UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED JULY 3, 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
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
As of June 30, 1999, the Registrant had 380,390,511 common shares,
$.75 par value, outstanding.
SEARS, ROEBUCK AND CO.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 AND 26 WEEKS ENDED JULY 3, 1999
Page
PART I - FINANCIAL INFORMATION.
Item 1. Financial Statements.
Condensed Consolidated Statements of
Income (Unaudited) -
13 and 26 Weeks Ended July 3, 1999
and July 4, 1998. 1
Condensed Consolidated Balance Sheets -
July 3, 1999 (Unaudited), July 4, 1998
(Unaudited) and January 2, 1999. 2
Condensed Consolidated Statements
of Cash Flows (Unaudited) -26 Weeks
Ended July 3, 1999 and July 4, 1998. 3
Notes to Condensed Consolidated
Financial Statements (Unaudited). 4
Independent Accountants' Review Report. 8
Item 2. Management's Discussion and
Analysis of Operations, Financial
Condition and Liquidity. 9
PART II - OTHER INFORMATION.
Item 1. Legal Proceedings. 18
Item 4. Submission of Matters to a
Vote of Security-Holders. 19
Item 6. Exhibits and Reports on
Form 8-K. 20
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEARS, ROEBUCK AND CO.
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME
(Unaudited)
<TABLE>
<S>
(millions,
except per share data) 13 Weeks Ended 26 Weeks Ended
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
<C> <C> <C> <C>
Merchandise sales
and services $8,955 $9,128 $16,864 $17,153
Credit
revenues 1,037 1,186 2,165 2,394
Total revenues 9,992 10,314 19,029 19,547
Costs and expenses
Cost of sales, buying
and occupancy 6,640 6,754 12,675 12,838
Selling and
administrative 2,045 2,067 3,968 4,016
Depreciation and
amortization 215 211 424 419
Provision for
uncollectible
accounts 215 355 506 749
Interest 313 361 647 737
Total costs
and expenses 9,428 9,748 18,220 18,759
Operating income 564 566 809 788
Other income (expense) (12) 3 (14) 9
Income before income
taxes and minority
interest 552 569 795 797
Income taxes (209) (223) (301) (315)
Minority interest (12) (10) (17) (13)
Net income $331 $336 $477 $469
Earnings per share
Basic $0.87 $0.86 $1.25 $1.20
Diluted $0.86 $0.85 $1.24 $1.19
Cash dividends
declared per share $0.23 $0.23 $0.46 $0.46
Average common and
common equivalent shares
outstanding 383.6 395.4 384.4 394.9
See accompanying notes.
</TABLE>
SEARS, ROEBUCK AND CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<S>
(millions) (Unaudited)
July 3, July 4, January 2,
1999 1998 1999
<C> <C> <C>
Assets
Current assets
Cash and cash
equivalents $ 397 $ 450 $ 495
Retained interest
in transferred
credit card
receivables 3,600 4,302 4,294
Credit card
receivables,
net 16,771 17,160 17,972
Other receivables 384 293 397
Merchandise
inventories 5,000 5,146 4,816
Prepaid expenses,
deferred charges
and other assets 604 521 506
Deferred income
taxes 729 759 791
Total current
assets 27,485 28,631 29,271
Property and
equipment, net 6,332 6,503 6,380
Deferred income
taxes 531 649 572
Other assets 1,502 1,388 1,452
Total assets $35,850 $37,171 $37,675
Liabilities
Current liabilities
Short-term
borrowings $ 3,814 $ 3,588 $ 4,624
Current portion
of long-term
debt and
capitalized
leases 612 2,865 1,414
Accounts payable
and other
liabilities 5,977 6,107 6,732
Unearned revenues 820 844 815
Other taxes 451 412 524
Total current
liabilities 11,674 13,816 14,109
Long-term debt and
capitalized leases 14,042 13,257 13,631
Postretirement
benefits 2,258 2,479 2,346
Minority interest
and other
liabilities 1,593 1,434 1,523
Total
liabilities 29,567 30,986 31,609
Commitments and Contingent Liabilities
Shareholders' Equity
Common shares 323 323 323
Capital in excess
of par value 3,566 3,586 3,583
Retained earnings 5,149 4,447 4,848
Treasury stock - at
cost (2,233) (1,655) (2,089)
Deferred ESOP
expense (160) (192) (175)
Accumulated other
comprehensive
income (loss) (362) (324) (424)
Total
shareholders'
equity 6,283 6,185 6,066
Total
liabilities
and shareholders'
equity $35,850 $37,171 $37,675
Total common
shares
outstanding 380.3 392.3 383.5
See accompanying notes.
</TABLE>
SEARS, ROEBUCK AND CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(millions) 26 Weeks Ended
<TABLE> July 3, July 4,
<S> 1999 1998
CASH FLOWS FROM OPERATING
ACTIVITIES:
<C> <C>
Net income $ 477 $469
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation,
amortization
and other noncash
items 464 472
Provision for
uncollectible
accounts 506 749
Loss (gain) on sales of
property and
investments 2 (6)
Change in (net
of acquisitions):
Deferred income taxes 81 88
Retained interest in
transferred credit
card receivables 694 (986)
Credit card
receivables 758 1,884
Merchandise
inventories (234) (108)
Other operating
assets (35) 50
Other operating
liabilities (732) (864)
Net cash
provided by
operating
activities 1,981 1,748
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses,
net of cash acquired (16) (34)
Proceeds from sales of
property and investments 101 8
Purchases of property and
equipment (575) (656)
Net cash used in
investing
activities (490) (682)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term
debt 909 1,924
Repayments of long-term
debt (1,313) (1,160)
Decrease in short-term
borrowings, primarily
90 days or less (830) (1,615)
Repayments of ESOP note
receivable 58 23
Common shares purchased (202) (52)
Common shares issued for
employee stock plans 42 87
Dividends paid to
shareholders (257) (180)
Net cash used in
financing activities (1,593) (973)
Effect of exchange rate
on cash and invested cash 4 (1)
Net increase (decrease)
in cash and cash
equivalents (98) 92
Balance at beginning of
year 495 358
Balance at end of period $ 397 $ 450
See accompanying notes.
</TABLE>
SEARS, ROEBUCK AND CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Condensed Consolidated Financial Statements
The Condensed Consolidated Balance Sheets as
of July 3, 1999 and July 4, 1998, the related
Condensed Consolidated Statements of Income for
the 13 and 26 weeks ended July 3, 1999 and
July 4, 1998, and the Condensed Consolidated
Statements of Cash Flows for the 26 weeks ended
July 3, 1999 and July 4, 1998 are unaudited.
The interim financial statements reflect all
adjustments (consisting only of normal recurring
accruals) which are, in the opinion of management,
necessary for a fair statement of the results for
the interim periods presented. The condensed
consolidated financial statements should be read
in conjunction with the consolidated financial
statements and notes thereto included in the
Sears, Roebuck and Co. (the "Company" or "Sears")
1998 Annual Report to Shareholders and Annual Report
on Form 10-K. The results of operations for the
interim periods should not be considered indicative
of results to be expected for the full year.
Certain reclassifications have been made in the
1998 financial statements to conform with the
current year presentation.
2. Shareholders' Equity and Dividend Restrictions
Under terms of indentures entered into in 1981 and
thereafter, Sears cannot take specified actions,
including the declaration of cash dividends,
which would cause its unencumbered assets,
as defined, to fall below 150% of its liabilities,
as defined. At July 3, 1999, approximately $5.0
billion could be paid in dividends to shareholders
under the most restrictive indentures.
