-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L3JkRJ84tJD0XdAjgafr8Fe2FDZTX85lZ1vXhZahUrYute+uiS6QOPwKFa5U3BEO 999BKOzZxnAyhbHR7IbGEg== 0000319256-97-000005.txt : 19970326 0000319256-97-000005.hdr.sgml : 19970326 ACCESSION NUMBER: 0000319256-97-000005 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961228 FILED AS OF DATE: 19970325 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEARS ROEBUCK & CO CENTRAL INDEX KEY: 0000319256 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 361750680 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-00416 FILM NUMBER: 97562236 BUSINESS ADDRESS: STREET 1: 3333 BEVERLY RD B-5 317A CITY: HOFFMAN ESTATES STATE: IL ZIP: 60179 BUSINESS PHONE: 7082862500 MAIL ADDRESS: STREET 1: 3333 BEVERLY RD B-5 317A CITY: HOFFMAN ESTATES STATE: IL ZIP: 60179 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K XANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR _TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 28, 1996 Commission file number 1-416 SEARS, ROEBUCK AND CO. (Exact name of registrant as specified in its charter) New York 36-1750680 (State of Incorporation) (I.R.S. Employer Identification No.) 3333 Beverly Road, Hoffman Estates, Illinois 60179 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (847) 286-2500 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ----------------------------------------- ------------------------ Common Shares, par value $0.75 per share New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange Extendable Notes due April 15, 1999 New York Stock Exchange 9-1/2% Notes due June 1, 1999 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None On January 31, 1997 Registrant had 391,526,298 common shares outstanding. Of these, 349,686,748 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 31, 1997) of approximately $16.8 billion, were owned by shareholders other than directors and executive officers of the Registrant, The Savings and Profit Sharing Fund of Sears Employees and any other person known by the Registrant as of the date hereof to beneficially own five percent or more of Registrant's common shares. Sears, Roebuck and Co. 10-K page 1 Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10- K or any amendment to this Form 10-K. [ X ] Documents Incorporated By Reference Parts I and II of this Form 10-K incorporate by reference certain information from the registrant's 1996 Annual Report to Shareholders (the "1996 Annual Report"). Part III of this Form 10-K incorporates by reference certain information from the registrant's definitive Proxy Statement dated March 20, 1997, for its Annual Meeting of Shareholders to be held on May 8, 1997 (the "1997 Proxy Statement"). Sears, Roebuck and Co. 10-K page 2 PART I Item 1. Business Sears, Roebuck and Co. ("Sears") originated from an enterprise established in 1886. It was incorporated under the laws of New York in 1906. Its principal executive offices are located at 3333 Beverly Road, Hoffman Estates, Illinois. Sears and its consolidated subsidiaries (the "Company") is a multi-line retailer which provides a wide array of merchandise and services through two segments - Domestic Operations and International Operations. The Company is among the largest retailers in the world on the basis of sales of merchandise and services. The Domestic Operations segment includes the Company's Retail Stores (comprised of Full-line, Home and Auto Stores), Home Services and Direct Response Marketing in the United States and Puerto Rico, and the results of the Company's portfolio of receivables arising from products used to pay for purchases of goods and services from Domestic Operations (the "Credit Card Portfolio"). The Credit Card Portfolio primarily relates to the Sears Card, the largest proprietary credit card in the United States. The International Operations segment consists of similar merchandising and service operations conducted through majority-owned subsidiaries in Canada and Mexico. For further information, see "Domestic Operations" and "International Operations" below and "Analysis of Consolidated Operations" and "Analysis of Consolidated Financial Condition" beginning on pages 21 and 27, respectively, of the 1996 Annual Report, incorporated herein by reference in response to Item 7 hereof. ________________________________ Information regarding revenues, income before income taxes and minority interest and net income and assets of the Company's Domestic and International merchandising operations for each of the three fiscal years ended December 28, 1996, December 30, 1995 and December 31, 1994, respectively, is in Note 14 of the Notes to Consolidated Financial Statements on page 39 of the 1996 Annual Report, incorporated herein by reference in response to Item 8 hereof. Information on the components of revenues is included in the "Analysis of Consolidated Operations" beginning on page 21 of the 1996 Annual Report, incorporated herein by reference in response to Items 7 and 8 hereof. The Company employs approximately 335,000 people worldwide. Sears, Roebuck and Co. 10-K page 3 DOMESTIC OPERATIONS Domestic Operations consists of Retail Stores, Home Services, Direct Response Marketing and Credit. Retail Stores At December 28, 1996, Retail Stores consisted of: - - Full-line Stores, which included 446 large-size stores located principally in shopping malls in major metropolitan areas, 367 medium-size stores that are also primarily mall-based, and eight small-size stores that stock a more narrow selection of merchandise and serve either neighborhoods of metropolitan areas or smaller communities. The merchandise offerings in the Full-line Stores include Apparel/Home Fashions, Hardlines and Licensed Businesses. The Apparel/Home Fashions departments 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. The Hardlines departments 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 focused on one type of business. Licensed Businesses includes portrait studios and optical. All of the furniture departments which were in Full-line Stores (excluding 42 in-store HomeLife Stores) have been closed as the stores have been remodeled. - - Home Stores, which included: - 149 Sears HomeLife furniture stores that target the value-seeking homeowner. There are 107 off-the-mall HomeLife stores and 42 HomeLife stores located in Full-line Stores. HomeLife stores have been opened within select major metropolitan areas. - 164 free-standing Sears Hardware stores 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. Sears Hardware stores are grouped within select major metropolitan areas. In addition, the Company acquired Orchard Supply Hardware Stores Corporation ("Orchard") in September 1996. As of year-end 1996, there were 65 Orchard stores providing a full line of hardware, tool and nursery products. Sears Hardware and Orchard stores target the "do-it-yourself" homeowner focused on repair and maintenance projects. - 469 Sears Dealer Stores that are primarily independently owned and operated and offer appliances and electronics for the home, CRAFTSMAN tools, DIEHARD batteries and lawn and garden equipment. Dealer Stores are primarily located in smaller, rural markets. - Commercial Sales, that targets home builders, remodelers and property managers for appliance purchases, as well as vocational schools, factory maintenance and service companies. Commercial sales has also introduced Sears, Roebuck and Co. 10-K page 4 the Appliance Select program in 32 Full-line Stores. This program targets the new home buyer and offers a full selection of KENMORE and major national brand kitchen and home appliances. - - Auto Stores, which included: - The Sears Tire Group which is comprised of 770 Sears Auto Centers primarily located at the mall-based Full-line Stores, 127 Tire America stores and 161 NTW stores. These stores sell and install tires, batteries and related goods and services. - The Parts Group which is comprised of 339 Western Auto stores, 288 Parts America stores and 864 independently owned and operated stores located in smaller, rural markets that operate under the Western Auto name and purchase merchandise wholesale from Western Auto Supply Company, a subsidiary of the Company. These stores sell an extensive selection of automotive parts. Many of the Western Auto stores also sell automotive services; however, the automotive services business is currently being discontinued in the Parts Group Stores. The Auto Stores are positioned to compete effectively with the strongest competitors that specialize in selling automotive parts and tires, batteries and related services. Home Services At December 28, 1996, Home Services included: - - Product Services (repair services), which provides product repair on all major brands of appliances, regardless of where purchased; - - Service Contracts, which provides extended warranty coverage through maintenance agreements; - - Installed Home Improvements, which includes the following services provided through outside contractors: - Home Improvement Products and Services, which sells and installs siding, roofing, cabinet refacing and other home improvements and provides services such as pest control and carpet cleaning; - Air Conditioning and Heating Systems, which sells and installs heating, ventilation and air conditioning for homes; and - Installation Services which installs water heaters, dishwashers and other products. Sears, Roebuck and Co. 10-K page 5 Direct Response Marketing Direct Response Marketing includes specialty catalogs, insurance (primarily credit protection), clubs and services, and impulse and continuity merchandise. Sears Shop at Home Services, Inc., a wholly-owned subsidiary of the Company, licenses to third-party distributors of specialty catalogs and merchandisers of shop-at-home services use of the Sears name and customer lists. _______________________ The pricing strategy for the Retail Stores, Home Services and Direct Response Marketing is to offer customers significant values every day, as well as to have special sales events offering additional values. These operations offer a mixture of national brands and high quality private label merchandise. Credit The products offered by the Company's domestic credit operations ("Credit") make it more attractive for customers to purchase goods and services from the Retail Stores, Home Services and Direct Response Marketing. As of December 1996, Credit had approximately 27.4 million active customer credit accounts (accounts with balances as of the beginning or end of December 1996). These accounts had an average balance of $971. Sears Card, the traditional charge card, accounted for approximately 90% of total receivables. There were approximately 40 million Sears Card customers with accounts that were active during any month in 1996. Sears stores also accept third party credit and debit cards such as VISA, MasterCard, American Express and Discover Card. Sears Card as a percent of total sales in the Full-line and HomeLife Stores was approximately 60.2%, 59.7% and 58.3% for fiscal years 1996, 1995 and 1994, 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 and increase the penetration of Credit products in all sales