined by multiplying the total
number of Company common shares granted pursuant to this option by a
fraction, the numerator of which is the number of calendar months which have
elapsed from the date of grant of this option through the date of your
Disability or death (rounded up to the nearest whole number but in no event
shall such numerator be greater than the denominator) and the denominator of
which is 12 and for which you shall not then have made payment or limited
stock appreciation rights elections as aforesaid. Any shares so received
shall continue to vest in accordance with the terms of your option grant. In
lieu, in whole or in part, of any such exercise of your option rights, you
(or your legal representative as set forth above in the event of your death)
may make elections with respect to any limited stock appreciation rights
which were exercisable at the date you so ceased to be employed, or at the
date of such Disability, normal retirement or, with Company approval, early
retirement, or death, as the case may be, but in no event after the
expiration of the aforesaid sixty-day period from and after a Change of
Control or after the Expiration Date.
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, 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 (other than under terms
specified herein), 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 may transfer this option or a portion hereof in accordance with the terms
and conditions described in Appendix B. As described in Appendix B, upon the
transfer of any portion of this option, certain features of this option
become null and void as to the transferred portion.
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.
Appendix B
Stock Option Transferability Feature
The terms and conditions of the transferability feature of this option are as
follows:
(1) Only vested options may be transferred.
(2) The whole option or any portion of at least 1,000 optioned shares hereof
may be transferred. However, the transferor may only make five transfers of
any one option.
(3) The transferor can transfer only to (a) any child, stepchild, grandchild,
parent, stepparent, grandparent, spouse, sibling, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law of
the transferor, including any person so related to the transferor by legal
adoption ("Immediate Family Members"), (b) a trust or trusts for the
exclusive benefit of such Immediate Family Members, or (c) a partnership or
limited liability company in which Immediate Family Members are the only
partners or members, as the case may be.
(4) If the transferor dies before the transferee exercises the option, the
transferor's estate will be liable for applicable taxes.
(5) Upon exercise of the transferred option (or portion thereof), delivery of
shares by the Company to the transferee is contingent on the payment of all
applicable tax withholding by or on behalf of the transferor.
(6) Upon the transfer of all or any portion of this option, the following
features of the option will become null and void as they relate to the
transferred portion: (a) the right to subsequent transfers, (b) the right to
additional grants by paying the purchase price with previously-owned shares
(i.e. the reload feature), (c) the deferral of gains from the exercise of the
option pursuant to the terms of the Sears, Roebuck and Co. Deferred
Compensation Plan, and (d) the right to have shares withheld from the option
exercise to cover tax withholding (i.e., tax withholding rights).
Sears, Roebuck and Co. may modify, amend, suspend, or terminate this feature
at any time.
Exhibit 10(ii)(17)
This document constitutes part of a prospectus covering securities that have
been registered under the Securities Act of 1933.
SEARS, ROEBUCK AND CO.
DEFERRED COMPENSATION PLAN
AS AMENDED AND RESTATED TO
October 14, 1998
ARTICLE I
DESIGNATION OF PLAN AND DEFINITIONS
1.1Title
This Plan shall be known as the "Sears, Roebuck and Co. Deferred Compensation
Plan" and shall become effective for Compensation received on and after
January 1, 1987.
1.2Definitions
The following definitions will apply:
(a)"Accounts" shall mean Deferred Compensation Accounts.
(b)"Beneficiary" or "Contingent Beneficiary" (collectively, "Beneficiary" or
"Beneficiaries"), shall mean the person or persons last designated in writing
by the Participant to the Committee, in accordance with Section 8.4 of this
Plan.
(c)"Board" shall mean the Board of Directors of the Company.
(d)"Committee" shall mean the Administrative Committee for Sears Benefit
Plans established by the Board of Directors on August 14, 1996.
(e)"Common Shares" shall have the same meaning as set forth in Section
4.3(h).
(f)"Company" shall mean Sears, Roebuck and Co. and all consolidated
subsidiaries thereof.
(g)"Company Stock Option" shall mean any option to acquire Common Shares
granted under a stock plan of the Company by a Participating Employer to an
Eligible Employee for services rendered, but only if the Eligible Employee is
(i) a member of the Corporate Strategic Leadership Team (or the successor to
such group) or any other group designated by the Committee for purposes of
this definition or (ii) designated by the Committee for purposes of this
definition.
(h)"Compensation" shall mean (i) salary, bonuses, LTIP awards (including
Common Shares received pursuant to the LTIP and, in the case of bonuses and
LTIP awards, restricted stock received pursuant to an equity swap election)
and any other compensation payable in cash with respect to services rendered
in any one Plan Year, by a Participating Employer to an Eligible Employee,
(ii) Stock Option Gain Compensation and (iii) any other compensation payable
for services rendered as may be designated by the Board or the Committee.
(i)"Deferred Compensation Account" shall mean the balance of all Compensation
deferred by a Participant, plus all interest, Dividend Equivalents and other
amounts accrued pursuant to Article IV of the Plan.
(j)"Dividend Equivalent" shall have the same meaning as set forth in Section
4.3(h) of this Plan.
(k)"Eligible Employee" shall mean any Employee who is eligible to be selected
as a Participant under Article II of this Plan.
(l)"Employee" shall mean any regular, full-time employee of the Company.
(m)"Fair Market Value" shall have the same meaning as set forth in Section
4.3(h).
(n)"Hardship" shall mean severe financial hardship to the Participant
resulting from a sudden and unexpected illness or accident of the Participant
or of a dependent (as defined in Section 152(a) of the Internal Revenue Code
of 1986, as amended) of the Participant, loss of the Participant's property
due to casualty, or other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the control of the
Participant. The circumstances that will constitute an unforeseeable
emergency will depend upon the facts of each case, but, in any case, payment
may not be made to the extent that such hardship is or may be relieved--
1)through reimbursement or compensation by insurance or otherwise,
2)by liquidation of the Participant's assets, to the extent the liquidation
of such assets would not itself cause severe financial hardship, or
3)by cessation of deferrals under the Plan.
Examples of what are not considered to be unforeseeable emergencies include
the need to send a Participant's child to college or the desire to purchase
a home.
(o)"LTIP" shall mean the Sears, Roebuck and Co. Long-Term Incentive
Compensation Plan or any similar plan of the Company providing compensation
intended to serve as incentive for performance to occur over a period longer
than one fiscal year.
(p)"Participant" shall mean an Eligible Employee participating in the Plan in
accordance with Article II hereof.
(q)"Participating Employer" shall mean the Company, or any Subsidiary which
adopts this Plan in accordance with Section 2.2 hereof.
(r)"Plan" shall mean this Sears, Roebuck and Co. Deferred Compensation Plan
as set forth herein, and as amended from time to time in accordance with
Article VII hereof.
(s)"Plan Year" shall mean the calendar year.
(t)"Section 16(a) Participants" shall mean Participants who are required to
file reports under Section 16(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
(u)"Separation from Service" shall mean the termination of a Participant's
employment with the Company for any reason whatsoever, including retirement,
resignation, dismissal and death.
(v)"Stock Option Gain Compensation" shall mean the excess of the Fair Market
Value on the exercise date of the Common Shares acquired from the exercise of
a Company Stock Option by an Eligible Employee over the exercise price of the
Company Stock Option.
(w)"Subaccount" shall have the same meaning as set forth in Section 4.3(h) of
this Plan.
(x)"Subsidiary" shall mean any corporation, partnership, limited liability
company or other entity at least 50 percent of the equity securities or
voting power of which are owned directly or indirectly by the Company.
(y) "Transfer" shall mean a change in a Participant's employment from a
Participating Employer to a Subsidiary which is not a Participating
Employer.
ARTICLE II
PARTICIPATION
2.1Eligibility
(a)All Employees who are designated by the Board from time to time as
"executive officers" for the purposes of Section 16 of the Exchange Act, and
the rules and regulations promulgated thereunder, shall be Eligible Employees
and may be Participants for the next Plan Year.
(b)Unless the Committee designates otherwise, all other key officers and
Employees who are expected to have Compensation and such other items of
income as the Committee shall determine, of over the amount fixed from time
to time by the Secretary of the Treasury pursuant to Section 401(a)(17) of
the Internal Revenue Code of 1986, as amended, for the next Plan Year, shall
be Eligible Employees and may be Participants for the next Plan Year. The
Committee may change the requirements in this Section 2.1 for eligibility,
provided, however, that the Committee shall not decrease said income
eligibility requirement.
2.2Participating Employers
Any Subsidiary, with the approval of the Company, may adopt this Plan for its
Eligible Employees.
2.3Notice of Eligibility
The Committee or its appointed representative shall notify each Eligible
Employee no later than 30 days prior to the first business day of any Plan
Year or as soon thereafter as practicable, that he/she is entitled to become
a Participant in the Plan for such Plan Year.
2.4Participation Election
(a) With respect to Compensation other than Stock Option Gain Compensation,
each Eligible Employee shall give written notice to the Committee or its
representative, of his/her election to become a Participant in the Plan for
any Plan Year, no later than the last business day of the preceding Plan
Year. Such notice shall specify the deferral percentages or amount of
Compensation (other than Stock Option Gain Compensation) to be deferred, of
the Compensation (other than Stock Option Gain Compensation) which would
otherwise be expected to be earned and payable with respect to the upcoming
Plan Year, as set forth in Section 3.1 of the Plan. If an Eligible Employee
fails to give such written notice of election, such failure will be deemed an
election not to become a Participant for such Plan Year. No change may be
made in deferral election for the plan year for which a deferral election
previously has been made. However, a participant may at any time suspend
participation in the Plan for the remainder of a plan year as to deferrals of
the salary component of compensation, and deferrals of said salary under the
Plan for that plan year will discontinue, starting with salary earned in the
month following the receipt by the Committee or its appointed representative
of written notice of such suspension.
(b)Notwithstanding the foregoing paragraph, with respect to any Company Stock
Option, an Eligible Employee shall give written notice to the Committee of
his/her election to defer his/her Stock Option Gain Compensation related to
such Company Stock Option no later than six months prior to the date such
Company Stock Option is exercised. Such election is irrevocable in the event
that the Eligible Employee actually exercises the Company Stock Option to
which the election relates.
2.5Participation Election Forms
The Committee shall approve and distribute to all Eligible Employees the
forms which shall be used by Eligible Employees to notify the Committee of
their elections pursuant to Section 2.4 to participate in the Plan and/or
defer Stock Option Gain Compensation. Such forms shall clearly delineate the
deferral alternatives provided by the Plan, pursuant to Section 3.1 hereof.
2.6Exercise of Company Stock Option
Notwithstanding any other provision of this Plan, the deferral of Stock
Option Gain Compensation with respect to any Company Stock Option is
conditioned on the Eligible Employee's use of the reload feature of the
Company Stock Option and the attestation by the Eligible Employee of his/her
current ownership of Company Common Shares having a Fair Market Value on the
exercise date equal to the exercise price of the Company Stock Option. The
Eligible Employee must have owned such Company Common Shares for at least six
months prior to exercise.
ARTICLE III
DEFERRALS
3.1Amount of Deferral
(a)Pursuant to Section 2.4 hereof, a Section 16(a) Participant may elect to
defer in whole number percentages or whole dollar terms, or a combination
thereof, up to all of the aggregate of that portion of such person's (i) base
salary in excess of (A) the amount fixed from time to time by the Secretary
of the Treasury pursuant to Section 401(a)(17) of the Internal Revenue Code
of 1986, as amended, or (B) any other higher limitation expressly imposed by
the Board and/or (ii) other Compensation (not including base salary).
(b)Any other Participant may, pursuant to Section 2.4 hereof, elect to defer
in whole number percentages or whole dollar terms, or a combination thereof,
up to all of the aggregate of that portion of a Participant's (i) base salary
in excess of (A) the amount fixed from time to time by the Secretary of the
Treasury pursuant to Section 401 (a) (17) of the Internal Revenue Code of
1986, as amended, or (B) any other higher limitation expressly imposed by the
Board or the Committee and/or (ii) other Compensation (not including base
salary).
3.2Effective Date of Deferral
Compensation deferred shall be credited to a Participant's Account as set
forth in Section 4.2.
3.3.Use of Amounts Deferred
Amounts credited to Deferred Compensation Accounts hereunder shall be a part
of the general funds of the Company, shall be subject to all the risks of the
Company's business, and may be deposited, invested or expended in any manner
whatsoever by the Company.
ARTICLE IV
DEFERRED COMPENSATION ACCOUNTS AND VESTING
4.1Establishment of Account
The Committee shall establish, by bookkeeping entry on the books of the
Company, a Deferred Compensation Account for each Participant. Such Account
shall be established as of the first day of the Plan Year for which the
Eligible Employee first becomes a Participant.
4.2Contributions to Account
The Committee shall cause deferred Compensation to be credited by bookkeeping
entry to each Participant's Account as follows: (a) base salary deferred
shall be credited as of the first day of the month following the month
containing the date on which such Compensation otherwise would have been
payable to the Participant and (b) all Compensation other than base salary
shall be credited as of the date on which such Compensation otherwise would
have been payable to the Participant.
4.3Accrual of Interest, Dividend Equivalents and Other Amounts on
Compensation Deferred
To each Subaccount shall be credited, as applicable, Compensation deferred,
interest, Dividend Equivalents and other amounts as set forth in paragraphs
(a) through (i) of this Section 4.3. Payments to the Participant shall be
debited from the appropriate Subaccount on the date of payment and amounts
transferred from another Subaccount under the Plan shall be debited from the
appropriate Subaccount on the date the transfer is effective pursuant to
Section 4.3(g).
(a)Subaccount #1 - Sears Roebuck Acceptance Corp. Commercial Paper Rate.
Compensation deferred into Subaccount #1 shall be credited to the Subaccount
on the same date or dates the Participant's Account is credited as set forth
in Section 4.2. Transfers to this Subaccount from another Subaccount shall
be credited to the Subaccount on the effective date of the transfer as set
forth in Section 4.3(g). Amounts credited to this Subaccount shall earn
interest from the date of credit to the date of debit. At the end of each
calendar month or, if earlier, on the date of payment, interest at a rate
equal to the monthly average per annum cost of commercial paper or the
equivalent issued by Sears Roebuck Acceptance Corp. ("SRAC") as reported in
the monthly report to the SRAC Board of Directors shall be credited to the
amounts in each Subaccount for the period from the date amounts were credited
to such Subaccount for amounts credited during the month or from the first
day of the month for amounts in the Subaccount on the last day of the
preceding month to the end of such calendar month or, if earlier, to the date
of payment.
(b)Subaccount #2 - Common Share Units. Compensation deferred into Subaccount
#2 shall be credited to the Subaccount on the same date or dates the
Participant's Account is credited as set forth in Section 4.2. Transfers to
this Subaccount from another Subaccount shall be credited to the Subaccount
on the effective date of the transfer as set forth in Section 4.3(g), except
for mandatory transfers from Subaccount #5, which shall be credited to the
Subaccount on the same date as provided in Section 4.3(e). Amounts credited
to this Subaccount shall be converted into a number of Common Share Units on
the date credited to the Subaccount by dividing the Compensation deferred by
the Fair Market Value on such date. If Common Share Units exist in a
Participant's Subaccount which are indexed under Subaccount #2 on a dividend
record date for the Company's Common Shares, Dividend Equivalents shall be
credited to the Participant's Subaccount on the related dividend payment
date, and shall be converted into the number of Common Share Units which
could be purchased with the amount of Dividend Equivalents so credited.
In the event of any change in the Company's Common Shares outstanding, by
reason of any stock split or dividend, recapitalization, merger,
consolidation, combination or exchange of stock or similar corporate change,
the Committee shall make such equitable adjustments, if any, by reason of any
such change, deemed appropriate in the number of Common Share Units credited
to each Participant's Subaccount #2.
(c)Subaccount #3 - Equity Index Subaccount. Compensation deferred into
Subaccount #3 shall be credited to the Subaccount on the same date or dates
the Participant's Account is credited as set forth in Section 4.2. Transfers
to this Subaccount from another Subaccount shall be credited to the
Subaccount on the effective date of the transfer as set forth in Section
4.3(g). On the last day in the month the amounts in the Participant's
Subaccount shall be adjusted by a percentage factor based on the total return
(including dividends) of the Equity Index from the date the amount was
credited to the Subaccount for amounts credited during the month or from the
first day of the month for amounts in the Subaccount on the last day of the
preceding month. Similar adjustments shall also be made on any date the
Subaccount is debited by reason of any distribution to the Participant. In
the event that the Equity Index is not published for any date referred to
above, the Equity Index for the closest day preceding such date for which
such Index is published shall be used.
(d)Subaccount #4 - Fixed Income Index Subaccount. Compensation deferred
into Subaccount #4 shall be credited to the Subaccount on the same date or
dates the Participant's Account is credited as set forth in Section 4.2.
Transfers to this Subaccount from another Subaccount shall be credited to the
Subaccount on the effective date of the transfer as set forth in Section
4.3(g). Amounts in the Subaccount shall earn additional amounts which will
be credited to the Subaccount on the last business day of each month or, if
earlier, the date of distribution to the Participant, based upon the
performance of the Fixed Income Index and the period of time during the month
that the amounts were in the Subaccount.
(e)Subaccount #5 - Restricted Common Share Unit Account. Compensation
deferred into Subaccount #5 shall be credited to the Subaccount on the same
date or dates the Participant's Account is credited as set forth in Section
4.2. If a Participant has elected to defer all or any portion of his or her
annual bonus Compensation or LTIP Compensation under this Plan and the
Participant has elected to receive all or any portion of such Compensation in
restricted Common Shares under any plan, contract, authorization or
arrangement of the Company, then the dollar amount of such Compensation shall
be allocated to Subaccount #5 and to no other Subaccount, except as provided
below.
Such Compensation shall be converted into Common Share Units in the same
manner as provided in Section 4.3(b) on the same date credited to the
Subaccount. Dividend Equivalents shall be credited to and equitable
adjustments shall be made to Subaccount #5 in the same manner as to
Subaccount #2 as set forth in Section 4.3(b). Any event that would cause a
forfeiture of restricted shares under any of the above-mentioned plans,
contracts, authorizations or arrangements of the Company shall cause a
forfeiture of Common Share Units under Subaccount #5.
On the date on which all restrictions would lapse if a participant had
received restricted Common Shares pursuant to any of the above-mentioned
plans, contracts, authorization or arrangements, instead of restricted common
share units pursuant to this Plan, all Dividend Equivalents (except for
Dividend Equivalents accruing as of the close of business on such date) will
cease to accrue and all amounts in Subaccount #5 shall automatically be
transferred into Subaccount #2 and thereafter shall be subject to all of the
provisions of the Plan applicable to Subaccount #2, including provisions
relating to transfers of amounts between Subaccount #2 and other Subaccounts
and distribution.
Under no circumstances may a Participant who has actually received restricted
Common Shares of the Company pursuant to any plan or arrangement be allowed
to defer such shares into this Plan.
(f)Subaccount #6 - Deferred Stock Option Gain Subaccount. Stock Option Gain
Compensation deferred into Subaccount #6 shall be credited to the Subaccount
on the same date of the exercise of the Company Stock Option by the
Participant. Such Deferred Stock Option Gain Compensation shall be converted
into Common Share Units on the date credited to the Subaccount in the same
manner as provided in Section 4.3(b). Dividend Equivalents shall be credited
to and equitable adjustments shall be made to Subaccount #6 in the same
manner as to Subaccount #2 as set forth in Section 4.3(b).
(g)Transfers between Subaccounts. Transfers among Subaccounts #1, #2, #3
and #4 may be made once each calendar month at the request of the Participant
upon application to the Director of Executive Compensation of the Company (or
any person succeeding to the functions previously performed by the Director
of Executive Compensation of the Company, regardless of title), and shall be
effective as of the first day of the calendar month subsequent to the month
in which the Company receives such Participant's request to transfer.
Notwithstanding the foregoing, (i) except for the mandatory transfer referred
to in Section 4.3(e) above, no transfers shall be allowed to or from
Subaccount #5 and (ii) no transfers shall be allowed to or from Subaccount
#6.
With respect to a Section 16(a) Participant, in the case of:
(i) any election to transfer or withdraw from Subaccount #2 which occurs
within six months after an election to transfer into Subaccount #2 or into
another Equity Fund Account; and
(ii)any election to transfer into Subaccount #2 which occurs within six
months after an election to transfer or withdraw from Subaccount #2 or from
another Equity Fund Account,
the second election shall not be effective for any purpose under this Plan,
and the account of any such Section 16(a) Participant shall continue to
reflect all balances and accruals as if such election had not been made. The
Company is authorized to make any adjustments to a Section 16(a)
Participant's account as may be necessary to give effect to the foregoing
provision.
(h)The following definitions apply to this Section 4.3:
1)"Common Share Unit" shall mean an amount of Compensation deferred which is
converted into a unit or fraction of a unit for purposes of the Plan by
dividing a dollar amount by the Fair Market Value of one of the Company's
Common Shares.
2)"Common Shares" shall mean the Company's common shares, par value $.75 per
share.
3)"Dividend Equivalent" shall mean an amount equal to the cash dividend paid
on one of the Company's Common Shares credited to a Subaccount for each
Common Share Unit credited to such Subaccount.
4)"Equity Fund Account" shall mean an account for a Section 16(a) Participant
maintained under a benefit plan of the Company, that contains a Company
"equity security" within the meaning of the term "equity security of such
issuer" in Rule 16a-1 under the Exchange Act.
5)"Equity Index" shall mean the Standard & Poor's 500 Composite Stock Price
Index which is a market value-weighted index consisting of 500 common stocks
of large U.S. domiciled companies selected by Standard and Poor's Corporation
("S&P") through a detailed screening process starting on a macro-economic
level and working toward a micro-economic level dealing with company specific
information such as market value, industry group classification,
capitalization and trading activity. S&P's primary objective for the S&P
Index is to represent the segment of the U.S. equity securities markets
consisting of large market capitalization stocks. However, companies are not
selected by S&P for inclusion because they are expected to have superior
stock price performance relative to the market in general or other stocks in
particular.
6)"Fair Market Value" shall mean the closing price of the Company's Common
Shares as reported by the Wall Street Journal or other comparable source in
a summary of composite transactions for stocks listed on the New York Stock
Exchange.
7)"Fixed Income Index" shall mean the Lehman Brothers Aggregate Bond Index,
which is made up of the Lehman Government/Corporate Bond Index ("Bond
Index"), the Lehman Mortgage-Backed Securities Index ("Mortgage-Backed
Securities Index"), and the Lehman Asset-Backed Securities Index
("Asset-Backed Securities Index"). The Bond Index is a composite of all
publicly issued, fixed rate, nonconvertible, domestic bonds. The issues are
rated investment grade or higher by Moody's Investors Service, Inc., S&P, or
Fitch Investors Service, Inc., in that order, have a minimum outstanding
principal of $100 million for U.S. Government issues or $50 million for other
bonds, and have a maturity of at least one year. The index is
capitalization-weighted. The Mortgage-Backed Securities Index includes 15-
and 30-year fixed rate securities backed by mortgage pools of the Government
National Mortgage Association, the Federal Home Loan Mortgage Corporation,
and the Federal National Mortgage Association. Graduated payment mortgages
and balloon mortgages are included in the index; buydown, manufactured homes
and graduated equity mortgages are not. The Asset-Backed Securities Index is
composed of credit card, auto, and home equity loans. Included in the index
are pass-through, bullet (noncallable), and controlled amortization
structures; no subordination tranches are included. All securities have an
average life of at least one year.
8)"Subaccount" shall mean the portion of the balance in an Account reflecting
the Compensation deferred and indexed, as specified by the Participant,
against one of the indices set forth in Sections 4.3(a), (b), (c), (d), (e)
or (f), and the interest, Dividend Equivalents and other amounts credited
thereto.
(i)Each Participant may vary the choice of Subaccounts to which Compensation
is credited by executing and delivering a notice to the Director of Executive
Compensation of the Company at any time; provided, however, that (i) annual
bonus compensation or LTIP Compensation that the Participant has elected to
receive in restricted Common Shares under any plan, contract, authorization
or arrangement of the Company may be credited only to Subaccount #5 and (ii)
Stock Option Gain Compensation may be credited only to Subaccount #6. Such
election shall be applicable only to Compensation payable on or after the
first day of the month following the month in which such notice of election
is received.
4.4Vesting
A Participant shall be fully vested in his/her Deferred Compensation Account
at all times, subject to Sections 3.3 and 8.2 and any plan, contract,
authorization or arrangement of the Company referred to in Section 4.3(e).
4.5Participant Transfers
In the event of a Transfer, deferrals of Compensation under this Plan shall
be discontinued as of the first day of the pay period during which the
Transfer becomes effective, according to Company policy. The Participant's
Account shall continue to be credited with interest, Dividend Equivalents and
other amounts pursuant to Section 4.3 in the same manner as the Accounts of
all other Participants, until such time as the Account is distributable
pursuant to Article V. In the event such an Employee again becomes an
Eligible Employee, he will be notified of his eligibility to become a
Participant again in accordance with the procedure in Section 2.3 and may
elect to become a Participant again in accordance with the procedure in
Section 2.3 and may elect to become a Participant again in accordance with
the procedure in Section 2.4.
4.6Transfers of Liabilities From Another Plan
The Committee or the Board, in the sole discretion of either the Committee or
the Board, may approve the transfer of benefit liabilities from another
unfunded deferred compensation arrangement of the Company (the "Other Plan")
to this Plan with respect to any individual who is an Eligible Employee, even
if such individual has not elected to participate in the Plan in accordance
with Section 2.4. If such individual is already a Participant, the balance
of his/her Account under this Plan will be increased by the balance of his
account(s) under the Other Plan as of the date of transfer. If the
individual is not already a Participant, an Account will be established for
him/her reflecting the balance of his/her account(s) under the Other Plan as
of the date of transfer. Each individual who has an account balance from an
Other Plan transferred to this Plan will be given the opportunity, prior to
the date of transfer, to choose the Subaccount(s) to which the transferred
amount will be credited under Section 4.3 and the timing and form of payment
to be made under Section 5.4; provided, however, that the Board or Committee
may eliminate the election with respect to any or all of the choice of
Subaccounts, the timing of payment and/or the form of payment to the extent
that the Other Plan provided the individual with the same options as the Plan
with respect to the choice of Subaccounts, the timing of payment and/or the
form of payment; provided, further, that the Board or Committee may designate
the Subaccount(s) to which restricted property may be transferred; provided,
further, that the Board or Committee may limit or prohibit transfers to
Subaccounts #5 and #6. If an individual fails to make a timely election in
accordance with the preceding sentence or to the extent the Board or the
Committee eliminates an individual's election as provided in the previous
sentence, the individual's balance in the Other Plan will be transferred to
this Plan and allocated among the Subaccount(s) under this Plan in a manner
that, in the judgment of the Company's Senior Vice President, Human
Resources, or any other person performing similar functions, regardless of
title (the "Senior Vice President, Human Resources"), most closely duplicates
the subaccount(s) to which his balance was allocated under the Other Plan,
and or such individual will be deemed to have elected distribution in the
form and/or at the time available under this Plan that in the judgment of the
Senior Vice President, Human Resources, most closely matches his/her
distribution election under the Other Plan. If the Senior Vice President,
Human Resources, determines that this Plan does not have a comparable
distribution option, the individual will be deemed to have elected
distribution in a lump sum upon the Participant's Separation from Service.
Once the balance from the Other Plan is transferred to this Plan, it will be
governed by the same rules regarding accrual of interest, Dividend
Equivalents and other amounts and the same rules regarding distributions,
including the ability to make new elections, as any other deferrals under
this Plan.
ARTICLE V
PAYMENTS
5.1Events Causing Accounts to Become Distributable
A Participant's Account becomes distributable on the date on which any of the
following occurs:
(a)Separation from Service;
(b)Demonstration of Hardship by the Participant to the Committee or its
representative; and
(c)As to all or any portion of an Account attributable to Compensation earned
and deferred and interest, Dividend Equivalents and other amounts accrued
thereon after the date on which the Committee receives a Participant's
election form under this subsection 5.1(c), on a date certain occurring at
any time subsequent to the close of the Plan Year in which the Participant
makes the election under this Section 5.1(c), as shall be irrevocably
specified by the Participant; provided, however, that a Participant shall be
permitted to make an election under this Section 5.1 (c) no more than one
time per Plan Year and shall not be permitted to have more than one election
under this Section 5.1 (c) outstanding at any time. Any balance in the
Participant's Account remaining after any payment under this paragraph (c),
and any balance in the Account attributable to participation in the Plan in
any year subsequent to the year in which a payout on such date certain
occurs, shall be paid to the Participant as provided in paragraph (a) or (b)
above.
Notwithstanding any contrary election by a Participant, any payment under
this Section 5.1 which would be made at a time when a Participant is a
"covered employee" as defined in Section 162(m) of the Internal Revenue Code
of 1986, as amended, and which the Company would be prohibited by said
Section 162(m) from claiming as a deduction on any tax return shall continue
to be deferred hereunder until the first date on which the Company can claim
such deduction, unless further deferred as provided in this Section 5.1.
5.2Notice of Account Payment and Commencement of Distribution
The Committee or its appointed representative shall notify a Participant or
Beneficiary, as the case may be, that he/she is entitled to receive payment
from an Account, no later than the first day of the month succeeding the date
on which the Account becomes distributable, or as soon thereafter as
practicable. Distribution of Account balances shall commence on the first
day of the month following the date on which the Account becomes
distributable, or as soon thereafter as practicable.
5.3 Form of Payment
(a)Payments of Account Balances to a Participant from Subaccounts #1, #2, #3
and #4 shall be in cash; payments of Account Balances to a Participant from
Subaccount #6 shall be made in whole Common Shares. Except as provided in
paragraphs (c) and (d) of this Section 5.3 and Article VIII hereof, payments
of Account balances to a Participant shall be in the form of one lump sum
payment or annual installment payments over a period of from 1 to 10 years,
at the election of the Participant; provided, that, at the election of the
Participant, a lump sum payment distributable upon the Participant's
Separation from Service may be delayed until the date one or two years after
the Participant's Separation from Service; provided, further, that,
at the election of the Participant, payment of the first installment
distributable upon the Participant's Separation from Service may be delayed
until one year after the Participant's Separation from Service.
(b)The following formula shall be used to determine each annual installment
payment to a Participant who has elected to receive installment payments:
(i) cash equal to:
remaining Account balance from Subaccounts #1, #2, #3 and #4 as of
current payment date number of remaining payments, including the current one
plus
(ii) whole Common Shares equal to:
remaining number of Common Share Units from Subaccount #6
as of current payment date
number of remaining payments, including the current one
On the last payment date, in addition to the installment payment determined
according to the above formula, the Participant shall receive cash in an
amount equal to the fractional Common Share Units remaining in Subaccount #
6 after the application of the above formula for that date, multiplied by the
Fair Market Value on such date. Annual payments shall be made on the day
payments commence pursuant to Section 5.2 and on each annual anniversary date
of such initial payment. Interest, Dividend Equivalents and other amounts
shall continue to accrue on the entire unpaid Account balance, as provided in
Section 4.3.
(c) In the event of a Participant's death prior to full distribution of
his/her Account, the remaining Account balance shall be paid in a lump-sum to
the Beneficiary or Beneficiaries, according to the designation made by the
Participant, as soon as practicable after a Participant's death, and shall
accrue interest, Dividend Equivalents and other amounts, as provided in
Section 4.3, until the account is completely distributed.
(d)Notwithstanding the provisions of paragraph (b) above, if the remaining
unpaid Account balance is $5,000 or less on any date an annual installment
payment is to be made to a Participant, the payment shall be the remaining
unpaid Account balance.
5.4Distribution Election
(a)Each Participant shall give written notice of his/her desired form of
payment at the time of his/her participation election set forth in Section
2.4.
(b)Except for distribution elections under Section 5.1(c), each Participant
may from time to time revise the terms of distribution of the Participant's
Account by submitting a revised written notice of his/her desired form of
payment, provided that (i) the revised written notice of his/her desired form
of payment shall be filed by the Participant with the Committee or its
representative no less than twelve months prior to the date on which payment
would commence to be made in the absence of such revised written notice, but
in any event no later than the day before the date of the Participant's
Separation from Service and (ii) in any event, distribution of the
Participant's Account shall not commence earlier than twelve months after the
Participant's revised notice of his/her desired form of payment is filed with
the Committee or its representative.