On February 3, 1998, the Board of Directors
extended, for an additional two years, the
common share repurchase program which was 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 authorized the Company to acquire up
to 20 million Sears common shares on the open market.
By the end of the first quarter of 1999, all 20
million common shares authorized to be purchased
under the repurchase program had been acquired.
On March 10, 1999, the Board of Directors approved
a common share repurchase program to acquire up to
$1.5 billion of the Company's common shares by
December 31, 2001. The shares will be purchased
on the open market or through privately negotiated
transactions. As of July 3, 1999, approximately
1.2 million common shares have been acquired under
this repurchase program at a cost of approximately
$58 million.
SEARS, ROEBUCK AND CO.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
3. Earnings Per Share
The following table sets forth the computations of basic and diluted earnings
per share:
<TABLE>
<S>
(millions,
except per share data)
13 Weeks Ended 26 Weeks Ended
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
<C> <C> <C> <C>
Basic:
Net income $331 $336 $477 $469
Average shares
outstanding 381.1 391.7 382.0 391.3
Earnings per
share -basic $0.87 $0.86 $1.25 $1.20
Diluted:
Net income $331 $336 $477 $469
Average shares
outstanding 381.1 391.7 382.0 391.3
Dilutive effect
of stock
options 2.5 3.7 2.4 3.6
Average shares
and equivalent
shares
outstanding 383.6 395.4 384.4 394.9
Earnings per
share -
diluted $ 0.86 $0.85 $ 1.24 $1.19
</TABLE>
In each period, certain outstanding options
were excluded from the computation of diluted
earnings per share because they would have been
antidilutive. As of July 3, 1999, options to
purchase 7.3 million shares of stock at prices
ranging from $47 to $64 and $45 to $64 per share
were excluded from the 13 and 26 week 1999 calcu-
lations, respectively. As of July 4, 1998, options
to purchase 1.9 million shares of stock at prices
ranging from $61 to $64 and $56 to $64 per share
were excluded from the 13 and 26 week 1998 calcu-
lations, respectively.
4. Comprehensive Income
The following table sets forth the computation
of comprehensive income:
<TABLE>
(millions)
13 Weeks Ended 26 Weeks Ended
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $331 $336 $477 $469
Other comprehen-
sive income (loss):
Unrealized gain
(loss) on invest-
ments (41) -- 42 --
Foreign currency
translation adjust-
ments 14 (15) 20 (13)
Total other
comprehensive
income (loss) (27) (15) 62 (13)
Total comprehensive
income $304 $321 $539 $456
</TABLE>
SEARS, ROEBUCK AND CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accumulated other comprehensive income (loss)
is comprised of foreign currency translation
charges of $105, $107 and $125 million as of
July 3, 1999, July 4, 1998 and January 2, 1999,
respectively, the Company's minimum pension
liability of $299, $217 and $299 million as of
July 3, 1999, July 4, 1998 and January 2, 1999,
respectively, and an unrealized gain on invest-
ments of $42 million as of July 3, 1999.
5. Segment Disclosures
The following table sets forth revenue, operating
income (expense) and total assets by segment:
<TABLE>
<S>
For the 13 weeks ended July 3, 1999
millions Retail Services Credit Corporate International Consolidated
<C> <C> <C> <C> <C> <C>
Revenue $7,252 $ 808 $ 973 $ -- $ 959 $9,992
Operating
income
(expense) 173 94 315 (63) 45 564
Total
assets 10,109 1,028 19,731 2,210 2,772 35,850
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
For the 13 weeks ended July 4, 1998
millions Retail Services Credit Corporate International Consolidated
Revenue $7,516 $ 798 $ 1,123 $ -- $ 877 $10,314
Operating
income
(expense) 199 97 286 (53) 37 566
Total
assets 10,760 913 20,849 2,105 2,544 37,171
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
For the 26 weeks ended July 3, 1999
millions Retail Services Credit Corporate International Consolidated
Revenue $ 13,674 $ 1,526 $ 2,036 $ -- $ 1,793 $19,029
Operating
income
(expense) 104 169 610 (136) 62 809
Total
assets 10,109 1,028 19,731 2,210 2,772 35,850
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
For the 26 weeks ended July 4, 1998
millions Retail Services Credit Corporate International Consolidated
Revenue $14,121 $ 1,490 $ 2,263 $ -- $ 1,673 $ 19,547
Operating
income
(expense) 139 177 538 (113) 47 788
Total
assets 10,760 913 20,849 2,105 2,544 37,171
</TABLE>
6. Effect of New Accounting Standards and Statements
In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In May, 1999 the
FASB voted to delay the adoption of SFAS No. 133 by one
year. This statement is now required to be adopted in
years beginning after June 15, 2000. The Company is
currently evaluating the effect this statement might
have on its consolidated financial position and results
of operations.
SEARS, ROEBUCK AND CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Disposition of Business
On January 30, 1999, the Company completed the sale
of its HomeLife furniture business. On November 18,
1998, the Company had 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 completion of the sale
did not have a material effect on the first quarter
1999 results of operations or financial condition.
8. Legal Proceedings
As previously reported, 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 was approved by the United
States District Court, Northern District of Illinois
by an order dated July 21, 1999. A related lawsuit
in Washington was dismissed by an order dated July 23,
1999 and a related lawsuit in Illinois was dismissed
by an order dated July 29, 1999.
Other than the above, there have been no material
developments in any legal proceedings since the
Company's disclosure in its Annual Report on
Form 10-K for the fiscal year ended January 2, 1999.
SEARS, ROEBUCK AND CO.
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Shareholders and Board of Directors
of Sears, Roebuck and Co.
We have reviewed the accompanying Condensed
Consolidated Balance Sheets of Sears, Roebuck and
Co. as of July 3, 1999 and July 4, 1998, and the
related Condensed Consolidated Statements of Income
for the 13-week and 26-week periods ended July 3,
1999 and July 4, 1998 and the Condensed Consolidated
Statements of Cash Flows for the 26-week periods ended
July 3, 1999 and July 4, 1998. These financial
statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards
established by the American Institute of Certified
Public Accountants. A review of interim financial
information consists principally of applying
analytical procedures to financial data and of making
inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to such condensed
consolidated financial statements for them to be
in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with
generally accepted auditing standards, the
Consolidated Balance Sheet of Sears, Roebuck and
Co. as of January 2, 1999, and the related
Consolidated Statements of Income, Shareholders'
Equity, and Cash Flows for the year then ended
(not presented herein); and in our report dated
February 11, 1999, we expressed an unqualified
opinion on those consolidated financial statements.
In our opinion, the information set forth in the
accompanying Condensed Consolidated Balance Sheet
as of January 2, 1999, is fairly stated, in all
material respects, in relation to the Consolidated
Balance Sheet from which it has been derived.
Deloitte & Touche LLP
Chicago, Illinois
August 2, 1999
SEARS, ROEBUCK AND CO.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY FOR THE
13 AND 26 WEEKS ENDED JULY 3, 1999 AND JULY 4, 1998
Analysis of Operations
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:
<TABLE>
<S> <S>
Retail consisting of: Corporate consisting of administrative
Full-line stores activities of a holding company nature,
Specialty Retail Group the costs of which are not allocated to
(Home stores the Company's businesses (includes
and Auto stores) e-commerce)
Services consisting of: International consisting of retail,
Home Services services and credit operations con-
Sears Direct (Direct Response ducted in Canada through Sears Canada,
Marketing) Inc. ("Sears Canada"), a 54.7% owned
consolidated subsidiary
Credit which manages domestic
Sears Card operations
</TABLE>
For the 13 weeks ended July 3, 1999, net income
was $331 million, or $0.86 per share, as compared
to $336 million, or $0.85 per share for the
comparable 1998 period. Second quarter 1998 earnings
include non-comparable income of $18 million or $0.05
per share related to the positive impact of SFAS
No. 125 accounting. Excluding this non-comparable
item, earnings per share would have been $0.80 in
the second quarter of 1998 compared with second
quarter 1999 earnings per share of $0.86, a 7.5%
increase. The increase in net income was primarily
due to improved performance of the Credit and
International segments, partially offset by declines
in the Retail and Services segments and higher
expenses in the Corporate segment. Earnings per
share also benefited from lower shares outstanding.