and service channels, as well as to increase the revenues of the Retail Stores, Home Services and Direct Response Marketing. Sears has an ongoing securitization program pursuant to which a portion of domestic customer receivables are sold through Sears Receivables Financing Group, Inc., a wholly-owned subsidiary, to trusts (the "securitization trusts") that issue credit account pass-through certificates to public and private investors. The outstanding interests of investors in the securitization trusts are not treated as assets, and the obligations of the securitization trusts to investors are not treated as liabilities, in the Company's financial statements. Pursuant to contractual agreements, Sears remains the servicer on the accounts creating the receivables and receives a fee for the services performed. See "Analysis of Consolidated Operations," "Analysis of Consolidated Financial Condition" and Notes 1 and 8 of the Notes to Consolidated Financial Statements beginning on pages 21, 27, 31 and 36, respectively, of the 1996 Annual Report, incorporated herein by reference in response to Items 7 and 8 hereof. Credit's operations are subject to federal and state legislation, including the consumer credit laws of each state in which its customers reside. From time to time, such legislation, as well as competitive conditions, may affect, among other things, credit card finance charges. While the Company cannot predict the effect of future competitive conditions and legislation or the measures which the Company might take in response thereto, a significant reduction in the finance charges imposed by Credit could have an adverse effect on the Company. In addition, changes in general Sears, Roebuck and Co. 10-K page 6 U.S. economic conditions, including, but not limited to, higher interest rates and continuing increases in delinquencies, charge-offs and personal bankruptcies could have an adverse effect on the Company. Sears National Bank (the "Bank"), a wholly-owned subsidiary of the Company acquired in 1994, is a credit card bank limited to engaging solely in credit card operations and is subject to certain other restrictions applicable to credit card banks under federal law. In 1994, the Bank became the issuer of Sears Card accounts in Arizona. Beginning in May 1995, the Company began to transfer to the Bank Sears Card accounts in 25 additional states. Beginning in November 1996, the Company began to transfer to the Bank Sears Card accounts in all remaining states. Certain of the Company's other customer credit accounts have also been transferred to or are being originated by the Bank. For additional information regarding Credit, see "Analysis of Consolidated Operations" beginning on page 21 of the 1996 Annual Report, incorporated herein by reference in response to Item 7 hereof. Strategic Initiatives The Company's vision is to be a compelling place to shop, work and invest. This vision is an outgrowth of the following five strategic priorities originally outlined in 1993 and further refined in 1996: focus on core businesses, serve the target customer, be market driven, achieve consistent productivity improvement and drive organizational transformation. Compelling Place to Shop The Company is focusing on its core customer, women and their families, and expanding the product offerings in apparel. This strategy is designed to take advantage of the Company's existing strengths of strong private brands, a loyal customer base, a strong position in durable goods, highly-focused product lines, a network of mall-based Full-line Stores, strong customer service, a nationwide service organization and attractive credit programs. A program, originally introduced in 1992 as the "Pure Selling Environment," is building a strong customer service orientation by relieving sales associates of administrative responsibilities and enabling them to spend more time and effort serving customers. Apparel offerings are designed to meet shoppers' needs with a mixture of national brands and high-quality, private brand merchandise. Expanded fragrance and cosmetics departments had been introduced in 288 stores by fiscal year-end 1996, with further expansion planned. The Company is continuing its emphasis on market-by-market assortment, marketing and pricing to strengthen the local competitive position of each store. Merchandising offerings are being implemented to target smaller rural markets, and Hispanic-American, African-American and Asian-American customers. As part of the store revitalization program referred to below, significant emphasis is also being placed on allocating capital to select geographic markets in order to focus the Company's positioning and marketing efforts on a market-by-market basis. Compelling Place to Work Programs are in place to foster teamwork, customer focus, and speed and simplicity in the workplace, and to develop depth in management. The programs for all salaried associates include an expansion of the Company's stock option program, commenced in fiscal 1994, and an incentive pay program based on the Company's performance, as measured by improvement of earnings. Programs for officers and senior managers include "Total Performance Indicators," measurement which focuses management on leading criteria for success, such as customer satisfaction, associate Sears, Roebuck and Co. 10-K page 7 attitudes towards their jobs and Sears, and financial results. New culture is a critical element in the success of the Company's strategic objectives. Compelling Place to Invest To support the focus on the retail businesses, in 1993 the Company commenced a $4 billion store revitalization program. The focus of the program is to upgrade the Company's Full-line Stores and make the Retail Stores a more compelling place to shop. Approximately 470 stores have been renovated and updated, and approximately 80 to 90 additional stores will be renovated and updated through fiscal 1997. The renovated and updated stores have increased selling area, more extensive apparel offerings, wider aisles and better lighting. Much of the additional selling area is being created from underutilized stockroom and back office areas and the closing of in- store furniture departments. By fiscal year-end 1997, the Company plans to have approximately 12 million additional square feet of apparel selling area in the renovated and updated stores, of which approximately 10.6 million square feet was added by fiscal year-end 1996. Capital is also being made available for selected new store openings and the continued expansion of off-the-mall concepts, such as Sears HomeLife, Sears Hardware stores, Western Auto's Parts America stores and Sears Tire Group's Tire America and NTW stores. On March 19, 1997, the Company announced plans to convert its Tire America and NTW stores into a single format, "National Tire and Battery" (NTB). In September 1996, the Company acquired Orchard and its 61 hardware stores. The Company may pursue additional selective strategic acquisitions as a means of growth, although there can be no assurances that any such acquisition will occur. Customer service, expense and logistics functions have been benchmarked against the competition, and expense reduction and process improvement programs are ongoing. The programs are intended to improve the value of merchandise to the customer, reduce selling and administrative expenses as a percentage of revenues and improve productivity and customer service levels. In fiscal 1994, Domestic Operations began a "strategic sourcing" initiative designed to reduce the costs of externally purchased goods and services. The goal of the strategic sourcing initiative is to analyze purchases and negotiate reduced expenditures while increasing quality and forging closer and more efficient links with important suppliers and vendors. A "shared services" concept initiated in late 1995 is intended to improve support functions by bringing an enhanced customer service focus to the Company's support functions, providing appropriate levels of service and improving costs and processes. ____________________ For further information, see "Properties" below and "Analysis of Consolidated Financial Condition" beginning on page 27 of the 1996 Annual Report incorporated herein by reference in response to Item 7 hereof. Sears, Roebuck and Co. 10-K page 8 Sources of Merchandise At December 28, 1996, Domestic Operations purchased goods primarily from approximately 7,500 domestic suppliers, most of whom have been suppliers for many years. Seasonality Due to holiday buying patterns, merchandise sales are traditionally higher in the fourth quarter than in the other quarterly periods and a disproportionate share of operating income is typically earned in the fourth quarter. Similarly, traditional business patterns generally result in the lowest sales and operating income in the first quarter. Trademarks The name "SEARS" is used extensively in the Company's Domestic Operations and other businesses. The Company's right to the name "SEARS" domestically continues so long as it uses the name. The name is also the subject of numerous renewable United States and foreign trademark and service mark registrations. This trade and service mark is material to the Company's Domestic Operations and other related businesses. The Company sells private label merchandise under a number of brand names which are important to Domestic Operations. Sears KENMORE, CRAFTSMAN and DIEHARD brands are among the strongest private label brands in retailing. The Company's right to these names continues so long as it uses the names. The names are also the subject of numerous renewable United States and foreign trademark and service mark registrations. Other important and well- recognized Company trademarks and service marks include BRAND CENTRAL, HOMELIFE, CIRCLE OF BEAUTY and CANYON RIVER BLUES. The Company's right to these names also continues so long as it uses the names. Competition The domestic retail merchandise business is highly competitive. Convenience of shopping facilities, quality of merchandise, competitive prices, brand names and availability of services such as credit, product delivery, repair and installation, are the principal factors which differentiate competitors. The Company believes it is able to compete in every respect despite strong competitive pressures in recent years. On average, the Company's ratio of operating costs to revenues is not as low as benchmark targets in the industry but is improving due to efforts to increase revenues and cut costs. See "Strategic Initiatives" above and "Analysis of Consolidated Operations" beginning on page 21 of the 1996 Annual Report, incorporated herein by reference to Item 7 hereof. Employees Domestic Operations employs approximately 290,000 people, including part- time employees. 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 five interconnected office buildings totaling approximately two million gross square feet of office space. Sears, Roebuck and Co. 10-K page 9 The following table sets forth information concerning stores operated by Domestic Operations. The information excludes catalog and specialty merchandising.