5.5Distribution Election Form
The Committee shall approve and distribute to all Participants a form which
shall be used by each Participant to notify the Committee of his/her desired
form of payment or to notify the Committee of any revision to his/her desired
form of payment. Such form shall clearly delineate the payment alternatives
provided pursuant to Section 5.4 hereof.
ARTICLE VI
ADMINISTRATION
6.1General Administration; Rights and Duties
Subject to the express limitations of the Plan, the Committee, on behalf of
the Participants, shall be charged with the general administration of the
Plan and with the responsibility for carrying out its provisions, and shall
have all powers necessary to accomplish those purposes, including, but not by
way of limitation, the following:
(a)To construe and interpret the Plan;
(b)To compute the amount of benefits payable to Participants;
(c)To authorize all disbursements by the Company of Account balances pursuant
to the Plan;
(d)To maintain all the necessary records for the administration of the Plan;
(e)To make and publish rules for the administration and interpretation of the
Plan and the transaction of its business;
(f)To inform each Participant as soon as practicable after January 1 of each
Plan Year, of the value of the Participant's Deferred Compensation Account as
of the end of the previous Plan Year;
(g)To appoint (i) officers or Employees of the Company whom the Committee
believes to be reliable and competent; and (ii) legal counsel (who may be
Employees of the Company and Participants), independent accountants and other
persons to assist the Committee in administering the Plan; and
(h)To conclusively determine, in its sole discretion, all questions arising
under the Plan, including the power to determine the rights and eligibility
of employees, Participants, and other persons, and the amounts of their
benefits under the Plan, and to remedy ambiguities, inconsistencies or
omissions, and without limiting the generality of the foregoing, to interpret
the provisions of the Plan to eliminate these ambiguities, inconsistencies or
omissions, and such determination by the Committee shall be conclusive on all
persons unless demonstrated to be incorrect to the satisfaction of the
Committee.
The determination of the Committee as to any disputed question or controversy
shall be conclusive.
Any member of the Committee may resign by delivering a written resignation to
the Board.
ARTICLE VII
PLAN AMENDMENTS AND TERMINATION
7.1Amendments
The Company shall have the right to amend this Plan from time to time by
resolutions of the Board or by the Committee, and to amend or rescind any
such amendments; provided, however, that no action under this Section 7.1
shall in any way reduce the amount of Compensation deferred or any interest,
Dividend Equivalents or other amounts credited thereon, up to and including
the end of the month in which such action is taken; provided, further, that
Section 1.2 (h) as it pertains to Section 16 (a) Participants and Sections
2.1 (a) and 3.1 (a) may be amended only by the Board. Interest, Dividend
Equivalents and other amounts will continue to accrue as provided in Section
4.3. All such amendments shall be in writing and shall be effective as
provided by the Board or the Committee, as the case may be, subject to the
limitations in this Section 7.1. The Committee shall inform each Participant
as soon as practicable following the enactment of any such amendment.
7.2Termination of Plan
Although the Company expects that this Plan will continue indefinitely,
continuance of this Plan is not a contractual or other obligation of the
Company, and the Company expressly reserves its right to discontinue this
Plan at any time by resolutions of the Board or the Compensation Committee of
the Board, effective as provided in such resolutions. However, no such
action shall in any way reduce the amount of Compensation deferred or any
interest, Dividend Equivalents or other amounts credited thereon, up to and
including the end of the month in which such action is taken. Interest,
Dividend Equivalents and other amounts will continue to accrue as provided in
Section 4.3.
ARTICLE VIII
MISCELLANEOUS
8.1Notification to Committee
Any notification given by a Participant pursuant to this Plan shall be made
in writing to the Committee or to such representative of the Committee as may
be designated by it for such purpose, and shall be deemed to have been made
or given on the date received by the Committee or such representative.
8.2Participants' Employment
Participation in this Plan shall not give any Participant the right to be
retained in the Company's employ or any right or interest other than as
herein provided. No Participant or Employee shall have any right to any
payment or benefit hereunder except to the extent provided in this Plan. The
Company expressly reserves the right to dismiss any Participant without any
liability for any claim against the Company, except to the extent expressly
provided herein. This Plan shall create only a contractual obligation on the
part of the Company and shall not be construed as creating a trust or other
fiduciary relationship with Participants. Participants will have only the
rights of general unsecured creditors of the Company with respect to
Compensation deferred and interest, Dividend Equivalents and other amounts
credited to their Accounts.
8.3Other Plans
This Plan shall not affect the right of any Employee or Participant to
participate in and receive benefits under and in accordance with the
provisions of any other Company plans which are now or may hereafter be in
existence.
8.4Beneficiaries and Contingent Beneficiaries
Each Participant shall, by written notice to the Committee, designate one or
more persons or entities (including a trust or trusts or his/her estate) to
receive any balance in his/her Deferred Compensation Account payable to
him/her under this Plan in the event of his/her death prior to full payment
thereof. The Participant may also designate a person or persons as a
Contingent Beneficiary or Contingent Beneficiaries who shall succeed to the
rights of the person or persons originally designated as Beneficiary or
Beneficiaries, in case the latter should die. He/she may from time to time
change any designation of Beneficiary or Contingent Beneficiary so made, and
the last written notice given by him/her to the Committee shall be
controlling. In the event a Participant designates a person other than
his/her spouse as Beneficiary of any interests under this Plan, the
Participant's spouse shall sign a statement specifically approving such
designation and authorizing the Committee to make payment of such interests
in the manner provided in such designation. In the absence of such
designation by the Participant, or in the absence of spousal approval and
authorization as hereinabove provided, or in the event of the death prior to
or simultaneous with the death of the Participant, of all Beneficiaries or
Contingent Beneficiaries, as the case may be, to whom payments were to be
made pursuant to a designation under this Section, and failing any other
valid designation by the Participant, such payments or any balance thereof
shall be paid to such Participant's legal representatives. In the event of
the death, subsequent to the death of the Participant, of all Beneficiaries
or Contingent Beneficiaries, as the case may be, to whom such payments were
to be made or were being made pursuant to a designation under this Section,
such payments or any balance thereof shall be paid to the legal
representatives of such Beneficiaries or Contingent Beneficiaries.
8.5Taxes
To the extent permitted by law, if the whole or any part of a Participant's
Account shall become the subject of any estate, inheritance, income,
employment or other tax which the Company shall legally be required to
withhold and/or pay, the Company shall have full power and authority to pay
such tax out of any monies or other property in its hands and charge such
amounts paid against the Account of the Participant whose interest hereunder
is subject to such taxes. Prior to making any such tax payment, the Company
may require such releases or other documents from any lawful taxing authority
as the Company shall deem necessary.
8.6Benefits Not Assignable; Obligations Binding Upon Successors
Benefits under this Plan and rights to receive the amounts credited to the
Account of a Participant shall not be assignable or transferable and any
purported transfer, assignment, pledge or other encumbrance or attachment of
any payments or benefits under this Plan, other than by operation of law,
shall not be permitted or recognized. Obligations of the Company under this
Plan shall be binding upon successors of the Company.
8.7Illinois Law Governs; Saving Clause
The validity of this Plan or any of its provisions shall be construed and
governed in all respects under and by the laws of the State of Illinois. If
any provisions of this Plan shall be held by a court of competent
jurisdiction to be invalid or unenforceable, the remaining provisions hereof
shall continue to be fully effective.
8.8Headings Not Part of Plan
Headings and subheadings in this Plan are inserted for reference only, and
are not to be considered in the construction of the provisions hereof.
8.9Mid-Year Participants
Notwithstanding Article III and Sections 4.5 and 5.4(a) and 5.5 of the Plan,
any person who shall be elected or appointed as an officer of a
Participating Employer and who expects to have Compensation over the amount
specified in Section 2.1(b) of the Plan for the Plan Year of his or her
election as an officer, and any person who becomes eligible to participate in
an LTIP ("Mid-Year Participants"), shall be an Eligible Employee and may be
a Participant, with respect to the portion of the Plan Year beginning the day
after the effective date of election or appointment, or eligibility to
participate in an LTIP. The Director of Executive Compensation of the
Company, or any other person performing similar functions, regardless of
title, is directed to notify all persons who become Mid-Year Participants of
their eligibility to participate in the Plan, as soon as practicable after
their election or appointment or after they become eligible to participate in
an LTIP. Each Mid-Year Participant shall give written notice to the
Committee or its representative, of his or her election to become a
Participant in the Plan for the remainder of such Plan Year, on a form to
be provided by the Company. If a Mid-Year Participant fails to give such
written notice of election within 30 days of being notified of his or her
eligibility, such failure will be deemed an election not to become a
Participant for the remainder of such Plan Year.
Exhibit 10(ii)(28)
SEARS, ROEBUCK AND CO.
3333 Beverly Road
Hoffman Estates, IL 60179
June 4, 1998
ARTHUR C. MARTINEZ
Chairman of the Board
and Chief Executive
Officer
847-286-1702
Richard J. Srednicki
8009 Oak Hammock Court
Jacksonville, FL 32256
Dear Richard:
I would like to extend to you our offer to join Sears, Roebuck and Co. as
President - Home Services. In this position you will be reporting directly to
me. While this letter does not constitute an employment contract, I thought
it important that we put our offer in writing to clarify the terms of your
employment. This offer is contingent upon the approval of the Sears Board of
Directors.
Your compensation package will consist of the following:
* Annual base salary of $500,000 with periodic increases based on
performance. Periodic and competitive-base salary increases can be expected
annually based on individual performance. Merit increases are effective each
January 1 and are granted in accordance with standards approved by the Board
of Directors' executive compensation committee. The budget pool for increases
in 1999 is expected to be in the 3-4% range.
* Participation in the Sears Annual Incentive Plan with a current bonus
target equal to 85% of base salary for 1998. Based on your current salary,
the bonus target amount equals $425,000 on an annualized basis. We will
guarantee a minimum annual incentive for 1998 of $425,000. The annual
incentive performance objective for your position will be based 50% on the
achievement of Company earnings per share goals and 50% on achievement of
Home Services income goals as well as your performance on your specific
individual performance priorities which we will agree to. Currently the
Company performance portion of the plan pays for performance above and below
the target objective as follows:
- -- Threshold(90% of prior year E.P.S.)pays 25% of target
- -- Target (110% of prior year E.P.S.) pays 100% of target
- -- Maximum(130% of prior year E.P.S.)pays 230% of target
* A sign-on bonus of $200,000 payable within 30 days following the beginning
of your employment.
Richard J. Srednicki
June 4, 1998
Page 2
* A stock option grant of 100,000 shares of Sears Stock, which will vest in
three equal annual installments from the date of grant and include a reload
feature and tax withholding rights.
* 1,666 shares of restricted stock which will vest in three annual
installments from the date of grant, and also have tax withholding rights.
* Participation in the Sears Long-Term Incentive Plan with an incentive
target of 125% of base pay. Your long-term incentive target will be conveyed
70% in the form of Sears stock options and 30% earned through a Performance
Incentive Plan that is paid out in the form of Sears common stock. The
Performance Incentive Plan awards will be determined based on achievement of
our Total Performance Indicator objectives. The Performance Plan award can
range from between 50%-150% of the target award. We will guarantee the
Performance Incentive Plan portion of your long-term incentive
at target for the 1997-1999 cycle which would equal approximately $187,500
and be paid in the form of Sears common stock.
* Sears has established share ownership guidelines for the top 200 executives
of the corporation. Your position qualifies for these ownership guidelines.
You will be required to own Sears shares equal in value to three times your
base salary within five years of employment.
* Participation in standard Company benefits commensurate with your position.
Your annual vacation will be 4 weeks. Welfare benefit coverage begins on the
first day of the month following your employment date, unless your employment
date is the first day of the month.
* A five year service enhancement to your final pension benefit will be
provided through the non-qualified pension plan. The service enhancement will
be accrued to you as a 2 year-for-1 year service credit over the first five
years of your employment with Sears. All other provisions of the Sears
pension plan will apply to this benefit.
* Relocation assistance in accordance with Sears Relocation Policy which
includes a $10,000 moving allowance, reimbursement for temporary living up to
six months, reimbursement for home visits and house hunting, a home appraisal
and purchase program available through Coldwell Banker Relocation and
reimbursement of customary closing costs for your new residence. In addition,
we agree to provide round-trip travel reimbursement for a reasonable number
of trips between Chicago and your home in Jacksonville, grossed up (at the
maximum Federal tax rate) to cover the additional taxes related to this
income.
Richard J. Srednicki
June 4, 1998
Page 3
* Nothing contained in this letter shall limit the right of you or Sears to
terminate your employment with or without cause at any time. However, in the
event that Sears should involuntarily terminate you other than for cause, you
will receive two year's base salary plus two year's target annual incentive.
This will constitute the entire damages you may claim against Sears should
termination occur under the circumstances outlined above. In exchange for
this severance protection, you will be required to sign our standard
non-compete agreement.
* We will also reimburse you for a reasonable and customary legal fees
incurred for advice on your employment offer up to a maximum of $10,000.
This offer of employment is contingent upon your satisfactorily passing a
pre-employment drug test which can taken prior to your reporting to work at
Hoffman Estates.
We have enclosed a copy of the non-compete agreement that includes the
severance benefits that you discussed with John Sloan.
Richard, we have great confidence in your ability to significantly contribute
to the future success of Sears, I look forward to working with you to build
that success.
/s/ Arthur Martinez
Accepted: /s/ Richard J. Srednicki Date 6/8/98
Richard J. Srednicki
cc: John Sloan
EXHIBIT 12(a)
COMPUTATION OF RATIO OF INCOME TO FIXED CHARGES
SEARS, ROEBUCK AND CO. AND CONSOLIDATED SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------------------------
(millions, except ratios) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Fixed Charges
Interest and amortization
of debt discount and
expense on all
indebtedness $1,423 $1,409 $1,365 $1,373 $1,279
Add interest element
implicit in rentals 144 147 121 119 114
----- ----- ----- ----- -----
1,567 1,556 1,486 1,492 1,393
Interest capitalized 5 3 5 4 1
----- ----- ----- ----- -----
Total fixed charges $1,572 $1,559 $1,491 $1,496 $1,394
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Income
Income from
continuing operations $1,072 $1,188 $1,271 $1,025 $857
Deduct undistributed
net income (loss)
of unconsolidated
companies 11 13 8 9 (7)
------ ------ ------ ------ -------
1,061 1,175 1,263 1,016 864
Add
Fixed charges (excluding
interest capitalized) 1,567 1,556 1,486 1,492 1,393
Income taxes 766 912 834 703 614
----- ----- ----- ----- -----
Income before
fixed charges and
income taxes $3,394 $3,643 $3,583 $3,211 $2,871
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio of income to
fixed charges 2.16 2.34 2.40 2.15 2.06
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</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>
Year Ended
-----------------------------------------
(millions, except ratios) 1996 1995 1994
<S> <C> <C> <C>
Fixed Charges
Interest and amortization
of debt discount and
expense on all indebtedness $1,365 $1,373 $1,279
Add interest element
implicit in rentals 121 119 114
------ ------ ------
1,486 1,492 1,393
Preferred dividend factor 41 89 234
Interest capitalized 5 4 1
------ ------ ------
Total fixed charges $1,532 $1,585 $1,628
------ ------ ------
------ ------ ------
Income
Income from
continuing operations $1,271 $1,025 $857
Deduct undistributed net
income (loss)of
unconsolidated companies 8 9 (7)
------ ------ -------
1,263 1,016 864
Add
Fixed charges (excluding
interest capitalized and
preferred dividend factor) 1,486 1,492 1,393
Income taxes 834 703 614
------ ------ -----
Income before
fixed charges and
income taxes $3,583 $3,211 $2,871
------ ------ ------
------ ------ ------
Ratio of income to combined
fixed charges and preferred
share dividends 2.34 2.03 1.76
------ ------ ------
------ ------ ------
<FN>
(A) In 1996 all the outstanding 8.88% Preferred Shares, First Series were
redeemed and thereafter the Company made no other preferred dividend
payments.
</FN>
</TABLE>
<PAGE> 1
SEARS, ROEBUCK AND CO.
Consolidated Statements of Income [PHOTO]
- -------------------------------------------------------------------------------
millions, except per common share data 1998 1997 1996
- -------------------------------------------------------------------------------
REVENUES
Merchandise sales and services $36,704 $36,371 $33,751
Credit revenues 4,618 4,925 4,313
- -------------------------------------------------------------------------------
Total revenues 41,322 41,296 38,064
- -------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales, buying and occupancy 27,257 26,779 24,889
Selling and administrative 8,318 8,322 8,059
Provision for uncollectible accounts 1,287 1,532 971
Depreciation and amortization 830 785 697
Interest 1,423 1,409 1,365
Reaffirmation charge -- 475 --
Impairment losses 352 -- --
- -------------------------------------------------------------------------------
Total costs and expenses 39,467 39,302 35,981
- -------------------------------------------------------------------------------
Operating income 1,855 1,994 2,083
Other income, net 28 144 30
- -------------------------------------------------------------------------------
Income before income taxes, minority
interest and extraordinary loss 1,883 2,138 2,113
Income taxes 766 912 834
Minority interest 45 38 8
- -------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY LOSS 1,072 1,188 1,271
- -------------------------------------------------------------------------------
Extraordinary loss on early
extinguishment of debt, net of tax 24 -- --
- -------------------------------------------------------------------------------
NET INCOME $ 1,048 $ 1,188 $ 1,271
- -------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE - BASIC:
Income before extraordinary loss $ 2.76 $ 3.03 $ 3.18
Extraordinary loss 0.06 -- --
- -------------------------------------------------------------------------------
Net income $ 2.70 $ 3.03 $ 3.18
- -------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE - DILUTED:
Income before extraordinary loss $ 2.74 $ 2.99 $ 3.12
Extraordinary loss 0.06 -- --
- -------------------------------------------------------------------------------
Net income $ 2.68 $ 2.99 $ 3.12
- -------------------------------------------------------------------------------
See accompanying notes.
18 SEARS, ROEBUCK AND CO.
<PAGE> 2
SEARS, ROEBUCK AND CO.
Management's Analysis of Consolidated Operations [PHOTO]
- -------------------------------------------------------------------------------
Sears, Roebuck and Co. and its consolidated subsidiaries ("the Company") is a
multi-line retailer providing a wide array of merchandise and services in the
United States, Puerto Rico and Canada. Operating results for the Company are
reported for four domestic segments and one international segment. The domestic
segments include the Company's operations in the United States and Puerto Rico.
The Company's segments are defined as follows:
RETAIL - consisting of:
- Full-line Stores, located primarily in shopping malls, which sell apparel,
home fashions and hardlines merchandise.
- Specialty Stores consisting of:
-- Home Stores, which are comprised of Hardware, Dealer and HomeLife
furniture Stores, The Great Indoors and Commercial Sales. In the first
quarter of 1999, the Company sold the HomeLife furniture business.
-- Auto Stores, consisting of the Sears Tire Group, sell and install tires,
batteries and related goods and services through Sears Auto Centers
and NTB National Tire & Battery ("NTB") stores. Auto Stores also
included the Parts Group, which sold automotive parts through Parts
America and Western Auto stores until November 2, 1998, when the
Company sold the Parts Group to Advance Auto Parts. Thereafter, the
Parts Group results are no longer included in the Company's
consolidated operations.
SERVICES - consisting of:
- Home Services, which provides product repair services, service contracts,
major home improvements and other home services such as pest control and
carpet cleaning.
- Sears Direct, consisting of direct-response marketing, which markets
insurance (credit protection, life and health), clubs and services
memberships, merchandise through specialty catalogs, and impulse and
continuity merchandise; and Sears Online, which offers merchandise for sale
via the Company's websites.
CREDIT - which manages the Company's portfolio of credit card 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.
INTERNATIONAL - consisting of retail, services, credit and corporate operations
similar to the Company's domestic operations. International operations are
conducted in Canada through Sears Canada Inc. ("Sears Canada"), a majority owned
subsidiary. International operations were also conducted through Sears Roebuck
de Mexico, S.A. de C.V. ("Sears Mexico"), a 75.5% owned subsidiary until March
1997, when 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.
Throughout management's analysis of consolidated operations and financial
condition, certain prior year information has been reclassified to conform with
the current year presentation. All references to earnings per share relate to
diluted earnings per common share.
RESULTS OF OPERATIONS
CONSOLIDATED
Net income in 1998 declined 11.8% to $1.05 billion, or $2.68 per share, from
$1.19 billion, or $2.99 per share for 1997. The results of operations for both
1998 and 1997 were affected by noncomparable items. The effects of the
noncomparable items on net income and earnings per share are summarized as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
millions, except per share 1998 1997 1996
- ---------------------------------------------------------------------------------------
EARNINGS EARNINGS EARNINGS
AFTER-TAX PER SHARE AFTER-TAX PER SHARE AFTER-TAX PER SHARE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income
excluding
noncomparable
items $1,300 $ 3.32 $1,303 $ 3.27 $1,271 $ 3.12
HomeLife
impairment loss (21) (0.05) -- -- -- --
Western Auto
impairment loss (243) (0.62) -- -- -- --
Extraordinary
loss on debt
extinguishment (24) (0.06) -- -- -- --
SFAS No. 125
accounting 36 0.09 136 0.35 -- --
Reaffirmation charge -- -- (320) (0.80) -- --
Sale of Advantis -- -- 91 0.23 -- --
Sale of Sears Mexico -- -- (36) (0.09) -- --
Postretirement
life insurance -- -- 37 0.09 -- --
Parts America
conversion -- -- (23) (0.06) -- --
- ---------------------------------------------------------------------------------------
Net income
as reported $1,048 $ 2.68 $1,188 $ 2.99 $1,271 $ 3.12
- ---------------------------------------------------------------------------------------
</TABLE>
DESCRIPTION OF NONCOMPARABLE ITEMS
On November 18, 1998, the Company entered into an agreement to sell its HomeLife
furniture business for $100 million in cash, a $10 million note receivable and a
19% ownership interest in the new HomeLife business. The Company recorded an
impairment loss of $33 million ($21 million after-tax) in the fourth quarter of
1998 to adjust the carrying value of HomeLife's assets to their estimated fair
market value, less cost to sell. The sale was completed on January 30, 1999.
On November 2, 1998, the Company completed an Agreement and Plan of Merger
of Western Auto, a wholly-owned subsidiary, and Advance Auto Parts whereby Sears
exchanged its interest in Western Auto for $175 million in cash and
approximately 40% equity ownership interest in the resulting combined company.
Based upon the terms of the sale, the Company recorded a pretax charge of $296
million ($225 million after-tax) in the third quarter of 1998 to adjust the
carrying value of Western Auto's assets to their estimated fair market value,
less cost to sell. In the fourth quarter, the loss was revised to reflect an
additional after-tax charge of $18 million based on the final terms of the
transaction.
On October 2, 1998, the Company prepaid debt with a face value of $300
million, which was due in May 2000. The transaction generated an extraordinary
loss of $37 million ($24 million after-tax). The loss resulted primarily from
the write-off of the related unamortized discount.
ANNUAL REPORT 1998 19
<PAGE> 3
SEARS, ROEBUCK AND CO.
Management's Analysis of Consolidated Operations (continued) [PHOTO]
- --------------------------------------------------------------------------------
In 1997, the Company implemented Statement of Financial Accounting
Standards ("SFAS") No. 125 which changed the way the Company accounts for
securitizations. SFAS No. 125 accounting provided incremental net income of $36
million in 1998 and reduced reported credit revenues, selling and administrative
expense and the provision for uncollectible accounts by $549 million, $129
million and $478 million, respectively. In 1997, SFAS No. 125 accounting
provided incremental net income of $136 million and reduced reported credit
revenues, selling and administrative expense and the provision for uncollectible
accounts by $321 million, $126 million and $417 million, respectively.
The 1997 reaffirmation charge of $475 million ($320 million after-tax)
represents the estimated cost of the settlement of lawsuits and investigations
by governmental agencies, including federal prosecutors, which 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 and other related matters. This estimate was based on management's
assumptions as to the ultimate outcome of future events and uncertainties. While
at year-end 1998 there are still additional costs to be incurred related to
these matters, one of the most significant uncertainties was resolved on
February 19, 1999, when the Company's plea agreement with the U.S. Attorney for
the District of Massachusetts was approved by a federal district court. As part
of the agreement, the Company agreed to pay a $60 million fine.
In 1997, the Company sold to IBM its 30% equity interest in Advantis, a
joint venture between IBM and the Company. The sale resulted in a pretax gain of
$150 million ($91 million after-tax) recorded in other income.
In 1997, the Company sold 60% of the outstanding shares of Sears Mexico to
Grupo Carso S.A. de C.V. The sale was recorded in the first quarter of 1997 and
resulted 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.
The Company changed its postretirement life insurance benefit plan
in 1997 by eliminating retiree life insurance benefits for all active associates
not retired by December 31, 1997. This plan change resulted in a one-time pretax
curtailment gain of $61 million ($37 million after-tax) recorded as a reduction
of selling and administrative expense.
The majority of the Western Auto stores were converted to the Parts America
format in 1997 and, as a result, the Company recorded a pretax charge of $38
million ($23 million after-tax) for this initiative.
ANALYSIS OF CONSOLIDATED RESULTS EXCLUDING NONCOMPARABLE ITEMS
Net income in 1998, excluding noncomparable items, was $1.30 billion or $3.32
per share, an increase of 1.5% over comparable 1997 per share earnings of $3.27.
The improvement was the result of better performance in the Credit, Services and
International segments along with a lower effective tax rate and fewer shares
outstanding, substantially offset by a decline in Retail results.
In 1997, net income excluding noncomparable items was $1.30 billion or
$3.27 per share, an increase of 4.8% over comparable 1996 per share earnings of
$3.12. The improved profitability of the Retail and Services segments, 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 trend of increased delinquencies and charge-offs during 1997.
REPORTABLE SEGMENTS
Segment operating income as reported and excluding noncomparable items is as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997
Excluding Effect of Excluding Effect of
non- non- non- non-
comparable comparable 1998 comparable comparable 1997
millions items items as reported items items as reported 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Retail $ 734 $(352) $ 382 $ 928 $ 23 $ 951 $ 841
Services 375 -- 375 361 -- 361 305
Credit 1,086 58 1,144 1,005 (253) 752 1,164
Corporate (211) -- (211) (212) -- (212) (216)
- -------------------------------------------------------------------------------------------------------------------------------
Domestic operating income 1,984 (294) 1,690 2,082 (230) 1,852 2,094
- -------------------------------------------------------------------------------------------------------------------------------
International 165 -- 165 142 -- 142 (11)
- -------------------------------------------------------------------------------------------------------------------------------
Total operating income $2,149 $(294) $1,855 $2,224 $(230) $1,994 $2,083
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20 SEARS, ROEBUCK AND CO.
<PAGE> 4
SEARS, ROEBUCK AND CO.
Management's Analysis of Consolidated Operations (continued) [PHOTO]
- -------------------------------------------------------------------------------
RETAIL
Retail store revenues as reported, operating income excluding noncomparable
items and related information are as follows:
- -------------------------------------------------------------------------------
millions, except number of stores and
Retail store revenues per selling square foot 1998 1997 1996
- -------------------------------------------------------------------------------
Full-line Stores revenues $23,140 $22,839 $21,581
Specialty Stores revenues 7,289 7,247 6,281
- -------------------------------------------------------------------------------
Total Retail revenues(1) $30,429 $30,086 $27,862
- -------------------------------------------------------------------------------
Operating income excluding noncomparable items $ 734 $ 928 $ 841
- -------------------------------------------------------------------------------
Number of Full-line Stores 845 833 821
Number of Specialty Stores 2,198 2,697 2,550
- -------------------------------------------------------------------------------
Total Retail stores 3,043 3,530 3,371
- -------------------------------------------------------------------------------
Retail store revenues per selling square foot(2) $ 317 $ 318 $ 321
Comparable store sales percentage increase 1.1% 2.3% 5.8%
- -------------------------------------------------------------------------------
(1) The Company's 1997 fiscal year included 53 weeks, compared to 52 weeks in
1998 and 1996. Excluding the 53rd week in 1997, total retail revenues
increased 3.0% in 1998 and 6.0% in 1997.
(2) 1997 revenues per square foot calculation excludes the 53rd week.
Retail revenues increased 1.1% in 1998 to $30.43 billion from $30.09
billion in 1997. Revenues in 1998 included 52 weeks compared to 53 weeks in
1997.
Full-line Stores revenues increased 1.3% in 1998, benefiting from the net
addition of 12 Full-line Stores as 23 stores were opened and 11 were closed. The
Full-line Stores increase was led by solid revenue performance in hardlines
merchandise as comparable store sales increased in 1998. Hardlines revenue
increases in home appliances and electronics were partially offset by a decline
in home improvement and home office merchandise sales. The hardlines revenue
increase was partially offset by soft apparel sales. Apparel sales were strong
in women's special sizes, fine jewelry and cosmetics and fragrances but weak in
dresses, junior's, boy's and men's apparel.
In addition to revenue growth in the Full-line Stores, Specialty Store
revenues increased slightly to $7.29 billion in 1998 from $7.25 billion in 1997.
The strong revenue performance in Hardware and Dealer Stores was offset by a
decline in Auto Stores revenues.
The revenue increase in Hardware and Dealer Stores in 1998 resulted from
the addition of new stores and strong comparable store sales increases. During
1998, the Company opened 10 net new Hardware Stores and 77 net new Dealer
Stores. The Commercial Sales business also produced strong revenue gains as the
Company continued to expand this business. In 1998, HomeLife revenues decreased
slightly and the HomeLife business ended 1998 with one less store than in 1997.
The Auto Stores 1998 revenues declined from 1997 levels as comparable store
sales decreased. Both Sears Auto Centers and NTB sales were adversely affected
by the relatively mild winter weather experienced in 1998. Results were also
affected by the sale of the Parts Group on November 2, 1998, which caused 1998
revenues to reflect only 10 months of Parts Group sales versus 12 months in the
prior year. Throughout 1998, the Company worked to build name recognition for
the new NTB format. As of year end, the Company operated 789 Sears Auto Centers
and 347 NTB stores.
Retail revenues increased 8.0% in 1997 to $30.09 billion from $27.86
billion in 1996. Revenues in 1997 included 53 weeks compared to 52 weeks in
1996.
Full-line Stores revenues increased 5.8% in 1997 as the Company opened 21
and closed 9 Full-line Stores. The addition of the 53rd week in 1997 also
contributed to the revenue growth. In 1997, apparel sales gains were led by
increases in women's ready-to-wear, children's and men's fashions and footwear.
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.
Specialty Store revenues increased to $7.25 billion in 1997 from
$6.28 billion in 1996. The increase primarily resulted from a full year of sales
from the Orchard Supply Hardware Stores in 1997, compared to 1996, which
included only fourth quarter sales; and the 53rd week in 1997. Dealer Stores
revenues increased as the Company added 107 net new stores in 1997. The HomeLife
business closed 23 locations in 1997 to focus better on high concentration
markets and cost management.
Auto Stores revenues declined slightly in 1997 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. As of
year-end 1997, the Company had substantially completed both conversion plans and
operated 780 Sears Auto Centers, 326 NTB stores and 576 Parts America stores.
[GRAPH]
In addition to revenue performance, gross margin, selling and
administrative expenses and depreciation and amortization are important elements
in determining Retail operating income. The following discussion of Retail gross
margin, selling and administrative expense and depreciation and amortization
excludes the effect of noncomparable items to provide a more meaningful
comparison between years. The noncomparable items that affected the Retail
segment operating income were the impairment losses related to the sales of
Western Auto and HomeLife in 1998, and the Parts America conversion and the
postretirement life insurance curtailment in 1997.
Retail gross margin as a percentage of Retail revenues declined 90 basis
points in 1998 from 1997. In 1997, Retail gross margin as a percentage of Retail
revenues declined 40 basis points from 1996. Both years declined due to higher
promotional activity driven by a competitive retail environment.
Retail selling and administrative expense as a percentage of Retail
revenues improved 40 basis points in 1998 from 1997. In 1997, Retail selling and
administrative expense as a percentage of Retail revenues improved 70 basis
points from 1996. Both years improved primarily due to leveraging payroll and
other employee-related costs.
Retail depreciation and amortization expense increased 6.4% in
1998 from 1997 and 15.2% in 1997 compared to 1996. These increases reflect the
continuation of the Company's store remodeling program and the growth in the
number of Specialty Stores in operation.