For the 26 weeks ended July 3, 1999, net income
was $477 million, or $1.24 per share compared to
$469 million, or $1.19 per share for the comparable
1998 period. The year-ago period included
non-comparable income of $39 million, or $0.10
per share related to the positive impact of SFAS
No. 125 accounting. Excluding this non-comparable
item, earnings per share increased 13.8% over the first
half of last year. The increase is primarily the
result of improved performance in the Credit segment.
Operating income by segment was as follows:
<TABLE>
<S>
13 Weeks Ended 26 Weeks Ended
(millions) July 3, July 4, July 3, July 4,
1999 1998 1999 1998
<C> <C> <C> <C>
Retail $173 $199 $104 $139
Services 94 97 169 177
Credit 315 286 610 538
Corporate (63) (53) (136) (113)
International 45 37 62 47
Total operating
income $564 $566 $809 $788
</TABLE>
SEARS, ROEBUCK AND CO.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY FOR THE
13 AND 26 WEEKS ENDED JULY 3, 1999 AND JULY 4, 1998
The Company's consolidated effective tax rate for the
13 weeks ended July 3, 1999 was 37.9% as compared to
39.2% in the prior year period. The decrease in the
effective tax rate is primarily due to a reduction
in domestic taxes on international operations and the
favorable resolution of certain tax audit issues.
For the 26 weeks ended July 3, 1999, the consolidated
effective tax rate was 37.9% as compared to 39.5% in
the comparable 1998 period.
Due to holiday buying patterns, merchandise sales are
traditionally higher in the fourth quarter than other
quarterly periods and a disproportionate share of
operating income is typically earned in the fourth
quarter. This business seasonality results in
performance for the 13 and 26 weeks ended July 3,
1999 which is not necessarily indicative of performance
for the balance of the year. The Company makes
available by phone a recorded message on the sales
performance of its domestic stores. The message is
updated weekly and can be heard by calling (847)286-6111.
Retail
Retail revenues decreased 3.5% to $7.25 billion
and 3.2% to $13.67 billion for the 13 and 26 weeks
ended July 3, 1999, respectively, from the comparable
1998 periods due to the divestitures of Western Auto
and HomeLife. Excluding the effect of the divested
businesses, retail revenues increased $191 million
or 2.7% and $404 million or 3.1% for the 13 and 26
week periods, respectively. Retail revenues and
related information are as follows:
<TABLE>
<S>
(millions, except
number of stores) 13 Weeks Ended 26 Weeks Ended
July 3, July 4, July 3, July 4,
1999 1998 Change 1999 1998 Change
<C> <C> <C> <C> <C> <C>
Revenues:
Full-line stores $5,675 $5,561 2.0% $10,741 $10,497 2.3%
Specialty Retail
Group 1,577 1,955 (19.3)% 2,933 3,624 (19.1)%
Total Retail
revenues $ 7,252 $7,516 (3.5)% $13,674 $14,121 (3.2)%
Number of Full-line
stores 848 835
Number of Specialty
Retail Group stores 2,127 2,758
Total Retail stores 2,975 3,593
Comparable store sales
percentage increase 1.0% 2.9% 1.4% 3.8%
</TABLE>
For the 13 week period, Full-line stores revenues
increased 2.0% over second quarter 1998.
Apparel revenues were flat during the second quarter
after a 4.3% gain in 1998. Women's sportswear, special
sizes, infant's apparel, cosmetics, fragrances and fine
jewelry posted solid sales increases. These increases
were offset by decreases in junior's, dresses, boy's and
girl's apparel, footwear and children's hardlines.
Hardlines revenues, comprised of home electronics,
home appliances, home office and home improvement
merchandise sales, as well as licensed business sales,
increased 3.1% in the second quarter of 1999.
All categories showed revenue increases over the
prior year.
SEARS, ROEBUCK AND CO.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY FOR THE
13 AND 26 WEEKS ENDED JULY 3, 1999 AND JULY 4, 1998
For the 26 week period, Full-line store revenues
increased 2.3% over 1998 as apparel increased 0.8%
and hardlines increased 3.0%.
For the 13 week period ended July 3, 1999, Specialty
Retail Group revenues decreased 19.3% from the
comparable 1998 period.
Home stores revenues decreased 4.5% from the 1998
level. The prior year includes revenues from
HomeLife which was sold on January 30, 1999.
Excluding HomeLife revenues in the prior year,
Home stores revenues increased 12.6% due to
strong comparable store sales increases in both
Hardware and Sears Dealer stores. Sears Dealer
and Hardware store revenues also benefited from
93 and 4 net new store openings, respectively.
The Great Indoors also produced strong revenue
gains over the comparable 1998 period.
Auto stores revenues decreased 38.6% from the
comparable 1998 period. The prior year includes
revenues from Western Auto which was sold on
November 2, 1998. Excluding the Western Auto
revenues in the prior year, Auto revenues decreased
6.1% as the Sears Tire Group reduced store count
by one and experienced weak comparable store sales.
Specialty Retail Group revenues declined 19.1% for
the 26 week period ended July 3, 1999 compared to
1998, largely due to the HomeLife and Western Auto
divestitures. Excluding the effect of the
divestitures, specialty retail group revenues
increased 5.9% for the 26 week period due to new
store growth and strong increases in Hardware and
Dealer stores' comparable store sales, partially
offset by weak Auto comparable store sales.
Retail gross margin as a percentage of Retail
revenues for the second quarter of 1999 declined
40 basis points from the second quarter of 1998.
A greater level of promotional activity in the
Full-line stores was a significant cause of the
decreased gross margin rate. For the 26 week
period, retail gross margin declined 60 basis
points.
Retail selling and administrative expense as a
percentage of Retail revenues for the second quarter
of 1999 improved 20 basis points from the second
quarter of 1998. The improvement was primarily
due to leveraging of payroll and other employee
related costs. For the 26 week period, the retail
selling and administrative expense rate improved 50
basis points.
Retail depreciation and amortization expense for
the second quarter of 1999 decreased $2 million or
1.2% from the comparable 1998 period. The decrease
reflects the HomeLife and Western Auto divestitures.
Excluding the impact of the divestitures, depreciation
and amortization increased $11 million due to the growth
in the number of Full-line and Specialty stores in opera-
tion. For the 26 week period, retail depreciation and
amortization expense decreased $6 million due to the
HomeLife and Western Auto divestitures.
Services
Services revenues, which are generated by the Home
Services and Sears Direct businesses, were up 1.3%
in the second quarter of 1999 versus the comparable
1998 period. For the second quarter of 1999 both Home
Services and Sears Direct showed revenue increases.
SEARS, ROEBUCK AND CO.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY FOR THE
13 AND 26 WEEKS ENDED JULY 3, 1999 AND JULY 4, 1998
Services gross margin as a percentage of Services
revenues for the second quarter of 1999 declined
20 basis points and Services selling and administra-
tive expense as a percentage of Services revenues
increased 10 basis points in the second quarter of
1999 over the comparable 1998 period. For the 26
week period, Services gross margin rate remained
flat and the selling and administrative expense rate
increased 60 basis points.