Full-line Auto Stores Home Stores Stores Tire(a) Parts(b) HomeLife(c) Hardware Dealer Other(d) Total Stores at December 28, 1996: 453(e) 554 116 32 14 5 21 1,195 Leased(f) Operating Leases Gross and Net Leases(g) 261 483 511 61 196 - 31 1,543 Short-term and Percentage Leases(h) 52 20 - - 8 - 2 82 Capital Leases(i) 55 1 - 14 11 - 6 87 Independently owned and operated Dealer Stores - - - - - 464 - 464 Total Stores at Fiscal Year End 1993 799 233 386 51 86 192 70 1,817 Stores opened during fiscal 1994 9 18 18 22 11 98 9 185 Stores closed during fiscal 1994 (8) (2) (20) (1) (17) (5) (9) (62) Stores previously included as part of Full-line Store properties - 758 - - - - - 758 1994 800 1,007 384 72 80 285 70 2,698 Stores opened during fiscal 1995 16 37 215 26 45 98 7 444 Stores closed during fiscal 1995 (10) (13) (17) (1) (17) (8) (6) (72) 1995 806 1,031 582 97 108 375 71 3,070 Stores opened during fiscal 1996 27 40 67 12 136(j) 120 9 411 Stores closed during fiscal 1996 (12) (13) (22) (2) (15) (26) (20) (110) 1996 821 1,058 627 107 229 469 60 3,371 Gross Retail Area at Fiscal Year End (k) (square feet in millions) 1996 108.4(l) 15.2(l) 6.9 3.8 6.1 3.8 2.0 146.2 1995 105.6(l) 15.0(l) 6.4 3.4 2.0 2.9 2.0 137.3 1994 104.3(l) 14.8(l) 4.7 2.5 1.1 2.2 1.9 131.5 Retail Selling Area at Fiscal Year End (k) (square feet in millions) 1996 69.9(l) 2.1(l) 4.7 3.2 5.6 2.6 1.5 89.8 1995 66.8(l) 2.1(l) 4.5 2.9 1.7 1.9 1.5 81.4 1994 64.3(l) 2.0(l) 3.3 2.1 0.9 1.3 1.5 75.4 _____________________________________________________________________________________________ Retail Store Revenues per Selling Square Foot(k) 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$321 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$323 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$317 Sears, Roebuck and Co. 10-K page 10 ________________ (a) 1993 and 1994 Tire Group store totals, exclude Sears Tire Group properties owned or leased as part of Full-line Store properties. (b) Excludes 864 independently owned and operated stores. (c) Excludes 42 HomeLife Stores located in Full-line Stores. (d) Other Stores consists of small-size appliance stores and retail outlet stores. Excludes Other facilities owned or leased as part of Full-line Store properties. (e) Includes 363 of the 446 large-size Full-line Stores. (f) Many of the leases contain renewal options. With respect to 14 stores, with lease terms ranging up to 37 years, Sears has the option to assume ownership of the property. (g) Leased for terms ranging from one to 95 years. Rentals are either fixed or fixed at minimum rentals coupled with a percentage of sales, including some sale and leaseback arrangements. (h) Leased for a term, or with a remaining term, of less than one year or under leases providing for payments based only on a percentage of sales. (i) Leased for terms ranging from eight to 75 years. The leases have been capitalized as assets of Domestic Operations. (j) Includes 65 Orchard Supply Hardware Stores, 61 of which were acquired in September 1996 and four of which were subsequently opened. (k) Square footage has been restated to conform with current year presentation. (l) Reflects reclassification of Sears Tire Group properties owned or leased as part of Full-line Store properties now separately disclosed. In addition, at December 28, 1996, there were 754 other sales offices and service facilities, most of which are occupied under short-term leases or are a part of other Sears facilities included in the above table. As of December 28, 1996, the Company leased and operated one fashion merchandising distribution center, owned and operated four fashion merchandising distribution centers, three retail replenishment centers and two direct delivery centers, and operated and substantially owned 19 market delivery operations. An additional four retail replenishment centers, 23 market delivery operations (six operated by third parties), four furniture consolidation centers (all of which were operated by third parties) and five direct delivery centers (four operated by third parties), were leased for terms ranging from one to 99 years. The Company operates two retail replenishment centers pursuant to sale and lease-back arrangements for a primary term of 25 years with renewal options for an additional 30 or 40 years and a fair market value purchase option at the end of the primary term, and at certain other times. These facilities have been constructed on land owned by the Company which has been leased to the lessor of the facility for an initial term of 25 years, with renewal options which extend 10 to 20 years beyond that in the lease to the Company. Sears, Roebuck and Co. 10-K page 11 Credit services its accounts principally at nine regional credit card operations centers ("RCCOCs") and one national account authorization center ("NAAC") in ten states, at four Credit Processing Centers, at the headquarters of the Bank in Phoenix, Arizona and at the Company's headquarters at Prairie Stone. One of the RCCOCs is owned and eight are leased for remaining terms ranging from four to ten years. The NAAC is leased for a remaining term of three years. One of the Credit Processing Centers is owned and three are leased for remaining terms ranging from one to six years. For Domestic Operations, the capital expenditures for expansion and remodeling and other improvements (including $60 million of capitalized financing leases but excluding amounts expended for administrative offices) amounted to $1.25 billion for the fiscal year ended December 28, 1996. In fiscal 1997, planned capital expenditures for Domestic Operations of approximately $1.5 billion include the remodeling and upgrade of merchandise presentations in approximately 80 to 90 existing Full-line Stores and 15 to 25 new or relocated Full-line Stores. Domestic Operations plans to open approximately 65 to 75 additional stores in the Sears Tire Group, 80 to 100 additional stores in the Parts Group, five to ten additional HomeLife stores, 40 to 50 additional Hardware stores (including Sears Hardware and Orchard) and over 100 additional Dealer Stores in fiscal 1997 and to convert approximately 240 Western Auto stores to the parts-only format in fiscal 1997 and 1998. The Company's ability to attain this growth will depend on, among other things, the availability of suitable store locations on appropriate terms. For additional information, see "Strategic Initiatives" above and "Analysis of Consolidated Financial Condition" beginning on page 27 of the 1996 Annual Report, incorporated herein by reference in response to Item 7 hereof. Sears, Roebuck and Co. 10-K page 12 INTERNATIONAL OPERATIONS The Company conducts similar merchandise and service operations in Canada through Sears Canada Inc., a consolidated, 55.0% owned subsidiary of Sears ("Sears Canada") and in Mexico through Sears, Roebuck de Mexico, S.A. de C.V., a consolidated, 75.5% owned subsidiary of Sears ("Sears Mexico"). In December 1996, Sears Canada issued approximately ten million new common shareson completion of an equity issue. As a result, the Company's ownership percentage was reduced from 61.1% to 55.0%. Sears Canada is the largest single retailer of general merchandise in Canada. Sears Canada operates 110 Full-line Stores, four Sears Whole Home Furniture Stores (similar to Domestic Operation's HomeLife stores) and nine outlet stores, and has 1,498 independent catalog merchant agents operating under local ownership, 60 independently operated dealer stores and 27 active warehouses. During fiscal 1996, Sears Canada did not relocate any Full-line Stores and closed one outlet store. Sears Canada currently has no plans to open any new Full-line Stores during fiscal 1997, but does continue to seek opportunities for expansion in desirable locations. Subject to the availability of suitable store locations on appropriate terms, in 1997, Sears Canada plans to open seven Sears Whole Home Furniture Stores, 20 dealer stores and 100 catalog merchant agent locations, as well as to renovate 15 Full-line Stores. As of December 28, 1996, Sears Canada employed approximately 35,000 full and part-time employees. Sears Canada has