ANNUAL REPORT 1998 21
<PAGE> 5
SEARS, ROEBUCK AND CO.
Management's Analysis of Consolidated Operations (continued) [PHOTO]
- --------------------------------------------------------------------------------
SERVICES
Services revenues and operating income as reported are as follows (noncomparable
items did not have an effect on operating income of the Services segment):
- -------------------------------------------------------------------------------
millions 1998 1997 1996
- -------------------------------------------------------------------------------
Services revenues $3,113 $3,073 $2,819
- -------------------------------------------------------------------------------
Operating income $ 375 $ 361 $ 305
- -------------------------------------------------------------------------------
Services revenues, generated primarily by the Home Services business,
increased 1.3% in 1998. Home Services revenues were flat due to a slight decline
in the home improvement business and the 53rd week included in the prior year.
The Company plans future growth in the Home Services business through market
expansion, improved marketing effectiveness and strengthening of the Company's
licensees. Sears Direct revenues increased 8.5% in 1998 from 1997 levels due to
continued strength of its marketing programs in targeting customers at home for
its various merchandise and services. All categories of Sears Direct products
showed improved revenue results, including clubs and services, insurance and
specialty catalogs.
[GRAPH]
In 1997, Services revenues improved 9.0% primarily due to increased Home
Services revenues, led by increases in in-home repair services and growth in
home improvement services. Revenues in 1997 also included the effect of the 53rd
week. Sears Direct revenues increased substantially in 1997 from 1996 levels due
to continued strength of its insurance programs.
Services gross margin as a percentage of Services revenues increased 100
basis points in 1998 from 1997. The margin rate increased due to the continued
effort to improve the profitability of the service contracts portfolio within
the Home Services business. In 1997, Services gross margin as a percentage of
revenues improved 370 basis points from 1996, primarily due to improved
profitability of the service contracts portfolio
Services selling and administrative expense as a percentage of Services
revenues increased 50 basis points in 1998 from 1997. The increase was due to
increased infrastructure investments in the businesses to support planned
growth. In 1997, Services selling and administrative expense as a percentage of
Services revenues increased 240 basis points from 1996 due to increased
marketing costs.
Services depreciation and amortization expense increased 14.1% in 1998 from
1997 and 11.8% in 1997 compared to 1996. These increases reflect both the
internal growth of the business and growth through acquisition.
Overall, Services operating income as a percentage of Services revenue was
relatively flat in 1998 compared to 1997. A slight increase in the Home Services
operating margin was offset by a decline in the Sears Direct operating margin.
Even with a decline in operating margin in 1998, the Sears Direct business
continued to provide a significant portion of the operating income for the
Services segment.
CREDIT
Domestic Credit revenues as reported and operating income are as follows:
- -------------------------------------------------------------------------------
millions 1998 1997 1996
- -------------------------------------------------------------------------------
Credit revenues $4,369 $4,649 $3,995
- -------------------------------------------------------------------------------
Operating income excluding noncomparable items $1,086 $1,005 $1,164
Noncomparable items:
SFAS No. 125 58 222 --
Reaffirmation charge -- (475) --
- -------------------------------------------------------------------------------
Operating income as reported $1,144 $ 752 $1,164
- -------------------------------------------------------------------------------
The primary reason for the $392 million increase in 1998 reported operating
income in the Credit segment compared to 1997 is the $475 million reaffirmation
charge which adversely affected 1997 results. Other factors affecting reported
Credit operating results are discussed below.
In 1998, Credit revenues decreased 6.0% to $4.37 billion. The decrease in
Credit revenues was attributable to a lower level of owned credit card
receivables and the 53rd week included in the prior year. In 1997, Credit
revenues increased 16.4% to $4.65 billion, reflecting higher average owned
receivable balances, increased late fees and the benefit of the 53rd week of
revenues. Excluding the effect from the change in accounting related to SFAS No.
125 in 1997, Credit revenues would have increased 24.4% over 1996 levels.
A summary of Credit information for the managed portfolio is as follows:
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
Sears Card as a % of sales(1) 51.6% 55.1% 56.6%
Average account balance (dollars) $ 1,076 $ 1,058 $ 977
Average managed credit card receivables (millions) $27,922 $27,150 $24,631
- -------------------------------------------------------------------------------
(1) Sears Card as a % of sales includes 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 1998 declined to 51.6% compared to 55.1% in 1997, due to a greater
preference for other payment methods, including cash, check and third-party
credit cards.
[GRAPH]
Credit selling and administrative expense increased 7.7% in 1998
from the 1997 amount. This increase was primarily attributable to increased
investment in collection and risk management activities and litigation costs. In
1997, selling and administrative expense decreased 7.4% from the 1996 level
primarily due to the implementation of SFAS No. 125 accounting. Excluding the
effect from the change in accounting method, selling and administrative expense
increased 10.4% while adjusted Credit revenues increased 24.4%, and therefore,
the ratio of selling and administrative expense to Credit revenue improved 200
basis points in 1997 compared to 1996.
22 SEARS, ROEBUCK AND CO.
<PAGE> 6
SEARS, ROEBUCK AND CO.
Management's Analysis of Consolidated Operations (continued) [PHOTO]
- --------------------------------------------------------------------------------
Domestic provision for uncollectible accounts and related information is as
follows:
- -------------------------------------------------------------------------------
millions 1998 1997 1996
- -------------------------------------------------------------------------------
Provision for uncollectible accounts $ 1,261 $ 1,493 $ 916
Net credit charge-offs to average
managed credit card receivables(1)(2) 7.35% 6.48% 4.21%
Delinquency rates at year end(3)(4) 6.82% 7.00% 5.40%
Owned credit card receivables $17,443 $19,386 $18,645
Allowance for uncollectible owned accounts $ 942 $ 1,077 $ 753
- -------------------------------------------------------------------------------
(1) The net credit charge-off rate includes the effect of the account
conversion for 12% of accounts onto the new credit system ("TSYS") in the
fourth quarter of 1998. The effect on the charge-off rate was not material.
(2) The following table sets forth the quarterly net credit charge-off rates
for the managed portfolio for 1998 and 1997. Although the 1998 annual
charge-off rate is higher than 1997, 1997 was a year of rapid deterioration
in the charge-off rate while 1998 showed considerable improvement:
- -------------------------------------------------------------------------------
Q1 Q2 Q3 Q4
- -------------------------------------------------------------------------------
1997 4.97% 5.69% 6.87% 7.76%
1998 8.12% 7.37% 7.20% 6.74%
- -------------------------------------------------------------------------------
(3) Under the Company's proprietary credit system, an account is generally
considered delinquent when its cumulative past due balance is three or more
times the scheduled minimum monthly payment.
(4) The 1998 delinquency rate is for the 88% of the managed accounts that have
not been converted to TSYS. For the TSYS accounts, which represent 12% of
the managed accounts at year end, the delinquency rate is 10.1%. For TSYS
accounts, the aging methodology is based on the number of completed billing
cycles during which a customer has failed to make a required payment.
Therefore, under TSYS, accounts are considered delinquent when a customer
has failed to make a payment in each of the last three or more billing
cycles.
In 1998, the provision for uncollectible accounts decreased 15.5% from
1997. The decrease is primarily attributable to favorable trends in delinquency
rates, charge-off experience and bankruptcy filings, as well as lower owned
credit card receivable balances and one less week of provision expense in 1998
compared to 1997 due to the effect of the 53rd week. As of January 2, 1999, the
allowance balance was $942 million compared to $1.08 billion at January 3, 1998.
The $135 million decrease in the allowance for uncollectible accounts relates to
the improvement in portfolio quality and the reduction in owned credit card
receivable balances. The owned credit card receivables decreased $1.94 billion
during 1998 primarily due to the transfer of credit card receivables from Sears
to a securitization Master Trust to provide receivable balances for future
securitizations. Receivables transferred to the securitization Master Trust in
1998 are classified as retained interest in transferred credit card receivables
in the balance sheet, and a $106 million allowance for uncollectible accounts
relating to the transferred receivables is included as a reduction of retained
interest in transferred credit card receivables at the end of 1998. The
provision for uncollectible accounts in 1997 was 63.0% above 1996, reflecting
increased delinquencies, charge-offs and bankruptcies, growth in the owned
credit card receivables portfolio, and a reduced rate of credit reaffirmations.
If 1997 were adjusted to a comparable basis with 1996 by excluding the effect on
the provision for SFAS No. 125 accounting, the provision would have been $1.91
billion, a 108.6% increase over 1996.
Interest expense from the domestic segments is included in the Credit
segment discussion since the majority of the Company's domestic interest expense
is allocated to the Credit segment. Generally, the domestic interest expense
that is not allocated to the Credit segment is allocated to the Retail segment
and is not a significant cost relative to costs of sales, buying and occupancy,
selling and administrative expense and depreciation and amortization expense in
the Retail segment.
Domestic interest expense is combined with the funding cost on receivables
sold through securitizations to represent total funding costs. The Company uses
credit card receivable securitizations as a significant funding source and
therefore, for purposes of this analysis, the interest paid on securitizations
is considered a funding cost. The total domestic funding costs are as follows:
- -------------------------------------------------------------------------------
millions 1998 1997 1996
- -------------------------------------------------------------------------------
Domestic segments interest expense(1) $1,318 $1,290 $1,191
Domestic funding cost of securitized receivables 433 437 348
- -------------------------------------------------------------------------------
Total domestic funding costs $1,751 $1,727 $1,539
- -------------------------------------------------------------------------------
(1) Credit segment interest expense was $1,244, $1,259 and $1,191 for 1998,
1997 and 1996, respectively.
Total domestic funding costs increased 1.4% in 1998 to $1.75 billion. The
increase in funding costs reflects additional debt needed to support a larger
managed credit card receivable portfolio, higher inventory levels, capital
spending and share repurchases, partially offset by a lower funding rate
environment. While the managed credit card receivables and inventory levels were
higher on average throughout 1998 than in 1997, the managed credit card
receivable balances and inventory balances at the end of 1998 were actually
lower than at the end of 1997, as noted in management's analysis of consolidated
financial condition. In 1997, the increase in funding costs reflects higher
funding requirements due to a larger managed 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.
CORPORATE
Corporate selling and administrative expense decreased $1 million in 1998
compared to 1997. The decrease was primarily attributable to targeted cost
containment and reduction efforts. In 1997, corporate selling and administrative
expense decreased $4 million compared to 1996 due to similar cost control
efforts.
ANNUAL REPORT 1998 23
<PAGE> 7
SEARS, ROEBUCK AND CO.
Management's Analysis of Consolidated Operations (continued) [PHOTO]
- --------------------------------------------------------------------------------
INTERNATIONAL
International revenues and operating income are as follows (noncomparable items
did not have an effect on operating income of the International segment):
- -------------------------------------------------------------------------------
millions 1998 1997 1996
- --------------------------------------------------------------------------------
Merchandise sales and services $3,162 $3,212 $3,070
Credit revenues 249 276 318
- -------------------------------------------------------------------------------
Total revenues $3,411 $3,488 $3,388
- -------------------------------------------------------------------------------
Operating income $ 165 $ 142 $ (11)
- -------------------------------------------------------------------------------
International operations include the results of Sears Canada for all
periods presented and the results of Sears Mexico through the first quarter of
1997, when the Company sold its majority interest.
International revenues were $3.41 billion in 1998, a 2.2% decrease from
revenues of $3.49 billion in 1997. The decrease resulted from the inclusion of
$100 million of revenues related to Sears Mexico in the prior year. Excluding
the effect of Sears Mexico, Sears Canada had strong retail and catalog sales
performance in 1998 which was partially offset by the negative effects of a
weaker Canadian dollar. In 1997, revenues increased 3.0% from 1996 due to Sears
Canada revenues increasing 13.5% on strong retail store and catalog performance,
partially offset by the loss of revenues due to the sale of Sears Mexico.
International gross margin as a percentage of International merchandise
sales and services decreased 30 basis points in 1998 from 1997. Sears Canada
gross margin rate declined primarily due to increased buying costs. In 1997,
International gross margin as a percentage of International merchandise sales
and services increased 200 basis points from 1996. Sears Canada gross margin
rate improved substantially due to savings realized from merchandise sourcing
initiatives.
International selling and administrative expense as a percentage of total
International revenues improved 100 basis points in 1998 from 1997. Sears Canada
selling and administrative expense rate improvement was primarily due to
leveraging payroll and other employee related costs. In 1997, International
selling and administrative expense as a percentage of total International
revenues improved 110 basis points from 1996. Sears Canada selling and
administrative rate improvement was primarily due to cost containment
initiatives coupled with revenue growth and a favorable comparison to 1996,
which included a restructuring charge.
International operating income improved $23 million in 1998 compared to
1997. The improvement is due to revenue growth resulting from the aggressive
growth strategy in the furniture and dealer store networks and renovations of
full-line stores; as well as strong expense leverage and less interest expense,
partially offset by a lower exchange rate. Operating income improved $153
million in 1997 compared to 1996 as 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
networks.
OTHER INCOME
Consolidated other income consists of:
- -------------------------------------------------------------------------------
millions 1998 1997 1996
- -------------------------------------------------------------------------------
Gain on sale of Advantis $-- $150 $--
Loss on sale of Sears Mexico -- (21) --
Gain on sales of property and investments 20 7 36
Miscellaneous 8 8 (6)
- -------------------------------------------------------------------------------
Total $28 $144 $30
- -------------------------------------------------------------------------------
INCOME TAX EXPENSE
Consolidated income tax expense as a percentage of pretax income was 40.7% in
1998, 42.7% in 1997 and 39.5% in 1996. The current year tax rate was increased
by certain items related to the sale of Western Auto. Excluding the effect of
the Western Auto sale, the Company's consolidated effective tax rate would have
been 38.2% in 1998. The 1997 tax rate was increased by certain items related to
the reaffirmation charge and the first quarter sale of Sears Mexico. Excluding
these significant items, the consolidated effective tax rate would have been
39.9% in 1997. Excluding significant items in both 1998 and 1997, the decrease
in 1998 income tax expense as a percentage of pretax income compared to 1997 is
due to favorable resolution of tax audit issues as well as a reduction in
domestic taxes on international operations. The increase in 1997 compared to
1996 was due to higher foreign tax expense on international operations,
partially offset by a lower effective tax rate on domestic operations.
SUPPLEMENTAL DOMESTIC OPERATIONS INFORMATION
The implementation of the Financial Accounting Standards Board's new rules on
segment reporting has resulted in a new set of reportable segments: Retail,
Services, Credit, Corporate and International. These new segments and their
results of operations have been discussed on the preceding pages. The Company is
also providing the supplemental domestic operations information in the form
reported in previous years to help facilitate the transition to our new
reporting model in this year of changing reportable segments.
24 SEARS, ROEBUCK AND CO.
<PAGE> 8
SEARS, ROEBUCK AND CO.
Management's Analysis of Consolidated Operations (continued) [PHOTO]
- --------------------------------------------------------------------------------
Domestic operating income as reported and excluding noncomparable items is
as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997
Excluding Effect of Excluding Effect of
non- non- non- non-
comparable comparable 1998 comparable comparable 1997
millions items items as reported items items as reported 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Merchandise sales and services $33,542 $ -- $33,542 $33,159 $ -- $33,159 $30,681
Credit revenues 4,918 (549) 4,369 4,970 (321) 4,649 3,995
- ---------------------------------------------------------------------------------------------------------------------------------
Total domestic revenues 38,460 (549) 37,911 38,129 (321) 37,808 34,676
- ---------------------------------------------------------------------------------------------------------------------------------
Cost of sales, buying and occupancy 24,935 -- 24,935 24,417 14 24,431 22,584
Gross margin % 25.7% 25.7% 26.4% 26.3% 26.4%
Selling and administrative 7,718 (129) 7,589 7,713 (171) 7,542 7,261
% of total revenues 20.1% 20.0% 20.2% 19.9% 20.9%
Provision for uncollectible accounts 1,739 (478) 1,261 1,910 (417) 1,493 916
Depreciation and amortization 766 -- 766 717 8 725 630
Interest 1,318 -- 1,318 1,290 -- 1,290 1,191
Impairment losses -- 352 352 -- -- -- --
Reaffirmation charge -- -- -- -- 475 475 --
- ---------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 36,476 (255) 36,221 36,047 (91) 35,956 32,582
- ---------------------------------------------------------------------------------------------------------------------------------
Operating income $ 1,984 $(294) $ 1,690 $ 2,082 $(230) $ 1,852 $ 2,094
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following discussion of domestic operating results excludes the effect
of noncomparable items to provide a more meaningful comparison between years.
While the table of noncomparable items on page 19 indicates the effect on net
income and earnings per share for each item, the above table includes only the
effect on operating income. In addition, this table includes the
reclassification effect related to the implementation of SFAS No. 125 as
contrasted with the accounting treatment prior to implementation of this
standard.
Domestic operations revenue increased 0.9% in 1998 to $38.46 billion,
compared to $38.13 billion in 1997. Revenue results included a 1.1% increase in
Retail revenues, a 1.3% increase in Services revenues and a 1.0% decrease in
Credit revenues. In 1997, domestic operations revenues increased 10.0%, led by a
24.4% increase in Credit revenues.
Gross margin as a percentage of domestic merchandise sales and services
declined 70 basis points to 25.7% from 26.4% in 1997. The decline is due to
increased promotional activity in the Retail segment. In 1997, gross margin as a
percentage of domestic merchandise sales and services remained flat at 26.4% as
the Retail gross margin rate declined due to higher promotional activity, but
was offset by an improvement in the Services gross margin.
Selling and administrative expense as a percentage of domestic revenues
improved 10 basis points in 1998 to 20.1% from 20.2% in 1997. The improvement
was primarily attributable to improved Retail expense leverage, partially offset
by increased operating expenses within Credit and Services. In 1997, selling and
administrative expense as a percentage of domestic revenues improved 70 basis
points to 20.2% from 20.9% in 1996. The improvement was primarily attributable
to leveraging payroll and other employee related costs in the Retail segment,
partially offset by increased marketing in the Services segment.
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 1999, the Company expects operating income to grow in its Retail, Services,
Credit and International segments. The Company anticipates low double-digit
earnings per share growth on a comparable basis for the full year of 1999.
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION
Certain statements made in this Annual Report 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 North American economic conditions (such as
interest rates and consumer confidence) and normal business uncertainty. In
particular, the discussion of Year 2000 matters beginning on page 29 is based on
assumptions about a variety of factors, including the technical skills of
employees and independent contractors, the representations and preparedness of
third parties, vendors' delivery of merchandise and performance of services
required by the Company and the collateral effects of Year 2000 compliance
issues on the Company's business partners and customers. 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 1998 25
<PAGE> 9
SEARS, ROEBUCK AND CO.
Consolidated Balance Sheets [PHOTO]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
millions, except per share data 1998 1997
- -------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 495 $ 358
Retained interest in transferred credit
card receivables 4,294 3,316
Credit card receivables 18,946 20,956
Less allowance for uncollectible accounts 974 1,113
- -------------------------------------------------------------------------------
Net credit card receivables 17,972 19,843
Other receivables 397 335
Merchandise inventories 4,816 5,044
Prepaid expenses and deferred charges 506 517
Deferred income taxes 791 830
- -------------------------------------------------------------------------------
Total current assets 29,271 30,243
Property and equipment
Land 395 487
Buildings and improvements 5,530 5,420
Furniture, fixtures and equipment 4,871 4,919
Capitalized leases 530 498
- -------------------------------------------------------------------------------
Gross property and equipment 11,326 11,324
Less accumulated depreciation 4,946 4,910
- -------------------------------------------------------------------------------
Total property and equipment, net 6,380 6,414
Deferred income taxes 572 666
Other assets 1,452 1,377
- -------------------------------------------------------------------------------
TOTAL ASSETS $ 37,675 $38,700
- -------------------------------------------------------------------------------
LIABILITIES
Current liabilities
Short-term borrowings $ 4,624 $ 5,208
Current portion of long-term debt and
capitalized lease obligations 1,414 2,561
Accounts payable and other liabilities 6,732 6,637
Unearned revenues 815 830
Other taxes 524 554
- -------------------------------------------------------------------------------
Total current liabilities 14,109 15,790
Long-term debt and capitalized lease obligations 13,631 13,071
Postretirement benefits 2,346 2,564
Minority interest and other liabilities 1,523 1,413
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 31,609 32,838
- -------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Common shares ($.75 par value per share,
1,000 shares authorized, 383.5 and
390.9 shares outstanding) 323 323
Capital in excess of par value 3,583 3,598
Retained earnings 4,848 4,158
Treasury stock-- at cost (2,089) (1,702)
Deferred ESOP expense (175) (204)
Accumulated other comprehensive income (424) (311)
- -------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 6,066 5,862
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 37,675 $38,700
- -------------------------------------------------------------------------------
See accompanying notes.
26 SEARS, ROEBUCK AND CO.
<PAGE> 10
SEARS, ROEBUCK AND CO.
Management's Analysis of Consolidated Financial Condition [PHOTO]
- --------------------------------------------------------------------------------
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 $18.95 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
the receivables in the Trust to provide funding. In addition to the receivables
in the Trust which back securities sold to third parties, the Company transfers
additional receivables to the Trust in accordance with the terms of the
securitization transactions and to have receivables readily available for future
securitizations.
A summary of these balances at year end is as follows:
- -------------------------------------------------------------------------------
millions 1998 1997 1996
- -------------------------------------------------------------------------------
Domestic:
Managed credit card receivables $28,357 $28,945 $27,063
Securitized balances sold (6,626) (6,404) (6,330)
Retained interest in transferred
credit card receivables(1) (4,400) (3,316) (2,260)
Other customer receivables 112 161 172
- -------------------------------------------------------------------------------
Domestic owned credit card receivables 17,443 19,386 18,645
International owned credit card receivables(2) 1,503 1,570 1,459
- -------------------------------------------------------------------------------
Consolidated owned credit card receivables $18,946 $20,956 $20,104
- -------------------------------------------------------------------------------
(1) The 1998 retained interest amount is shown before reserve of $106 million
related to the transfers during 1998.
(2) International owned credit card receivables are net of sold balances of
$267 million in 1996.
The credit card receivable balances are geographically diversified within
the United States and Canada. The Company grants retail consumer credit based on
the 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.
[GRAPH]
Inventories are primarily valued on the last-in, first-out or LIFO method.
Inventories would have been $679 million higher if valued on the first-in,
first-out or FIFO method at January 2, 1999. Inventories on a FIFO basis totaled
$5.50 billion at January 2, 1999, compared to $5.76 billion at January 3, 1998.
The decrease in inventory levels reflects the November 2, 1998, sale of Western
Auto. Excluding the Western Auto inventory at year-end 1997, inventory increased
$91 million due to additional inventory needed to support the addition of new
Full-line and Specialty Stores.
CAPITAL RESOURCES
Total net funding for the Company at January 2, 1999, was $26.30 billion
compared with $27.24 billion at January 3, 1998. The decrease in funding is
primarily due to a decrease in domestic managed credit card receivable balances
at year-end 1998 compared to year-end 1997 and the disposition of Western Auto.
Net year-end funding, including debt reflected on the balance sheet and investor
certificates related to credit card receivables sold through securitizations, is
as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
millions 1998 % of Total 1997 % of Total 1996 % of Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Short-term
borrowings $ 4,624 17.6% $ 5,208 19.1% $ 3,533 14.1%
Long-term debt
and capitalized
lease obligations 15,045 57.2% 15,632 57.4% 14,907 59.5%
Securitized
balances sold 6,626 25.2% 6,404 23.5% 6,597 26.4%
- -------------------------------------------------------------------------------
Total funding $26,295 100.0% $27,244 100.0% $25,037 100.0%
- -------------------------------------------------------------------------------
</TABLE>
[GRAPH]
In 1998, the Company reduced the percentage of short-term borrowings and
increased fixed-rate, longer-term debt and securitization funding in its funding
mix as interest rate conditions were favorable in the term 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 effect on net income
from 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. The
Company has policies that centrally govern the use of such off-balance sheet
financial instruments.
The current ratings of the Company's debt securities appear in the table
below:
- -------------------------------------------------------------------------------
Moody's Duff &
Investors Phelps Fitch
Services, Standard Credit IBCA,
Inc. & Poor's Rating Co. Inc.
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
ANNUAL REPORT 1998 27
<PAGE> 11
SEARS, ROEBUCK AND CO.
Consolidated Statements of Cash Flows [PHOTO]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
millions 1998 1997 1996
- -------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,048 $ 1,188 $ 1,271
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities
Depreciation, amortization and
other noncash items 907 807 774
Extraordinary loss on early
extinguishment of debt 37 -- --
Provision for uncollectible accounts 1,287 1,532 971
Loss (gain) on sale of businesses 352 (129) --
(Gain) loss on sales of property
and investments (20) 7 (36)
Change in (net of acquisitions):
Deferred income taxes 178 273 (31)
Retained interest in transferred
credit card receivables (978) (1,056) 3,318
Credit card receivables 423 (2,285) (5,739)
Merchandise inventories (167) ( 475) (475)
Other operating assets (65) (160) 111
Other operating liabilities 88 (258) 1,025
- -------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 3,090 (556) 1,189
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of
cash acquired (34) (138) (296)
Proceeds from sales of property
and investments 220 394 42
Purchases of property and equipment (1,212) (1,328) (1,189)
- --------------------------------------------------------------------------------
Net cash used in
investing activities (1,026) (1,072) (1,443)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 2,686 3,920 4,683
Repayments of long-term debt (3,375) (3,299) (1,832)
(Decrease) increase in short-term
borrowings, primarily 90 days or less (576) 1,834 (1,814)
Termination of interest rate swap agreements -- (633) --
Repayments of ESOP note receivable 23 16 21
Preferred stock redemption -- -- (325)
Common shares purchased for employee
stock plans (528) (170) (164)
Common shares issued for employee stock plans 126 103 134
Dividends paid to shareholders (278) (441) (394)
- -------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (1,922) 1,330 309
- -------------------------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents (5) (4) (1)
- -------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 137 (302) 54
- -------------------------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR 358 660 606
- -------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 495 $ 358 $ 660
- -------------------------------------------------------------------------------
See accompanying notes.
28 SEARS, ROEBUCK AND CO.
<PAGE> 12
SEARS, ROEBUCK AND CO.
Management's Analysis of Consolidated Financial Condition (Continued) [PHOTO]
- -------------------------------------------------------------------------------
The Company utilizes Sears Roebuck Acceptance Corp. ("SRAC"), a
wholly-owned subsidiary, to issue commercial paper, to maintain a medium-term
note program, to issue intermediate-term notes and to issue long-term
underwritten debt. SRAC issued term debt securities totaling $2.53 billion in
1998. SRAC commercial paper outstanding was $4.24 billion and $5.25 billion at
January 2, 1999, and January 3, 1998, respectively. SRAC commercial paper is
supported by $6.105 billion of syndicated credit agreements; $1.04 billion of
which expires in 1999, $875 million of which expires in 2002 and $4.19 billion
of which expires in 2003. The weighted average interest rate on SRAC term debt
issued in 1998 was 6.43% compared to 6.78% in 1997. The decrease in rate is due
to a general decline in interest rates. The following securities were issued
during 1998:
o $478 million of fixed-rate medium-term notes, weighted average coupon of
6.03% and average term of 5.7 years;
o $50 million of variable-rate medium-term notes, average term of
one year; and
o $2 billion of discrete underwritten notes, weighted average coupon of 6.53%
and average term of 20 years.
The Company, through its subsidiary SRFG, Inc., securitizes domestic credit
card receivables to access intermediate-term funding in a cost-effective manner.
In 1998, the Company issued $985 million of fixed-rate term certificates through
securitizations, compared to $523 million in 1997. As of January 2, 1999, there
were $6.63 billion of 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 $633 million payment represented 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.
On November 12, 1996, 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.
CAPITAL SPENDING
The Company has substantially completed its capital expenditure program
initiated in 1993 to renovate and update its Full-line Stores. In addition, the
Company has increased the number of its Full-line and Specialty Stores. Capital
expenditures during the past three years are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
millions 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Full-line Stores, primarily
remodeling and expansion efforts $ 672 $ 812 $ 848
Specialty Stores 241 320 181
Other - distribution centers/support functions 299 196 160
- -------------------------------------------------------------------------------
Total capital expenditures $1,212 $1,328 $1,189
- --------------------------------------------------------------------------------
</TABLE>
The Company plans capital expenditures of $1.2 billion for 1999, which
includes remodeling and expansion of approximately 55 existing Full-line Stores,
the opening of 18 to 25 new Full-line Stores and more than 250 Specialty Stores.
The Company may also pursue selective strategic acquisitions.
SHARE REPURCHASES
During 1998, the Company repurchased 10.6 million shares of its common stock for
$528 million under its share repurchase program related to employee stock-based
incentive plans.
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 foreseeable
future.
YEAR 2000
Year 2000 compliance is the ability of information systems to properly recognize
and process dates and date-sensitive information including the year 2000 and
beyond (commonly referred to as Year 2000 or Y2K). Year 2000 compliance is
critical to the Company because the Company and many of its merchandise vendors
and service providers are highly reliant on information systems to operate their
businesses.
The Company is using both internal and external resources to complete its
Year 2000 compliance initiatives. The Year 2000 efforts of the Company's credit
and bank operations are subject to regulatory review.
STATE OF READINESS
In 1997, the Company established a corporate project office, which reports to an
executive management team, to oversee, monitor and coordinate the Company-wide
Year 2000 effort. The Company's Year 2000 compliance plan focuses on three areas
- -- information systems, business management and merchandise vendors -- and
generally covers six stages:
o Inventorying the Company's systems (including equipment with embedded
chips), merchandise vendors and service providers;
o Assessing whether a Year 2000 compliance issue exists for each system and
provider;
o Remediating each system with a Year 2000 compliance issue by performing any
necessary enhancements, upgrades, modifications or replacements;
o Testing each remediated system by using a date simulation testing tool for
future dates that trigger specific processing;
o Certifying each system, which involves performing final testing for
validation of Year 2000 compliance by systems, finance and business senior
managers; and,
o Contingency planning to mitigate Year 2000 compliance risks.
Only the inventory, assessment and contingency planning stages apply to
merchandise vendors and service providers.
ANNUAL REPORT 1998 29
<PAGE> 13
SEARS, ROEBUCK AND CO.
Consolidated Statements of Shareholders' Equity [PHOTO]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Capital
Common in Excess 8.88%
dollars in millions Shares Common of Par Preferred Retained Treasury
shares in thousands Outstanding Stock Value Shares Earnings Stock
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year 1996 390,488 $322 $3,634 $ 325 $2,444 $(1,634)
Net income 1,271
Other comprehensive income:
Currency translation
Minimum pension liability, net
of tax of $28
Total comprehensive income
Dividends to shareholders:
Common ($0.92 per share) (360)
Preferred (25)
Stock options exercised and other changes 4,355 1 (16) 143
Shares repurchased for employee stock plans (3,449) (164)
ESOP expense recognized
Preferred stock redemption (325)
- --------------------------------------------------------------------------------------------------
Balance, end of year 1996 391,394 $323 $3,618 $ -- $3,330 $(1,655)
- --------------------------------------------------------------------------------------------------
Net income 1,188
Other comprehensive income:
Currency translation
Reclassification adjustment for
loss included in net income
Minimum pension liability, net
of tax of $34
Total comprehensive income
Dividends to shareholders ($0.92 per share) (360)
Stock options exercised and other changes 2,936 (20) 123
Shares repurchased for employee stock plans (3,442) (170)
ESOP expense recognized
- --------------------------------------------------------------------------------------------------
Balance, end of year 1997 390,888 $323 $3,598 $ -- $4,158 $(1,702)
- --------------------------------------------------------------------------------------------------
Net income 1,048
Other comprehensive income:
Currency translation
Minimum pension liability, net
of tax of $45
Total comprehensive income
Dividends to shareholders ($0.92 per share) (358)
Stock options exercised and other changes 3,263 (15) 141
Shares repurchased for employee stock plans (10,643) (528)
ESOP expense recognized
- --------------------------------------------------------------------------------------------------
Balance, end of year 1998 383,508 $323 $3,583 % -- $4,848 $(2,089)
- --------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Accumulated
Deferred Other Total Total
dollars in millions ESOP Comprehensive Shareholders' Comprehensive
shares in thousands Expense Income Equity Income
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of year 1996 $(253) $(453) $4,385
Net income 1,271 $1,271
Other comprehensive income:
Currency translation 4 4 4
Minimum pension liability, net
of tax of $28 8 8 8
------
Total comprehensive income $1,283
======
Dividends to shareholders:
Common ($0.92 per share) (360)
Preferred (25)
Stock options exercised and other changes 128
Shares repurchased for employee stock plans (164)
ESOP expense recognized 23 23
Preferred stock redemption (325)
- -----------------------------------------------------------------------------------------------------------
Balance, end of year 1996 $(230) $(441) $4,945
- -----------------------------------------------------------------------------------------------------------
Net income 1,188 $1,188
Other comprehensive income:
Currency translation (17) (17) (17)
Reclassification adjustment for
loss included in net income 87 87 87
Minimum pension liability, net
of tax of $34 60 60 60
------
Total comprehensive income $1,318
======
Dividends to shareholders ($0.92 per share) (360)
Stock options exercised and other changes 103
Shares repurchased for employee stock plans (170)
ESOP expense recognized 26 26
- -----------------------------------------------------------------------------------------------------------
Balance, end of year 1997 $(204) $(311) $5,862
- -----------------------------------------------------------------------------------------------------------
Net income 1,048 $1,048
Other comprehensive income:
Currency translation (31) (31) (31)
Minimum pension liability, net
of tax of $45 (82) (82) (82)
-----
Total comprehensive income $ 935
=====
Dividends to shareholders ($0.92 per share) (358)
Stock options exercised and other changes 126
Shares repurchased for employee stock plans (528)
ESOP expense recognized 29 29
- -----------------------------------------------------------------------------------------------------------
Balance, end of year 1998 $(175) $(424) $6,066
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
<PAGE> 14
SEARS, ROEBUCK AND CO.