Services depreciation and amortization increased
5.1% in the second quarter of 1999 from the
comparable 1998 period. The increase reflects
continued growth of the Services businesses.
Credit
Domestic Credit revenues decreased 13.4% to $1.0
billion and 10.0% to $2.0 billion, respectively,
for the 13 and 26 weeks ended July 3, 1999 from the
comparable prior year periods. The decline in Credit
revenues was primarily attributable to a lower level
of owned credit card receivables and reduced late fees.
A summary of Credit information (for the managed port-
folio) is as follows:
<TABLE>
13 Weeks Ended 26 Weeks Ended
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
<C> <C> <C> <C>
Sears Card as a % of sales 47.7% 52.3% 47.9% 52.7%
Average account balance (1)
(as of July 3, 1999 and
July 4, 1998) $1,182 $1,086 $1,182 $1,086
Average managed credit
card receivables
(millions) $26,469 $27,808 $27,039 $28,151
</TABLE>
(1) As of July 3, 1999, all accounts have been converted
to the new credit account processing system ("TSYS").
Under TSYS, only accounts with balances are included in
the calculation of average account balance. Therefore,
the average account balance statistic is higher under
TSYS than it would be under the Company's proprietary
credit system, which was used for the July 4, 1998 average
account balance.
The percentage of merchandise sales and services
transacted with the Sears Card in the second quarter
of 1999 declined to 47.7% compared to 52.3% a year ago
due to greater preference for the use of cash, checks
and third party credit cards. The payment rate during
the second quarter of 1999 was also higher than in the
comparable prior year quarter, contributing to the
decrease in average managed receivables.
Credit selling and administrative expense as a
percentage of Credit revenues increased 320 basis
points in the second quarter of 1999 and 310 basis
points for the 26 week period from the comparable 1998
periods. The increase was primarily due to increased
investment in collection efforts and system expenses.
Increased information system costs are primarily related
to the conversion to the TSYS account processing system,
which now tracks the activity and completes the
processing of transactions related to the managed
credit card portfolio. This system conversion was
completed during the second quarter of 1999. The
benefits from increased spending on collections
are reflected in the provision for uncollectible
accounts as charge-offs show favorable trends, even
though the new TSYS account processing system
generally charges off accounts sooner than the
previously used proprietary credit system.
SEARS, ROEBUCK AND CO.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY FOR THE
13 AND 26 WEEKS ENDED JULY 3, 1999 AND JULY 4, 1998
The domestic provision for uncollectible accounts
and related information is as follows:
<TABLE>
<S>
13 Weeks Ended 26 Weeks Ended
(millions) July 3, July 4, July 3, July 4,
1999 1998 1999 1998
<C> <C> <C> <C>
Provision for
uncollectible
accounts $206 $348 $490 $735
Net credit
charge-offs as
a percentage of
average managed
credit card
receivables(1) 7.11% 7.37% 7.08% 7.74%
July 3, April 3, Jan. 2,
1999 1999 1999
Domestic managed credit
card receivables -
delinquency rate (2) 7.29% 8.07% 9.28%
Allowance for
uncollectible accounts $850 $932 $942
Allowance % of domestic
owned credit card
receivables 5.27% 5.72% 5.44%
</TABLE>
(1)The 1999 net charge-off rate includes all of the
accounts in the domestic portfolio. Twelve percent
of the accounts were converted to the new TSYS account
processing system in October 1998, 38% were converted in
March 1999, and 50% were converted in April 1999. Balances
are generally charged-off earlier under the TSYS system
than under the proprietary system.
(2)The July 3, 1999 delinquency rate reflects 100% of
the domestic managed credit card receivable balances.
At April 3, 1999 and January 2, 1999, there were 50% and
12%, respectively, of the managed credit card accounts
on the TSYS system and the delinquency rates at these dates
reflect only those portions of the portfolio. Delinquency
rates calculated on the Company's pre-TSYS proprietary system
are not comparable to delinquencies calculated on the TSYS
system due to differences in calculation methodology.
The domestic provision for uncollectible accounts
decreased 40.8% to $206 million and 33.3% to $490 million
for the 13 and 26 weeks ended July 3, 1999, respectively,
from the comparable prior year periods. The decrease
was attributable to lower owned credit card receivable
balances, and favorable trends in delinquency rates and
charge-offs. Assuming continuing favorable trends in
delinquency and charge-off rates, the Company anticipates
that the required allowance for uncollectible accounts
will be lower in the second half of 1999 and that the 1999
year end ratio of the allowance as a percentage of domestic
owned credit card receivables will also be lower.
Interest expense is discussed within the Credit segment
since the majority of the Company's interest expense is
allocated to the Credit segment. Interest expense is
combined with the funding costs on receivables sold
through securitizations to represent total funding costs
as follows:
<TABLE>
<S>
13 Weeks Ended 26 Weeks Ended
(millions) July 3, July 4, July 3, July 4,
1999 1998 1999 1998
<C> <C> <C> <C>
Consolidated
interest
expense(1) $313 $361 $647 $737
Funding cost on
securitized
receivables 106 107 212 213
Total funding
costs $419 $468 $859 $950
</TABLE>
(1) Credit segment interest expense was $273 and $319
for the second quarter of 1999 and 1998, respectively,
and $562 and $647 for the 26 weeks ended July 3, 1999
and July 4, 1998, respectively.
SEARS, ROEBUCK AND CO.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY FOR THE
13 AND 26 WEEKS ENDED JULY 3, 1999 AND JULY 4, 1998
Consolidated interest expense decreased in the second
quarter of 1999 compared to the second quarter of 1998
due to lower on-book debt levels caused by a decrease
in owned credit card receivables and retained interest
assets. Interest expense also benefited from a lower
funding rate in the second quarter of 1999 vs. 1998.
The funding cost on securitized receivables was consistent
in both years due to slightly higher levels of average
securitized balances offset by slightly lower funding rates.
Corporate
Corporate expenses increased $10 million in the second
quarter of 1999 and $23 million for the first 26 weeks
of 1999 compared to similar periods in 1998.
The increase was primarily attributable to higher
e-commerce costs and additional spending on information
systems projects. The information systems costs for 1999
are more heavily weighted towards the first half of the year
since Year 2000 testing will take precedence in the second
half of 1999.
International
International revenues for the second quarter of 1999
increased 9.4% from the same period a year ago.
Sears Canada enjoyed strong retail and catalog sales
performance. For the 26 week period, International revenues
increased 7.2%.
International gross margin as a percentage of
International merchandise and services revenues increased
180 basis points in the second quarter of 1999 from the
comparable prior year quarter, reflecting a shift in
balance of sale to higher margin apparel merchandise and
savings realized from merchandise sourcing initiatives.
For the 26 week period, International gross margin increased
120 basis points.
International selling and administrative expense as a
percentage of total International revenues increased
110 basis points in the second quarter of 1999 from the
second quarter of 1998. The increase was primarily due
to higher employee-related costs. For the 26 week period,
the International selling and administrative expense rate
increased 20 basis points.