an ongoing securitization program pursuant to which undivided co-ownership interests in its pool of 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. Sears Canada acts as servicer of the charge account receivables. Sears Mexico operates 42 Full-line Stores and three satellite stores and has two warehouses. During fiscal 1996, one new store was opened and three stores were closed. Sears Mexico does not plan to open any new stores in fiscal 1997. As of December 28, 1996, Sears Mexico employed approximately 10,000 full and part-time employees. Sears, Roebuck and Co. 10-K page 13 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 commercial customer receivables balances to, Sears Roebuck Acceptance Corp. ("SRAC"), a wholly-owned finance subsidiary. SRAC obtains funds primarily from the issuance of commercial paper and through intermediate-term loans, medium-term notes and discrete underwritten debt. Sears and SRAC have also borrowed through Sears Overseas Finance N.V. ("SOFNV"), a wholly- owned international finance subsidiary, which has obtained funds from the issuance of long-term debt, primarily in Europe, in both U. S. dollars and foreign currencies. SOFNV does not plan to issue additional debt. Sears DC Corp. ("SDCC"), a wholly-owned finance subsidiary of Sears, was formed to borrow money and lend the proceeds of such borrowings to certain former subsidiaries of the Company. These former subsidiaries have repaid all of their indebtedness to SDCC. The only outstanding debt of SDCC is one series of outstanding medium-term notes. Pending repayment of these notes as they become due, SDCC from time to time loans such funds to Sears. SDCC does not plan to issue additional debt. Substantially all the debt and related interest expense of SDCC, SRAC and SOFNV supports the Credit Card Portfolio. In addition, various direct and indirect subsidiaries of Sears have engaged in securitization programs in which credit card receivables are sold in public or private transactions. See "Domestic Operations - Credit," and "International Operations," beginning on pages 6 and 13, respectively, and Notes 6 and 8 of the Notes to Consolidated Financial Statements beginning on pages 35 and 36 in the 1996 Annual Report, incorporated herein by reference to Item 8 hereof. Sears, Roebuck and Co. 10-K page 14 Executive Officers of the Registrant The following table sets forth the names of the executive officers of the Company, the positions and offices with the Company held by them, the date they first became officers of the Company and their current ages:
Date First Became Name Position Officer Age - ---------- ---------------- ---------------- ---- Arthur C. Martinez Chairman of the Board 1992 57 of Directors, President and Chief Executive Officer Paul A. Baffico President, Automotive Group 1992 50 John H. Costello Senior Executive Vice President, General Manager, Marketing 1993 49 Steven D. Goldstein President, Credit 1996 45 Alan J. Lacy Executive Vice President and Chief Financial Officer 1995 43 Michael D. Levin Senior Vice President, General Counsel and Secretary 1996 54 Robert L. Mettler President, Merchandising - Full-line Stores 1993 56 William G. Pagonis Executive Vice President, Logistics 1993 55 Anthony J. Rucci Executive Vice President, Administration 1993 46 William L. Salter President, Home Stores 1995 53 Joseph A. Smialowski Senior Vice President, Chief Information Officer 1993 48 Allan B. Stewart President, Stores - Full-line Stores 1984 54 Jane J. Thompson President, Home Services 1988 45
No family relationships exist among the above-named individuals. Messrs. Baffico, 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. Martinez joined Sears in September 1992 as Chairman and Chief Executive Officer of Sears Merchandise Group and in August 1995 became Chairman of the Board of Directors, President and Chief Executive Officer of the Company. Prior to joining Sears he had been a Vice Chairman of Saks Fifth Avenue and responsible for all of its administrative functions since August 1990 and, from January 1987 until August 1990, was Senior Vice President of Batus, Inc. and responsible for its Saks Fifth Avenue, Marshall Field's, J.B. Ivey and Breuner's stores. Mr. Costello joined Sears in April 1993 as Senior Executive Vice President, General Manager, Marketing Division, of the Merchandise Group. Prior to joining Sears, he had been President and Chief Operating Officer of Nielsen Marketing Research USA. Mr. Goldstein joined Sears in April 1996 as President, Credit. Prior to joining Sears, he had been Chairman and Chief Executive Officer of American Express Bank, an international banking institution. Sears, Roebuck and Co. 10-K page 15 Mr. Lacy joined Sears in January 1995 as Senior Vice President, Finance of the Merchandise Group. Prior to joining Sears, he had been Vice President, Financial Services and Systems, of Philip Morris Companies Inc. and President of Philip Morris Capital Corporation since September 1993. From September 1989 to September 1993, he was Senior Vice President of Kraft General Foods in charge of finance, strategy and development matters. Mr. Levin joined Sears in January 1996 as Senior Vice President and General Counsel. Prior to joining Sears, he had been a partner in the law firm of Latham & Watkins since 1982. Effective March 1, 1996, Mr. Levin also became Secretary of the Company. Mr. Mettler joined Sears in February 1993 as President, Apparel Group of the Merchandise Group. Prior to joining Sears, he had been President and Chief Executive Officer of Robinson's Inc. Mr. Pagonis joined Sears in November 1993 as Senior Vice President of Logistics of the Merchandise Group. Prior to joining Sears, he had been a Lieutenant General in the U.S. Army. Mr. Rucci joined Sears in October 1993 as Executive Vice President, Administration of the Merchandise Group. Prior to joining Sears, he had been Senior Vice President, Strategy, Business Development and External Affairs and previously Senior Vice President, Human Resources, of Baxter International, Inc. Mr. Smialowski joined Sears in September 1993 as Vice President and Chief Information Officer. Prior to joining Sears, he had been a partner at Price Waterhouse, which provides public accounting, tax and management consulting services. Mr. Smialowski joined Price Waterhouse in December 1984 and was admitted as a partner in 1990. Item 2. Properties Information regarding the principal properties of the Company is incorporated herein by reference to pages 9 to 12 of Item 1 hereof. Item 3. Legal Proceedings None Item 4. Submission of Matters to a Vote of Security Holders None Sears, Roebuck and Co. 10-K page 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters DESCRIPTION OF SEARS COMMON SHARES The summary contained herein of certain provisions of the Restated Certificate of Incorporation, as amended (the "Certificate of Incorporation"), of Sears does not purport to be complete and is qualified in its entirety by reference to the provisions of such Certificate of Incorporation filed as Exhibit 3.