Management's Analysis of Consolidated Financial Condition (Continued) [PHOTO]
- -------------------------------------------------------------------------------
The information systems area includes:
o The Company's proprietary and third party information systems;
o Related hardware, software and data and telephone networks; and,
o Information systems service providers.
As of January 30, 1999, the Company has completed an inventory and
assessment of its mission critical (vital to business operations) information
systems. The Company has remediated approximately 82% of its mission critical
systems and has assessed or tested approximately 63% of them as Year 2000
compliant, subject to certification. The Company expects to have substantially
completed remediation and testing by July 1999 and certification by November
1999. The Company has issued a moratorium on deploying any non-Year 2000 changes
into its systems production environment from July 1, 1999 through April 1, 2000
(subject to business critical changes), which will assist in completing
certification.
The Company has obtained written assurances from two mission critical
information systems service providers that their systems and services will be
Year 2000 compliant and is assessing their Year 2000 test plans and results. One
of these service providers is the primary provider of the Company's computer,
data and voice infrastructure, which supports merchandise procurement and
distribution, inventory control, point-of-sale and other information systems and
functions. The other service provider is providing the Company's new account
processing system and operating platform to which the Company is converting its
Credit business.
The business management area includes:
o Equipment and systems that contain embedded computer technology, such as
elevators and security systems;
o Resale merchandise; and,
o Non-information systems service providers.
Based on the Company's assessment, it believes that its equipment and
systems that contain embedded computer technology present little Year 2000
exposure or risk. Based on information from its merchandise manufacturers, the
Company believes that, with the exception of certain older model personal
computers, its resale merchandise does not have Year 2000 compliance issues. The
Company has assessed its mission critical, non-information systems service
providers and does not believe that these service providers pose a substantial
Year 2000 compliance risk to the Company.
The Company has divided its mission critical merchandise vendors into three
tiers:
o The first tier is the Company's 40 largest merchandise vendors, which
comprise approximately 50% of its merchandise sales;
o The second tier is the 306 next largest vendors, which comprise
approximately 30% of its merchandise sales; and,
o The third tier is the 639 next largest vendors, which comprise
approximately 10% of its merchandise sales.
The Company has communicated to each mission critical vendor that if it is
not Year 2000 compliant by July 1, 1999, the Company may find an alternative
vendor. The Company categorizes its vendors on a scale of green (on target to be
compliant by July 1), yellow (on target to be compliant by July 1 but minor
concerns about progress) and red (not on target to be compliant by July 1). The
Company has performed site visits of all but one (which it anticipates
completing by April 1, 1999) of its first tier vendors. The Company is
performing telephone conferences with second tier vendors. The Company has
completed telephone conferences with 90% of second tier vendors with a red
rating and anticipates completing telephone conferences with all others by June
1. In addition, the Company is tracking responses to the Year 2000 questionnaire
distributed to all mission critical vendors in January 1998, reviewing follow-up
progress reports, reviewing vendors' filings with the Securities and Exchange
Commission and conducting electronic data interchange testing for all mission
critical vendors. As of February 28, 1999, the Company has assigned red ratings
to one first tier vendor (less than 1% of merchandise sales), 55 second tier
vendors (approximately 5% of merchandise sales) and 256 third tier vendors
(approximately 3% of merchandise sales).
CONTINGENCY PLANS
The Company is developing contingency plans that identify what actions need to
be taken if a critical system, merchandise vendor or service provider is not
Year 2000 compliant. Each of the Company's business units is required to develop
contingency plans, which the Company expects to finalize by July 1999.
RISKS
The Company believes that its most significant Year 2000 risk factors are:
o Failure of either of its two mission critical information systems service
providers to make their systems Year 2000 compliant;
o Failure of the Company to timely complete implementation of its new payroll
processing system, which it anticipates completing by July 1999; and,
o Failure of a first tier mission critical merchandise vendor, or multiple
merchandise vendors or service providers, to supply merchandise or services
for an extended period of time.
Although the occurrence of any one of these scenarios could have a material
adverse effect on the Company, the Company does not believe that any of these
scenarios or any other Year 2000 compliance issues that would materially affect
the Company's operations are reasonably likely to occur.
COSTS
As of January 30, 1999, the Company estimates total costs (including external
costs and the costs of internal personnel) related to its Year 2000 effort to be
approximately $65 million, of which the Company (including Sears Canada) had
incurred approximately $30 million through January 30, 1999. In addition, the
Company has accelerated the planned development of new systems with improved
business functionality to replace systems that were not Year 2000 compliant,
including the Company's new payroll processing system. The Company expects these
systems will cost approximately $78 million, of which the Company had incurred
approximately $53 million through January 30, 1999. The Company funds Year 2000
costs with cash flows from operations.
ANNUAL REPORT 1998 31
<PAGE> 15
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. and all majority-owned domestic and international companies ("the Company").
Investments in companies in which the Company exercises significant influence,
but not control, are accounted for using the equity method of accounting.
Investments in companies in which the Company has less than a 20% ownership
interest, and does not exercise significant influence, are accounted for at
cost.
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 1997 and 1996 financial
statements to conform with the current year presentation.
FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest December 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>
1998 January 2, 1999 52
1997 January 3, 1998 53
1996 December 28, 1996 52
- -------------------------------------------------------------------------------
</TABLE>
MERCHANDISE SALES AND SERVICES
Revenues from merchandise sales and services are net of estimated returns and
allowances and exclude sales tax. Included in merchandise sales and services are
gross revenues of licensees of $1.71, $1.82 and $1.80 billion for 1998, 1997 and
1996, respectively.
SERVICE CONTRACTS
The Company sells extended service contracts with terms of coverage generally
between 12 and 36 months. Revenues and incremental direct acquisition costs from
the sale of these contracts are deferred and amortized over the lives of the
contracts. Costs related to performing the services under 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
Basic earnings per common share is computed by dividing net income available to
common shareholders by the weighted-average number of common shares outstanding.
Diluted earnings per common share also includes the dilutive 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 the 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 January 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. Subsequent to January 3, 1998, amounts transferred
from the Company's credit card portfolio to the Trust become securities upon
transfer. Accounts are transferred net of the related allowance for
uncollectible accounts and income is recognized generally on an effective yield
basis over the collection period of the transferred balances. The retained
interest consists 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. The
contractually required seller's interest represents the dollar amount of credit
card receivables that, according to the terms of the Company's securitization
agreements, must be included in the Trust in addition to the amount of
receivables which back the securities sold to third parties. The excess seller's
interest is the dollar amount of receivables that exist in the Trust to provide
for future securitizations, but is not contractually required to be in the
Trust. Retained interests are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
millions 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Investor certificates held by the Company $ 920 $ 545 $ 522
Contractually required seller's interest 764 697 684
Excess seller's interest 2,716 2,074 1,054
- -------------------------------------------------------------------------------
Retained interest in transferred credit card
receivables $4,400(1) $3,316 $2,260
- -------------------------------------------------------------------------------
</TABLE>
(1) The 1998 retained interest amount is shown before reserve of $106 million
related to the transfers during 1998.
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 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 repaid 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 judgement.
Under the Company's proprietary credit system, 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 an account is charged off, at which time uncollected finance
charge revenue is recorded as a
32 Sears Roebuck and Co.
<PAGE> 16
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
reduction of credit revenues. The Company has primarily used this proprietary
system for all periods presented in the financial statements. However, in the
fourth quarter of 1998, the Company converted 12% of its managed portfolio of
credit card receivables to a new credit processing system. Under the new system,
uncollectible accounts will be charged off automatically when the customer fails
to make a payment in each of the last eight billing cycles. Finance charge
revenue that is charged off will continue to be recorded as a reduction of
credit revenue. The remaining 88% of accounts on the proprietary credit system
will be converted to the new system in 1999.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" in 1997. SFAS No. 125 requires that the Company
recognize gains on its 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. Accordingly, the adoption of
SFAS No. 125 increased net income by $36 million in 1998 and $136 million in
1997 versus the net income that would have been recognized under the previous
accounting method.
MERCHANDISE INVENTORIES
Approximately 88% 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 $34 and $17 million in
1998 and 1997, respectively, and a charge of $19 million in 1996. Partial
liquidation of merchandise inventories valued under the LIFO method resulted in
credits of $2 million in 1997. No layer liquidation occurred in 1998 or 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 $679 and
$713 million higher at January 2, 1999, and January 3, 1998, respectively.
Merchandise inventories of International operations, operations in Puerto
Rico, and certain Sears Tire Group formats, which in total represent
approximately 12% 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 3 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.
LONG-LIVED ASSETS
Long-lived assets, identifiable intangibles and goodwill related to those assets
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable.
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 periods not exceeding 40 years. The Company periodically assesses
the recoverability of the carrying value and the appropriateness of the
remaining life of goodwill.
ADVERTISING
Costs for newspaper, television, radio and other media advertising are expensed
the first time the advertising occurs. The total cost of advertising charged to
expense was $1.67, $1.59 and $1.53 billion in 1998, 1997 and 1996, respectively.
DIRECT-RESPONSE MARKETING
The Company direct markets insurance (credit protection, life and health), clubs
and services memberships, merchandise through specialty catalogs, and impulse
and continuity merchandise. For insurance and clubs and services, deferred
revenue is recorded when the member is billed (upon expiration of any free trial
period), and revenue is recognized over the insurance or membership period.
Otherwise, revenue is recognized when merchandise is shipped.
Membership acquisition and renewal costs, which primarily relate to
membership solicitations, are capitalized since such direct-response advertising
costs result in future economic benefits. Such costs are amortized over the
shorter of the program's life or five years, primarily in proportion to when
revenues are recognized. For specialty catalogs, costs are amortized over the
life of the catalog, not to exceed one year. The consolidated balance sheets
include deferred direct-response advertising costs of $131 and $90 million at
January 2, 1999, and January 3, 1998, respectively, and that are included in
prepaid expenses and deferred charges, or 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. Any differential to be paid or received is
accrued 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 lives of the caps. Payments
received based on interest rate cap agreements reduce interest expense. The
unamortized cost of 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.
ANNUAL REPORT 1998 33
<PAGE> 17
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
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
hedges at inception of the hedge contract. Accordingly, changes in market values
of financial 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
Effective January 4, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires the Company to report the change in its
net assets from nonowner sources. Accumulated other comprehensive income is
comprised of foreign currency translation adjustments of $125 and $94 million at
January 2, 1999, and January 3, 1998, respectively, and adjustments to the
Company's minimum pension liability of $299 and $217 million as of January 2,
1999, and January 3, 1998, respectively. The Company has chosen to disclose
comprehensive income in the Consolidated Statements of Shareholders' Equity, and
prior year information has been restated to conform to the SFAS No. 130
requirements.
Effective January 4, 1998, the Company adopted AICPA Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," which requires the Company to capitalize certain
software development costs. Generally, once the capitalization criteria of the
SOP have been met, external direct costs of materials and services used in
development of internal-use software, payroll and payroll-related costs for
employees directly involved in the development of internal-use software and
interest costs incurred when developing software for internal use are to be
capitalized. The adoption of this SOP did not have a material effect on the
Company's consolidated financial position, results of operations or cash flows
during 1998.
Effective January 2, 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," and SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS
No. 131 establishes revised standards for the reporting of information about the
Company's operating segments, and SFAS No. 132 standardizes the disclosure
requirements for pension and other postretirement benefit plans. The adoption of
these statements did not impact the Company's consolidated financial position,
results of operations or cash flows, but did affect the disclosures contained in
Notes 5 and 15. Prior year information has been restated to conform with the
requirements of these statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. The Company is
currently evaluating the effect this statement might have on the consolidated
financial position or results of operations of the Company.
2. DISPOSITION OF BUSINESSES
On November 18, 1998, the Company entered into an agreement to exchange its
interest in the HomeLife furniture business for $100 million in cash, a $10
million note receivable and a 19% equity ownership in the new HomeLife business.
The Company recorded a pretax charge of $33 million ($21 million after-tax) in
the fourth quarter of 1998 to adjust the carrying value of HomeLife's assets to
their estimated fair market value, less cost to sell. The sale was completed on
January 30, 1999.
On November 2, 1998, the Company completed an Agreement and Plan of Merger
of Western Auto, a wholly-owned subsidiary, and Advance Auto Parts, whereby
Sears exchanged its interest in Western Auto for $175 million in cash and
approximately 40% equity ownership in the resulting combined company. Based on
the terms of the sale, the Company recorded a pretax charge of $296 million
($225 million after-tax) in the third quarter of 1998 to adjust the carrying
value of Western Auto's assets to their estimated fair market value, less cost
to sell. In the fourth quarter of 1998, this loss was revised to reflect an
additional after-tax charge of $18 million based on the final terms of the
transaction.
3. ACQUISITION OF BUSINESS
During 1996, the Company acquired all the outstanding stock of Orchard Supply
Hardware Stores Corporation ("Orchard") for $309 million. At the date of
acquisition, Orchard was 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.
4. INCOME TAXES
Income before income taxes, minority interest and extraordinary loss is as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
millions 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $1,704 $2,018 $2,099
Foreign 179 120 14
- -------------------------------------------------------------------------------
Total $1,883 $2,138 $2,113
- --------------------------------------------------------------------------------
Federal, state and foreign taxes are as follows:
- --------------------------------------------------------------------------------
millions 1998 1997 1996
- --------------------------------------------------------------------------------
Current
Federal $ 472 $ 468 $ 720
State 41 75 133
Foreign 74 97 25
- --------------------------------------------------------------------------------
Total 587 640 878
- --------------------------------------------------------------------------------
Deferred
Federal 159 256 (12)
State 15 18 (8)
Foreign 5 (2) (24)
- --------------------------------------------------------------------------------
Total 179 272 (44)
- --------------------------------------------------------------------------------
Income tax provision $ 766 $ 912 $ 834
- --------------------------------------------------------------------------------
</TABLE>
34 SEARS, ROEBUCK AND CO.
<PAGE> 18
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
A reconciliation of the statutory federal income tax rate to the effective
rate is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit 1.9 2.9 3.9
Reaffirmation charge -- 1.3 --
Sale of Sears Mexico -- 1.3 --
Sale of Western Auto 2.3 -- --
Other 1.5 2.2 0.6
- --------------------------------------------------------------------------------
Effective income tax rate 40.7% 42.7% 39.5%
- --------------------------------------------------------------------------------
</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 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Unearned maintenance income $ 417 $ 435
Allowance for uncollectible accounts 448 493
State income taxes 125 93
Postretirement benefit liability 974 1,059
Minimum pension liability 165 120
Other deferred tax assets 565 655
- --------------------------------------------------------------------------------
Total deferred tax assets 2,694 2,855
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Property and equipment 399 394
Prepaid pension 78 96
LIFO 123 132
Deferred swap termination loss 182 193
Other deferred tax liabilities 549 544
- --------------------------------------------------------------------------------
Total deferred tax liabilities 1,331 1,359
- --------------------------------------------------------------------------------
Net deferred taxes $1,363 $1,496
- --------------------------------------------------------------------------------
</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 $426 million at January 2, 1999. If
these earnings were to be remitted, taxes of $104 million would be due.
Income taxes of $366, $886 and $386 million were paid in 1998, 1997 and
1996, respectively.
5. Benefit plans
Expenses for retirement and savings-related benefit plans were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
millions 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sears 401(k) Profit Sharing Plan $ 31 $ 33 $ 31
Pension plans 88 106 99
Postretirement benefits (38) (41) 76
Other plans -- 6 8
- --------------------------------------------------------------------------------
Total $ 81 $104 $214
- --------------------------------------------------------------------------------
</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"). 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 $75, $71 and $64
million in 1998, 1997 and 1996, respectively.
The Plan includes an Employee Stock Ownership Plan ("the ESOP") to prefund
a portion of the Company's anticipated contribution. The Company provided the
ESOP with a loan that was used to purchase Sears common shares in 1989. In June
1998, the ESOP refinanced the loan and extended its maturity to 2024. 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 was $15.27. The Company
uses the ESOP shares to fund the Company contribution, which thereby reduces
expense.
The ESOP loan bears interest at 6.1% (9.2% prior to refinancing) 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 $24,
$23 and $29 million in 1998, 1997 and 1996, respectively. The balance of the
ESOP loan was $267 and $290 million at January 2, 1999 and January 3, 1998,
respectively.
The reported expense is determined as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
millions 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense recognized by ESOP $ 21 $ 27 $ 29
Less dividends on ESOP shares (19) (20) (21)
Cost of shares allocated to employees and
plan expenses 29 26 23
- --------------------------------------------------------------------------------
Sears 401(k) Profit Sharing Plan expense $ 31 $ 33 $ 31
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, total committed to be released, allocated and
remaining unallocated ESOP shares were 1.9, 12.5 and 11.5 million, respectively.
All ESOP shares are considered outstanding in the calculation of earnings per
share.
RETIREMENT BENEFIT 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. The Company uses October 31 as the measurement date for determining
pension plan assets and obligations.
In addition to providing pension 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 10
ANNUAL REPORT 1998 35
<PAGE> 19
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
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.
The change in benefit obligation, change in plan assets, funded status,
reconciliation to amounts recognized in the consolidated balance sheets and
weighted average assumptions are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
millions Pension Benefits Postretirement Benefits
- --------------------------------------------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Beginning balance $ 2,824 $ 2,677 $ 1,270 $ 1,716
Benefits earned
during the period 78 74 7 13
Interest cost 184 190 84 105
Actuarial loss (gain) 104 153 (22) 10
Benefits paid (302) (255) (136) (141)
Foreign exchange impact (38) (21) (4) (2)
Plan amendments 22 -- -- (366)
Elimination of
postretirement life
insurance for
active associates -- -- -- (61)
Disposition of Western Auto -- -- (19) --
Other -- 6 -- (4)
- --------------------------------------------------------------------------------
Ending balance $ 2,872 $ 2,824 $ 1,180 $ 1,270
- --------------------------------------------------------------------------------
Change in plan assets at fair value:
Beginning balance $ 2,710 $ 2,490 $ -- $ --
Actual return on plan
assets 176 484 -- --
Company contributions 46 26 136 141
Benefits paid (302) (255) (136) (141)
Foreign exchange impact (54) (27) -- --
Other (16) (8) -- --
- --------------------------------------------------------------------------------
Ending balance $ 2,560 $ 2,710 $ -- $ --
- --------------------------------------------------------------------------------
Funded status of the plan: $ (312) $ (114) $(1,180) $(1,270)
Unrecognized net loss (gain) 600 495 (396) (414)
Unrecognized prior
service benefit (25) (55) (770) (880)
Unrecognized transitional asset -- (10) -- --
- --------------------------------------------------------------------------------
Net amount recognized $ 263 $ 316 $(2,346) $(2,564)
- --------------------------------------------------------------------------------
Amounts recognized in the
balance sheet consist of:
Prepaid benefit cost $ 164 $ 174 $ -- $ --
Accrued benefit liability (365) (195) (2,346) (2,564)
Accumulated other
comprehensive income 464 337 -- --
- --------------------------------------------------------------------------------
Net amount recognized $ 263 $ 316 $(2,346) $(2,564)
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
- --------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted-average
assumptions:
Discount rate 7.25% 7.25% 7.75% 7.25% 7.25% 7.75%
Return on
plan assets 9.50% 9.50% 9.50% NA NA NA
Rate of
compensation
increases 4.00% 4.00% 4.25% NA NA NA
- --------------------------------------------------------------------------------
</TABLE>
The components of net periodic benefit cost are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
- --------------------------------------------------------------------------------
millions 1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Components of net
periodic benefit cost:
Benefits earned
during the period $ 78 $ 74 $ 72 $ 7 $ 13 $ 18
Interest cost 184 190 189 84 105 125
Expected return
on plan assets (220) (208) (206) -- -- --
Amortization of
unrecognized
net prior
service benefit (8) (6) (6) (103) (68) (60)
Amortization of
unrecognized
transitional asset (9) (10) (10) -- -- --
Recognized net
loss (gain) 47 52 52 (26) (30) (7)
Elimination of
postretirement
life insurance
for active associates -- -- -- -- (61) --
Other 16 14 8 -- -- --
- --------------------------------------------------------------------------------
Net periodic
benefit cost $ 88 $ 106 $ 99 $ (38) $(41) $ 76
- --------------------------------------------------------------------------------
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $2,309, $2,210 and $1,845 million, respectively,
at January 2, 1999, and $2,268, $2,123 and $1,928 million, respectively, at
January 3, 1998. 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 minimum pension liability, net of tax, was $299 million at January
2, 1999 and $217 million at January 3, 1998, and is included in accumulated
other comprehensive income as a reduction of shareholders' equity.
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 December 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 all active associates, the Company also
announced the reduction in life insurance over a 10-year period to a maximum
coverage of $5,000 for all post-1977 retirees.
The weighted-average health care cost trend rate used in measuring the
postretirement benefit expense is 5.0% for 1999 and thereafter. A one percentage
point change in the assumed health care cost trend rate would have the following
effects:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
One Percentage One Percentage
millions Point Increase Point Decrease
- --------------------------------------------------------------------------------
<S> <C> <C>
Effect on total service
and interest cost components $ 4 $ (3)
Effect on postretirement
benefit obligation $27 $(22)
- --------------------------------------------------------------------------------
</TABLE>
36 SEARS, ROEBUCK AND CO.
<PAGE> 20
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements (Continued)
- -------------------------------------------------------------------------------
6. BORROWINGS
Short-term borrowings consist of:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
millions 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper $4,463 $5,100
Bank loans 91 106
Promissory note 70 --
Other loans -- 2
- --------------------------------------------------------------------------------
Total short-term borrowings $4,624 $5,208
Weighted-average interest rate at year end 5.3% 5.9%
Weighted-average interest rate at year end,
including effects of swaps 6.3% 6.7%
- --------------------------------------------------------------------------------
</TABLE>
At January 2, 1999, the Company had credit agreements totaling $6.62
billion. SRAC's credit facilities totaled $6.105 billion in syndicated credit
agreements. Sears Canada had credit agreements totaling $523 million. These
syndicated and other credit agreements provide for loans at prevailing interest
rates and mature at various dates through April 2003. The Company pays
commitment fees in connection with these credit agreements.
The Company had interest rate swap agreements that established fixed rates
on $1.50 billion and $1.49 billion of short-term variable rate debt at January
2, 1999 and January 3, 1998, respectively, resulting in weighted-average
interest rates of 6.8% and 6.9%, respectively. The weighted-average maturity of
agreements in effect on January 2, 1999, was approximately 14 years.
Long-term debt is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
millions ISSUE 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
SEARS, Roebuck and Co.
6.25% to 9.5% Notes, due 1999 to 2004 $ 500 $ 1,250
8.2% Extendable Notes, due 1999 31 31
6% Debentures, $300 million face value, due 2000,
effective rate 14.8% -- 250
9.375% Debentures, due 2011 300 300
4.43% to 10.0% Medium-Term Notes,
due through 2021 1,550 2,045
Capitalized lease obligations 311 279
SEARS Roebuck Acceptance Corp.
5.87% Term Loan, due 1999 -- 50
6.00% to 7.5% Notes, due 2000 to 2038 5,084 3,099
5.53% to 7.26% Medium-Term Notes, due 1999 to 2013 5,976 6,033
SEARS DC Corp.
7.81% to 9.26% Medium-Term Notes,
due through 2012 332 444
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
SEARS Canada Inc.
6.55% to 11.70% Debentures, due 1999 to 2007 392 421
Notes, mortgages, bonds and capitalized leases 115 127
SEARS Canada Receivables Trust
5.34% to 9.18% Receivables Trusts,
due 1999 to 2006 405 678
OTHER SUBSIDIARIES
Notes, mortgage and capitalized leases 49 154
- --------------------------------------------------------------------------------
15,045 15,632
Less current maturities 1,414 2,561
- --------------------------------------------------------------------------------
Total long-term debt $13,631 $13,071
- --------------------------------------------------------------------------------
</TABLE>
On October 2, 1998, the Company prepaid the 6% debentures with a face value
of $300 million, which were due in May 2000. The transaction generated an
extraordinary loss of $37 million and a related income tax benefit of $13
million, resulting in an after-tax loss of $24 million. The loss resulted
primarily from the write-off of the related unamortized discount. The debt was
refinanced with the issuance of commercial paper. During 1998, the Company also
prepaid at par value the 5.87% term loan of $50 million which was due in 1999.
As of January 2, 1999, long-term debt maturities for the next five years
are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
millions
- --------------------------------------------------------------------------------
<S> <C>
1999 $1,414
2000 1,993
2001 2,455
2002 1,607
2003 2,439
- --------------------------------------------------------------------------------
</TABLE>
The Company paid interest of $1.3, $1.4 and $1.3 billion in 1998, 1997 and
1996, respectively. Interest capitalized was $5, $3 and $5 million in 1998, 1997
and 1996, 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. Contingent rent is accrued
over the lease term, provided that the achievement of the specified sales
level that triggers the contingent rental is probable. Certain leases include
renewal or purchase options. Operating lease rentals were $431, $439 and $365
million, including contingent rentals of $55, $57 and $66 million in 1998,
1997 and 1996, respectively.
Minimum lease obligations, excluding taxes, insurance and other expenses
payable directly by the Company, for leases in effect as of January 2, 1999, are
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Capital Operating
millions leases leases
- --------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 65 $ 334
2000 65 290
2001 64 253
2002 59 223
2003 59 199
After 2003 796 1,143
- --------------------------------------------------------------------------------
Total minimum payments $1,108 $2,442
Less imputed interest 655
- --------------------------------------------------------------------------------
Present value of minimum lease payments 453
Less current maturities 21
- --------------------------------------------------------------------------------
Long-term obligations $ 432
- -------------------------------------------------------------------------------
</TABLE>
The Company has committed to purchase data and voice networking and
information processing services of at least $216 million annually through 2004
from a third-party provider. Total expenses incurred by the Company for these
services during 1998, 1997 and 1996 were $355, $361 and $327 million,
respectively.
ANNUAL REPORT 1998 37
<PAGE> 21
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements (Continued) PHOTO
- --------------------------------------------------------------------------------
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 rates. 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 January 2, 1999, and January 3, 1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998
- --------------------------------------------------------------------------------
CONTRACT OR
NOTIONAL FAIR CARRYING
millions AMOUNT VALUE VALUE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate swap agreements:
Pay floating rate, receive fixed rate $ 805 $ 9 $ --
Pay fixed rate, receive floating rate 1,499 (176) --
Foreign currency hedge agreements 10 (2) --
- --------------------------------------------------------------------------------
<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>
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 5.63% and received a
weighted-average rate of 6.81% in 1998. For pay fixed rate, receive floating
rate swaps, the Company paid a weighted-average rate of 6.90% and received a
weighted average rate of 5.64% in 1998. The fair values of interest rate swaps
are based on prices quoted from dealers. If a counterparty fails to meet the
terms of a swap 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 January 2, 1999 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Notional amount
- --------------------------------------------------------------------------------
Over
millions 1 year 2-5 years 5 years
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate swap agreements $620 $613 $1,071
Foreign currency hedge agreements 1 9 --
- --------------------------------------------------------------------------------
</TABLE>
During 1997, the Company paid $633 million to terminate interest rate
swaps. The deferred loss related to these terminations was $441 million and $464
million at January 2, 1999, and January 3, 1998, respectively, and is being
amortized over the remaining lives of the original swap periods.
CREDIT-RELATED
The Company had outstanding domestic securitized credit card receivables sold of
$6.63 and $6.40 billion at January 2, 1999, and January 3, 1998, 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 $88 million at January 2, 1999. 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 January 2, 1999, and January 3, 1998.
9. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The Company grants credit to customers throughout North America. The five states
and the respective receivable balances in which the Company had the largest
amount of managed credit card receivables were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
millions 1998 % of Balance 1997 % of Balance
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
California $2,946 10.4% $2,966 10.2%
Texas 2,285 8.1% 2,368 8.2%
Florida 2,069 7.3% 2,114 7.3%
New York 1,689 6.0% 1,706 5.9%
Pennsylvania 1,457 5.1% 1,522 5.3%
- --------------------------------------------------------------------------------
</TABLE>
10. LEGAL PROCEEDINGS
The Company has been subject to a federal civil and criminal investigation in
connection with activities relating to certain debt reaffirmation agreements
with current and former credit card holders of the Company who had declared
personal bankruptcy. Under the reaffirmation provisions of the United States
Bankruptcy Code, a debtor seeking Chapter 7 protection may agree to repay his or
her debts to creditors. This reaffirmation agreement must be filed with the
bankruptcy court to be valid. On February 19, 1999, Sears Bankruptcy Recovery
Management Services, Inc., a subsidiary of the Company, pleaded guilty in
federal district court to one count of bankruptcy fraud and was fined $60
million. The fine will have no effect on the Company's earnings because the
Company recorded a pretax charge of $475 million against earnings for the
settlement of lawsuits, fines and related matters stemming from the improper
handling of certain debt reaffirmation agreements and other related matters in
the second quarter of 1997. The plea agreement does not require any change in
the day-to-day operations of Sears or the subsidiary.
38 SEARS, ROEBUCK AND CO.
<PAGE> 22
SEARS, ROEBUCK AND CO.
Notes To Consolidated Financial Statements (continued) [PHOTO]
- --------------------------------------------------------------------------------
In a separate civil action related to the reaffirmation matter dating from
April 17, 1997, Sears reached a settlement agreement with the U.S. Attorney for
the District of Massachusetts, which was approved by the federal district court
on February 23, 1999. Under the terms of that agreement, the Company will
continue to file all reaffirmation agreements obtained in Chapter 7 bankruptcies
as required by the United States Bankruptcy Code.
On March 9, 1999, the Company reached an agreement to settle a class action
lawsuit stemming from an increase in the annual percentage rate assessed on
certain balances of some Sears credit customers. This settlement, which is
subject to final approval by the United States District Court, Northern District
of Illinois, is also expected to resolve related lawsuits in Illinois and
Washington. The lawsuit was brought on behalf of a nationwide class of Sears
credit customers who had outstanding balances when their accounts were
transferred to Sears National Bank, a wholly-owned subsidiary of Sears, during a
period from 1994 through 1996, and who had not fully paid off those balances as
of the effective dates of an April 1997 Notice of Change in Credit Terms. Under
the terms of the settlement, the Company will provide to the class members cash
and coupons with a face value totaling approximately $156 million. The Company
previously reserved for the estimated cost of the settlement; therefore, the
settlement will not have a material effect on the Company's annual results of
operations, financial position, liquidity or capital resources. The settlement
does not require any change in the Company's credit practices.