Financial Condition
The consolidated owned net credit card receivables
balances of $16.77 billion, $17.16 billion and $17.97
billion as of July 3, 1999, July 4, 1998 and
January 2, 1999, respectively, exclude credit card
receivables transferred to a securitization Master
Trust as follows:
<TABLE>
<S>
(millions) July 3, July 4, January 2,
1999 1998 1999
<C> <C> <C>
Domestic
Managed credit card
receivables $26,103 $27,725 $28,251
Securitized balances
sold (6,381) (6,667) (6,626)
Retained interest in
transferred credit
card receivables (3,600) (4,302) (4,294)
Other customer
receivables 104 202 112
Domestic owned credit
card receivables 16,226 16,958 17,443
International credit
card receivables 1,430 1,339 1,503
Consolidated credit
card receivables $17,656 $18,297 $18,946
Less: Allowance for
uncollectible
accounts 885 1,137 974
Credit card
receivables, net $16,771 $17,160 $17,972
</TABLE>
SEARS, ROEBUCK AND CO.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY FOR THE
13 AND 26 WEEKS ENDED JULY 3, 1999 AND JULY 4, 1998
Consolidated credit card receivables (before allowance for
uncollectible accounts) decreased $641 million when
comparing the second quarter of 1999 with the second
quarter of 1998. The decrease is primarily due to a
decrease in managed receivables. Managed credit card
receivables decreased from second quarter 1998 primarily
due to declining market share of sales on the Sears Card
and faster payment rates. Compared to 1998 year-end,
consolidated credit card receivables (before allowance
for uncollectible accounts) decreased $1.29 billion due
to the normal seasonal nature of the retail industry as
well as the aforementioned declining market share.
As of July 3, 1999, consolidated merchandise inventories
on the first-in, first-out (FIFO) basis were $5.69
billion, compared with $5.88 billion at July 4, 1998
and $5.50 billion at January 2, 1999. The decrease in
inventory levels from the second quarter of 1998 reflects
the dispositions of the Western Auto and HomeLife businesses.
The increase in inventory from January 2, 1999 reflects the
normal seasonal build-up of inventory, partially offset by
the sale of HomeLife.
Total property and equipment, net of accumulated
depreciation, was $6.33 billion at July 3, 1999
compared with $6.50 billion a year earlier. The
decrease reflects the dispositions of Western Auto
and HomeLife, partially offset by the net addition of
13 Full-line stores and 97 Specialty stores, as well as
remodeling activity within the Full-line stores.
Total funding for the Company at July 3, 1999 was
$24.85 billion compared with $26.38 billion a year
earlier. The decrease in funding reflects the recent
divestitures of HomeLife and Western Auto and the decrease
in the managed credit card receivables portfolio.
Total funding includes debt recorded on the balance
sheet and investor certificates related to credit card
receivables sold through securitizations as follows:
<TABLE>
<S>
July 3, July 4, January 2,
(millions) 1999 1998 1999
<C> <C> <C>
Short-term borrowings $ 3,814 $ 3,588 $ 4,624
Long-term debt and
capitalized lease
obligations 14,654 16,122 15,045
Securitized balances
sold 6,381 6,667 6,626
Total funding $24,849 $26,377 $26,295
</TABLE>
The Company accesses a variety of capital markets to
preserve flexibility and diversify its funding sources.
The primary funding sources utilized include unsecured
commercial paper, medium term notes, senior debt and
securitization.
Liquidity
Based upon the cash flow expected to be generated from
future operations and the Company's ability to cost-
effectively access multiple sources of funding, the
Company believes sufficient resources will be available
to maintain its planned level of operations, capital
expenditures and dividends in the future.
SEARS, ROEBUCK AND CO.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY FOR THE
13 AND 26 WEEKS ENDED JULY 3, 1999 AND JULY 4, 1998
Year 2000
This description updates the description of the Company's Year 2000 project on
pages 29 and 31 of Sears 1998 Annual Report to Shareholders.
State of Readiness
Information Systems
As previously reported, the Company has completed an
inventory and assessment of its mission critical (vital
to business operations) information systems. As of July 9,
1999, approximately 97% of the Company's mission critical
systems have either been remediated or assessed as not
containing a Year 2000 compliance issue. The Company
expects to complete remediation and testing of the mission
critical systems by September 1999. The Company has
modified its certification program (final testing and
validation) to require certification of mission critical
and retired systems only. This certification process has
begun, and the Company expects to complete it by November
1999. To assist in completing certification, the Company
has issued a moratorium on deploying any changes into its
systems production environment from July 1, 1999 through
April 1, 2000 (subject to business critical changes) that
are not related to the Year 2000 compliance project.
A formal process has been developed for managing business
critical changes implemented during the moratorium,
including a retesting and recertification process where
necessary.
Business Management
There have been no changes in the Company's assessment
of its equipment and systems that contain embedded
computer technology, its resale merchandise, or its
mission critical, non-information systems service
providers -- the Company believes that these areas
do not pose a substantial Year 2000 compliance risk
to the Company.
Merchandise Vendors
The Company had rated 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 of its first tier vendors (50% of merchandise
sales), and has performed follow-up site visits on
certain first tier vendors that had been rated yellow
or red. In addition, the Company has performed site
visits on 32 second tier vendors (approximately 6% of
merchandise sales), including all those that had been
rated red or that were among the higher volume second
tier vendors with yellow or green ratings. The Company
has completed telephone conferences with all second tier
vendors.
The Company now rates its vendors as either green or
red. The green category consists of vendors that have
represented to the Company that they were compliant,
including the development of contingency plans, subject
to the possible failure of the vendor's third party
providers. The green category also includes vendors
in the third tier that reported that they would be
compliant by August 1, 1999. The Company recently
requested from all such third tier vendors confirmation
that they met their projected compliance dates. All
other vendors are rated in the red category. As of
August 2, 1999, three first tier vendors (approximately
5% of merchandise sales), five second tier vendors
(approximately 1% of merchandise sales) and 197 third
tier vendors (approximately 2% of merchandise sales)
were rated in the red category. The Company continues
to monitor vendors rated in the red category, including
reviewing follow-up progress reports, reviewing vendors'
filings with the Securities and Exchange Commission
(first and second tier only) and conducting electronic
data interchange testing. The Company also plans
additional site visits to selected vendors rated in
the red category.
SEARS, ROEBUCK AND CO.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY FOR THE
13 AND 26 WEEKS ENDED JULY 3, 1999 AND JULY 4, 1998
Contingency Plans
Each of the Company's business units 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. These
plans will be based on existing emergency response
plans, business continuity plans and the results of
the Year 2000 compliance project. The business units
are considering various contingencies, such as
alternative merchandise vendors and service providers,
operational alternatives due to a loss of utilities or
public services and manual transaction process
alternatives due to a loss of a mission critical
information system. The Company expects to finalize
its contingency plans by October 1999. In addition,
the Company anticipates completing in the fourth quarter
of 1999 the development and rehearsing of its century
rollover event management procedures.
Risks
The Company previously identified as a risk the failure
to timely implement its new payroll processing system.
The Company has now completed implementation of that
system and no longer regards that system as a risk factor.
The Company believes that its most significant Year 2000
risk factors are:
- - Failure of either of its two mission critical information
systems service providers to make their systems Year
2000 compliant; and
- - 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 either 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 effect the Company's operations are reasonably
likely to occur.
Costs
The Company estimates total costs (including external
costs and the costs of internal personnel) related to
its Year 2000 effort to be approximately $67 million,
of which the Company (including Sears Canada) has
incurred approximately $47 million. 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 $81 million,
of which the Company has incurred approximately $72 million.
The Company funds Year 2000 costs with cash flows from
operations.
Cautionary Statement Regarding Forward-Looking Information
Certain statements made in this 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, delinquency and charge-off trends in the credit
card receivables portfolio, general North American economic
conditions (such as interest rates and consumer confidence)
and normal business uncertainty. In particular, the discussion
of Year 2000 matters above 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.
SEARS, ROEBUCK AND CO.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, 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 was approved by the United
States District Court, Northern District of Illinois
by an order dated July 21, 1999. A related lawsuit in
Washington was dismissed by an order dated July 23, 1999
and a related lawsuit in Illinois was dismissed by an order
dated July 29, 1999.