(i) hereto and incorporated by reference herein. The Certificate of Incorporation authorizes the issuance of 1,000,000,000 common shares, par value $0.75 per share, and 50,000,000 preferred shares, par value $1.00 per share. As of January 31, 1997, there were no preferred shares outstanding. Preferred shares may be issued in series with rights and privileges as authorized by the Board of Directors. Subject to the restrictions on dividends mentioned below and the rights of the holders of any preferred shares which may hereafter be issued, each holder of common shares is entitled to one vote per share, to vote cumulatively for the election of directors, to dividends declared by the Board of Directors, and, upon liquidation, to share in the assets of Sears pro rata in accordance with his, her or its holdings after payment of all liabilities and obligations. The holders of common shares have no preemptive, redemption, subscription or conversion rights. Sears Board of Directors is divided into three classes serving staggered three-year terms. Because the Board is classified, shareholders wishing to exercise cumulative voting rights to assure the election of one or more directors must own approximately three times as many shares as would be required if the Board were not classified. Directors may be removed only for cause upon the affirmative vote of at least 75% of the shares entitled to vote. Such a vote is also required to alter, amend or repeal, or to adopt any provision inconsistent with, Article 5 of the Certificate of Incorporation concerning directors, or to fix the number of directors by shareholder vote. There are no restrictions on repurchases or redemption of shares by Sears which do not impair its capital, except that the indentures relating to certain of Sears long-term debt and an agreement pursuant to which Sears has provided a credit facility in support of certain tax increment revenue bonds issued by the Village of Hoffman Estates, Illinois, in connection with the construction of its headquarters facility, provide that Sears will not take certain actions, including the declaration of cash dividends and the repurchase of shares, which would cause Unencumbered Assets plus certain Capitalized Rentals to drop below 150% of Liabilities plus such Capitalized Rentals (as such terms are defined in the indentures and the agreement). The amount by which such Unencumbered Assets plus Capitalized Rentals exceeds 150% of such Liabilities plus Capitalized Rentals, as computed under certain of the indenture provisions and those of the credit facility agreement referred to above, is set forth in Note 13 of the Notes to Consolidated Financial Statements beginning on page 38 of the 1996 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 41 of the 1996 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 38 of the 1996 Annual Report. Sears, Roebuck and Co. 10-K page 17 Item 6. Selected Financial Data The material under the caption "Five-Year Summary of Consolidated Financial Data" on page 40 of the 1996 Annual Report is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information contained under the captions "Analysis of Consolidated Operations" on pages 21 - 25 and "Analysis of Consolidated Financial Condition" on pages 27 and 29, of the 1996 Annual Report, is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The consolidated financial statements of the Company, including the notes to all such statements, and other information on pages 20 - 41 (other than that incorporated by reference to Item 7 hereof) of the 1996 Annual Report is incorporated herein by reference. Item 9. Changes in and Disagreements with Independent Auditors on Accounting and Financial Disclosure None Sears, Roebuck and Co. 10-K page 18 PART III Item 10. Directors and Executive Officers of the Registrant Information regarding directors and executive officers of the Company is incorporated herein by reference to the descriptions under "Item 1: Election of Directors" on pages 2 - 8 of the 1997 Proxy Statement and to Item 1 of this Report under the caption "Executive Officers of the Registrant" on pages 15 - 16. Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference to the material under the captions "Item 1: Election of Directors," "Directors' Compensation and Benefits," "Executive Compensation," "Stock Options," "Long-Term Performance Plan," "Pension Plan Table," "Employment Contracts, Termination and Change in Control Arrangements" and "Compensation Committee Interlocks and Insider Participation" on pages 2 - 8, 9 - 10, 11, 12, 13, 13 - 14, 14 - 16 and 21, respectively, of the 1997 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference to the material under the heading "Item 1: Election of Directors" on pages 2 - 8 of the 1997 Proxy Statement. Item 13. Certain Relationships and Related Transactions None. Sears, Roebuck and Co. 10-K page 19 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 for October 16, 1996 was filed with the Securities and Exchange Commission (the "Commission") on October 17, 1996 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. Sears, Roebuck and Co. 10-K page 20 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SEARS, ROEBUCK AND CO. (Registrant) /S/James A. Blanda* By:James A. Blanda Vice President and Controller March 24, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /S/Arthur C. Martinez* Director, Chairman of the ) Arthur C. Martinez Board of Directors, President ) and Chief Executive Officer ) ) /S/Alan J. Lacy* Executive Vice President ) Alan J. Lacy and Chief Financial Officer ) (Principal Financial ) Officer ) ) /S/James A. Blanda* Vice President ) James A. Blanda and Controller (Principal ) Accounting Officer) ) ) /S/Hall Adams, Jr.* Director ) Hall Adams, Jr. ) ) /S/Warren L. Batts* Director ) Warren L. Batts ) ) /S/Alston D. Correll, Jr.* Director ) Alston D. Correll, Jr. ) ) /S/Michael A. Miles* Director ) Michael A. Miles ) ) /S/Richard C. Notebaert* Director ) March 24, 1997 Richard C. Notebaert ) ) /S/Nancy C. Reynolds* Director ) Nancy C. Reynolds ) ) /S/Clarence B. Rogers* Director ) Clarence B. Rogers ) ) /S/Donald H. Rumsfeld* Director ) Donald H. Rumsfeld ) ) /S/Dorothy A. Terrell* Director ) Dorothy A. Terrell *By: /S/James A. Blanda Individually and as Attorney-in-fact James A. Blanda SEARS, ROEBUCK AND CO. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Year Ended December 28, 1996 The following consolidated financial statements, notes thereto and related information of Sears, Roebuck and Co, are incorporated herein by reference to the Company's 1996 Annual Report. Page* ------- Consolidated Statements of Income** 20 Consolidated Balance Sheets** 26 Consolidated Statements of Cash Flows** 28 Consolidated Statements of Shareholders' Equity** 30 Notes to Consolidated Financial Statements 31 Quarterly Results** 41 Common Stock Market Information and Dividend Highlights*** 41 * Refers to page number in Company's Annual Report. ** Incorporated by reference in Item 8 herein. *** Incorporated by reference in Item 5 herein. The following additional financial statement schedules and report and consent of Independent Certified Public Accountants are furnished herewith pursuant to the requirements of Form 10-K. Sears, Roebuck and Co. Page - ---------------------- ------ Schedules required to be filed under the provisions of regulation S-X Article 5: Schedule II - Valuation and Qualifying Accounts S-3 Schedules required to be filed under the provisions of Regulation S-X Article 7: None. Report of Independent Certified Public Accountants S-4 Consent of Independent Certified Public Accountants S-5 All other schedules are omitted because they are not applicable or not required. SEARS, ROEBUCK AND CO. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions ---------------------------------- (millions) Balance at Charged to Other Balance Beginning Costs and Additions Deductions at End Description of Period Expenses (Describe)(B) (Describe)(B) of Period - --------------- ---------- ----------- ------------- ------------- ---------- Year Ended December 28, 1996 - ----------------------------- Allowance for uncollectible accounts $ 826 $ 914 (A) $ 72 (C) $ 1,004 (F) $ 808 ------- ---------- ---------- ----------- -------- Year Ended December 30, 1995 - ---------------------------- Allowance for uncollectible accounts $ 813 $ 604 (A) $ 111 (D) $ 702 (F) $ 826 ------ ---------- ---------- ----------- -------- Year Ended December 31, 1994 - ---------------------------- Allowance for uncollectible accounts $ 770 $ 489 (A) $ 167 (E) $ 613 (F) $ 813 ------ ---------- ---------- ------------ (A) Excludes provision related to recourse liability for sold accounts of $222, $140 and $137 million in 1996, 1995 and 1994, respectively. (B) Excludes charge-offs and recoveries related to the recourse liability for sold accounts. (C) Includes: Recoveries of Accounts Charged Off $ 156 Reclass to Recourse on Accounts Sold (84) ------- $ 72 (D) Includes: Recoveries of Accounts Charged Off $ 130 Reclass to Recourse on Accounts Sold (19) ------- $ 111 (E) Includes: Recoveries of Accounts Charged Off $ 109 Reclass from Recourse on Accounts Sold 58 ------ $ 167 (F) Represents Uncollectible Accounts Which Have Been Charged-Off.
INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors Sears, Roebuck and Co. We have audited the consolidated financial statements of Sears, Roebuck and Co. as of December 28, 1996 and December 30, 1995, and for each of the three years in the period ended December 28, 1996 and have issued our report thereon dated February 10, 1997; such consolidated financial statements and report are included in the 1996 Sears, Roebuck and Co. Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedule of Sears, Roebuck and Co., listed in item 14(a)1 and 2. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We have also previously audited, in accordance with generally accepted auditing standards, the Consolidated Statements of Financial Position of Sears, Roebuck and Co. as of December 31, 1992 through 1994, and the related Consolidated Statements of Income, Shareholders' Equity and Cash Flows for each of the two years in the period ended December 31, 1993 (none of which are presented herein); and we expressed unqualified opinions on those consolidated financial statements. Effective January 1, 1992, the Company changed its method of accounting for the cost of postretirement benefits other than pensions and postemployment benefits. Our audits were conducted for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The additional information set forth under "Operating Results" and "Financial Position" and on the lines captioned "Book value per common share (year end)", "Average common and equivalent shares outstanding", "Earnings (loss) per common share" for each of the five years in the period ended December 28, 1996, appearing under the caption "Five Year Summary of Consolidated Financial Data" on page 40 of the Sears, Roebuck and Co. 1996 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 10, 1997 EXHIBIT INDEX Sears, Roebuck and Co. Form 10-K For the Year Ended December 28, 1996 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 August 14, 1996 (incorporated by reference to Exhibit 4(E) to Registration Statement No. 333-11973). 4.(i) Forms of restricted stock grants under Registrant's 1990 Employees Stock Plan (incorporated by reference to Exhibit 4.(i) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993).** 4.(ii) Form of restricted stock grants under Registrant's 1994 Employees Stock Plan (incorporated by reference to Exhibit 4(ii) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994).** 4.(iii) Registrant hereby agrees to furnish to the Commission, upon request, with the instruments defining the rights of holders of each issue of long- term debt of the Registrant and its consolidated subsidiaries. 10.(i)(a) Separation Agreement dated February 20, 1995 between Registrant and The Allstate Corporation (incorporated by reference to Exhibit 10(a) to The Allstate Corporation's Current Report on Form 8-K dated February 22, 1995).*** 10.(i)(b) Marketing File Separation Agreement dated February 20, 1995 between Registrant and The Allstate Corporation (incorporated by reference to Exhibit 10(b) to The Allstate Corporation's Current Report on Form 8-K dated February 22, 1995).*** 10.(i)(c) Research Services Agreement dated February 20, 1995 between Registrant and The Allstate Corporation (incorporated by reference to Exhibit 10(c) to The Allstate Corporation's Current Report on Form 8-K dated February 22, 1995).*** 10.(i)(d) Tax Sharing Agreement dated May 14, 1993 between Registrant and its subsidiaries (incorporated by reference to Exhibit 10.6 to Amendment No. 3 to The Allstate Corporation's Registration Statement No. 33-59676). 10.(i)(e) Supplemental Tax Sharing Agreement dated January 27, 1995 between Registrant and The Allstate Corporation (incorporated by reference to Exhibit 10(d) to The Allstate Corporation's Current Report on Form 8-K dated February 22, 1995).*** 10.(i)(f) Supplemental Human Resources Allocation Agreement dated January 27, 1995 between Registrant and The Allstate Corporation (incorporated by reference to Exhibit 10(e) to The Allstate Corporation's Current Report on Form 8-K dated February 22, 1995).*** 10.(i)(g) Profit Sharing and Employee Stock Ownership Plan Allocation Agreement dated January 27, 1995 between Registrant and The Allstate Corporation (incorporated by reference to Exhibit 10(f) to The Allstate Corporation's Current Report on Form 8-K dated February 22, 1995).*** 10.(iii)(1) Registrant's 1979 Incentive Compensation Plan (incorporated by reference to Exhibit 10.(iii)(1) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1985).** **** 10.(iii)(2) Registrant's 1978 Employes Stock Plan, as amended (incorporated by reference to Exhibit 10.(iii)(2) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989).** **** 10.(iii)(3) Registrant's Deferred Compensation Plan for Directors, as amended and restated on October 9, 1996 (incorporated by reference to Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996).** **** 10.(iii)(4) Registrant's Annual Incentive Compensation Plan, amended and restated as of January 1, 1994 (incorporated by reference to Appendix B to the Registrant's Proxy Statement dated March 23, 1994).** **** 10.(iii)(5) Registrant's Long-Term Incentive Compensation Plan, amended and restated as of January 1, 1994 (incorporated by reference to Appendix C to the Registrant's Proxy Statement dated March 23, 1994).** **** 10.(iii)(6) Registrant's 1982 Employees Stock Plan (incorporated by reference to Exhibit 4(a)(1) to Registration Statement No. 2-80037 of the Registrant).**** 10.(iii)(7) Description of Registrant's Supplemental Life Insurance Plan, amended as of December 31, 1986 (incorporated by reference to the second and third full paragraphs on page 10 of the Registrant's Proxy Statement dated March 26, 1987).** **** 10.(iii)(8) Registrant's Non-Employee Directors' Retirement Plan, as amended and restated to March 13, 1996 (incorporated by reference to Exhibit 10. (iii)(8) to Registrant's Annual Report on Form 10-K for the year ended December 30, 1995).** **** 10.(iii)(9) Description of Registrant's Non-Employee Director Life Insurance Plan (incorporated by reference to the eighth paragraph on page 4 of the Registrant's Proxy Statement dated March 26, 1986).** **** 10.(iii)(10) Registrant's 1990 Employees Stock Plan, amended as of May 12, 1994 (incorporated by reference to Exhibit 10.20 to The Allstate Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).*** **** 10.(iii)(11) Registrant's Supplemental Retirement Income Plan, as amended effective February 6, 1996 (incorporated by reference to Exhibit 10.(iii)(11) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995).** **** 10.(iii)(12) Registrant's 1986 Employees Stock Plan, amended as of May 12, 1994 (incorporated by reference to Exhibit 10.19 to The Allstate Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).*** **** 10.(iii)(13) Registrant's Transferred Executives Pension Supplement (incorporated by reference to Exhibit 10.(iii)(13) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988).** **** 10.(iii)(14) Amendment to Registrant's Transferred Executives Pension Supplement adopted on March 13, 1996 (incorporated by reference to Exhibit 10.(iii)(14) to Registrant's Annual Report on Form 10-K for the year ended December 30, 1995).** **** 10.(iii)(15) Registrant's Supplemental Long-Term Disability Plan (incorporated by reference to Exhibit 10.d to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995).** **** 10.(iii)(16) Registrant's Deferred Compensation Plan, as amended and restated on October 9, 1996 (incorporated by reference to Exhibit 10(b) to Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996).** **** 10.(iii)(17) Registrant's Management Supplemental Deferred Profit Sharing Plan (incorporated by reference to Exhibit 10(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 1, 1994).** **** 10.(iii)(18) Registrant's Non-Employee Director Stock Plan (incorporated by reference to Appendix B of the Registrant's Proxy Statement dated March 20, 1996).** **** 10.(iii)(19) Registrant's 1994 Employees Stock Plan (incorporated by reference to Appendix A to the Registrant's Proxy Statement dated March 23, 1994).** **** 10.(iii)(20) Employment Agreement between Registrant and Arthur C. Martinez dated August 10, 1992 (incorporated by reference to Exhibit 10.(a) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1992).** **** 10.(iii)(21) Agreement dated November 13, 1995 amending employment contract of Arthur C. Martinez dated August 10, 1992 (incorporated by reference to Exhibit 10. (iii)(21) to Registrant's Annual Report on Form 10-K for the year ended December 30, 1995).** **** *10.(iii)(22) Agreement dated as of December 26, 1996 regarding retirement and consulting services of Marvin Stern.** **** 10. (iii)(23) Extension of employment contract of Arthur C. Martinez, dated August 9, 1995 (incorporated by reference to Exhibit 10(c) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995).** **** 10. (iii)(24) Employment Agreement between the Registrant and John H. Costello, dated April 1, 1993 (incorporated by reference to Exhibit 10(a) to the Registrant's Current Report on Form 8-K dated June 20, 1995).** **** 10. (iii)(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. (iii)(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. (iii)(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. (iii)(28) Letter from the Registrant to Anthony J. Rucci dated September 21, 1993 relating to employment (incorporated by reference to Exhibit 10(f) to the Registrant's Current Report on Form 8-K dated June 20, 1995).** **** 10. (iii)(29) Letter from the Registrant to Michael D. Levin dated November 27, 1995 relating to employment (incorporated by reference to Exhibit 10(iii)(32) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995).** **** 10.(iii)(30) Letter from the Registrant to Steven D. Goldstein dated March 12, 1996 relating to employment (incorporated by reference to Registrant's quarterly report on Form 10-Q for the quarterly period ended March 30, 1996).** **** 10.(iii)(31) Form of severance and non-compete agreement for executive officers of the Registrant (incorporated by reference to Exhibit 10(c) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996).