On January 13, 1999, ten "Doe" plaintiffs filed a putative class action in
the United States District Court for the Central District of California against
eighteen domestic clothing retailers, including the Company, and eleven foreign
clothing suppliers (the "Federal Action"). The Doe plaintiffs allege that they
have worked in garment factories on the island of Saipan in the Commonwealth of
the Northern Mariana Islands, and they purport to represent a class of other
current and former workers. The plaintiffs allege that class members were forced
to work under illegal labor conditions in the Saipan factories used by
suppliers, and they assert against the Company claimed violations of the
Racketeering Influenced Corrupt Organizations Act, the Anti-Peonage Act, the
Thirteenth Amendment to the U.S. Constitution, and the Law of Nations. The
central allegation of the Federal Action is that the Company and the other
retail defendants who purchased garments manufactured in the Saipan factories
used by suppliers are liable to the plaintiff class for any alleged unlawful
working conditions imposed upon them by their employers. The case seeks
injunctive and declaratory relief, unspecified treble damages, interest and
attorneys' fees and expenses. On January 13, 1999, a related case was also filed
against seventeen named domestic clothing retailers, including the Company, and
additional unnamed retailers, in San Francisco County Superior Court (the "State
Action"), alleging violations of the California Business and Professional Code.
The named plaintiffs in the State Action are the Union of Needletrades
Industrial and Textile Employees, AFL-CIO, Global Exchange, Sweatshop Watch and
the Asian Law Caucus, who purport to bring the action on behalf of the general
public of the State of California. The central allegation in the State Action is
that the Company and the other defendants engaged in unlawful and unfair
business practices in the selling and advertising in California of garments that
had been manufactured under allegedly illegal labor conditions on Saipan. The
case seeks injunctive relief, restitution and disgorgement of profits, interest
and attorney's fees and costs. The Company intends to vigorously defend these
cases. The consequences of these actions are not presently determinable, but in
the opinion of the management of the Company, the ultimate liability is not
expected to have a material effect on the results of operations, 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 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.
11. 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.
12. EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
millions, except per share data 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $1,048 $1,188 $1,271
Less: dividends on preferred shares -- -- 25
- --------------------------------------------------------------------------------
Net income available to common shareholders(1)$1,048 $1,188 $1,246
- --------------------------------------------------------------------------------
Average common shares outstanding 388.6 391.6 391.8
Earnings per share - basic $ 2.70 $ 3.03 $ 3.18
Dilutive effect of stock options 3.1 6.2 7.3
Average common and common
equivalent shares outstanding 391.7 397.8 399.1
- --------------------------------------------------------------------------------
Earnings per share - diluted $ 2.68 $ 2.99 $ 3.12
- --------------------------------------------------------------------------------
</TABLE>
(1) Income available to common shareholders is the same for purposes of
calculating basic and diluted EPS.
In each period, certain options were excluded from the computation of
diluted earnings per share because they would have been antidilutive. At January
2, 1999, January 3, 1998 and December 28, 1996, options to purchase 5.2, 4.7 and
0.7 million shares of stock at prices ranging from $52 to $64, $47 to $64 and
$48 to $52 per share were excluded from the 1998, 1997 and 1996 calculations,
respectively.
ANNUAL REPORT 39
<PAGE> 23
SEARS, ROEBUCK AND CO.
Notes To Consolidated Financial Statements (continued) [PHOTO]
- --------------------------------------------------------------------------------
13. SHAREHOLDERS' EQUITY
DIVIDEND PAYMENTS
Under terms of indentures entered into in 1981 and thereafter, the Company
cannot take specified actions, including the declaration of cash dividends, that
would cause its unencumbered assets, as defined, to fall below 150% of its
liabilities, as defined. At January 2, 1999, approximately $4.0 billion could be
paid in dividends to shareholders under the most restrictive indentures.
PREFERRED SHARES
In Nov. 1996, the Company redeemed the 8.88% Preferred Shares at a redemption
price of $25 per depository share plus accrued dividends to the redemption date.
SHARE REPURCHASE PROGRAM
On February 3, 1998, the Board of Directors extended, for an additional two
years, the common share repurchase program which is used to acquire shares for
distribution in connection with the expected exercise of stock options, the
grant of restricted shares and the exchange of deferred shares under the
Company's stock plans. The program authorizes the Company to acquire up to 20
million Sears common shares on the open market. Through January 2, 1999, 17.5
million common shares have been acquired under the repurchase program.
14. 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. Generally, options vest over a three- or
four-year period and become exercisable either in equal, annual installments
over the vesting period, or at the end of the vesting period. Options generally
expire in 10 or 12 years.
Additionally, certain options were granted in 1997 with performance-based
features that required the Company's share price to reach specified targets at
three- and five-year intervals from the grant date to be earned. In February
1999, the Company extended the period of time allowed to meet the specified
targets by one year. The Company had 1.2 million and 1.4 million
performance-based options outstanding at the end of 1998 and 1997, respectively.
Subject to the satisfaction of the performance-based features, these
performance-based options vest 50% in year six, 25% in year seven and 25% in
year eight from the time of grant. The Company did not recognize compensation
expense in 1998 or 1997 related to these options because the exercise price
exceeded the Company share price at both year ends.
The Company measures compensation cost under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and 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>
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 1.81% 1.59% 1.86%
Expected volatility 28% 28% 28%
Risk-free interest rate 5.82% 6.19% 6.23%
Expected life of options 6 years 6 years 6 years
- --------------------------------------------------------------------------------
</TABLE>
Had compensation cost for the Company's stock option plans been determined
using the fair value method under 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 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income-- as reported $1,048 $1,188 $1,271
Net income-- pro forma 1,023 1,174 1,264
Earnings per share-- basic
As reported 2.70 3.03 3.18
Pro forma 2.63 3.00 3.16
Earnings per share -- diluted
As reported 2.68 2.99 3.12
Pro forma 2.61 2.95 3.10
- --------------------------------------------------------------------------------
</TABLE>
Changes in stock options are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
shares in thousands 1998 1997 1996
- --------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance 15,155 $34.16 14,389 $25.00 18,721 $22.83
Granted 4,171 55.73 4,165 58.23 750 48.65
Exercised (2,671) 25.00 (2,832) 23.67 (4,358) 19.71
Canceled or expired (1,404) 52.98 (567) 31.17 (724) 25.12
- --------------------------------------------------------------------------------
Ending balance 15,251 $39.93 15,155 $34.16 14,389 $25.00
- --------------------------------------------------------------------------------
Reserved for future
grant at year end 9,979 12,840 16,655
Exercisable 8,217 $25.43 7,524 $23.89 6,560 $22.65
- --------------------------------------------------------------------------------
Fair value of
options granted
during the year $18.61 $17.98 $16.33
- --------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding
at January 2, 1999:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
shares in thousands Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------
Weighted-Avg.
Range of Number Remaining Weighted-Avg. Number Weighted-Avg.
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 01/02/99 Life in Years Price at 01/02/99 Price
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10.00 to $20.00 1,517 5.1 $16.06 1,517 $16.06
20.01 to 30.00 5,081 7.2 24.13 5,081 24.13
30.01 to 40.00 1,029 8.7 31.93 1,029 31.93
40.01 to 50.00 2,393 8.8 47.57 514 48.57
50.01 to 64.00 5,231 9.0 60.28 76 55.38
- ----------------------------------------------------------------------------------------
$10.00 to $64.00 15,251 8.4 $39.93 8,217 $25.43
- ----------------------------------------------------------------------------------------
</TABLE>
40 SEARS, ROEBUCK AND CO.
<PAGE> 24
SEARS, ROEBUCK AND CO.
Notes To Consolidated Financial Statements (continued) [PHOTO]
- --------------------------------------------------------------------------------
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 10 million. The first purchase period
began January 1, 1998, and 0.6 million shares were issued under the ASOP in
1998.
15. SUMMARY OF SEGMENT DATA
The Company is a multi-line retailer providing a wide array of merchandise and
services, and no single product or service accounted for a significant
percentage of the Company's consolidated revenue. The Company has four domestic
segments, which include the Company's operations in the United States and Puerto
Rico, and one international segment. The domestic segments are Retail, Services,
Credit and Corporate.
The Retail segment includes the operating results of the Company's
Full-line Stores, Home Stores and Auto Stores, and the Services segment includes
the operating results of the Company's Home Services and Sears Direct
businesses. These businesses have been aggregated into their respective
reportable segments based on the management reporting structure and their
similar economic characteristics, customers and distribution channels.
A general description of the merchandise and services offered in each
segment follows:
RETAIL
Full-lines Stores, which are located principally in shopping malls, sell
apparel, home fashions and hardlines merchandise. Home Stores, consisting of
Hardware, Dealer and HomeLife furniture Stores, The Great Indoors and Commercial
Sales, include sales of hardlines and furniture. The Company's Auto Stores sell
and install tires, batteries and related goods and services.
SERVICES
Associates and third-party licensee partners of the Company provide product
repair services, extended warranty service contracts and home improvement
products. Sears Direct consists of direct-response marketing, which markets
insurance (credit protection, life and health), clubs and service memberships,
merchandise through specialty catalogs, and impulse and continuity merchandise;
and Sears Online, which offers merchandise for sale via the Company's websites.
CREDIT
The Credit business manages the Company's portfolio of receivables arising from
purchases of merchandise and services from domestic operations.
CORPORATE
The Corporate segment includes activities that are of a holding-company nature,
primarily consisting of administrative activities, the costs of which are not
allocated to the Company's businesses.
INTERNATIONAL
The International segment consists of retail, credit, services and corporate
operations similar to the Company's domestic operations. International
operations are conducted in Canada through Sears Canada, Inc., a 54.7% owned
subsidiary. International operations were also conducted in Mexico through
Sears, Roebuck de Mexico, S.A. de C.V. ("Sears Mexico") until March 29, 1997
when the Company sold 60% of the outstanding shares of Sears Mexico. Thereafter,
Sears Mexico's results are no longer included in the Company's consolidated
results.
The segments do not record intersegment revenues and expenses. External
revenues and expenses are allocated between the applicable segments.
The domestic segments participate in a centralized funding program.
Interest expense is allocated to the Credit segment based on its funding
requirements assuming a 9-to-1 debt to equity ratio. Funding includes debt
reflected on the balance sheet and investor certificates related to credit card
receivables sold through securitizations. Services is allocated interest income
based on the after-tax cash flow it generates through the sale of service
contracts. The remainder of net domestic interest expense is reported in the
Retail segment.
The Company's segments are evaluated on a pretax basis, and a stand-alone
income tax provision is not calculated for the individual segments. The Company
includes its deferred income taxes within the Corporate segment. The other
accounting policies of the segments are substantially the same as those
described in the Company's summary of significant accounting policies
footnote.
ANNUAL REPORT 1998 41
<PAGE> 25
SEARS, ROEBUCK AND CO.
Notes To Consolidated Financial Statements (continued) [PHOTO]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
millions Retail Services Credit International Corporate Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
1998
<S> <C> <C> <C> <C> <C> <C>
Revenue $30,429 $3,113 $ 4,369 $3,411 $ -- $41,322
Depreciation and amortization expense 671 49 13 64 33 830
Interest revenue -- 59 -- -- -- 59
Interest expense 133 -- 1,244 105 -- 1,482
Operating income (expense) 382 375 1,144 165 (211) 1,855
Equity in net income of investees
accounted for by the equity method -- -- -- 5 -- 5
Noncomparable items--
income (expense), pretax (352) -- 58 -- (37) (331)
Total assets 10,046 943 21,605 2,816 2,265 37,675
Capital expenditures 934 50 18 91 119 1,212
- -----------------------------------------------------------------------------------------------------------------------------------
1997
Revenue $30,086 $3,073 $ 4,649 $3,488 $ -- $41,296
Depreciation and amortization expense 639 42 13 60 31 785
Interest revenue -- 61 -- -- -- 61
Interest expense 92 -- 1,259 119 -- 1,470
Operating income (expense) 951 361 752 142 (212) 1,994
Equity in net income of investees
accounted for by the equity method -- -- -- 6 -- 6
Noncomparable items--
income (expense), pretax 23 -- (253) (21) 150 (101)
Total assets 10,732 753 22,250 2,801 2,164 38,700
Capital expenditures 1,114 51 9 108 46 1,328
- -----------------------------------------------------------------------------------------------------------------------------------
1996
Revenue $27,862 $2,819 $ 3,995 $3,388 $ -- $38,064
Depreciation and amortization expense 547 38 13 67 32 697
Interest revenue -- 65 -- -- -- 65
Interest expense 65 -- 1,191 174 -- 1,430
Operating income (expense) 841 305 1,164 (11) (216) 2,083
Equity in net income of investees
accounted for by the equity method -- -- -- 13 -- 13
Noncomparable items--
income (expense), pretax -- -- -- -- -- --
Total assets 9,778 508 20,421 2,939 2,521 36,167
Capital expenditures 1,034 56 15 46 38 1,189
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Noncomparable items in 1998 were:
Retail: Impairment loss related to the sales of Western Auto and
HomeLife
Credit: SFAS No. 125 accounting
Corporate: Extraordinary loss on debt extinguishment
Noncomparable items in 1997 were:
Retail: Postretirement life insurance curtailment, partially offset by
the Parts America conversion
Credit: Reaffirmation charge, partially offset by SFAS No. 125
accounting
International: Loss on the sale of Sears Mexico
Corporate: Gain on the sale of Advantis
42 Sears, Roebuck and Co.
<PAGE> 26
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/ Alan J. Lacy
- ------------------------------------
Alan J. Lacy
Chief Financial Officer
/s/ Jeffrey N. Boyer
- ------------------------------------
Jeffrey N. Boyer
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 2, 1999 and January 3, 1998 and the related Consolidated
Statements of Income, Shareholders' Equity, and Cash Flows for each of the three
years in the period ended January 2, 1999. 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 2, 1999 and January 3, 1998 and the results of its operations and its
cash flows for each of the three years in the period ended January 2, 1999 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 11, 1999, except for paragraphs 1 and 3 of Note 10, as to which the
date is March 10, 1999
ANNUAL REPORT 1998 43
<PAGE> 27
SEARS, ROEBUCK AND CO.
Five-Year Summary of Consolidated Financial Data
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
millions, except per common share and shareholder data 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Revenues $ 41,322 $ 41,296 $ 38,064 $34,835 $ 33,021
Costs and expenses 39,467 39,302 35,981 33,130 31,567
Operating income 1,855 1,994 2,083 1,705 1,454
Other income, net 28 144 30 27 31
Income before income taxes,
minority interest and extraordinary items 1,883 2,138 2,113 1,732 1,485
Income taxes 766 912 834 703 614
Income from continuing operations 1,072 1,188 1,271 1,025 857
Income from discontinued operations -- -- -- 776 402
Extraordinary (loss) gain (24) -- -- -- 195
Net income 1,048 1,188 1,271 1,801 1,454
FINANCIAL POSITION
Retained interest in transferred credit card receivables $ 4,294 $ 3,316 $ 2,260 $ 5,579 $ 3,543
Credit card receivables, net 17,972 19,843 19,303 14,527 14,658
Merchandise inventories 4,816 5,044 4,646 4,033 4,044
Property and equipment, net 6,380 6,414 5,878 5,077 4,253
Net assets of discontinued operations -- -- -- -- 7,231
Total assets 37,675 38,700 36,167 33,130 37,312
Short-term borrowings 4,624 5,208 3,533 5,349 6,190
Long-term debt 15,045 15,632 14,907 11,774 9,985
Total debt 19,669 20,840 18,440 17,123 16,175
Percent of debt to equity 324% 356% 373% 391% 453%
Shareholders' equity $ 6,066 $ 5,862 $ 4,945 $ 4,385 $ 10,801
SHAREHOLDERS' COMMON SHARE INVESTMENT
Book value per common share $ 15.82 $ 15.00 $ 12.63 $ 10.40 $ 29.78
Shareholders 233,494 235,336 243,986 256,624 262,387
Average common and equivalent shares outstanding 392 398 399 394 389
Earnings per common share - diluted
Income from continuing operations $ 2.74 $ 2.99 $ 3.12 $ 2.53 $ 2.13
Income from discontinued operations -- -- -- 1.97 1.03
Extraordinary (loss) gain (.06) -- -- -- 0.50
Net income $ 2.68 $ 2.99 $ 3.12 $ 4.50 $ 3.66
Cash dividends declared per common share $ .92 $ .92 $ .92 $ 1.26 $ 1.60
Cash dividend payout percent 34.3% 30.8% 29.5% 28.0% 43.7%
Market price - per common share (high-low) 65-39 1/16 65 1/4-38 3/4 53 7/8-38 1/4 60-30 55 1/8-42 1/8
- -----------------------------------------------------------------------------------------------------------------------------------
Closing market price at December 31 42 1/2 45 1/4 46 39 46
- -----------------------------------------------------------------------------------------------------------------------------------
Price/earnings ratio (high-low) 24 - 15 22-13 17-12 16-12 15-12
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Operating results and financial position reflect the 1995 dispositions of
Allstate and Homart as discontinued operations.
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
distribution.
Certain prior year information has been reclassified to conform
with current year presentation.
44 Sears, Roebuck and Co.
<PAGE> 28
SEARS, ROEBUCK AND CO.
Market Risk (Unaudited) [PHOTO]
- --------------------------------------------------------------------------------
The following tables provide information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates. 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. The fair value of the Company's long-term, fixed-rate debt
was estimated by discounting estimated cash flows based on the Company's current
borrowing rates for debt with similar maturities. The interest rate derivative
financial instruments were valued based on the instruments' termination value at
year end. The carrying amounts of short-term debt and long-term, variable-rate
debt approximate fair value. All items described in the table below are
non-trading.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1998
- -----------------------------------------------------------------------------------------------------------------------------------
dollars in millions 1999 2000 2001 2002 2003 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial paper $4,463 $ -- $ -- $ -- $ -- $ -- $ 4,463 $ 4,463
Average interest rate 5.30%
Bank loans $ 161 $ -- $ -- $ -- $ -- $ -- $ 161 $ 161
Average interest rate 5.21%
Long-term debt, including
current portion
Fixed rate amount $1,313 $1,947 $2,332 $1,587 $2,416 $4,716 $14,311 $ 14,966
Average interest rate 7.60% 6.81% 6.93% 6.94% 6.44% 7.19%
Variable rate amount $ 80 $ 25 $ 102 $ -- $ 4 $ 84 $ 295 $ 295
Average interest rate 4.80% 5.28% 5.71% 6.23% 5.71
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate derivative financial
instruments related to debt:
Pay floating rate, receive fixed rate $ 555 $ 250 $ -- $ -- $ -- $ -- $ 805 $ 9
Average pay rate 5.31% 5.28%
Average receive rate 6.75% 6.87%
Pay fixed rate, receive floating rate $ 65 $ 200 $ 98 $ 65 $ -- $1,071 $ 1,499 $ (176)
Average pay rate 9.40% 7.05% 4.95% 9.54% 6.56%
Average receive rate 5.05% 5.21% 5.36% 5.36% 5.56%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
1997
- ------------------------------------------------------------------------------------------------------------------------------------
dollars in millions 1998 1999 2000 2001 2002 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
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 $2,343 $1,588 $5,086 $14,743 $15,391
Average interest rate 8.91% 7.61% 7.67% 6.91% 6.94% 7.05%
Variable rate amount $ 250 $ 80 $ 25 $ 110 $ -- $ -- $ 465 $ 465
Average interest rate 5.71% 5.66% 5.89% 4.27%
- ------------------------------------------------------------------------------------------------------------------------------------
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>
ANNUAL REPORT 1998 45
<PAGE> 29
SEARS, ROEBUCK AND CO.
Quarterly Results (Unaudited) [PHOTO]
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter FourthQuarter Year
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
millions, except per common share data 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $9,163 $8,732 $10,258 $9,700 $9,743 $9,782 $12,158 $13,082 $41,322 $41,296
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 222 357 566 121 173 592 894 924 1,855 1,994
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 133 182 336 117 44 353 535 536 1,048 1,188
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per common share - diluted 0.34 0.46 0.85 0.29 0.11 0.89 1.39 1.35 2.68 2.99
- ------------------------------------------------------------------------------------------------------------------------------------
Excluding impact of noncomparable items
Operating income 188 294 537 538 478 508 946 884 2,149 2,224
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 112 179 318 311 298 301 572 512 1,300 1,303
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per common share - diluted 0.28 0.45 0.80 0.78 0.76 0.76 1.48 1.29 3.32 3.27
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1998 noncomparable items consist of impairment charges related to the sale of
Western Auto and HomeLife, an extraordinary loss on the early extinguishment of
debt and the impact of SFAS No. 125 accounting.
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 curtailment gain.
The fourth quarter pretax LIFO adjustments were credits of $64 and $47 million
in 1998 and 1997, compared with charges of $30 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 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock price range
High 59 7/8 56 3/4 65 54 3/4 63 9/16 65 1/4 50 3/4 57 3/8 65 65 1/4
Low 42 1/2 44 1/2 55 1/16 45 40 9/16 53 9/16 39 1/16 38 3/4 39 1/16 38 3/4
Close 58 1/4 51 1/4 62 1/16 53 5/8 41 7/8 57 42 1/2 46 3/16 42 1/2 46 3/16
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, 1999 was 231,331.
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; Swiss, EBS; and Dusseldorf, Germany.
46 SEARS, ROEBUCK AND CO.
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 of January 2, 1999.
Names Place of Organization
------- ---------------------
Consolidated Subsidiaries:
Sears Canada Inc. Canada
Sears Acceptance Company Inc. Canada
Sears Logistics Services, Inc. Delaware
Sears National Bank United States
SRFG, Inc. Delaware
Sears Roebuck Acceptance Corp. Delaware
91 other companies Various
The Company owns 20% to 50% of the outstanding voting securities of 35
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, and 333-38131 of Sears, Roebuck
and Co.; Registration Statement Nos. 33-58139, 33-64215, 333-9817, 333-30879,
and 333-62847 of Sears, Roebuck and Co. and Sears Roebuck Acceptance Corp.;
Registration Statement Nos. 33-64775, 333-18591, and 333-43309 of Sears,
Roebuck and Co. and Sears, Roebuck and Co. Deferred Compensation Plan;
Registration Statement Nos. 33-57205, 333-11973, and 333-53194
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 11, 1999, except for paragraphs 1 and 3 of Note 10, as
to which the date is March 10, 1999, incorporated by reference in the Annual
Report on Form 10-K of Sears, Roebuck and Co. for the year ended January 2,
1999.
/S/Deloitte & Touche LLP
Deloitte & Touche LLP
Chicago, Illinois
March 10, 1999
S-5
Exhibit 24
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, ALAN J.
LACY, ANASTASIA D. KELLY and JEFFREY N. BOYER, 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 his or her name,
this 10th day of March, 1999.
NAME TITLE
/S/Arthur C. Martinez
Arthur C. Martinez Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
/S/Alan J. Lacy
Alan J. Lacy Chief Financial Officer
(Principal Financial Officer)
/S/Jeffrey N. Boyer
Jeffrey N. Boyer Vice President and Controller
(Principal Accounting Officer)
/S/Hall Adams, Jr.
Hall Adams, Jr. Director
/S/Brenda C. Barnes
Brenda C. Barnes Director
/S/Warren L. Batts
Warren L. Batts Director
/S/Alston D. Correll, Jr.
Alston D. Correll, Jr. Director
/S/ Michael A. Miles
Michael A. Miles Director
/S/Richard C. Notebaert
Richard C. Notebaert Director
/S/Hugh B. Price
Hugh B. Price Director
/S/Clarence B. Rogers, Jr.
Clarence B. Rogers, Jr. Director
/S/Patrick G. Ryan
Patrick G. Ryan Director
/S/Dorothy A. Terrell
Dorothy A. Terrell Director
Exhibit 99(i)
SEARS 401(k) PROFIT SHARING PLAN
(As Amended and Restated Effective As of January 1,1998)
SECTION 1
General
1.1 History, Purpose and Effective Date. Sears, Roebuck and Co. (the
"Company"), a New York corporation, has established the Sears 401(k) Profit
Sharing Plan (the "Plan"), formerly known as The Savings and Profit Sharing
Fund of Sears Employees, to encourage eligible employees to save a portion of
their earnings on a regular basis, to accumulate capital for their future
economic security, to share in the profits of the Company, and to acquire a
proprietary interest in the Company. On December 20, 1989, an employee stock
ownership plan feature (the "ESOP") was added to the Plan. The Plan consists
of a profit sharing plan with a cash-or-deferred arrangement which is
intended to qualify under sections 401(a) and 401(k) of the Internal Revenue
Code of 1986, as amended (the "Code"), and an employee stock ownership plan
which is intended to qualify (as a stock bonus plan) under sections 401(a)
and 4975(e)(7) of the Code. The assets of the ESOP consist of the stock and
cash equivalents described in Supplement C and all other amounts attributable
to Employer Contributions and After-Tax Contributions, including Employer
Contributions and After-Tax Contributions made with respect to Plan Years
beginning before January 1, 1990. The assets of the ESOP are invested
primarily in common shares of the Company ("Common Stock") which qualify as
"employer securities" within the meaning of section 409(l) of the Code.
Except as expressly designated herein, the following provisions constitute an
amendment, restatement and continuation of the Plan as in effect immediately
prior to January 1, 1998, generally the "Effective Date" of the Plan as set
forth herein. If a different effective date is set forth herein with respect
to a particular provision, that date shall determine when the amendment to
the Plan is effective with respect to that provision.
1.2 Related Companies and Employers. The term "Related Company" means any
corporation or trade or business during any period during which it is, along
with the Company, a member of a controlled group of corporations or a
controlled group of trades or businesses, as described in sections 414(b) and
414(c), respectively, of the Code. The Company and each Related Company
which adopts the Plan with the consent of the Company are referred to below
collectively as the "Employers" and individually as an "Employer", provided
that only a Related Company that is a corporation may participate in the
ESOP.
1.3 Plan Administration, Trust and Fiduciary Responsibility. The authority
to control and manage the non-investment operations of the Plan is vested in
the Company, as more fully described in subsection 13.1. Except as otherwise
expressly provided herein, the Company shall have the rights, duties and
obligations of an "administrator" as that term is defined in section 3(16)(A)
of the Employee Retirement Income Security Act of 1974, as amended (ERISA)
and of a "Plan Administrator" as that term is defined in section 414(g) of
the Code. A committee comprised of one or more members appointed by the
Company to oversee the investment of the Plan's assets (the "Investment
Committee") has the authority and responsibility to appoint or select
trustees, custodians, investment managers and insurance companies to handle
Plan assets and to allocate assets to each of them, to determine the
advisability of establishing or modifying any Investment Fund made available
under the Plan, to establish investment guidelines, proxy voting policies and
securities trading procedures, and to monitor the investment performance of
the fiduciaries responsible for the investment of Plan assets. The
Investment Committee has delegated some of the foregoing authority and
responsibility to Sears Investment Management Co. (SIMCO). The Company, the
Investment Committee and SIMCO shall be "named fiduciaries", as described in
section 402 of ERISA, with respect to their authority under the Plan. In
addition, each Participant in the Plan shall be a "named fiduciary" within
the meaning of section 402 of ERISA, to the extent that Common Stock or
shares of Morgan Stanley Dean Witter and Co. (MSDW) or The Allstate
Corporation (Allstate), whether or not allocated to his Accounts, are voted
or tendered according to the Participant's directions. All assets of the
Plan will be held, managed and controlled by one or more trustees (the
"Trustee") acting under a "Trust" established pursuant to a "Trust Agreement"
which forms a part of the Plan. The Company may also appoint an outside
recordkeeper (Recordkeeper) to maintain the records of Participants' Accounts
under the Plan and to handle other administrative matters.
1.4 Plan Year. The term "Plan Year" means the twelve-consecutive-month
period beginning on each January 1 and ending on the following December 31.
1.5 Accounting Dates. The term "Accounting Date" means each day on which
the New York Stock Exchange is open for business, as determined by the
Company in its sole discretion.
1.6 Applicable Laws. The Plan shall be construed and administered in
accordance with the internal laws of the State of Illinois to the extent that
such laws are not preempted by the laws of the United States of America.
1.7 Gender and Number. Where the context permits, words in any gender shall
include any other gender, words in the singular shall include the plural and
the plural shall include the singular.
1.8 Notices. Any notice or document required to be filed with the Company
under the Plan will be properly filed if delivered or mailed, postage
prepaid, to the Company (or its delegate), at its principal executive
offices. Any notice required under the Plan may be waived by the person
entitled to notice.
1.9 Form of Election and Signature. Unless otherwise specified herein, any
election or consent permitted or required to be made or given by any
Participant or other person entitled to benefits under the Plan, and any
permitted modification or revocation thereof, shall be made in writing or
shall be given by means of such interactive telephone and/or computer system
as the Plan Administrator may designate from time to time as the sole vehicle
for executing regular transactions under the Plan (referred to generally
herein as the "Phone System"). Each Participant shall have a personal
identification number or "PIN" for purposes of executing transactions through
the Phone System, and entry by a Participant of his PIN (with his Social
Security Number) shall constitute his valid signature for purposes of any
transaction the Company determines should be executed by means of the Phone
System, including but not limited to, enrolling in the Plan, electing
contribution rates, making investment choices, executing loan documents (if
loans are permitted under the Plan), and consenting to a withdrawal or
distribution. Any election made through the Phone System shall be considered
submitted to the Plan Administrator on the date it is electronically
transmitted, unless such transmission occurs after the applicable cut off
date, as determined by the Company in its sole discretion, for the Phone
System for that day, in which case it will be considered submitted on the
next day on which the New York Stock Exchange is open for business.
1.10 Evidence. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the person acting
on it considers pertinent and reliable, and signed, made or presented by the
proper party or parties.
1.11 Action by Employers. Any action required or permitted to be taken by
the Company or any other Employer which is a corporation shall be by
resolution of its Board of Directors or a duly authorized committee thereof,
or by a duly authorized officer of the Employer. Any action required or
permitted to be taken by any Employer which is a partnership shall be by a
general partner of such partnership or by a duly authorized officer thereof.
1.12 Plan Supplements. The provisions of the Plan as applied to any
Employer or any group of employees of any Employer may be modified or
supplemented from time to time by the Company by the adoption of one or more
Supplements'. Each Supplement shall form a part of the Plan as of the
Supplement's effective date. In the event of any inconsistency between a
Supplement and the Plan document, the terms of the Supplement shall govern.
1.13 Defined Terms. Terms used frequently with the same meaning are defined
throughout the Plan. The Index of Defined Terms attached hereto contains an
alphabetical listing of all such terms and the subsections in which they are
defined.
SECTION 2
Eligibility Service
2.1 Year of Eligibility Service. Except as provided in subsection 2.3, an
employee will have a "Year of Eligibility Service" in accordance with the
following:
(a)A full-time employee will have a Year of Eligibility Service on the
anniversary of his date of hire by the Employers and Related Companies unless
his employment is interrupted by an absence of more than 12 months; in the
case of a full-time employee who is absent from service with the Employers
and Related Companies for more than 12 months, a Year of Eligibility Service
equals an aggregate of 365 days of employment with the Employers and Related
Companies.
(b)A part-time, seasonal or temporary employee will have a Year of
Eligibility Service at the conclusion of a Computation Period during which he
completes at least 1,000 Hours of Service (without the necessity of being
still employed on the last day of such period). A "Computation Period" is
the initial 12-consecutive-month period commencing on the date an employee is
first credited with an Hour of Service and each subsequent 12-month period
commencing on the anniversary of the date he is first credited with an Hour
of Service (defined in subsection 2.3). An individual's Computation Period
shall remain the same, notwithstanding an absence from employment, unless
such individual is treated as a new employee pursuant to subsection 2.2
(describing the rule of parity).
For purposes of this Section 2, a "full-time employee" is an employee who is
regularly scheduled to work a full work week as determined by the rules
established for his work location, and a part-time, seasonal or temporary
employee is an employee who is not regularly scheduled to work a full week.
In the event that an individual changes status from a full-time to a
part-time, seasonal or temporary employee or vice-versa (whether in
connection with a termination of employment or otherwise) the following rules
shall apply, subject to the provisions of subsection 2.2.
(i)an employee who moves from part-time, seasonal or temporary status to
full-time status shall be credited with the greater of (A) the period of
service that would be credited under paragraph 2.1(a) during the Computation
Period in which the transfer occurs or (B) the service creditable under
paragraph 2.1(b) as of the date of transfer, in addition to any Years of
Eligibility Service already earned before the Computation Period in which the
transfer occurs; and
(ii)an employee who moves from full-time to part-time, seasonal or temporary
status shall receive credit for Hours of Service in the Computation Period in
which the transfer occurs, determined by multiplying 45 by the number of
weeks worked in any fractional part of a year credited under paragraph 2.1(a)
immediately prior to the transfer, in addition to any full Years of
Eligibility Service earned prior to the transfer.