Other than the above, there have been no material
developments in any legal proceedings since the Company's
disclosure in its Annual Report on Form 10-K for the fiscal
year ended January 2, 1999.
SEARS, ROEBUCK AND CO.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders.
On May 13, 1999, the Company held its annual meeting of
shareholders at the Apparel Mart in Atlanta, Georgia.
Brenda C. Barnes, Michael A. Miles and Dorothy A. Terrell
were elected to Class B of the Board of Directors for three
year terms expiring at the 2002 annual meeting of
shareholders. The shareholders approved the recommendation
of the Audit Committee that Deloitte & Touche LLP be appointed
auditors for 1999. Shareholder proposals regarding the
classified Board of Directors, vendor standards and CERES
Principles were voted on and defeated. The votes on these
matters were as follows:
1. Election of Directors.
Name For Withheld
Brenda C. Barnes 326,759,302 4,563,779
Michael A. Miles 326,483,124 4,839,957
Dorothy A. Terrell 326,731,955 4,591,126
2. Appointment of Deloitte & Touche LLP as auditors for 1999.
For Against Abstain
327,410,234 2,176,991 1,735,856
3. Shareholder proposal regarding the classified Board of Directors.
For Against Abstain Broker Non-Votes
136,585,219 141,702,877 5,891,624 47,143,361
4. Shareholder proposal regarding vendor standards.
For Against Abstain Broker Non-Votes
22,149,356 242,416,684 19,626,908 47,130,133
5. Shareholder proposal regarding CERES Principles.
For Against Abstain Broker Non-Votes
27,652,959 237,742,021 18,797,965 47,130,136
SEARS, ROEBUCK AND CO.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
An Exhibit Index has been filed as part of this
Report on Page E-1.
(b) Reports on Form 8-K.
A Current Report on Form 8-K was filed by the
Registrant on April 23, 1999 to report, under Item 5,
that the Registrant issued a press release to report
its first quarter earnings and that representatives
of the Registrant intended to meet with analysts and
investors in England and to file, under Item 7, a copy
of such press release and certain materials presented
at such meetings.
A Current Report on Form 8-K was filed by the Registrant
on June 29, 1999 to report, under Item 5, that the
Registrant issued a press release to report its progress
with respect to certain strategic business initiatives
and to file, under Item 7, a copy of such press release.
SEARS, ROEBUCK AND CO.
SIGNATURE
Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Sears, Roebuck and Co.
(Registrant)
August 6, 1999 By /s/ Jeffrey N. Boyer .
Jeffrey N. Boyer
Vice President and Controller
(Principal Accounting Officer and duly
authorized officer of Registrant)
E-1
EXHIBIT INDEX
SEARS, ROEBUCK AND CO.
13 AND 26 WEEKS ENDED JULY 3, 1999
Exhibit No.
3(a) Restated Certificate of Incorporation as in
effect on May 13, 1996 (incorporated by reference
to Exhibit 3(a) to Registrant's Statement No. 333-8141).
3(b) By-laws, as amended to February 2, 1999
(incorporated by reference to Exhibit 3.(ii) to
Registrant's Annual Report on Form 10-K for the
fiscal year ended January 2, 1999).
4. Registrant hereby agrees to furnish 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. Form of Non-Compete/Change of Control
Agreement between Sears and certain of its officers.
12(a). Computation of ratio of income to fixed
charges for Sears and consolidated subsidiaries for
each of the five years ended January 2, 1999 and for
the six- and twelve-month periods ended July 3, 1999.
12(b). Computation of ratio of income to combined
fixed charges and preferred share dividends for Sears
and consolidated subsidiaries (incorporated by reference
to Exhibit 12.(b) to Registrant's Annual Report on
Form 10-K for the fiscal year ended January 2, 1999).
15. Acknowledgement of awareness from Deloitte & Touche
LLP, dated August 2, 1999, concerning unaudited interim
financial information.
27. Financial Data Schedule.
Exhibit 10
Each executive officer and certain other senior
officers of the Registrant have executed or will
execute a Non-Compete/Change of Control Agreement,
substantially in the form attached hereto. The term
of the non-competition and other related provisions
for Mr. Arthur C. Martinez, Chairman of the Board of
Directors, President and Chief Executive Officer, is
three years; for members of the Executive Committee is
two years; and for all other officers is one year.
NON-COMPETE/CHANGE OF CONTROL AGREEMENT
Sears, Roebuck and Co., including its subsidiaries
(collectively referred to as "Sears"), and ____
_________________ ("Executive"), intending to be
legally bound and for good and valuable consideration,
agree as follows:
1) Severance Pay. Should Executive be involuntarily
terminated from Sears for any reason, other than Cause
(as defined below), death, total and permanent disability,
or retirement at or after age 65, and other than a Change
of Control Termination (as defined below), Sears agrees
to pay severance to Executive in the form of two years
of salary continuation, which will include annual base
salary plus annual bonus target as determined by the year
in which termination occurs, less legal deductions. While
receiving salary continuation, Executive will be placed
on a leave of absence status and entitled to all benefits
for which Executive is eligible to participate.
Stock options will continue to vest during the salary
continuation period. Vested options will expire in
accordance with their respective grant letters.
After the first year, salary continuation payments
will be subject to mitigation by the amount of any
compensation and benefits to which the Executive is
entitled because of any employment, including self-
employment.
2) Change of Control. Sears shall pay to Executive
the severance described in Section 3, and Executive
shall be entitled to participate in the benefits
described in Section 3, if Executive's employment is
terminated under the circumstances described below
(a "Change of Control Termination"):
a) Executive's employment with Sears and all of its
subsidiaries is terminated:
i) On the day of, or within 24 months after,
occurrence of a Change of Control, as such term is
defined in Appendix A; or
ii) Prior to a Change of Control but at the request
of any third party participating in or causing the
Change of Control; or
(iii) Otherwise in connection with or in anticipation
of a Change of Control; and
b) Executive's termination of employment was not
i) On account of Executive's death or total and
permanent disability;
ii) For Cause (as defined below); or
iii) On account of Executive's retirement, or
Executive's resignation other than for Good Reason
(as defined below).
For the purpose of this Agreement, (a) "Cause" shall mean
(1) a material breach by Executive of those duties and
responsibilities that do not differ in any material
respect from Executive's duties and responsibilities
during the 90-day period immediately prior to termination
of employment, which breach is demonstrably willful and
deliberate on Executive's part, is committed in bad faith
or without reasonable belief that such breach is in the best
interests of Sears and is not remedied in a reasonable period
of time after receipt of written notice from Sears specifying
such breach, (2) the commission by Executive of a felony
involving moral turpitude, or (3) dishonesty or willful
misconduct in connection with Executive's employment, and
(b) "Good Reason" shall mean a significant reduction in
Executive's responsibilities, title or annual base salary,
or Executive's mandatory relocation to an office more than
50 miles from the primary location at which Executive is
required to perform Executive's duties immediately prior
to termination of employment, and which reduction in
responsibilities, title or annual base salary, or
relocation is not remedied in a reasonable period of
time after receipt of written notice from Executive
specifying that "Good Reason" exists for purposes of
this Agreement.
3) Change of Control Severance Pay. In the event of
a Change of Control Termination, Sears agrees to pay
Executive's base salary and annual bonus target, prorated
through the date of the Change of Control Termination,
plus severance pay in the form of an undiscounted lump
sum equal to (a) two years of Executive's base salary plus
(b) the product of two multiplied by Executive's annual
bonus target as determined by the year in which termination
occurs, less legal deductions. For two years following the
Change of Control Termination, Executive will be placed on
a leave of absence status and entitled to all benefits for
which Executive is eligible to participate.