** **** 10. (iii)(32) Sears Executive Retirement Plan Arrangements. *11. Computation of Earnings per Share. *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 December 28, 1996. *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. - ------------ * 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. EX-10 2 Exhibit 10(iii)(22) AGREEMENT It being mutually agreed between Sears, Roebuck and Co. ("Sears") and Marvin Stern ("Stern") that he retire from Sears, the parties, intending to be legally bound and for good and valuable consideration, agree as follows: 1. Stern agrees to discontinue his present job duties and resign as an officer of Sears effective December 31, 1996. For the period January 1, 1997 through July 15, 1998, Stern will remain on payroll as an active employee performing duties as a special consultant. Stern agrees to retire from Sears as of July 15, 1998. For the period January 1, 1997 through December 31, 1997, Stern will forego his current compensation and be paid a retainer of $300,000.00 less legal deductions payable monthly. For the period January 1, 1998 through July 15, 1998, Stern will be paid $175,000 less legal deductions payable monthly. Stern will be entitled to a 1996 Annual Incentive. Such incentive will be calculated and paid to Stern in the same manner and time as Sears normally pays the incentive to other similarly situation employees and will be based on actual 1996 Company performance. Stern will be entitled to a 1997 Annual Incentive payable at 70% of his 1997 retainer and a 1998 Annual Incentive payable at 70% of his 1998 retainer. Stern will be eligible for full 1996 Long Term Incentive participation but will not participate for 1997 or 1998. Payment for 1996 participation will be actual payout based on Company performance results for 1996 and 1997 to be paid at the normal payout date in March 1998. A special bonus of $36,625.00 will be paid to Stern in January 1997. 2. Consulting assignments will be on an as needed basis at Sears discretion which may require advice concerning Hardware stores integration, home solutions initiative and Canada/Mexico operations. 3. All benefits Stern is currently eligible for and enrolled in will continue until July 15, 1998. Upon his retirement on July 15, 1998, Stern will receive all payments and benefits to which he is entitled as governed by the terms and conditions of Company policy and benefit programs then in effect and the provisions of this Agreement. Stern will not be entitled to service allowance or any other severance benefits specifically waives any rights he may have under the Sears Closed Unit/Reorganization Severance Allowance Plan for Salaried Associates or any similar plan. 4. Stern agrees that his decision to retire is irrevocable. 5. Stern agrees that the terms of this Agreement, including the compensation paid to him, shall be considered confidential and shall not be disclosed or communicated in any manner except as required by law. In addition, Stern agrees not to disclose any Confidential Information or proprietary information regarding Sears and its subsidiaries except upon written consent of Sears. "Confidential Information" means information (1) disclosed to or known by Stern as a consequence of or through Stern's employment with Sears, (2) not generally known outside Sears, and (3) which relates to Sears business. Stern will not, except as Sears may otherwise consent or direct in writing, reveal or disclose, sell, use, lecture upon, or publish any Confidential Information or proprietary information of Sears, or authorize anyone else to do these things. Provided, however, that Stern's obligations under this paragraph are limited only to those geographic locations or areas in which any Confidential Information is used by Sears or is expected to be used in the reasonable foreseeable future. Stern's obligation under this paragraph will cease when a specific portion of the Confidential Information or proprietary information becomes publicly known. 6. Stern agrees that during his remaining employment as a special consultant and for a one year period thereafter, he 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 the United States in which Sears conducts its business: a. Hiring, recruiting or attempting to recruit for any person or business entity, which is a Competitor (as defined below) with Sears, any person employed by Sears; and b. Being employed by or being connected to any person who or business which is a competitor of Sears business or planned business. For the purposes of this Agreement, "Competitor" shall be defined as any business and any branch, office or operation there of, which is in material competition with Sears, including without limitation, any direct marketing business or retail department, specialty, discount, furniture, appliance, electronics, hardware, home improvement, auto parts/service, apparel store business with annual gross sales in excess of $500 million, any vendor with annual gross sales of services or merchandise to Sears in excess of $100 million. 7. Stern agrees that the restrictions set forth above in paragraph 6 are necessary to prevent the use and disclosure of Sears Confidential Information and to otherwise protect the legitimate business interests of Sears and that the provisions of paragraph 6 are reasonable. Stern agrees that irreparable harm would result if he should breach this Agreement and that monetary damages alone would not provide adequate relief for any such breach. Accordingly, if Stern breaches this Agreement, he agrees that injunctive relief in favor of Sears is proper. Moreover, Stern acknowledges and agrees that any award of injunctive relief shall not preclude Sears from seeking or recovering any lawful compensatory damages which may result from a breach of this Agreement. 8. This Agreement will be governed under the internal laws of the state of Illinois. 9. This Agreement is contingent upon Stern signing the attached General Release and Waiver. This Agreement supersedes the agreement signed by Stern on May 21, 1996 and any other agreement between the parties, whether oral or written, relating to the subject matter of this Agreement. Agreed to: /S/Marvin M. Stern Date: 12/26/96 SEARS, ROEBUCK AND CO. by: /S/Anthony J. Rucci Date: Dec. 20, 1996 EX-11 3 Exhibit 11 SEARS, ROEBUCK AND CO. AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE
Year Ended ----------------------------- (millions, except per common share data) 1996 1995 1994 EARNINGS Income from continuing operations $ 1,271 $ 1,025 $ 857 Discontinued operations - 776 402 Extraordinary gain (loss) - - 195 ------- ------- ------- Net income 1,271 1,801 1,454 Preferred share dividends (25) (29) (29) ------- ------- ------- Net income applicable to common shares $ 1,246 $ 1,772 $ 1,425 WEIGHTED AVERAGE NUMBER OF COMMON SHARES (1) Primary 399.1 394.0 388.9 Fully dilutive effect of stock options - after application of treasury stock method - - - -------- ------- ------- Maximum number of common and common equivalent shares outstanding 399.1 394.0 388.9 -------- ------- ------- -------- ------- ------- EARNINGS PER COMMON SHARE (1) PRIMARY Income from continuing operations $ 3.12 $ 2.53 $ 2.13 Discontinued operations - 1.97 1.03 Extraordinary gain - - 0.50 ------- -------- ------- Net income $ 3.12 $ 4.50 $ 3.66 ------- -------- ------- ------- -------- ------- FULLY DILUTED (3) Income from continuing operations $ 3.12 $ 2.53 $ 2.13 Discontinued operations - 1.97 1.03 Extraordinary gain - - 0.50 ------- ------- ------- Net income $ 3.12 $ 4.50 $ 3.66 ------- ------- ------- ------- ------- ------- (1) Series A Mandatorily Exchangeable Preferred Shares are considered common shares for purposes of computing weighted average number of common shares. (2) The maximum dilution of earnings per common share assumes the exercise of all outstanding stock options. The treasury stock method has been applied based upon the higher of the closing price at fiscal year end or the average price of the common shares during the respective years. (3) Fully diluted earnings per common share are not disclosed in the Company's financial statements in accordance with APB Opinion No. 15 since the maximum dilutive effect is less than 3%.
EX-12 4 Exhibit 12. (a) COMPUTATION OF RATIO OF INCOME TO FIXED CHARGES SEARS, ROEBUCK AND CO. AND CONSOLIDATED SUBSIDIARIES
Year Ended (millions, except ratios) 1996 1995 1994 1993 1992 Fixed Charges Interest and amortization of debt discount and expense on all indebtedness $1,365 $1,373 $1,279 $1,318 $1,389 Add interest element implicit in rentals 121 119 114 105 165 ------ ------ ------ ------ ------ 1,486 1,492 1,393 1,423 1,554 Interest capitalized 5 4 1 3 23 ------ ------ ------ ------ ------ Total fixed charges $1,491 $1,496 $1,394 $1,426 $1,577 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Income (loss) Income (loss) from continuing operations $1,271 $1,025 $857 $625 ($1,812) Deduct undistributed net income (loss) of unconsolidated companies 8 9 (7) 6 (4) ------ ------ ------ ----- -------- 1,263 1,016 864 619 (1,808) Add Fixed charges (excluding interest capitalized) 1,486 1,492 1,393 1,423 1,554 Income taxes (benefit) 834 703 614 329 (1,039) ------ ------ ------- ------ -------- Income (loss) before fixed charges and income taxes $3,583 $3,211 $2,871 $2,371 ($1,293) ------ ------ ------ ------ -------- ------ ------ ------ ------ -------- Ratio of income to fixed charges 2.40 2.15 2.06 1.66 (A) ------ ------ ------ ------ -------- ------ ------ ------ ------ -------- (A) As a result of the loss for the year ended December 31, 1992, earnings did not cover fixed charges by $2,870 million.
EX-12 5 Exhibit 12. (b) COMPUTATION OF RATIO OF INCOME TO COMBINED FIXED CHARGES AND PREFERRED SHARE DIVIDENDS SEARS, ROEBUCK AND CO. AND CONSOLIDATED SUBSIDIARIES
Year Ended ------------------------------------------- (millions, except ratios) 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ Fixed Charges Interest and amortization of debt discount and expense on all indebtedness $1,365 $1,373 $1,279 $1,318 $1,389 Add interest element implicit in rentals 121 119 114 105 165 ------ ------ ------ ------ ------ 1,486 1,492 1,393 1,423 1,554 Preferred dividend factor 41 89 234 209 120 Interest capitalized 5 4 1 3 23 ------ ------ ------ ------ ------ Total fixed charges $1,532 $1,585 $1,628 $1,635 $1,697 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Income (loss) Income (loss) from continuing operations $1,271 $1,025 $857 $625 ($1,812) Deduct undistributed net income (loss) of unconsolidated companies 8 9 (7) 6 (4) ------ ------ ------- ----- ------- 1,263 1,016 864 619 (1,808) Add Fixed charges (excluding interest capitalized and preferred dividend factor) 1,486 1,492 1,393 1,423 1,554 Income taxes (benefit) 834 703 614 329 (1,039) ------ ------ ------ ------ -------- Income (loss) before fixed charges and income taxes $3,583 $3,211 $2,871 $2,371 ($1,293) ------ ------ ------ ------ -------- ------ ------ ------ ------ -------- Ratio of income to combined fixed charges and preferred share dividends 2.34 2.03 1.76 1.45 (A) ------ ------- ------ ------ -------- ------ ------- ------ ------ -------- (A) As a result of the loss for the year ended December 31, 1992, earnings did not cover fixed charges by $2,990 million.