For purposes of the foregoing, the transfer will be deemed to have occurred
on the date the employee returns to work when the change in status occurs in
connection with an interruption of active employment.
2.2 Treatment as New Employee After Consecutive One Year Breaks in Service.
If an employee who has never become a Participant (and therefore does not
have a nonforfeitable right to any benefit under the Plan) terminates
employment with the Employers and Related Companies, and the number of his
consecutive One Year Breaks in Service equals or exceeds seven (six in the
case of an individual whose first 12 months of a Maternity or Paternity
Absence are disregarded under subsection 2.4), then any Year of Eligibility
Service (and any eligibility service not yet constituting a Year of
Eligibility Service) earned prior to the first such One Year Break in Service
shall be erased and, if he is later employed or reemployed by an Employer or
a Related Company, he shall be considered a new employee for all purposes
under the Plan. Notwithstanding the foregoing, an individual who was
employed by the Company or a Related Company before 1998 and who terminates
employment after having earned a Year of Eligibility Service but before
becoming a Participant by making contributions to the Plan shall retain his
Year of Eligibility Service regardless of the length of his absence. The
foregoing exception shall not apply to any individual who was hired before
1998 but who terminates employment with the Employers and Related Companies
without having earned a Year of Eligibility Service.
2.3 Hour of Service. The term "Hour of Service" means, with respect to any
employee, each hour for which he is paid or entitled to payment for the
performance of duties for an Employer or a Related Company or for which back
pay, irrespective of mitigation of damages, has been awarded to the employee
or agreed to by an Employer or a Related Company, subject to the following:
(a)An employee or Participant shall be credited with the number of regularly
scheduled working hours included in the time period on the basis of which
payment to the Employee is calculated (or, if the number of such hours is not
determinable, 8 Hours of Service per day (to a maximum of 40 Hours of Service
per week)) for any period during which he performs no duties for an Employer
or a Related Company (irrespective of whether the employment relationship has
terminated) by reason of a vacation, holiday, illness, incapacity (including
disability), layoff, jury duty, military duty or leave of absence but for
which he is directly or indirectly paid or entitled to payment by an Employer
or a Related Company; provided, however, that an employee or Participant
shall not be credited with more than 501 Hours of Service under this
paragraph (a) for any single continuous period during which he performs no
duties for an Employer or a Related Company. Payments considered for
purposes of the foregoing sentence shall include payments unrelated to the
length of the period during which no duties are performed but shall not
include payments made solely as reimbursement for medically related expenses
or solely for the purpose of complying with applicable workmen's
compensation, unemployment compensation or disability insurance laws.
(b)Hours of Service shall be calculated and credited pursuant to Department
of Labor Regulation section 2530.200b-2, which is incorporated herein by
reference.
2.4 One Year Break in Service. Except with respect to an employee whose
absence from employment constitutes a Maternity or Paternity Absence or as
otherwise provided in this subsection 2.4, the term "One Year Break in
Service means the 12-consecutive-month period commencing on the earlier of
(a)the day an employee's employment with the Employers and Related Companies
is terminated for any reason, or
(b)in the event an employee is absent from service with the Employers and
Related Companies for any reason other than resignation, retirement,
discharge or death, the first anniversary of the first day of such period of
absence, if he is not paid or entitled to payment for the performance of
duties for an Employer or a Related Company during that 12-consecutive-month
period. Any absence of less than 12 months shall be disregarded. For
purposes of the foregoing, an employee or Participant who is absent on leave
of absence (as determined by his Employer's personnel policy) will be
considered to have been discharged on the date of his scheduled return to
work if he does not in fact return to work at the expiration of such leave.
An individual who is absent because of service in the U.S. Armed Forces will
begin a One Year Break in Service on the 91st day following his discharge
from military service, if he does not return to work within 90 days of such
discharge.
With respect to an individual whose absence from employment constitutes a
Maternity or Paternity Absence, the term One Year Break in Service means the
12-consecutive-month period commencing on the second anniversary of the first
day of such absence if he is not paid or entitled to payment for the
performance of duties for an Employer or a Related Company during that
12-consecutive-month absence. The period between the first and second
anniversaries of the first day of a Maternity or Paternity Absence shall not
constitute a period of continuous Service. The term Maternity or Paternity
Absence means an employee's or Participant's absence from work because of the
pregnancy of such individual, the birth of a child of such individual, the
placement of a child with such individual in connection with the adoption of
a child by such individual, or for purposes of caring for the child by such
individual immediately following such birth or placement. The Plan
Administrator may require the employee or Participant to furnish such
information as it considers necessary to establish that such individuals
absence was a Maternity or Paternity Absence.
2.5 Military Absences. Notwithstanding any other provision of the Plan to
the contrary, eligibility service shall be credited, and make-up
contributions shall be permitted (and made), as required by section 414(u) of
the Code.
2.6 Pre-Acquisition Service. By written resolution of the most senior
executive of the Company with primary responsibility for employee benefit
matters, regardless of title (the Benefits Executive), or by the terms of a
stock or asset purchase agreement, merger agreement or other transaction
document executed by the Company, the Company may recognize pre-acquisition
service with, or pre-acquisition eligibility under a plan similar to the Plan
of, a company which becomes a Related Company or the assets of which are
acquired by a Related Company, for purposes of determining eligibility under
the Plan. Such pre-acquisition service and/or eligibility shall be
calculated in such manner as the Benefits Executive in his sole discretion
shall determine.
SECTION 3
Participation in Plan
3.1 Eligibility for Participation. Subject to the terms and conditions of
the Plan, each Eligible Employee who was a Participant in the Plan
immediately prior to the Effective Date will continue as such. Each other
Eligible Employee will become a Participant in the Plan on the latest of (i)
the date he attains age 21, (ii) the first day following the date on which he
has completed one Year of Eligibility Service, and (iii) the effective date
of his election to participate in the Plan, provided he is still an Eligible
Employee on such date. Each employee of an Employer is an "Eligible
Employee" for any period in which he satisfies all of the following
requirements:
(a)he belongs to a group of employees to whom participation in the Plan has
been extended by the Company,
(b)he is not a member of a collective bargaining unit, unless the Plan has
been extended to the collective bargaining unit under a currently effective
collective bargaining agreement,
(c)he is not a person employed outside the United States who is neither a
citizen nor a resident of the United States, and
(d)he does not perform services for an Employer under a contract, agreement
or arrangement that purports to treat him as either an independent contractor
or the employee of a leasing organization or agency, even if he is
subsequently determined (by judicial action or otherwise) to have instead
been a common law employee of such Employer.
For purposes of paragraph (a) above, all employees of an Employer will be
considered to belong to an eligible group unless the Company by written
action of the Benefits Executive designates certain groups of employees or
business units as ineligible to participate in the Plan.
Except as provided in subsection 2.2, if a Participant ceases to be an
Eligible Employee for any reason, including termination of employment, and he
again becomes an Eligible Employee, he will be eligible to recommence his
participation in the Plan immediately upon again becoming an Eligible
Employee. In the event an employee of an Employer or a Related Company who
was not an Eligible Employee becomes an Eligible Employee, such employee will
immediately be eligible to commence participation in the Plan if he has
completed a Year of Eligibility Service and is at least age 21.
3.2 Commencement of Participation. Each Eligible Employee is required to
make an election to participate in the Plan. An Eligible Employee may elect
to commence participation in the Plan on the first day following the date he
has satisfied all of the eligibility requirements set forth in subsection
3.1. If an Eligible Employee does not properly elect to commence
participation on such date, he may commence his participation on any day
thereafter. Any such election will be effective with the first payroll that
is administratively feasible following such election.
3.3 Inactive Participation. If an individual ceases to meet the eligibility
requirements of subsection 3.1, such individual shall be considered an
inactive Participant in the Plan as long as any amount is credited to his
Accounts under the Plan, and:
(a)no contributions shall be made by or for him under Section 4 or Section 5;
and
(b)except as otherwise expressly provided herein, he may not make a
withdrawal under Section 10 after he ceases to be an employee of an Employer
or a Related Company.
3.4 Plan Not Contract of Employment. The Plan does not constitute a
contract of employment, and participation in the Plan will not give any
employee or Participant the right to be retained in the employ of any
Employer nor any right or claim to any benefit under the Plan, unless such
right or claim has specifically accrued under the terms of the Plan.
3.5 Leased Employees. If a person satisfies the requirements of section
414(n) of the Code and applicable Treasury regulations for treatment as a
"Leased Employee", such Leased Employee shall not be eligible to participate
in this Plan but, to the extent required by section 414(n) of the Code and
applicable Treasury regulations, such person shall be treated as if the
services performed by him in such capacity were performed by him as an
employee of a Related Company which has not adopted the Plan; provided,
however, that no such service shall be credited for any period during which
not more than 20% of the non-Highly Compensated workforce of the Employers
and the Related Companies consists of Leased Employees and the Leased
Employee is a participant in a money purchase pension plan maintained by the
leasing organization which (i) provides for a non-integrated employer
contribution of at least 10 percent of compensation, (ii) provides for full
and immediate vesting, and (iii) covers all employees of the leasing
organization (beginning with the date they become employees), other than
those employees excluded under section 414(n)(5) of the Code. For purposes
of this subsection 3.5, "Highly Compensated" shall have the meaning set forth
in subsection 8.12.
SECTION 4
Pre-Tax, After-Tax and Rollover Contributions
4.1 Pre-Tax Contributions. Subject to the limitations set forth in
subsections 4.3 and 4.8 and Section 8 and such additional rules as the
Company from time to time may establish on a uniform and nondiscriminatory
basis, for any payroll period a Participant may elect to have his Eligible
Compensation reduced by a whole percentage, and a corresponding amount
contributed on his behalf to the Plan by his Employer as a "Pre-Tax Contribu-
tion", which amount shall not be less than 1 percent nor more than 21 percent
of his Eligible Compensation (as defined in subsection 4.7) for that payroll
period. Any election pursuant to this subsection 4.1 shall be effective as
soon after it is entered into the Phone System as is administratively
feasible.
4.2 After-Tax Contributions. Subject to the limitations set forth in
subsections 4.3 and 4.8 and Section 8 and such additional rules as the
Company from time to time may establish on a uniform and nondiscriminatory
basis, for any payroll period a Participant may elect to make "After-Tax
Contributions" to the Plan through payroll deductions in a whole percentage
that is not less than 1 percent nor more than 10 percent of his Eligible
Compensation for that payroll period, but which for any Plan Year does not
exceed $15,000. Any election pursuant to this subsection 4.2 shall be
effective as soon after it is entered into the Phone System as is
administratively feasible.
4.3 Total Pre-Tax and After-Tax Contributions. Notwithstanding the
foregoing provisions of this Section 4, Pre-Tax Contributions made on behalf
of a Participant and After-Tax Contributions made by such Participant for any
payroll period may not together exceed 21 percent of his Eligible
Compensation for such payroll period.
4.4 Payment of Pre-Tax and After-Tax Contributions. Pre-Tax Contributions
and After-Tax Contributions shall be paid to the Trustee by the Employer on
the earliest date on which such contributions can be reasonably and
accurately segregated from the Employer's general assets with appropriate
data confirmation to ensure proper crediting.
4.5 Modification, Discontinuance and Resumption of Pre-Tax or After-Tax
Contributions. Subject to such rules and restrictions as the Company may
establish on a uniform and nondiscriminatory basis, a Participant may adjust
his Pre-Tax and/or After-Tax Contributions prospectively by entering into the
Phone System, prior to the time such change is to be effective, an election
to make any of the changes listed below:
(a)change his Pre-Tax and/or After-Tax Contribution rates within the limits
specified above;
(b)discontinue making Pre-Tax and/or After-Tax Contributions; or
(c)resume making Pre-Tax and/or After-Tax Contributions.
4.6 Rollover Contributions. A Participant may make a Rollover Contribution
(as defined below) to the Plan, in cash, subject to the determination of the
Company that such rollover satisfies the requirements of this subsection 4.6.
Before approving a rollover, the Company may request from the Participant any
documents which the Company, in its discretion, deems necessary. The term
"Rollover Contribution" means a rollover contribution of all or part of a
distribution which, under applicable provisions of the Code, is permitted to
be rolled over to a qualified plan. In no event shall a Participant be
permitted to make a Rollover Contribution of any amounts previously
contributed to another plan by the Participant on an after-tax basis.
4.7 Compensation and Eligible Compensation. The Plan takes into account
different items of compensation paid to Participants and Eligible Employees
for different purposes. Generally, all items of taxable compensation are
divided into the following five categories:
(a)regular pay, which includes (but is not limited to) hourly wages, salary,
shift differential, standby pay, normal vacation pay, Sunday premium pay,
business training pay;
(b)special pay, which includes (but is not limited to) vacation pay paid in
a lump sum, taxable moving allowances and any related tax gross-up,
merchandise and trip awards, cash prizes, tuition reimbursement, sign-up
bonuses, WOW bonuses, finders fees;
(c)annual bonus and regular incentive pay;
(d)deferred compensation, including amounts paid to or from any nonqualified
deferred compensation plan sponsored by the Employers and Related Companies
or any long-term incentive plan; and
(e)gain from the exercise of a nonqualified stock option or the lapsing of a
restriction on Company stock awards.
All items in categories (a) and (c) that are paid to a Participant during a
Plan Year or that would have been paid to a Participant during such Plan Year
but for his Pre-Tax Contribution election under this Plan (or any other cash
or deferred arrangement maintained by the Employers and Related Companies) or
his salary reduction election under a cafeteria plan (within the meaning of
section 125 of the Code) maintained by an Employer or Related Company,
constitute Eligible Compensation for such Plan Year. All items in
categories (a), (b), and (c) (determined prior to any such pre-tax or salary
reduction election) are considered to constitute "Compensation" within the
meaning of Treas. Reg. Sec. 1.415-2(d) and sections 414(s) and 414(q) of the
Code for purposes of applying the limits of Section 8 of the Plan. Items in
categories (d) and (e) are not taken into account for any purpose under the
Plan. Notwithstanding the foregoing, the term Eligible Compensation shall
not include amounts paid after the date shown as the Participant's
termination date on his Employers payroll records.
4.8 Limitation on Compensation Taken Into Account For Any Plan Year. Only
Eligible Compensation not exceeding the limit set forth in section 401(a)(17)
of the Code may be taken into account under Section 4 or 5 of the Plan.
4.9 Residents of Puerto Rico. Participants who are residents of Puerto Rico
may not make contributions on a pre-tax basis. Such Participants may make
only After-Tax Contributions from 1 percent through 10 percent, in whole
percentages, of Eligible Compensation. However, in no event shall such a
Participant's After-Tax Contributions for a Plan Year exceed $22,000. For
purposes of subsections 5.1 and 5.8, such a Participant's After-Tax
Contributions of up to the lesser of 5 percent of Eligible Compensation or an
amount equal to the maximum amount of Pre-Tax Contributions permitted in
accordance with subsection 4.1 will be treated in the same manner as Pre-Tax
Contributions under the Plan. Any After-Tax Contributions in excess of the
preceding limitations shall be treated as After-Tax Contributions for all
purposes of the Plan. Accounting for such Participants, and other
limitations of the Plan, shall be adjusted to reflect this fact.
SECTION 5
Employer Contributions
5.1 Amount of Employer Contribution. Subject to the terms and conditions of
the Plan, including Supplement C hereof, for each fiscal year of the Company,
the "Employer Contribution" to the Plan for the Plan Year which ends with or
within each such fiscal year shall be an amount equal to the lesser of (a) 70
percent of the Pre-Tax Contributions made on behalf of Participants for such
Plan Year that do not exceed 5 percent of their Eligible Compensation, or
(b) the amount determined in accordance with subsection 5.2 for such fiscal
year; provided, however, that the Employer Contribution otherwise required
under this subsection 5.1 for any Plan Year shall be reduced by the Fair
Market Value (determined as of December 31 of that Plan Year) of the ESOP
Common Stock allocated to the Accounts of Participants in accordance with
paragraph C-8(b) of Supplement C. The Employer Contribution shall be
allocated to Participants' Accounts in accordance with the provisions of
subsection
5.8. For general valuation purposes the term Fair Market Value means the
closing price on the New York Stock Exchange for that day or the next
preceding business day; for purposes of allocating shares released from the
ESOP Suspense Account, Fair Market Value has the meaning set forth in
subsection C-10.
5.2 Limitations on Amount of Employer Contribution. In no event shall the
Employer Contribution for any Plan Year ending within a fiscal year exceed an
amount equal to (a) 6 percent of the sum of (i) the Net Income of the Company
for such fiscal year and (ii) an amount designated by the Company in its sole
discretion, which amount shall be no greater than the amount determined by
the Company to be the total direct and indirect expenses of the Company and
the employers for such fiscal year attributable in whole or in part to the
maintenance of the Plan, less (b) the amount determined under clause (ii)
above.
5.3 Definition of Net Income of the Company. The term "Net Income of the
Company" for any fiscal year of the Company shall mean the net income of the
Company and the Employers for the portion of the year in which they
participate in the Plan as adjusted to exclude the following: (a) gains or
losses on the disposition of investments in subsidiaries which do not
participate in the Plan; (b) provision for federal income tax; and (c)
provision for Plan expense.
5.4 Medium of Employer Contribution. The Employer Contribution will be made
either in cash or in Common Stock, or partially in each. Except as provided
in subsection 5.1, any Common Stock comprising a portion of the Employer
Contribution shall be valued at the Fair Market Value thereof at the date or
dates on which any contribution in that form is made.
5.5 Time of Employer Contribution. The Employer Contribution will be made
annually as soon after the end of each fiscal year as an audit of that year's
operations of the Company and the Employers will permit, but an Employer, at
its option, may at any time or times before the end of its fiscal year or
prior to the completion of such audit, make advancements to the Plan, either
in cash or in Common Stock, or partially in each, in anticipation of such
Employer's share of the Employer Contribution for such fiscal year. If the
total of any such advancements exceeds such Employer's share of the Employer
Contribution for such fiscal year, as determined under subsection 5.6, such
excess may be repaid by the Plan to the Employer making such excess
advancements in accordance with paragraph (b) of Section 12. Any Employer
Contribution that is made to the Plan after the last day of a Plan Year, but
on or before the due date (including extensions thereof) for the filing of
the federal income tax return of the Company for the tax year in which the
last day of such Plan Year occurs, may be designated by the Employers as an
Employer Contribution with respect to such Plan Year.
5.6 Allocation of Employer Contribution To Employers. The share of each
Employer in the Employer Contribution for any fiscal year shall equal the
total sum credited out of such contributions to the Accounts of all Plan
Participants who are employees of such Employer on the date as of which the
contribution is credited.
5.7 Determination of Net Income of the Company. The determination of Net
Income of the Company shall be made, except as otherwise expressly provided,
in conformity with generally accepted accounting principles effective at the
close of each fiscal year. The firm of independent certified public
accountants selected by the Company to make the annual examination of the
Company's financial statements shall certify the amount of Net Income of the
Company for purposes of the Plan, and such certification shall be conclusive
on all persons.
5.8 Allocation of Employer Contribution Among Participants. Subject to the
terms and conditions of the Plan, the Employer Contribution for a Plan Year
will be allocated among and credited to the Accounts of Participants who made
Pre-Tax Contributions during such Plan Year and who either
(a)were in the employ of the Employers and Related Companies on December 31
of such Plan Year; or
(b)terminated employment with all Employers and Related Companies on or after
attainment of age 55 and completion of 10 or more years of continuous
service with the Employers, measured from the service date shown on the last
Employer's payroll records,
provided that the Company, by written action of the Benefits Executive, may
waive the requirement of paragraph (a) above in the case of Participants who
are employed by an Employer or a business unit which is sold to or merged or
combined with another entity or otherwise disposed of in a business
transaction and whose employment is terminated because of such transaction,
as determined by such Benefits Executive in his sole discretion.
Such allocation shall be made pro rata, according to the amount of each such
Participant's Pre-Tax Contribution (not in excess of 5% of Eligible
Compensation) for that year.
5.9 Qualified Matching Contributions. For each Plan Year any Employer
may, but shall not be required to, contribute an additional percentage of the
Pre-Tax Contributions made on behalf of Participants employed by such
Employer who are not Highly Compensated (as defined in subsection 8.12). Any
contribution made pursuant to this subsection 5.9 shall be referred to
hereinafter as a "Qualified Matching Contribution". At the discretion of the
Company, Qualified Matching Contributions may be tested under subsection 8.7
or 8.9 in accordance with applicable Treasury regulations.
5.10 Limitations on Amount of Employer Contributions. In no event shall
the sum of any Pre-Tax Contributions, Employer Contribution and Qualified
Matching Contributions made by an Employer for any Plan Year exceed the
limitations imposed by Section 404 of the Code on the maximum amount
deductible on account thereof by the Employer for that year.
5.11 Payment of Employer Contributions. Each Employer's contributions
under the Plan (other than Pre-Tax Contributions) for any Plan Year shall be
paid to the Trustee, without interest, no later than the time prescribed by
law for filing the Employer's federal income tax return, including any
extensions thereof.
SECTION 6
Investment of the Trust Fund
6.1 Investment Funds. The Investment Committee shall establish and cause
the Trustee to maintain one or more "Investment Funds" or "Funds" for the
investment of Participants' Accounts. The Investment Committee in its
discretion may add additional Investment Funds, may delete any Investment
Fund or may change the investment strategy or categories of permitted
investments of any Investment Fund without prior notice to Participants. One
of the Investment Funds shall be a "Company Stock Fund" invested in Common
Stock of the Company and, until January 1, 1999, in the MSDW and Allstate
stock received as dividends on such Common Stock, and cash or cash
equivalents held for liquidity purposes. All MSDW and Allstate stock held
within the Company Stock Fund must be withdrawn or liquidated and the
proceeds transferred to another Investment Fund by Participants no later than
December 31, 1998. If a Participant does not take appropriate action to
divest his Accounts of his interest in Allstate and MSDW shares by December
31, 1998, all such shares shall be liquidated by the Trustee (over such
period as the Trustee deems appropriate) and the proceeds reinvested in the
Investment Fund designated by the Company for that purpose.
6.2 Investment Fund Accounting. The Company shall maintain or cause to be
maintained separate subaccounts for each Participant in each of the
Investment Funds to separately reflect his interest in each such Fund and the
portion of such interest that is attributable to each of his Accounts. The
Company, in its sole discretion, may establish uniform rules for reporting
the value of each such subaccount, including but not limited to using a
"unit" measurement to reflect each Participants interest in an Investment
Fund that has the effect of blending the value of the cash or cash
equivalents that comprise part of that Fund with the value of the securities
in which the Fund is primarily invested.
6.3 Investment Fund Elections. At the time that a Participant enrolls in
the Plan he may specify the percentage, in increments of 1%, of contributions
subsequently credited to his Accounts that are to be invested in each of the
Investment Funds in accordance with uniform rules established by the Company.
Any such investment direction shall be deemed to be a continuing direction
until changed by the Participant. During any period in which no such
direction has been given in accordance with rules established by the Company,
contributions credited to a Participant shall be invested in the Investment
Funds as determined by the Company. A Participant may modify his investment
direction prospectively by using the Phone System prior to the effective time
of the change in accordance with uniform rules established by the Company.
The Plan is intended to satisfy the requirements of section 404(c) of ERISA
with respect to Participants' investment elections. To the extent permitted
by law, neither the Company, the Investment Committee, the Trustee, SIMCO nor
any other fiduciary of the Plan shall be liable for any loss resulting from
a Participants exercise of his right to direct the investment of his
Accounts.
6.4 Transfers Between Investment Funds. Subject to uniform rules
established by the Company, each Participant may elect to transfer,
prospectively, the value of his Accounts held in any Investment Fund to any
other Investment Fund then made available to such Participant. Any such
election shall be made by entering it into the Phone System prior to the time
it is to be effective in accordance with uniform rules established by the
Company. Notwithstanding the foregoing, amounts attributable to Employer
Contributions invested in the Company Stock Fund may not be transferred to
any other Investment Fund, except as provided in subsection C-9.
6.5 Liquidity. In order to accommodate investment changes and other
elections by Participants in a timely manner, a certain portion of each of
the Investment Funds may be held in cash or cash equivalents. The percentage
of assets held in each Investment Fund in cash or cash equivalents may differ
from Fund to Fund and from time to time, as considered appropriate by the
Investment Committee (or its delegate). The rate of return of each
Investment Fund will be a combination of the short term earnings (or losses)
on the cash portion of the Fund and the earnings (or losses) of the
securities or other investments in which such Fund is primarily invested,
determined in accordance with uniform rules established by the Investment
Committee (or its delegate).
6.6 Voting and Tendering of Common Stock and Shares of Allstate and MSDW.
Notwithstanding any other provisions of this Plan:
(a)Effective January 1, 1999, Common Stock held by the Trustee shall be voted
as follows:
(i)Before each meeting of the Company's shareholders, each Participant shall
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 Accounts under the Plan on the Accounting Date coinciding with
or next 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.
(ii)Common Stock for which the Trustee does not receive timely voting
directions, including those shares which are not allocated to Participants'
Accounts, shall be voted in the same proportion as all Common Stock held
under the Plan (including shares held in a separate trust fund) with respect
to which directions are received by the Trustee.
(b)Tender and exchange rights with respect to Common Stock held by the
Trustee shall be exercised as follows:
(i)Each Participant shall be furnished 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 Accounts. Common Stock as to which the Trustee has received timely
instructions shall be tendered or exchanged in accordance with such
instructions.
(ii)Common Stock allocated to Participants' Accounts for which instructions
are not timely received shall not be tendered or exchanged.
(iii)Shares of Common Stock which are not allocated to Participants' Accounts
shall be tendered or exchanged by the Trustee in its sole discretion.
(c)The Company and the Trustee shall take all reasonable steps necessary to
assure that Participants' individual directions shall remain confidential.
Notwithstanding the foregoing, the Trustee shall provide such information
with respect to the tender or exchange of Company Shares as an independent
record keeper may require for operation of the Plan, if the recipient of such
information agrees to keep such information confidential.
(d)The Trustee shall execute such ballots, proxies or other instruments as
may be necessary or desirable in order to effectuate the provisions of this
subsection 6.6.
(e)Voting, tender and exchange rights with respect to shares of Allstate and
MSDW 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 subsection
6.6.
SECTION 7
Plan Accounting
7.1 Participants' Accounts. The Company shall maintain the following
"Accounts" in the name of each Participant:
(a)an "Employer Contribution Account," which shall reflect Employer
Contributions, if any, made on his behalf and the income, losses,
appreciation and depreciation and expenses attributable thereto;
(b)a "Pre-Tax Account," which shall reflect Pre-Tax Contributions, if any,
made on his behalf and the income, losses, appreciation, depreciation and
expenses attributable thereto;
(c)an "After-Tax Account," which shall reflect After-Tax contributions made
by the Participant and the income, losses, appreciation, depreciation and
expenses attributable thereto;
(d)a "Qualified Matching Account," which shall reflect Qualified Matching
Contributions, if any, made on his behalf, and the income, losses,
appreciation, depreciation and expenses attributable thereto;
(e)a "Rollover Account," which shall reflect Rollover Contributions, if any,
made by him and the income, losses, appreciation, depreciation and expenses
attributable thereto.
In addition, the Company may maintain subaccounts within the Pre-Tax and
After-Tax Accounts to distinguish contributions (and the earnings thereon)
eligible to be matched from contributions (and the earnings thereon) above
the matching limit, as well as subaccounts to reflect balances transferred to
this Plan from another qualified plan that are subject to special rules. The
Accounts and subaccounts provided for in this subsection 7.1 shall be for
accounting purposes only, and there shall be no segregation of assets within
the Investment Funds among the separate Accounts. Reference to the "balance"
in a Participant's Accounts means the aggregate of the balances in the
subaccounts maintained in the Investment Funds attributable to those
Accounts.
7.2 Allocation of Fund Earnings and Changes in Value. As of each
Accounting Date, interest, dividends and changes in value in each Investment
Fund since the preceding Accounting Date shall be allocated to each
Participant's subaccounts invested in such Investment Fund by adjusting
upward or downward the balance of his subaccounts invested in such Investment
Fund in the ratio which the subaccounts of such Participant invested in such
Investment Fund bears to the total of the subaccounts of all Participants
invested in such Investment Fund as of such Accounting Date, excluding
therefrom, for purposes of this allocation only, all Pre-Tax, After-Tax,
Employer, Qualified Matching and Rollover Contributions received since the
preceding Accounting Date, so that the total of the subaccounts of all
Participants in each Investment Fund shall equal the total value of such fund
(exclusive of such contributions) as determined by the Trustee in accordance
with uniform procedures consistently applied. The Plan will use a daily
valuation system, which generally shall mean that Accounts will be updated
each business day to reflect activity for that day, such as new contributions
received by the Trustee, changes in Participants' investment elections, and
changes in the unit value of the Investment Funds under the Plan. Such daily
valuation is dependent upon the Plan's recordkeeper receiving complete and
accurate information from a variety of different sources on a timely basis.
Since events may occur that cause an interruption in this process, affecting
a single Participant or a group of Participants, there shall be no guarantee
by the Plan that any given transaction will be processed on the anticipated
day. In the event of any such interruption, any affected transaction will be
processed as soon as administratively feasible and no attempt shall be made
to reconstruct events as they would have occurred absent the interruption,
regardless of the cause, unless the Company in its sole discretion directs
the Plan's recordkeeper to do so.
7.3 Allocation and Crediting of Contributions. Subject to the provisions
of Section 8, contributions shall be allocated and credited as follows:
(a)Pre-Tax, After-Tax, and Rollover Contributions made on behalf of a
Participant shall be credited to that Participant's appropriate Accounts as
of the Accounting Date coinciding with the day such contribution is received
by the Trustee with verified data; and
(b)As of the last day of each Plan Year, Employer Contributions and any
Qualified Matching Contributions made by an Employer for that year shall be
allocated as of the last day of that year by such Employer in accordance with
subsections 5.8 and 5.9.
Notwithstanding the foregoing, unless the Company establishes uniform rules
to the contrary, contributions made to the Plan shall share in the gains and
losses of the Investment Funds only when actually made to the Trustee.
7.4 Correction of Error. In the event of an error in the adjustment of a
Participant's Accounts, the Company, in its sole discretion, may correct such
error by either crediting or charging the adjustment required to make such
correction to or against income and expenses of the Trust for the Plan Year
in which the correction is made or the Employer may make an additional
contribution to permit correction of the error. Except as provided in this
subsection 7.4, the Accounts of other Participants shall not be readjusted on
account of such error.
7.5 Statement of Plan Interest. As soon as practicable after the last day
of each Plan Year and at such other intervals as the Company may determine,
the Company shall provide each Participant with a statement reflecting the
balances of his Accounts. Each Participant is responsible for reviewing his
statement and any Participant who discovers an error shall bring it to the
attention of the Company within 90 days of receipt of the statement. If a
Participant does not bring errors in his statement to the attention of the
Company within 90 days of receipt of his statement, the Participant will be
deemed to have confirmed the accuracy of the statement.
SECTION 8
Limitations on Compensation, Contributions and Allocations
8.1 Reduction of Contribution Rates. To conform the operation of the Plan
to sections 401(a)(4), 401(k)(3), 401(m)(2), 402(g) and 415(c) of the Code,
the Company may establish limits on the Pre-Tax and After-Tax Contribution
rates that may be elected by Participants, may unilaterally modify or revoke
any Pre-Tax or After-Tax Contribution election made by a Participant pursuant
to subsections 4.1 and 4.2, and may reduce the share of the Employer
Contribution (even to zero) allocable to any Participant as a match pursuant
to subsection 5.8. In the event that the Company determines, prior to the
end of a Plan Year, that the limits it has imposed on Highly Compensated
Participants to ensure compliance with sections 401(k)(3) and 401(m)(2) are
more restrictive than necessary based upon preliminary testing results, the
Company in its discretion may modify such limits prospectively and may also
permit affected Participants to make additional contributions from Eligible
Compensation payable during the remainder of such year, provided that no such
Participant may contribute more, on an annual basis, than the effective
annual rate of contribution permitted for Highly Compensated Participants as
a group, applied against the maximum amount of Eligible Compensation
permitted to be taken into account for that Plan Year under section
401(a)(17) of the Code.