4) Gross-Up Payment. If, for any reason, any part or
all of the amounts payable to Executive under this Agreement
(or otherwise, if such amounts are in the nature of
compensation paid or payable by Sears or any of its
subsidiaries after there has been a Change of Control)
are deemed to be "excess parachute payments" within the
meaning of Section 280G(b)(1) of the Internal Revenue Code
of 1986, as amended (the "Code"), Sears shall pay to such
Participant, in addition to any other amounts that he may
be entitled to receive pursuant to the Plan, an amount
which, after all federal, state, and local taxes (of
whatever kind) imposed on the participant with respect
to such amount are subtracted therefrom, is equal to the
excise taxes imposed on such excess parachute payments
pursuant to Section 4999 of the Code.
5) Protective Covenants. Executive acknowledges that
the above consideration, absent this Agreement, is
beyond what Sears is obligated to pay. Executive further
acknowledges that benefits payable to Executive under
Sears Long-Term Incentive Plan and any special grants
of restricted stock or stock options for retention
purposes are contingent on Executive's signing of this
Agreement, and that such benefits constitute additional
consideration beyond what Sears is obligated to pay.
In consideration of the opportunity for severance benefits
and Long-Term Incentive Plan payments specified above,
and other good and valuable consideration, Executive
agrees to the following:
a) The confidential and proprietary information and
trade secrets of Sears are among its most valuable
assets and include but are not limited to its customer
and vendor lists, databases, computer programs,
frameworks, models, its marketing programs, its sales,
financial, marketing, training and technical information,
and any other information, whether communicated orally,
electronically, in writing or in other tangible forms
concerning how Sears creates, develops, acquires or
maintains its products and its marketing plans,
targets its potential customers and operates its
retail and other businesses. Sears has invested,
and continues to invest, considerable amounts of
time and money in obtaining and developing the
goodwill of its customers, its other external
relationships, its data systems and data bases,
and all the information described above (hereinafter
collectively referred to as "Sears Confidential
Information"). Any misappropriation or unauthorized
disclosure of Sears Confidential Information in any
form would irreparably harm Sears. Executive will not,
except as Sears may otherwise consent or direct in
writing, reveal or disclose, sell, use, lecture upon
or publish any Sears Confidential Information.
Executive's obligation under this paragraph will
cease as to any information which has become publicly
known through a source other than the Executive.
b) For a period of two years from Executive's last
day of active employment, whether or not severance is
payable, Executive shall not, directly or indirectly
(through another business or person), engage in the
following activities or assist others in such activities,
anywhere in the United States or in any other jurisdiction
outside of the United States in which Sears conducts or
plans to conduct its business:
i) Hiring, recruiting, or attempting to recruit for any
person or business entity that is a Competitor (as
defined below) of Sears, any person employed by Sears; and,
ii) Being employed by, being connected to, or consulting
for any person who or business entity which is a
Competitor of Sears business or planned business at
the time of the termination of Executive's active
employment with Sears.
The provisions of paragraph 5(b) will apply should
Executive's employment be terminated by either party
for any reason (including but not limited to
resignation or retirement); provided, however, that
the provisions of paragraph 5(b)(ii) will not apply
should Executive's employment be terminated due to a
Change of Control Termination.
c) For the purposes of this Agreement, "Competitor"
shall be defined as any business and any branch,
office or operation thereof, which is in material
competition with Sears, including without limitation,
any direct marketing or electronic commerce business or
retail department, specialty, discount, furniture,
appliance, electronics, hardware, home improvement or
home services, auto parts/service or apparel business
with annual gross sales in excess of $500 million,
and any vendor with annual gross sales of services or
merchandise to Sears in excess of $100 million.
d) Executive will provide Sears with such information
as Sears may from time to time request to determine
Executive's compliance with this Agreement.
Executive authorizes Sears to contact Executive's
future employers and other entities with whom Executive
has any sort of business relationship to determine
Executive's compliance with this Agreement or to
communicate the contents of this Agreement to such
employers and entities. Executive releases Sears,
its agents and employees, from all liability for any
damage arising from any such contacts or communications.
e) The restrictions set forth above are necessary to
prevent the use and disclosure of Sears Confidential
Information and to otherwise protect the legitimate
business interests of Sears. The provisions of this
Agreement are reasonable.
f) Upon the termination of Executive's employment
by either party, Executive will, if requested by
Sears, execute a binding general waiver and release
of claims in a form provided by Sears.
g) Irreparable harm would result from any breach
by Executive of the provisions of this Agreement,
and monetary damages alone would not provide adequate
relief for any such breach. Accordingly, if
Executive breaches this Agreement, injunctive relief
in favor of Sears is proper. Moreover, any award of
injunctive relief shall not preclude Sears from seeking
or recovering any lawful compensatory damages which may
have resulted from a breach of this Agreement, including
a forfeiture of any payments not made and a return of any
payments already received.
h) Any waiver, or failure to seek enforcement or remedy
for any breach or suspected breach of any provision
of this Agreement by Sears in any instance shall not
be deemed a waiver of such provision in the future.
i) Executive may request (a) a waiver of the
non-competition provisions of this Agreement or
(b) that the time frame in paragraph 5(b) above,
commence during Executive's continued employment
with Sears, by written request to the Chief Executive
Officer of Sears or the equivalent. Such a request
will be given reasonable consideration and may be
granted, in whole or in part, or denied at Sears
absolute discretion.
6) If any provision(s) of this Agreement shall be found
invalid, illegal, or unenforceable, in whole or in part,
then such provision(s) shall be deemed to be modified or
restricted to the extent and in the manner necessary to
render the same valid and enforceable, or shall be deemed
excised from this Agreement, as the case may require, and
this Agreement shall be construed and enforced to the
maximum extent permitted by law, as if such provision(s)
had been originally incorporated herein as so modified or
restricted, or as if such provision(s) had not been
originally incorporated herein, as the case may be.
7) This Agreement will be governed under the internal
laws of the State of Illinois. Executive agrees that
the state and federal courts located in the State of
Illinois shall have exclusive jurisdiction in any
action, suit or proceeding based on or arising out of
this Agreement, and Executive hereby: (a) submits to
the personal jurisdiction of such courts; (b) consents
to the service of process in connection with any action,
suit, or proceeding against Executive; and (c) waives any
other requirement (whether imposed by statute, rule of court,
or otherwise) with respect to personal jurisdiction, venue
or service of process.
8) This Agreement does not constitute a contract of
employment, and Executive acknowledges that Executive's
employment with Sears is terminable at will by either
party with or without cause and with or without notice.
9) If any provision of this Agreement conflicts with
any other agreement, policy, plan, practice or other
Sears document, then the provisions of this Agreement
will control. This Agreement will supersede any prior
agreement between Executive and Sears with respect to
the subject matter contained herein, and may be amended
only by a writing signed by an officer of Sears.
SEARS, ROEBUCK AND CO.