8.2 Compensation for Limitation/Testing Purposes. Compensation as defined
in subsection 4.7, shall be used in applying the limits set forth in this
Section 8, provided that for purposes of subsections 8.3 and 8.12
Compensation for the entire Plan Year shall be used, but for purposes of
subsection 8.7 and 8.9 only Compensation paid after an individual becomes
eligible to participate in the Plan shall be used.
8.3 Limitations on Annual Additions. Notwithstanding any other provisions
of the Plan to the contrary, a Participant's Annual Additions (as defined
below) for any Plan Year shall not exceed an amount equal to the lesser of:
(a)$30,000 (as adjusted for cost-of-living increases under section 415(d) of
the Code); or
(b)25 percent of the Participant's Compensation for that Plan Year,
determined without regard to the limitation under section 401(a)(17) of the
Code, and calculated as if each Section 415 Affiliate (defined below) were a
Related Company,
reduced by any Annual Additions for the Participant for the Plan Year under
any other defined contribution plan of an Employer or a Related Company or
Section 415 Affiliate, provided that, if any other such plan has a similar
provision, the reduction shall be pro rata. The term "Annual Additions"
means, with respect to any Participant for any Plan Year, the sum of all
contributions allocated to a Participant's Accounts under the Plan for such
year, excluding Rollover Contributions and any Pre-Tax Contributions that are
distributed as excess deferrals in accordance with subsection 8.6, but
including any Pre-Tax, After-Tax or Employer Contributions treated as excess
contributions or excess aggregate contributions under subsections 8.8, 8.10
and 8.11. A Participant's Annual Additions with respect to Supplement C
allocations shall be determined solely on the basis of contributions thereto
without regard to the value of ESOP Common Stock released from the Suspense
Account and, if no more than one third of the Employer Contributions which
are deductible under section 404(a)(9) of the Code by reason of their
application to make payments on an ESOP Loan are allocated to
Highly-Compensated Participants, a Participant's Annual Additions shall not
include any share of an Employer Contribution which is deductible under
section 404(a)(9)(B) of the Code by reason of its application to the payment
of interest on an ESOP Loan. The term Annual Additions shall also include
employer contributions allocated for a Plan Year to any individual medical
account (as defined in section 415(l) of the Code) of a Participant and any
amount allocated for a Plan Year to the separate account of a Participant for
payment of post-retirement medical benefits under a funded welfare benefit
plan (as described in section 419A (d)(2) of the Code), which is maintained
by an Employer or a Related Company or Section 415 Affiliate. "Section 415
Affiliate" means any entity that would be a Related Company if the ownership
test of section 414 of the Code was "more than 50%" rather than "at least
80%".
8.4 Excess Annual Additions. If, as a result of a reasonable error in
estimating a Participant's Compensation, a reasonable error in determining
the amount of Pre-Tax Contributions that may be made with respect to a
Participant under the limits of section 415 of the Code or such other
mitigating circumstances as the Commissioner of Internal Revenue shall
prescribe, the Annual Additions for a Participant for a Plan Year exceed the
limitations set forth in subsection 8.3, the excess amounts shall be treated,
as necessary, in accordance with Treas. Reg. Sec. 1.415-6(b)(6)(ii), after any
After-Tax Contributions, and then any Pre-Tax Contributions, and any income,
losses, appreciation or depreciation attributable to the foregoing, are first
returned to the Participant to reduce the excess amount.
8.5 Combined Plan Limitation. If a Participant also participates in any
defined benefit plan (as defined in section 415(k) of the Code) maintained by
an Employer or a Related Company or Section 415 Affiliate, the aggregate
benefits payable to, or on account of, the Participant under such plan
together with this Plan will be determined in a manner consistent with
section 415(e) of the Code, to the extent applicable for Plan Years before
January 1, 2000. The benefit provided for the Participant under the defined
benefit plan shall be adjusted to the extent necessary so that the sum of the
"defined benefit fraction" and the "defined contribution fraction" (as such
terms are defined in section 415(e) of the Code and applicable regulations
thereunder) calculated with regard to such Participant does not exceed 1.0.
For purposes of this subsection 8.5, all qualified defined benefit plans
(whether or not terminated) of the Employers, Related Companies and Section
415 Affiliates shall be treated as one defined benefit plan.
8.6 Annual Limit on 401(k) Deferrals. In no event shall the Pre-Tax
Contributions for a Participant under the Plan and any other elective
deferrals (as defined in section 402(g)(3) of the Code) under any other
cash-or-deferred arrangement maintained by an Employer or a Related Company
for any taxable year exceed the maximum amount as may be permitted under
section 402(g) of the Code. If during any taxable year a Participant is also
a participant in any other cash-or-deferred arrangement, and if his elective
deferrals made under such other arrangements together with his Pre-Tax
Contributions made under the Plan exceed the maximum amount permitted for the
Participant for that year under section 402(g) of the Code, the Participant,
not later than March 1 following the close of such taxable year, may request
the Company to direct the Trustee to distribute all or a portion of such
excess to him, with any gains or losses allocable thereto for that Plan Year
determined in accordance with any reasonable method adopted by the Company
for that Plan Year that either (i) conforms to the accounting provisions of
Section 7 and is consistently applied to the distribution of excess
contributions under this subsection 8.6 and subsections 8.8, 8.10 and 8.11 to
all affected Participants, or (ii)satisfies any alternative method set forth
in applicable Treasury regulations. Any such request shall be in writing and
shall include adequate proof of the existence of such excess, as determined
by the Company in its sole discretion. If the Company is so notified, such
excess amount shall be distributed to the Participant no later than the April
15 following the close of the Participant's taxable year. In addition, if
the applicable limitation for a Plan Year happens to be exceeded with respect
to this Plan alone, or this Plan and another plan or plans of the Employers
and Related Companies, the Company shall direct such excess Pre-Tax
Contributions (with allocable gains or losses) to be distributed to the
Participant as soon as practicable after the Plan Administrator is notified
of the excess deferrals by an Employer or the Participant, or otherwise
discovers the error (but no later than the April 15 following the close of
the Participant's taxable year). Notwithstanding the foregoing provisions of
this subsection 8.6, the dollar amount of any distribution due hereunder
shall be reduced by the dollar amount of any Pre-Tax Contributions previously
distributed to the same Participant pursuant to subsection 8.8; provided,
however, that for purposes of subsections 8.3 and 8.7, the correction under
this subsection 8.6 shall be deemed to have occurred before the correction
under subsection 8.8.
8.7 Section 401(k)(3) Testing. For any Plan Year beginning on or after
January 1, 1997, the amount by which the average of the Deferral Percentages
(as defined below) for that Plan Year of each eligible employee who is Highly
Compensated for that Plan Year (the "Highly Compensated Group Deferral
Percentage") exceeds the average of the Deferral Percentages for that Plan
Year of each eligible employee who is not Highly Compensated for that Plan
Year (the "Non-highly Compensated Group Deferral Percentage"), shall be less
than or equal to either (i) a factor of 1.25 or (ii) both a factor of 2 and
a difference of 2. The "Deferral Percentage" for any eligible employee for
a Plan Year shall be determined by dividing his Pre-Tax Contributions (and
Qualified Matching Contributions, if applicable) for that Plan Year by his
Compensation for that Plan Year (measured from the date he first becomes
eligible to participate in the Plan and not the date he actually becomes a
Participant), subject to the following special rules:
(a)any employee eligible to participate in the Plan at any time during a Plan
Year in accordance with subsection 3.1 (without regard to any suspension
imposed by any other provision hereunder) shall be counted, whether or not
any Pre-Tax Contributions are made on his behalf for the year;
(b)the Deferral Percentage for any Highly Compensated Participant who is
eligible to participate in the Plan and who is also eligible to make elective
deferrals under one or more other arrangements described in section 401(k) of
the Code that are maintained by an Employer or a Related Company for a plan
year that ends with or within the same calendar year as the Plan Year (other
than a plan subject to mandatory disaggregation under applicable Treasury
regulations) shall be determined as if all of such elective deferrals were
made on his behalf under the Plan;
(c)Pre-Tax Contributions distributed to a Participant as excess deferrals
under subsection 8.6 shall be counted in determining such Participant's
Deferral Percentage, except in the case of a distribution to a Non-highly
Compensated Participant required to comply with section 401(a)(30) of the
Code;
(d)if this Plan is aggregated with one or more other plans for purposes of
section 410(b) of the Code (other than the average benefit percentage test),
this subsection 8.7 shall be applied as if all such plans were a single plan;
provided, however, that for Plan Years beginning after 1989, such aggregated
plans must all have the same plan year,
(e)all Participants who are members of collective bargaining units shall be
tested separately under this subsection 8.7.
8.8 Correction Under Section 401(k) Test. In the event that the Highly
Compensated Group Deferral Percentage for any Plan Year does not initially
satisfy one of the tests referred to in subsection 8.7, the Company shall
direct the Trustee to distribute to Highly Compensated Participants enough of
their Pre-Tax Contributions under the leveling method (first reducing the
Participant with the highest dollar contribution and then the next highest,
and so forth) described in applicable Treasury regulations and notices, along
with allocable income determined in accordance with such notices or
regulations, so that the Highly Compensated Group Deferral Percentage meets
one of the tests referred to in subsection 8.7. The amounts to be
distributed to any Participant pursuant to this subsection 8.8 shall be
reduced by the amount of any Pre-Tax Contributions distributed to him for the
taxable year ending with or within such Plan Year pursuant to subsection 8.6.
The Company shall take such actions and cause any distribution to be made no
later than the close of the Plan Year following the Plan Year for which the
excess contributions were made.
8.9 Section 401(m)(2) Testing. For any Plan Year beginning on or after
January 1, 1997, the amount by which the average of the Contribution
Percentages (as defined below) for that Plan Year of each eligible employee
who is Highly Compensated for that Plan Year (the "Highly Compensated Group
Contribution Percentage") exceeds the average of the Contribution Percentages
for that Plan Year of each eligible employee who is not Highly Compensated
for that Plan Year (the "Non-highly Compensated Group Contribution
Percentage") shall be less than or equal to either (i) a factor of 1.25 or
(ii) both a factor of 2 and a difference of 2. The "Contribution Percentage"
for any eligible employee for a Plan Year shall be determined by dividing his
total After-Tax Contributions and Employer Contributions (and, if applicable,
Qualified Matching Contributions) for that Plan Year by his Compensation for
that Plan Year (measured from the date he first becomes eligible to join the
Plan and not the date he actually becomes a Participant), subject to the
following special rules:
(a)any employee eligible to participate in the Plan at any time during a Plan
Year in accordance with subsection 3.1 (without regard to any suspension
imposed by any other provision hereunder) shall be counted, regardless of
whether any After-Tax, Employer or Qualified Matching Contributions are made
by him for the year;
(b)the Contribution Percentage for any Highly Compensated Participant who is
eligible to participate in the Plan and who is also eligible to participate
in one or more other qualified plans maintained by an Employer or a Related
Company with a plan year that ends with or within the same calendar year as
the Plan Year (other than a plan subject to mandatory disaggregation under
applicable Treasury regulations) with after-tax or matching contributions
shall be determined as if all such contributions were made under the Plan;
(c)if this Plan is aggregated with one or more other plans for purposes of
section 410(b) of the Code (other than the average benefit percentage test),
this subsection 8.9 shall be applied as if all such plans were a single plan;
provided, however, that such aggregated plans must all have the same plan
year; and
(d)members of collective bargaining units shall be excluded from testing
under this subsection 8.9
8.10 Correction Under Section 401(m) Test. In the event that the Highly
Compensated Group Contribution Percentage for any Plan Year does not
initially satisfy one of the tests referred to in subsection 8.9, the Company
shall direct the Trustee to distribute to the Highly Compensated Participants
enough of their After-Tax Contributions and Employer Contributions under the
leveling method (first reducing the Participant with the highest dollar
amount of contributions, and then the next highest and so forth) described in
applicable Treasury notices and regulations, along with allocable income
determined in accordance with such notices or regulations, so that the Highly
Compensated Group Contribution Percentage meets one of the tests referred to
in subsection 8.9. Any such corrective distribution shall be made first from
any Employer Contribution attributable to Pre-Tax Contributions that have to
be returned pursuant to subsections 8.4, 8.6 or 8.8, second from After-Tax
Contributions, then (if necessary) from any other Employer Contributions.
The Company shall make any necessary distribution no later than the close of
the Plan Year following the Plan Year in which such excess aggregate
contributions were contributed.
8.11 Multiple Use of Alternative Limitation. Notwithstanding any other
provision of this Section 8, if the 1.25 factors referred to in subsections
8.7 and 8.9 are both exceeded for a Plan Year, the leveling method of
correction prescribed in subsection 8.10 shall be continued until the
aggregate limit set forth in Treas. Reg. Sec.1.401(m)-2(b) is satisfied for
such Plan Year, to the extent applicable.
8.12 Highly Compensated. An employee or Participant shall be "Highly
Compensated" for any Plan Year beginning on or after January 1, 1997 if he:
(a)was at any time a 5 percent owner of an Employer or a Related Company
during that or the preceding Plan Year; or
(b)received Compensation in excess of $80,000 (indexed for cost-of-living
adjustments under section 415(d) of the Code) for the preceding Plan Year.
8.13 Forfeiture of Orphan Matching Employer Contributions. In the event
that any Pre-Tax Contributions are distributed to a Participant to correct a
situation where there are excess annual additions, excess deferrals, excess
contributions or excess aggregate contributions pursuant to subsections 8.4,
8.6, 8.8 or 8.10, any Employer Contributions allocated as a match with
respect to such Pre-Tax Contributions and not already returned in accordance
with subsection 8.10 shall be forfeited and used to reduce future Employer
Contributions.
SECTION 9
Vesting and Termination Dates
9.1 Vested Interest. A Participant at all times shall have a fully
vested, nonforfeitable interest in all of his Accounts.
9.2 Termination of Employment. If a Participant's employment is
terminated for any reason, his "Termination Date" generally will be the last
day for which he is paid wages or salary for services performed for an
Employer or Related Company, unless he is terminated while on an unpaid leave
of absence, in which case his Termination Date will be the day as of which he
is notified by his Employer of his termination or he resigns (whichever is
applicable).
SECTION 10
Withdrawals While Employed
10.1 Partial Withdrawals from the Plan Without Terminating Employment. A
Participant may elect to withdraw from the Plan, without terminating
employment, an amount specified by him, which amount shall not exceed the
balance of such Participant's Accounts reduced by the following:
(a)If he has not participated in the Plan for at least 5 years, an amount
equal to the Employer Contributions credited to his Accounts for the last two
Plan Years; and
(b)If he has not attained age 59 1/2, all Pre-Tax Contributions and any earnings
attributable thereto.
In addition, a Participant who has not attained age 59 1/2 and is confronted by
a Hardship (as defined below) may withdraw his Pre-Tax Contributions (up to
the amount required by such Hardship), but not the earnings on his Pre-Tax
Contributions, provided he has first withdrawn all other available amounts
under the Plan.
10.2 Hardship. For purposes of subsection 10.1 above, a withdrawal will
not be considered to be made on account of Hardship unless the withdrawal is
requested because of an immediate and heavy financial need of the Participant
caused by one of the following:
(a)medical expenses described in section 213(d) of the Code incurred by the
Participant, his spouse, or any dependents of the Participant (as defined in
section 152 of the Internal Revenue Code) or necessary for such persons to
obtain such medical care;
(b)purchase (excluding mortgage payments) of a principal residence for the
Participant;
(c)payment of tuition (and related expenses) for the next 12 months of
postsecondary education for the Participant, his spouse, children or
dependents;
(d)the need to prevent the eviction of the Participant from his principal
Residence or foreclosure on the mortgage of the Participant's principal
residence;
(e)expenses directly related to serious damage to the principal residence of
the Participant caused by a catastrophic event such as fire, flood, hurricane
or earthquake;
(f)funeral expenses of a family member; or
(g)such other deemed immediate and heavy financial need established from time
to time by the Commissioner of Internal Revenue.
To be considered a Hardship withdrawal under subsection 10.1, the withdrawal
must also be necessary to satisfy the immediate and heavy financial need of
the Participant, and will be so deemed if the Participant represents to the
Company (or its delegate) in writing that the need cannot be relieved:
(h)through reimbursement or compensation by insurance or otherwise;
(i)by reasonable liquidation of the Participant's assets, to the extent such
liquidation would not itself give rise to an immediate and heavy financial
need;
(j)by ceasing to make contributions to the Plan (or any other deferred
compensation plan); or
(k)by borrowing on reasonable commercial terms.
10.3 Sources of Withdrawals. Any partial withdrawal will be made from,
and will be charged to, the withdrawing Participant's Accounts, subject to
the limits on amounts available for partial withdrawals set forth in
subsection 10.1: first, from the portion of the Participant's Accounts
reflecting his After-Tax Contributions made prior to January 1, 1987; next,
from the portions of the Participant's Accounts reflecting his After-Tax
Contributions made after December 31, 1986 and reflecting the earnings on
such After-Tax Contributions; next, from the portion of the Participant's
Accounts reflecting the earnings on his After-Tax Contributions made prior to
January 1, 1987 and from the portion of the Participant's Accounts reflecting
Employer Contributions; and, finally, from the portion of the Participant's
Accounts reflecting his Pre-Tax Contributions. Unless otherwise requested by
the Participant, his various investment subaccounts will be charged in the
order and in such proportions as the Plan Administrator may specify. A
Participant who makes a withdrawal may elect to have any specified amounts
which would otherwise be payable to him in cash or in shares of MSDW or
Allstate used by the Trustee to purchase and distribute whole shares of
Common Stock to the Participant at a price determined in accordance with
subsection 5.1. Requests for payment in Common Stock may be required to be
processed as two separate transactions within the Phone System, the first
being an investment transfer and the second being the actual withdrawal; both
transactions may occur on the same Accounting Date.
10.4 Method of Making Elections, Revocations, etc. All actions required
of, or permitted to be taken by, Participants under this Section 10 shall be
made through the Phone System, and in the case of a Hardship withdrawal,
shall be followed by whatever written forms and documentation the Company
deems appropriate.
SECTION 11
Withdrawals After Termination of Employment
11.1 Withdrawals by and Distributions to Participants After Termination of
Employment. When a Participant's Termination Date occurs (for a reason other
than his death), his Accounts shall be distributed or withdrawn in accordance
with the following provisions of this Section 11.
(a)If the value of the Participant's Accounts does not exceed $5,000, and did
not exceed $5,000 at the time of any prior distribution or withdrawal, his
Accounts will be distributed to him in a lump sum payment as soon as
practicable after the Plans Recordkeeper is notified of his termination of
employment.
(b)If the value of the Participant's Accounts exceeds $5,000, the Participant
may withdraw his Accounts on the Distribution Date (as defined in paragraph
(c) below) he elects, in a lump sum; provided, however that such a
Participant may make a partial withdrawal of a portion of his Accounts during
the first fifteen months following his termination of employment, deferring
payment of the rest of his Accounts until such later Distribution Date as he
elects (within the limits set forth in this Section 11).
(c)A Participant's "Distribution Date" shall mean the date as of which a
payment is made to him pursuant to this Section 11, without regard to any
administrative delay. A Participant may elect that his Distribution Date
occur on any Accounting Date occurring after his Termination Date (but not
later than the date on which he attains age 70), provided that no election of
a Distribution Date will be valid if it is made more than 90 days prior to
such date.
11.2 Distributions to Beneficiaries. If a Participant dies while his
Accounts remain undistributed, payment of his Accounts will be made to his
Beneficiary or Beneficiaries as soon as practicable after the Recordkeeper
receives confirmation of his death.
11.3 Limits on Commencement and Duration of Distributions. The following
distribution rules shall be applied in accordance with sections 401(a)(9) and
401(a)(14) of the Code and applicable regulations thereunder, including the
minimum distribution incidental benefit requirement of Treas. Reg.
Sec. 1.401(a)(9)-2, and shall supersede any other provision of the Plan to the
contrary:
(a)Unless the Participant elects otherwise, in no event shall distribution
commence later than 60 days after the close of the Plan Year in which the
latest of the following events occurs: the Participant's attainment of age
65, or the Participant's Termination Date. The failure of a Participant to
consent to a distribution is deemed to be an election to defer commencement
of payment for purposes of the preceding sentence.
(b)Notwithstanding any other provision herein to the contrary, distribution
of a Participants Accounts shall be made to him (or on his behalf) in the
form of a lump sum distribution on or before his Required Beginning Date (as
defined below). A Participant's "Required Beginning Date" is April 1 of the
calendar year following the calendar year in which he attains age 70 1/2 or
terminates employment, whichever is later.
11.4 Beneficiary Designations. The term "Beneficiary" shall mean the
Participant's surviving spouse. However, if the Participant is not married,
or if the Participant is married but his spouse consents (as provided below)
to the designation of a person other than the spouse, the term Beneficiary
shall mean such person or persons as the Participant designates to receive
his Accounts upon his death. Such designation may be made, revoked or
changed (without the consent of any previously-designated Beneficiary except
his spouse) only by an instrument signed by the Participant and filed with
the Recordkeeper prior to his death. A spouse's consent to the designation
of a Beneficiary other than the spouse shall be in writing, shall acknowledge
the effect of such designation, shall be witnessed by a notary public and
shall be effective only with respect to such consenting spouse. In default
of such designation, or at any time when there is no surviving spouse and no
surviving Beneficiary designated by the Participant, his Beneficiary shall be
his estate. For purposes of the Plan, "spouse" means the person to whom the
Participant is legally married at the relevant time. Notwithstanding the
foregoing provisions of this subsection 11.4, no spousal consent to the
designation of a person other than, or in addition to, the spouse as
Beneficiary shall be required if it is established to the satisfaction of the
Plan Administrator that the spouse's consent cannot be obtained because there
is no spouse, because the spouse cannot be located or because of such other
circumstances as may be prescribed in applicable Treasury regulations.
11.5 Distribution Only Upon Separation From Service. Notwithstanding any
other provision of the Plan to the contrary, a Participant may not commence
distribution of the portion of his Accounts attributable to his Pre-Tax
Contributions pursuant to this Section 11 prior to the date he attains age
59 1/2, even though his employment with the Employers and Related Companies has
terminated, unless or until he also has a "separation from service" within
the meaning of section 401(k)(2)(B) of the Code. The foregoing restriction
shall not apply, however, if the Participant's termination of employment
occurs in connection with either (a) the sale by an Employer or a Related
Company to an unrelated corporation of at least 85% of the assets of a trade
or business or (b) the disposition of its interest in a subsidiary to an
unrelated entity, and the requirements for distribution under applicable
Treasury regulations on account of such sale or disposition are met.
11.6 Form of Payment. Distributions from the Company Stock Fund shall be
made in cash unless the Participant elects to have all or a portion of his
interest in such fund distributed in shares of Allstate or MSDW shares (to
the extent of the Participant's investment in each) or in shares of Common
Stock. Distributions from the other Investment Funds shall be made in cash,
unless the Participant elects that some or all of such cash be converted to
Common Stock.
11.7 Facility of Payment. Notwithstanding the provisions of subsections
11.1 and 11.2, if, in the Company's opinion, a Participant or other person
entitled to benefits under the Plan is under a legal disability or is in any
way incapacitated so as to be unable to manage his financial affairs, the
Plan Administrator may direct the Trustee to make payment to a relative or
friend of such person for his benefit until claim is made by a conservator or
other person legally charged with the care of his person or his estate.
Thereafter, any benefits under the Plan to which such Participant or other
person is entitled shall be paid to such conservator or other person legally
charged with the care of his person or his estate.
11.8 Interests Not Transferable. The interests 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 properly documented levy of
the Internal Revenue Service, required tax withholding or qualified domestic
relations orders that relate to the provision of child support, alimony or
marital rights of a spouse, child or other dependent and which meet such
other requirements as may be imposed by section 414(p) of the Code or
regulations issued thereunder. Notwithstanding any other provision of the
Plan to the contrary, distribution of the entire portion of a Participant's
Accounts awarded to his alternate payee may be made in a lump sum payment, as
soon as practicable after the Company (or its delegate) determines that such
order is qualified, without regard to whether the Participant would himself
be entitled under the terms of the Plan to withdraw or receive a distribution
of such lump sum amount at that time, but only if the terms of the order
provide for such immediate distribution either specifically or by general
reference to any manner of distribution permitted under the Plan.
11.9 Absence of Guaranty. None of the Company, the Trustee, or the
Employers in any way guarantee the assets of the Plan from loss or
depreciation, or guarantee any payment to any person. The liability of the
Trustee to make any payment is limited to the available assets of the Plan
held under the Trust.
11.10 Missing Participants or Beneficiaries. Each Participant and each
designated Beneficiary must file with the Recordkeeper from time to time in
writing his post office address and each change of post office address. Any
communication, statement or notice addressed to a Participant or designated
Beneficiary at his last post office address filed with the Recordkeeper, or,
in the case of a Participant, if no address is filed with the Recordkeeper,
then at his last post office address as shown on the Employers' records, will
be binding on the Participant and his designated Beneficiary for all purposes
of the Plan. None of the Company, the Employers, or the Trustee will be
required to search for or locate a Participant or designated Beneficiary.
11.11 Direct Rollover Option. In accordance with uniform rules established
by the Company, each Participant, surviving spouse of a Participant or
alternate payee under a qualified domestic relations order within the meaning
of section 414(p) of the Code who is due to receive an eligible rollover
distribution from the Plan may direct the Plan Administrator to transfer all
or a portion of such distribution directly to another eligible retirement
plan. For purposes of this subsection, the terms "eligible rollover
distribution" and "eligible retirement plan" as applied to any such
individual shall have the meaning accorded such terms under section
401(a)(31) of the Code (or any successor provision thereto) and applicable
regulations thereunder.
SECTION 12
No Reversion to Employers
No part of the corpus or income of the Trust shall revert to the Employers or
be used for, or diverted to, purposes other than the exclusive benefit of
Participants and Beneficiaries, subject to the following:
(a)Employer contributions under the Plan are conditioned upon the
deductibility of the contributions under section 404 of the Code, and, to the
extent any such deduction is disallowed, the Trustee shall, upon written
request of the Employer, return the amount of any contribution (to the extent
disallowed), reduced by the amount of any losses thereon, to the Employer
within one year after the date the deduction is disallowed.
(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 that Employer,
return the amount of such contribution or portion, reduced by the amount of
any losses thereon, to that Employer within one year after the date of
payment.
(c)If, upon termination of the Plan, any amounts are held under the Plan in
a suspense account pursuant to Treas. Reg. Sec. 1.415-6(b)(6)(ii) and such
amounts may not be credited to the Accounts of Participants, such amount will
be returned to the Employers as soon as practicable after the termination of
the Plan.
SECTION 13
Administration
13.1 Administrative Authority. The Company shall be the Plan Administrator
of the Plan and shall have the following discretionary authority, powers,
rights and duties in addition to those vested in it elsewhere in the Plan or
Trust Agreement:
(a)to adopt such rules of procedure and regulations as, in its opinion, may
be necessary for the proper and efficient administration of the Plan and as
are consistent with the provisions of the Plan;
(b)to enforce the Plan in accordance with its terms and with such applicable
rules and regulations it may adopt;
(c)to determine conclusively all questions arising under the Plan, including
the power to determine the eligibility of employees and the rights of
Participants and other persons entitled to benefits under the Plan and their
respective benefits, to make factual findings and to remedy ambiguities,
inconsistencies or omissions of whatever kind;
(d)to maintain and keep adequate records concerning the Plan and concerning
its proceedings and acts in such form and detail as the Company may decide;
(e)to direct all payments of benefits under the Plan;
(f)to perform the functions of a "plan administrator", as defined in section
414(g) of the Code, for all purposes of the Plan, including for purposes of
establishing and implementing procedures to determine the qualified status of
domestic relations orders (in accordance with the requirements of section
414(p) of the Code) and to administer distributions under such qualified
orders;
(g)to employ agents, attorneys, accountants or other persons (who may also be
employed by or represent the Employers) for such purposes as the Company
considers necessary or desirable to discharge its duties;
(h)to establish a claims procedure in accordance with section 503 of ERISA;
and
(i)to furnish the Employers, the Investment Committee and the Trustee with
such information with respect to the Plan as may be required by them for tax
or other purposes.
The certificate of an officer of the Company that the Company has taken or
authorized any action shall be conclusive in favor of any person relying on
the certificate.
13.2 Delegation of Administrative Responsibilities and Powers. In
exercising its authority to control and manage the operation and
administration of the Plan, the Company may delegate all or any part of its
responsibilities and powers to any person or persons selected by it. Any
such allocation or delegation may be revoked at any time.
13.3 Uniform Rules. In managing the Plan, the Company shall uniformly
apply rules and regulations adopted by it to all persons similarly situated.
13.4 Information to be Furnished to Company. The other Employers and
Related Companies shall furnish the Company such data and information as may
be required for it to discharge its duties. The records of the Employers and
Related Companies as to an employee's or Participant's period of employment,
termination of employment and the reason therefor, leave of absence,
reemployment and Eligible Compensation shall be conclusive on all persons
unless the Participant satisfactorily demonstrates that such records are
incorrect. Participants and other persons entitled to benefits under the
Plan must furnish to the Company such evidence, data or information as the
Company considers desirable to carry out the Plan.
13.5 Company's Decision Final. Any interpretation of the Plan and any
decision on any matter within the discretion of the Company made by the
Company (or its delegate) shall be binding on all persons. A misstatement or
other mistake of fact shall be corrected when it becomes known, and the
Company shall make such adjustment on account thereof as it considers
equitable and practicable.
13.6 Exercise of Companys Duties As Plan Administrator. Notwithstanding any
other provisions of the Plan, the Company shall discharge its duties
hereunder solely in the interests of the Participants and other persons
entitled to benefits under the Plan, and:
(a)for the exclusive purpose of providing benefits to Participants and other
persons entitled to benefits under the Plan; and
(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 a like character
and with like aims.
13.7 Administrative Expenses. Except as otherwise determined by the
Company, the reasonable expenses of administering the Plan and the fees and
expenses incurred in connection with the collection, administration,
management, investment, protection and distribution of the Plan assets under
the Trust shall be paid directly by the Trust out of Plan assets or, if paid
by one or more Employers, reimbursed by the Trust, to the maximum extent
permitted by law, and shall be allocated to Participant's accounts in
accordance with rules established by the Company in its sole discretion.
13.8 Indemnification of Individuals Acting on Behalf of the Company. To the
extent not reimbursed by any applicable insurance policy, any person acting
on behalf of the Company with respect to the Plan shall be indemnified by the
Employers against any and all liabilities, losses, costs and expenses
(including legal fees and expenses) of whatsoever kind and nature which may
be imposed on, incurred by or asserted against any of them by reason of the
performance of such function if the individual did not act dishonestly or in
willful violation of the law or regulation under which such liability, loss,
cost or expense arises.
13.9 The Trustee. Title to all assets of the Plan will be held in trust
by one or more trustees appointed by the Company for the uses and purposes
set forth herein. The powers, duties and responsibilities of the trustees
are set forth more fully in one or more trust agreements between the Company
and the trustees.
13.10 The Investment Committee. Except as otherwise provided in the trust
agreement between the Company and the Trustee, all of the assets of the Plan
shall be managed and controlled by the Investment Committee, which shall
consist of one or more individuals, none of whom shall be a Trustee. The
members of the Investment Committee shall be appointed by the Company and
shall serve at the pleasure of the Company. The powers, duties and
responsibilities of the Investment Committee are set forth more fully in the
trust agreement between the Company and the Trustee.
13.11 General Powers, Rights and Duties of the Investment Committee.
Except as otherwise specifically provided and in addition to the powers,
rights and duties specifically given to the Investment Committee elsewhere
herein and in the trust agreement, the Investment Committee shall have the
following rights, powers and duties:
(a)To direct the Trustee to the extent required under the terms of any trust
agreement with respect to the acquisition, retention and disposition of Plan
assets and with respect to the exercise of investment powers, authorities and
discretions relating to such assets; provided, however, that subject to the
other provisions of the Plan (including Supplement C), the Trustee shall
invest that portion of the assets of the Plan consisting of Employers'
Contributions and earnings thereon in Common Stock to the end that, in the
largest measure possible, Participants may share in the earnings of the
Company and acquire a proprietary interest therein.