______________________ by:___________________________
Executive
______________________ _________________________
Date Date
Appendix A
Certain Definitions
A "Change of Control" shall mean:
(a) The acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)
(2) of the Securities Exchange Act of 1934, as amended
[the "Exchange Act"]) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (i) the then outstanding
common shares of the Company (the "Outstanding Company
Common Shares") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled
to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided,
however, that the following acquisitions shall not
constitute a Change of Control: (i) any acquisition
directly from the Company (excluding an acquisition by
virtue of the exercise of a conversion privilege);
(ii) any acquisition by the Company or any of its
subsidiaries; (iii) any acquisition by any employee
benefit plan (or any related trust) sponsored or
maintained by the Company or any of its subsidiaries;
or (iv) any acquisition by any corporation pursuant to
a reorganization, merger or consolidation, if,
following such reorganization, merger or consolidation,
the conditions described in clauses (i), (ii) and (iii)
of (c) below are satisfied; or
(b) Individuals who, as of the date hereof
constitute the Board of Directors of the Company
(the "Board")(as of the date hereof the "Incumbent
Board") cease for any reason to constitute at least
a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date
hereof whose election, or nomination for election by
the Company's shareholders, was approved by a vote of
at least a majority of the directors then comprising
the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of
either an actual or threatened election contest
(as such terms are used in Rule 14a-11 of Regulation
14A promulgated under the Exchange Act) or other
actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than
the Board; or
(c) Approval by the shareholders of the
Company of a "Business Combination," which shall
mean a reorganization, merger or consolidation, in
each case, unless, following such reorganization,
merger or consolidation, (i) more than 60% of,
respectively, the then outstanding common shares of
the corporation resulting from such reorganization,
merger or consolidation and the combined voting power
of the then outstanding voting securities of such
corporation entitled to vote generally in the election
of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the
individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company
Common Shares and Outstanding Company Voting Securities
immediately prior to such reorganization, merger or
consolidation in substantially the same proportions
as their ownership, immediately prior to such
reorganization, merger or consolidation, of the
Outstanding Company Common Shares and Outstanding
Company Voting Securities, as the case may be, (ii)
no Person (excluding the Company, any of its
subsidiaries, any employee benefit plan (or
related trust) sponsored or maintained by the
Company, any of its subsidiaries or such corpora-
tion 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 in-
directly, 20% or more of, respectively, the then
outstanding common shares of the corporation re-
sulting from such reorganization, merger or
consolidation or the combined voting power of the
then outstanding voting securities of such corpora-
tion 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 corpora-
tion resulting from such reorganization, merger or
consolidation were members of the Incumbent Board
at the time of the execution of the initial agree-
ment providing for such reorganization, merger or
consolidation; or
(d) Approval by the shareholders of the Company
of (i) a complete liquidation or dissolution of the
Company or (ii) the sale or other disposition of all
or substantially all of the assets of the Company,
other than to a corporation, with respect to which
following such sale or other disposition, (A) more
than 60% of, respectively, the then outstanding
common shares of such corporation and the combined
voting power of the then outstanding voting securities
of such corporation entitled to vote generally in the
election of directors is then beneficially owned,
directly or indirectly, by all or substantially all
of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding
Company Common Shares and Outstanding Company Voting
Securities immediately prior to such sale or other
disposition in substantially the same proportion as
their ownership, immediately prior to such sale or
other disposition, of the Outstanding Company
Common Shares and Outstanding Company Voting
Securities, as the case may be, (B) no Person
(excluding the Company, any of its subsidiaries,
and any employee benefit plan (or related trust)
sponsored or maintained by the Company, any of its
subsidiaries or such corporation and any Person
beneficially owning, immediately prior to such
sale or other disposition, directly or indirectly,
20% or more of the Outstanding Company Common Shares
or Outstanding Company Voting Securities, as the case
may be) beneficially owns, directly or indirectly,
20% or more of, respectively, the then outstanding
common shares of such corporation and the combined
voting power of the then outstanding voting
securities of such corporation entitled to vote
generally in the election of directors and (C) at
least a majority of the members of the board of
directors of such corporation were members of the
Incumbent Board at the time of the execution of the
initial agreement or action of the Board providing
for such sale or other disposition of assets of the
Company.
For purposes of the foregoing definition of "Change
of Control," a "subsidiary" of the Company shall
mean any corporation in which the Company,
directly or indirectly, holds a majority of the
voting power of such corporation's outstanding
shares of capital stock.
EXHIBIT 12(a)
COMPUTATION OF RATIO OF INCOME TO FIXED CHARGES
SEARS, ROEBUCK AND CO. AND CONSOLIDATED SUBSIDIARIES
<TABLE>
<S>
Twelve Three
Months Months
Ended Ended
July 3, July 3, Year Ended
(millions, except ratios) 1999 1999 1998 1997 1996 1995 1994
(unaudited) (unaudited)
<C> <C> <C> <C> <C> <C> <C>
Fixed Charges
Interest and amortization
of debt discount and
expense on all
indebtedness $1,333 $647 $1,423 $1,409 $1,365 $1,373 $1,279
Add interest element
implicit in rentals 137 72 144 147 121 119 114
1,470 719 1,567 1,556 1,486 1,492 1,393
Interest Capitalized 5 2 5 3 5 4 1
Total fixed charges $1,475 $721 $1,572 $1,559 $1,491 $1,496 $1,394
Income
Income from continuing
operations $1,080 $477 $1,072 $1,188 $1,271 $1,025 $ 857
Deduct undistributed
net income
of unconsolidated
companies 10 3 11 13 8 9 (7)
1,070 474 1,061 1,175 1,263 1,016 864
Add
Fixed charges
(excluding interest
capitalized) 1,470 719 1,567 1,556 1,486 1,492 1,393
Income taxes 753 301 766 912 834 703 614
Income before fixed
charges and
income taxes $3,293 $1,494 $3,394 $3,643 $3,583 $3,211$2,871
Ratio of income to fixed
charges 2.23 2.07 2.16 2.34 2.40 2.15 2.06
</TABLE>
EXHIBIT 15
To the Shareholders and Board of Directors
of Sears, Roebuck and Co.
We have made a review, in accordance with standards
established by the American Institute of Certified
Public Accountants, of the unaudited interim financial
information of Sears, Roebuck and Co. for the 13-week
and 26-week periods ended July 3, 1999 and July 4, 1998,
as indicated in our report dated August 2, 1999; because
we did not perform an audit, we expressed no opinion on
that information.
We are aware that our report referred to above, which is
included in your Quarterly Report on Form 10-Q for the
13-week and 26-week periods ended July 3, 1999 and July 4,
1998, is incorporated 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, 333-9817, 33-64215, 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. for 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.
We are also aware that the aforementioned report,
pursuant to Rule 436(c) under the Securities Act of
1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or
a report prepared or certified by an accountant within
the meaning of Sections 7 and 11 of that Act.
Deloitte & Touche LLP
Chicago, Illinois
August 2, 1999
<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>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> JUL-03-1999
<CASH> 397
<SECURITIES> 3,600<F1>
<RECEIVABLES> 17,656
<ALLOWANCES> 885
<INVENTORY> 5,000
<CURRENT-ASSETS> 27,485
<PP&E> 11,722
<DEPRECIATION> 5,390
<TOTAL-ASSETS> 35,850
<CURRENT-LIABILITIES> 11,674
<BONDS> 14,042
0
0
<COMMON> 323
<OTHER-SE> 5,960
<TOTAL-LIABILITY-AND-EQUITY> 35,850
<SALES> 8,955
<TOTAL-REVENUES> 1,037
<CGS> 6,640
<TOTAL-COSTS> 6,640
<OTHER-EXPENSES> 2,260<F2>
<LOSS-PROVISION> 215
<INTEREST-EXPENSE> 313
<INCOME-PRETAX> 552
<INCOME-TAX> 209
<INCOME-CONTINUING> 331
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 331
<EPS-BASIC> 0.87<F3>
<EPS-DILUTED> 0.86
<FN>
<F1> Represents retained interest in transferred credit card receivables
<F2> Represents the sum of selling and administrative expense, and depreciation
and amortization expense
<F3> Represents basic earnings per share
</FN>
</TABLE>