(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 Committee's duties and responsibilities.
(d)To appoint an Executive Director--Investments, and a Secretary, who may,
but need not, be members of the Investment Committee, and to employ such
other agents, attorneys, accountants, investment advisors and other persons
and to delegate to them and allocate among them, 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 allocation or delegation shall also be in writing;
any action of the delegate or person to 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 shall be liable for the acts or
omissions of such delegates or persons to whom responsibilities have been
allocated except as required by law.
(e)Without limiting the generality of (d) above, to appoint one or more
investment managers as defined in section 3(38) of ERISA ("Investment
Manager") to manage (with power to acquire and dispose of) the assets of the
Plan, any of which Investment Managers 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 Investment Committee hereunder or
under the trust agreement (including the power to delegate and, in the case
of SIMCO, the power, with prior notice to the Investment Committee, to
appoint an Investment Manager), in which event any direction to the Trustee
from any duly appointed Investment Manager with respect to the acquisition,
retention or disposition of Plan assets shall have the same force and effect
as if such direction had been given by the Investment Committee, and to
remove any Investment Manager; 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.
13.12 Manner of Action by Investment Committee. In the performance of the
Investment Committee's duties, the following provisions shall apply where the
context admits:
(a)An Investment Committee member, by written instrument, may delegate any or
all of his rights, powers, duties or discretions to any other Committee
member, with the consent of the latter.
(b)The Investment Committee may act by meeting or by a written instrument
signed without meeting and may execute any document by signing one document
or concurrent documents. Actions of the Investment Committee may be
communicated by telephone by the Secretary of the Investment Committee, a
majority of the members of the Investment Committee or any member of the
Investment Committee designated by a majority of the members of the
Investment Committee.
(c)An action or decision of a majority of the members of the Investment
Committee as to a matter shall be as effective as if taken or made by all
members of the Investment Committee, but, except to the extent otherwise
expressly provided by law, no member of the Investment Committee who dissents
from any action or decision of the majority of the Investment Committee shall
be liable or responsible for such action.
(d)If, because of the number qualified to act, there is an even division of
opinion among the members of the Investment Committee as to any matter, a
disinterested party selected by the Investment Committee shall decide the
matter and his decision shall control.
(e)The certificate of the Secretary of the Investment Committee or of a
majority of the members of the Investment Committee that the Investment
Committee has taken or authorized any action shall be conclusive in favor of
any person relying on the certificate.
13.13 Liabilities and Responsibilities of the Trustee, Investment
Committee and Employers. Any final judgment or decree which may be rendered
against the Plan, the Trustee, the Investment Committee or any other
fiduciary with respect to the Plan which is not predicated upon a breach of
fiduciary responsibility shall be satisfied from the Plan's assets, and not
from the individual assets of the Trustee, the members of the Investment
Committee or other fiduciaries. No Employer shall have any responsibility or
liability whatsoever with reference to the management or conduct of the
business of the Plan, or for any act or failure to act on the part of the
Trustee, any member of the Investment Committee, any Investment Manager or
any other fiduciary or their agents and employees, except that the Company
shall be responsible for the acts it performs (or fails to perform) in its
capacity as Plan Administrator (unless any such responsibility has been
delegated to another person in accordance with the provisions of subsection
13.2).
SECTION 14
Amendment and Termination
14.1 Amendment. While it is expected that the Plan will be continued,
either the Company or a duly authorized committee or officer thereof may
terminate the Plan or amend it from time to time, except that no amendment
will reduce a Participant's interest in the Plan to less than an amount equal
to the amount he would have been entitled to receive if he had resigned from
the employ of the Employers and the Related Companies on the day of the
amendment, and no amendment will eliminate an optional form of benefit with
respect to a Participant except as otherwise permitted by law.
14.2 Termination. The Plan will terminate as to all of the Employers on
any day specified by the Company upon advance written notice of the
termination given to the Employers. Employees of an Employer shall cease
active participation in the Plan (and will be treated as inactive Partici-
pants in accordance with subsection 3.3) on the first to occur of the
following:
(a)the date on which that Employer ceases to be an Employer by appropriate
action taken by the Company or by such Employer;
(b)the date that Employer is judicially declared bankrupt or insolvent; or
(c)the dissolution, merger, consolidation, reorganization or sale of that
Employer, or the sale of all or substantially all of the assets of an
Employer, except that, subject to the provisions of subsection 14.3, with the
consent of the Company, in any such event arrangements may be made whereby
the Plan will be continued by any successor to that Employer or any purchaser
of all or substantially all of that Employer's assets, in which case the
successor or purchaser will be substituted for the Employer under the Plan.
14.3 Merger and Consolidation of the Plan, Transfer of Plan Assets,
Acceptance of Transfers from Other Plans. The Company in its discretion may
direct the Trustee to transfer all or a portion of the assets of this Plan to
another defined contribution plan of the Employers or Related Companies which
is qualified under section 401(a) of the Code or, in the event of the sale of
stock of an Employer or all or a portion of the assets of an Employer, to a
qualified plan of an employer which is not a Related Company. The Benefits
Executive by written resolution may permit the Plan to accept a transfer of
assets and liabilities to this Plan from another defined contribution plan
that is qualified under section 401(a) of the Code, may direct the Trustee
accordingly, and may adopt such amendment or Supplement to the Plan as such
Benefits Executive considers necessary to reflect the terms of such transfer,
including provision for any protected rights that may not be eliminated by
reason of such transfer under section 411(d)(6) of the Code. In the case of
any merger or consolidation with, or transfer of assets and liabilities to or
from, any other plan, provisions shall be made so that each affected
Participant in the Plan on the date thereof (if the Plan or the other plan,
as applied to that Participant, then terminated) would receive a benefit
immediately after the merger, consolidation or transfer which is equal to or
greater than the benefit he would have been entitled to receive immediately
prior to the merger, consolidation or transfer if the Plan or such other
plan, as applied to him, had then terminated.
14.4 Distribution on Termination and Partial Termination. Upon
termination or partial termination of the Plan, all benefits under the Plan
shall continue to be paid in accordance with Sections 10 and 11 as those
sections may be amended from time to time.
14.5 Notice of Amendment, Termination or Partial Termination. Affected
Participants will be notified of an amendment, termination or partial
termination of the Plan as required by law.
EXECUTED this ____ day of ________________, 1998, to be effective as
indicated herein.
SEARS, ROEBUCK AND CO.
By: /s/John T. Sloan
John T. Sloan
Its: Senior Vice President, Human Resources
SUPPLEMENT A
SEARS 401(k) PROFIT SHARING PLAN
Tax Credit Employee Stock Ownership Feature
Effective as of January 1, 1983 a tax credit employee stock ownership feature
(the "ESOF") was added to the Plan in the form of Supplement A thereto. ESOF
"Stock Ownership Contributions" were made in accordance with such Supplement
A for plan years ending after December 31, 1982 and before January 1, 1987.
The ESOF was terminated as of December 20, 1989 and the Supplement A Shares
Fund, to which Company stock held under the ESOF was credited, was merged
into and made part of the Company Stock Fund.
SUPPLEMENT B
SEARS 401(k) PROFIT SHARING PLAN
Top-Heavy Provisions
B-1.Application. This Supplement B to the Sears 401(k) Profit Sharing Plan
shall be applicable on and after the date on which the Plan becomes Top-Heavy
(as described in subsection B-5).
B-2.Effective Date. The Effective Date of the top-heavy provisions as set
forth in this Supplement B is January 1, 1998.
B-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 B.
B-4.Affected Participant. For purposes of this Supplement A, the term
"Affected Participant" means each Participant who is employed by an Employer
or a Related Company during any Plan Year for which the Plan is Top-Heavy;
provided, however, that the term "Affected Participant" shall not include any
Participant who is covered by a collective bargaining agreement if retirement
benefits were the subject of good faith bargaining between his Employer and
his collective bargaining representative.
B-5.Top-Heavy. The Plan shall be "Top-Heavy" for any Plan Year if, as of the
Determination Date for that year (as described in paragraph (a) next below),
the present value of the benefits attributable to Key Employees (as defined
in subsection B-6) under all Aggregation Plans (as defined in subsection B-9)
exceeds 60% of the present value of all benefits under such plans. The
foregoing determination shall be made in accordance with the provisions of
section 416 of the Code. Subject to the preceding sentence:
(a)The Determination Date with respect to any plan for purposes of deter-
mining Top-Heavy status for any plan year of that plan shall be the last day
of the preceding plan year or, in the case of the first plan year of that
plan, the last day of that year. The present value of benefits as of any
Determination Date shall be determined as of the accounting date or valuation
date coincident with or next preceding the Determination Date. If the plan
years of all Aggregation Plans do not coincide, the Top-Heavy status of the
Plan on any Determination Date shall be determined by aggregating the present
value of Plan benefits on that date with the present value of the benefits
under each other Aggregation Plan determined as of the Determination Date of
such other Aggregation Plan which occurs in the same calendar year as the
Plan's Determination Date.
(b)Benefits under any plan as of any Determination Date shall include the
amount of any distributions from that plan made during the plan year which
includes the Determination Date (including distributions under a terminated
plan which, if it had not been terminated, would have been included in an
aggregation group) or during any of the preceding four plan years, but shall
not include any amounts attributable to employee contributions which are
deductible under section 219 of the Code, any amounts attributable to
employee-initiated rollovers or transfers made after December 31, 1983 from
a plan maintained by an unrelated employer, or, in case of a defined
contribution plan, any amounts attributable to contributions made after the
Determination Date unless such contributions are required by section 412 of
the Code or are made for the plan's first plan year.
(c)Benefits attributable to a participant shall include benefits paid or
payable to a beneficiary of the participant, but shall not include benefits
paid or payable to any participant who has not performed services for an
Employer or Related Company during any of the five plan years ending on the
applicable Determination Date; provided, however, that if a participant
performs no services for five years and then performs services, the benefits
attributable to such participant shall be included.
(d)The accrued benefit of any participant who is a Non-Key Employee with
respect to a plan but who was a Key Employee with respect to such plan for
any prior plan year shall not be taken into account.
(e)The accrued benefit of a Non-Key Employee shall be determined under the
method which is used for accrual purposes for all plans of the Employer and
Related Companies; or, if there is no such method, as if the benefit accrued
not more rapidly than the slowest accrual rate permitted under section
411(b)(1)(C) of the Code.
(f)The present value of benefits under all defined benefit plans shall be
determined on the basis of a 7.5% per annum interest factor and the 1951
Group Annuity Projected Mortality Table for Males, with a one-year setback.
B-6.Key Employee. The term "Key Employee" means an employee or deceased
employee (or beneficiary of such deceased employee) who is a Key Employee
within the meaning ascribed to that term by section 416(i) of the Code.
Subject to the preceding sentence, the term Key Employee includes any
employee or deceased employee (or beneficiary of such deceased employee) who
at any time during the plan year which includes the Determination Date or
during any of the four preceding plan years was:
(a)an officer of any Employer or Related Company with Compensation for that
year in excess of 50 percent of the amount in effect under section
415(b)(1)(A) of the Code for the calendar year in which that year ends;
provided, however, that the maximum number of employees who shall be
considered Key Employees under this paragraph (a) shall be the lesser of 50
or 10% of the total number of employees of the Employers and the Related
Companies disregarding any excludable employees under Code section 414(q)(8).
(b)one of the 10 employees owning the largest interests in any Employer or
any Related Company (disregarding any ownership interest which is less than
1/2 of one percent), excluding any employee for any plan year whose
Compensation for that year did not exceed the applicable amount in effect
under section 415(c)(1)(A) of the Code for the calendar year in which that
year ends;
(c)a 5% owner of any Employer or of any Related Company; or
(d)a 1% owner of any Employer or any Related Company having Compensation for
that year in excess of $150,000.
B-7.Compensation. The term "Compensation" for purposes of this Supplement B
generally means compensation within the meaning of section 415(c)(3) for that
year, not exceeding the maximum amount permitted for any year under Code
section 401(a)(17). However, for Plan Years beginning on or after January 1,
1989, solely for purposes of determining who is a Key Employee, the term
"Compensation" means compensation as defined in Code section 414(q)(7).
B-8.Non-Key Employee. The term "Non-Key Employee" means any employee (or
beneficiary of a deceased employee) who is not a Key Employee.
B-9.Aggregation Plan. The term "Aggregation Plan" means the Plan and each
other retirement plan (including any terminated plan) maintained by an
Employer or Related Company which is qualified under section 401(a) of the
Code and which:
(a)during the plan year which includes the applicable Determination Date, or
during any of the preceding four plan years, includes a Key Employee as a
participant;
(b)during the plan year which includes the applicable Determination Date or,
during any of the preceding four plan years, enables the Plan or any plan in
which a Key Employee participates to meet the requirements of section
401(a)(4) or 410 of the Code; or
(c)at the election of the Employer, would meet the requirements of sections
401(a)(4) and 410 if it were considered together with the Plan and all other
plans described in paragraphs (a) and (b) next above.
B-10. Required Aggregation Plan. The term "Required Aggregation Plan" means
a plan described in either paragraph (a) or (b) of subsection B-9.
B-11. Permissive Aggregation Plan. The term "Permissive Aggregation Plan"
means a plan described in paragraph (c) of subsection B-9.
B-12. Vesting. For any Plan Year during which the Plan is Top-Heavy, the
Account balances of each Affected Participant who has completed at least
three Years of Service shall be 100% vested. If the Plan ceases to be
Top-Heavy for any Plan Year, the provisions of this subsection B-12 shall
continue to apply to any Affected Participant who had completed at least 3
Years of Service prior to such Plan Year.
B-13. Minimum Contribution. For any Plan Year during which the Plan is
Top-Heavy, the minimum amount of Employer contributions, excluding elective
contributions as defined in Code section 401(k), allocated to the Accounts of
each Affected Participant who is employed by an Employer or Related Company
on the last day of that year who is a Non-Key Employee and who is not
entitled to a minimum benefit for that year under any defined benefit
Aggregation Plan which is top-heavy nor is entitled to a minimum contribution
for that year under any other defined contribution Aggregation Plan
maintained by the Employer shall, when expressed as a percentage of the
Affected Participant's Compensation for that year, be equal to the lesser of:
(a)3%; or
(b)the percentage at which Employer contributions (including Employer
contributions made pursuant to a cash or deferred arrangement) are allocated
to the Accounts of the Key Employee for whom such percentage is greatest.
For purposes of the preceding sentence, compensation earned while a member of
a group of employees to whom the Plan has not been extended shall be
disregarded. Paragraph (b) next above shall not be applicable for any Plan
Year if the Plan enables a defined benefit plan described in paragraph B-9(a)
or B-9(b) to meet the requirements of section 401(a)(4) or 410 for that year.
Employer contributions for any Plan Year during which the Plan is Top-Heavy
shall be allocated first to Non-Key Employees until the requirements of this
subsection B-13 have been met and, to the extent necessary to comply with the
provisions of this subsection B-13, additional contributions shall be
required of the Employers.
B-14. Aggregate Benefit Limit. For any Plan Year during which the Plan is
Top-Heavy, paragraphs (2)(B) and (3)(B) of section 415(e) of the Code shall
be applied by substituting "1.0" for "1.25".
SUPPLEMENT C
SEARS 401(k) PROFIT SHARING PLAN
Employee Stock Ownership Plan (ESOP) Portion of the Plan
C-1.Purpose. The purpose of this Supplement C to the Plan is to set forth
the terms of the Plan as applied to the portion of the ESOP attributable to
ESOP Loans as described in subsection C-4.
C-2.Effective Date. The effective date of this Supplement C is December 20,
1989.
C-3.Participation. Each Participant in the Plan on the Effective Date of
this Supplement C shall immediately become a Participant in this Supplement
C. Every other person who thereafter becomes a Participant in the Plan shall
at the same time become a Participant in this Supplement C.
C-4.ESOP Loans. The Trustee is authorized to incur debt (an "ESOP Loan") for
the purpose of acquiring Common Stock or for the purpose of repaying all or
any portion of any outstanding ESOP Loan. The terms of any ESOP Loan shall
be subject to the conditions and restrictions set forth in the applicable
provisions of the trust agreement or agreements between the Company and the
Trustee. Common Stock acquired with the proceeds of an ESOP Loan (ESOP
Common Stock) shall be credited to a "Suspense Account" within the Company
Stock Fund until released in accordance with subsection C-7. The Plan
Administrator shall maintain or cause to be maintained a subaccount for each
Participant to reflect his interest in the Company Stock Fund which is
attributable to each ESOP Loan.
C-5.ESOP Cash Equivalents. All cash dividends on Common Stock held in the
ESOP which are not allocated to Participants' Accounts or, in the case of
allocated shares, which the Company directs, are to be used to make payments
on ESOP Loans, and all Employer Contributions made under subsection C-6 with
respect to Plan Years beginning on or after January 1, 1990 shall be credited
to a cash equivalents account pending their application to ESOP Loan
payments. All such dividends and earnings shall be used to make principal
payments on outstanding ESOP Loans to the extent then due. In the event that
the amount of such dividends and earnings exceeds the amount of principal
payable on that date, the excess shall be applied until exhausted to interest
payable on that date, and principal and interest payments due thereafter.
Notwithstanding the preceding sentences of this subsection C-5, in lieu of
making payments on outstanding ESOP Loans, the Investment Committee may
direct that all or any amount of cash dividends received with respect to
Common Stock held in the ESOP allocated to Participants' Accounts shall be
credited proportionately to such Participants' Accounts pending investment in
the Company Stock Fund. Any amount that is applied to make a payment on an
outstanding ESOP Loan after the last day of a Plan Year (the "prior Plan
Year"), but on or before the due date (including extensions thereof) for the
filing of the federal income tax return of the Company for the tax year in
which the last day of such prior Plan Year occurs, may be designated by the
Employers as a payment with respect to such prior Plan Year.
C-6.Employer Contribution. For each Plan Year beginning on or after January
1, 1990, the Employers shall make contributions under this subsection C-6
which, after taking into account the use of dividends and earnings in
accordance with subsection C-5, are sufficient to meet all scheduled payments
of principal and interest on outstanding ESOP Loans. The Employer
Contribution otherwise required by subsection 5.1 for any Plan Year shall be
reduced by the Fair Market Value (determined as of December 31 of that Plan
Year) of the ESOP Common Stock allocated to the Accounts of Participants in
accordance with paragraph C-8(b). In addition to the foregoing
contributions, in any Plan Year, the Employers may make supplemental
contributions to be used by the Trustee to prepay any ESOP Loan, to pay
expenses of the Plan and any related trust and to satisfy the
dividend-replacement requirements for that year with respect to ESOP Common
Stock allocated to Participants' Accounts. All Employer Contributions for
Plan Years beginning on or after January 1, 1990 shall be used to make
payments on ESOP Loans to the extent required to meet any scheduled payments
of principal and interest after taking into account the use of dividends and
earnings in accordance with subsection C-5.
C-7.Release of ESOP Common Stock From Suspense Account. As of the last day
of each calendar quarter throughout the duration of an ESOP Loan, a portion
of the ESOP Common Stock acquired with the proceeds of such ESOP Loan shall
be withdrawn from the Suspense Account. Such ESOP Common Stock released for
a Plan Year shall be allocated to eligible Participants' Accounts in
accordance with the provisions of subsection C-8.
(a)Subject to the provisions of paragraph (b) below, the number of shares of
ESOP Common Stock which shall be released from the Suspense Account for any
Plan Year (calculated separately with respect to each ESOP Loan) shall be
equal to the product of:
(i)the number of shares of ESOP Common Stock acquired with the proceeds of
the ESOP Loan which are then held in the Suspense Account;
MULTIPLIED BY
(ii)a fraction, the numerator of which is the amount of principal and
interest paid on that loan for that Plan Year and the denominator of which is
the amount of principal and interest paid or payable on that loan for that
Plan Year and for all future years.
For purposes of determining the fraction in (ii), 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
the Plan Year, and if an ESOP Loan is refinanced, the numerator in such
fraction shall not include the proceeds of the second loan used to make
principal and interest payments on the first loan (that is, the loan being
refinanced).
(b)Notwithstanding the provisions of paragraph (a) above, if provided by the
terms of an ESOP Loan or directed by the Investment Committee prior to the
first payment of principal or interest on any ESOP Loan, the number of shares
of ESOP Common Stock attributable to such ESOP Loan which are withdrawn from
the Suspense Account for any Plan Year shall be proportionate to principal
payments only, provided that:
(i)such withdrawal is consistent with the provisions of the ESOP Loan with
respect to the release of shares of ESOP Common Stock as collateral, if any,
for such loan;
(ii)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;
(iii)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
(iv)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 shares of Common Stock are attributable. In addition, if
an ESOP Loan is refinanced, the numerator in the fraction described in
paragraph (a) above shall not include the proceeds from the second ESOP Loan
used to make payments of principal and interest on the first ESOP Loan.
C-8.Allocation and Crediting of ESOP Common Stock to Participants' Accounts
and Application to Plan Limitations. Shares of ESOP Common Stock released
from the Suspense Account during any Plan Year shall be allocated and
credited as follows:
(a)To the extent that dividends on Common Stock previously allocated to the
Accounts of a Participant have been used to make payments on an ESOP Loan,
such Accounts shall be credited with newly-released shares of ESOP Common
Stock with a Fair Market Value determined as of the last day of the month
preceding the month of the dividend payment date equal to the amount of such
dividend.
(b)As of each December 31, any shares of ESOP Common Stock released from the
Suspense Account that are attributable to payments made on ESOP Loans for the
Plan Year ending on that date (including payments made after such December 31
that are designated as payments with respect to the plan year ending on such
December 31 pursuant to subsection C-5) and not credited in accordance with
paragraph (a) shall be credited to the Accounts of eligible Participants
pursuant to subsection 5.8.
(c)For purposes of subsection 8.3 of the Plan, the Employer Contribution for
any Plan Year which is utilized to make any payment of principal or interest
on an ESOP Loan shall be deemed to have been allocated among Participants in
the same ratios as the number of shares of ESOP Common Stock released from
the Suspense Account are credited in accordance with paragraph (b) above,
without regard to the value of the shares of ESOP Common Stock released from
the Suspense Account.
(d)All ESOP Common Stock allocated to Participants in accordance with
paragraph (b) above shall be treated as Employer Contributions for purposes
of subsection 5.1 and 8.9 and as matching contributions for purposes of
section 401(m) of the Code.
C-9.Transfer Elections by Participants. Notwithstanding any more restrictive
provision of the Plan to the contrary, a qualified Participant (as defined
below) may make the elections as set forth in this subsection C-9.
(a)A qualified Participant during each of his qualified election periods (as
defined below), may elect to transfer not more than 25 percent (50 percent in
the case of his last qualified election period) of the sum of his entire
interest in the ESOP portion of the Plan plus his prior transfers (or, prior
to January 1, 1998, withdrawals) under this subsection C-9; provided,
however, that the portion of a Participant's ESOP interest that is subject to
election under this paragraph for any qualified election period shall be
reduced by the portion of his ESOP interest that was previously transferred
(or withdrawn) pursuant to this subsection C-9.
(b)Any election made in accordance with the provisions of paragraph (a) next
above with respect to any qualified election period shall be given effect not
later than 90 days after the end of that qualified election period.
(c)Any election required under this subsection shall be made in such manner
as the Plan Administrator may require.
(d)For purposes of this subsection, the term "qualified Participant" means an
employee who has completed at least ten years of participation in the ESOP,
commencing on or after January 1, 1983, and has attained at least age 55.
(e)For purposes of this subsection, "qualified election periods" shall
include the 90-day period immediately following the last day of the first
Plan Year in which the Participant becomes a qualified Participant, and the
90-day period following each of the five subsequent Plan Years.
(f)The provisions of this subsection C-9 shall not apply to any Participant
if the value of the Common Stock allocated to such Participant in the ESOP
portion of the Plan (determined as of the end of the month immediately
preceding the first day on which the participant would otherwise be entitled
to make an election under this subsection) is $500 or less.
C-10. Fair Market Value. For purposes of this Supplement C, the Fair Market
Value of a share of Common Stock as of any date means the closing price of a
share of such stock on that date as reported in a summary of composite
transactions for stocks listed on the New York Stock Exchange, unless such
date is not a trading date, in which case it means the closing price as
reported on the next preceding trading date.
Exhibit 99(ii)
FIRST AMENDMENT TO THE
SEARS 401(k) PROFIT SHARING TRUST
WHEREAS, Sears, Roebuck and Co. (the "Company") and State Street Bank and
Trust Company (the "Trustee") executed a trust agreement known as the Sears
401(k) Profit Sharing Trust Agreement (As Amended and Restated effective as
of January 1, 1998) (the "Trust").
WHEREAS, pursuant to subsection 13.1 of the Trust, the Company reserved the
right to amend the Trust, provided that any amendment changing the rights,
duties and liabilities of the Trustee may be made with its consent;
WHEREAS, the Trustee has consented to the assignment of determining in its
sole discretion whether a proposed refinancing of an ESOP Loan is in
accordance with the requirements of ERISA;
NOW, THEREFORE, pursuant to the amending power reserved to the Company by
subsection 13.1 of the Trust, the Trust be, and hereby is, amended by adding
the following new Section 4.5A to the Trust effective as of January 1, 1998:
"4.5A. Refinancing of ESOP Loans. With respect to the refinancing of any
ESOP Loan, the Trustee shall be an independent fiduciary and assume the
exclusive responsibility for determining whether the terms and conditions of
any refinancing satisfy the trustee's duties and responsibilities under
ERISA, and the Company and Trustee may separately agree to the terms and
conditions of such engagement. Notwithstanding any provision to the
contrary, the Trustee is limited in its ability to refinance an ESOP Loan to
those refinancing proposals presented to it by the Company. In effectuating
the refinancing of an ESOP Loan, the Trustee shall have the power to take all
actions necessary to refinance all or a portion of such ESOP Loans, either by
extending or shortening the maturities of existing ESOP Loans or by allowing
the Company to loan an amount to the trust which is used to repay an existing
loan, and for any sum so borrowed, to issue its promissory note as trustee,
to pledge any securities or other property of the fund for the repayment of
such loan, to repay from time to time the principal and interest on such loan
with any such borrowing or refinancing and to execute any documents,
instruments or certificates to effectuate such borrowing or refinancing; and
provided further that if any ESOP Loan is from, or guaranteed by, a "party in
interest" within the meaning of Section 3(14) of ERISA, the requirements of
Section 6.2(a)-(i) shall be satisfied."
FURTHER, the officers of the Company be, and hereby are, authorized to take
whatever actions are necessary to carry out the intent and purpose of the
foregoing amendments.
SEARS, ROEBUCK AND CO.
By: /s/ James Constantine
James Constantine
Its: pursuant to Power of Attorney
for Alice M. Peterson,
Vice President and Treasurer
Date: June 26, 1998
AGREED AND CONSENTED TO BY
STATE STREET BANK AND TRUST COMPANY
By: /s/James S. Phalen
James S. Phalen
Its: Executive Vice President
Date: June 26, 1998
Exhibit 99(iii)
FIRST AMENDMENT TO THE
SEARS 401(K) PROFIT SHARING TRUST AGREEMENT
This First Amendment (this "Amendment") dated as of December 1, 1998 by and
between Sears, Roebuck and Co., a New York corporation (the "Company"), and
State Street Bank and Trust Company, a Massachusetts trust company, (the
"Trustee"), amends the Sears 401(k) Profit Sharing Trust Agreement (As
amended and restated as of January 1, 1998) between the Company and the
Trustee (the "Trust Agreement").
WHEREAS, the Company and the Trustee agree that it is desirable that the
Company amend the voting provisions of the Sears 401(k) Profit Sharing Plan;
and
WHEREAS, the Company and the Trustee desire to amend the voting provisions of
the Trust Agreement to conform to the proposed amendments to the voting
provisions of the Sears 401(k) Profit Sharing Plan;
NOW, THEREFORE, the Company and the Trustee hereby agree as follows:
1) Section 7.1(b) of the Trust Agreement shall be deleted and replaced in its
entirety by the following:
"(b) Common Stock for which the Trustee does not receive timely voting
instructions, including those shares which are not allocated to participants'
accounts, shall be voted in the same proportion as all Common Stock held
under the Plan with respect to which directions are received by the Trustee."
2) In all other respects, the Trust Agreement shall remain in full force and
effect and shall continue unaffected by this Amendment.
IN WITNESS WHEREOF, the undersigned have duly executed this Amendment as of
the date first above written.
SEARS, ROEBUCK AND CO.
By: /s/ John T. Sloan
John T. Sloan
Senior Vice President,
Human Resources
STATE STREET BANK AND TRUST COMPANY
By: /s/ John Scott Feely
Name: John Scott Feely
Title: Vice President
Exhibit 99(iv)
CONTACT:
Paula S. Davis
847/286-8361
FOR IMMEDIATE RELEASE:
March 16, 1999
SEARS REALIGNS AUTO AND SEARS DIRECT BUSINESS UNITS, PROMOTES WHITE
HOFFMAN ESTATES, Ill -- Sears, Roebuck and Co. today announced a realignment
of certain businesses and related executive moves.
Sears Auto Centers and NTB National Tire & Battery stores will join the
specialty store group that reports to William L. Salter, president of Home
Stores. Related to the change, Paul A. Baffico, president, Automotive Group
for the last six years, will retire after 34 years at Sears. William C.
White, senior vice president, Southeast region, was promoted to president,
Sears Tire Group.
"Bill White is a veteran Sears merchant with extensive store management
experience, including the auto centers," said Arthur C. Martinez, chairman
and CEO of Sears. "With this move, the automotive and other specialty store
formats can more readily share the many best practices each has developed."
The company also announced the realignment of the Sears Direct organization.
The company's specialty catalog operation will be moved to the Marketing
organization, which will further enhance efforts to ensure consistent
presentation of Brand Sears to customers.
The direct response business, including insurance products, clubs and
services, headed by E. Vachel Pennebaker, president, Direct Response, will
move to the Credit organization, reporting to Alan J. Lacy, president,
Credit.
- -more-
Page 2/Sears
"Aligning this customer data driven-group with our credit operation creates
natural synergies that will leverage the use of the Sears Card database and
generate more opportunities to connect with our customers," Martinez said.
The Online business, led by Alice M. Peterson, vice president and general
manager, Sears Online, will report to Richard J. Srednicki, president of Home
Services.
"There are clear connections between Home Services intention to provide a
complete set of services to our customers and the opportunity afforded by the
Online channels. This change will help ensure that we function as an
integrated provider of solutions for the home," said Martinez. "The Home
Services group has developed a significant online parts business, and Rich
Srednicki has relevant experience in this area."
As a result of this reorganization, Jane J. Thompson, president, Sears
Direct, has decided to leave the company to pursue other interests. Thompson
joined Sears in 1988, serving in strategic corporate planning roles until
1993. In 1993, she was named executive vice president and general manager of
Sears Credit and served in that position until she was named president of
Sears Home Services in 1996. In 1998, she was named president, Sears Direct.
Sears is a leading U.S. retailer of apparel, home and automotive products and
services, serving American households through 845 full-line department stores
and more than 2,000 specialty retail locations nationwide. More information
about Sears is available at the company's website at www.sears.com.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JAN-02-1999
<CASH> 495
<SECURITIES> 4,294<F1>
<RECEIVABLES> 18,946
<ALLOWANCES> 974
<INVENTORY> 4,816
<CURRENT-ASSETS> 29,271
<PP&E> 11,326
<DEPRECIATION> 4,946
<TOTAL-ASSETS> 37,675
<CURRENT-LIABILITIES> 14,109
<BONDS> 13,631
0
0
<COMMON> 323
<OTHER-SE> 5,743
<TOTAL-LIABILITY-AND-EQUITY> 37,675
<SALES> 36,704
<TOTAL-REVENUES> 41,322
<CGS> 27,257
<TOTAL-COSTS> 27,257
<OTHER-EXPENSES> 9,500<F2>
<LOSS-PROVISION> 1,287
<INTEREST-EXPENSE> 1,423
<INCOME-PRETAX> 1,883
<INCOME-TAX> 766
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<EXTRAORDINARY> (24)
<CHANGES> 0
<NET-INCOME> 1,048
<EPS-PRIMARY> 2.70<F3>
<EPS-DILUTED> 2.68
<FN>
<F1>Represents retained interest in transferred credit card receivables
<F2>Represents the sum of selling and administrative expense, depreciation
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<F3>Represents basic earnings per share
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