EX-13 6 Exhibit 13 S E A R S , R O E B U C K A N D C O . 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 which it believes provides reasonable assurance that, in all material respects, assets are maintained and accounted for in accordance with management's authorizations and transactions are recorded accurately in the books and records. The concept of reasonable assurance is based on the premise that the cost of internal controls should not exceed the benefits derived. To assure the effectiveness of the internal control system, the organizational structure provides for defined lines of responsibility and delegation of authority. The Company's formally stated and communicated policies demand of employees high ethical standards in their conduct of its business. These policies address, among other things, potential conflicts of interest; compliance with all domestic and foreign laws, including those related to financial disclosure; and the confidentiality of proprietary information. As a further enhancement of the above, the Company's comprehensive internal audit program is designed for continual evaluation of the adequacy and effectiveness of its internal controls and measures adherence to established policies and procedures. Deloitte & Touche LLP, independent certified public accountants, have audited the financial statements of the Company, and their report is presented below. Their audit also includes a study and evaluation of the Company's control environment, accounting systems and control procedures 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 Executive Vice President and Chief Financial Officer /s/ James A. Blanda James A. Blanda Vice President and Controller INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS AND BOARD OF DIRECTORS SEARS, ROEBUCK AND CO. We have audited the accompanying Consolidated Balance Sheets of Sears, Roebuck and Co. as of December 28, 1996 and December 30, 1995, and the related Consolidated Statements of Income, Shareholders' Equity, and Cash Flows for each of the three years in the period ended December 28, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sears, Roebuck and Co. as of December 28, 1996 and December 30, 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 28, 1996 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Chicago, Illinois February 10, 1997 Sears annual report 1996 p.19 S E A R S , R O E B U C K A N D C O . CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------- millions, except per common share data 1996 1995 1994 - ------------------------------------------------------------------------------------- REVENUES Merchandise sales and services $33,812 $31,188 $29,608 Credit revenues 4,424 3,807 3,502 - ------------------------------------------------------------------------------------- Total revenues 38,236 34,995 33,110 - ------------------------------------------------------------------------------------- COSTS AND EXPENSES Cost of sales, buying and occupancy 24,925 23,202 21,882 Selling and administrative 8,030 7,391 7,338 Depreciation and amortization 697 580 531 Provision for uncollectible accounts 1,136 744 626 Interest 1,365 1,373 1,279 - ------------------------------------------------------------------------------------- Total costs and expenses 36,153 33,290 31,656 - ------------------------------------------------------------------------------------- Operating income 2,083 1,705 1,454 Other income 22 23 17 - ------------------------------------------------------------------------------------- Income before income taxes 2,105 1,728 1,471 Income taxes 834 703 614 - ------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 1,271 1,025 857 Discontinued operations -- 776 402 - ------------------------------------------------------------------------------------- Income before extraordinary gain 1,271 1,801 1,259 Extraordinary gain related to early extinguishment of debt -- -- 195 - ------------------------------------------------------------------------------------- NET INCOME $ 1,271 $ 1,801 $ 1,454 - ------------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE: Income from continuing operations, after allowing for dividends on preferred shares $ 3.12 $ 2.53 $ 2.13 Discontinued operations -- 1.97 1.03 - ------------------------------------------------------------------------------------- Income before extraordinary gain 3.12 4.50 3.16 Extraordinary gain -- -- 0.50 - ------------------------------------------------------------------------------------- Net income $ 3.12 $ 4.50 $ 3.66 - ------------------------------------------------------------------------------------- Average common and common equivalent shares outstanding 399.1 394.0 388.9 - -------------------------------------------------------------------------------------
See accompanying notes. p.20 Sears annual report 1996 S E A R S , R O E B U C K A N D C O . ANALYSIS OF CONSOLIDATED OPERATIONS Sears, Roebuck and Co. ("the Company") is a multi-line retailer providing a wide array of merchandise and services in the United States, Canada and Mexico. In 1996, the Company marked its first full year of operations focused exclusively on retailing since 1931. In 1995, the Company divested itself of its insurance and real estate subsidiaries as follows: - - The Company's 80% ownership interest in The Allstate Corporation ("Allstate") was distributed to shareholders as a tax-free dividend in June 1995. The distribution of Allstate reduced consolidated shareholders' equity by $8.98 billion. - - The Homart Development Co. and affiliated entities ("Homart") were sold. The consolidated financial statements present the results of Allstate and Homart as discontinued operations as discussed in note 2 to the consolidated financial statements. Operating results for the Company are reported for two business segments: domestic operations and international operations. The domestic operations segment includes the Company's operations in the United States and Puerto Rico. The Company's domestic operations are comprised of the following: - - Retail Stores consisting of: - Full-line Stores, located principally in shopping malls, which sell apparel, home fashions and hardlines merchandise. - Home Stores, located off-the-mall, comprised of Sears Hardware, Orchard Supply Hardware, Sears Dealer and HomeLife furniture stores and Commercial Sales. - Auto Stores, all of which are considered off-the-mall stores, are separated into two divisions: the Sears Tire Group, which sells and installs tires, batteries and related goods and services through Sears Auto Centers, Tire America and NTW stores; and the Parts Group, which includes the automotive parts stores of Western Auto and Parts America. - - Home Services which provides product repair services, maintenance agreements, installed home improvements and carpet cleaning and pest control for the home. - - Direct Response Marketing which provides specialty catalogs, credit protection insurance, clubs and services, and impulse and continuity merchandise. - - Credit includes the results of the Company's portfolio of receivables arising from products used to pay for purchases of merchandise and services from domestic operations. The domestic credit card receivables portfolio consists primarily of Sears Card, the largest proprietary credit card in the United States. International operations consists of similar merchandising and service operations conducted in Canada through Sears Canada Inc. ("Sears Canada"), a 55.0% owned subsidiary, and in Mexico through Sears Roebuck de Mexico, S.A. de C.V. ("Sears Mexico"), a 75.5% owned subsidiary. On Dec. 9, 1996 Sears Canada issued approximately ten million previously unissued common shares of stock. As the Company did not participate in this offering, its ownership percentage was reduced from 61.1% to 55.0%. No gain or loss was recorded on this transaction. Throughout the analyses of consolidated operations and financial condition, certain prior year information has been reclassified to conform with current year presentation. Consolidated revenues for 1996, 1995 and 1994 were as follows:
- ------------------------------------------------------------------ millions 1996 1995 1994 - ------------------------------------------------------------------ Domestic operations: Merchandise sales and services $30,742 $28,173 $26,284 Credit revenues 4,106 3,455 3,177 - ------------------------------------------------------------------ Total domestic operations 34,848 31,628 29,461 International operations 3,388 3,367 3,649 - ------------------------------------------------------------------ Total revenues $38,236 $34,995 $33,110 - ------------------------------------------------------------------
Consolidated revenues in 1996 increased $3.24 billion, or 9.3%, resulting from continued growth in domestic operations. Domestic revenues rose $3.22 billion, or 10.2%, primarily due to strong sales increases within Full-line Stores, Home Stores and Auto Stores. The domestic credit portfolio also contributed to the overall revenue growth. International operations revenues were $3.39 billion, relatively flat as compared to prior year, as the economic environment continues to be challenging for both Canada and Mexico. In 1995, consolidated revenues increased $1.89 billion, or 5.7%, from 1994. Domestic revenues rose $2.17 billion, or 7.4%, primarily due to strong merchandise sales and solid credit revenues increases. International revenues declined $282 million, or 7.7%, due to adverse exchange rate changes and difficult economic conditions in both Canada and Mexico. DOMESTIC OPERATIONS Supplementary domestic merchandising information:
- -------------------------------------------------------------------------- millions, except number of stores 1996 1995 1994 - -------------------------------------------------------------------------- Full-line Stores revenues $21,657 $20,104 $18,910 Off-the-mall store revenues 6,266 5,361 4,866 - -------------------------------------------------------------------------- Total retail store revenues 27,923 25,465 23,776 Service and other revenues 2,819 2,708 2,508 - -------------------------------------------------------------------------- Domestic merchandise sales and services $30,742 $28,173 $26,284 - -------------------------------------------------------------------------- Number of Full-line Stores 821 806 800 Number of off-the-mall stores 2,550 2,264 1,898 - -------------------------------------------------------------------------- Total retail stores 3,371 3,070 2,698 - -------------------------------------------------------------------------- Retail store revenues per selling square foot(1) $ 321 $ 323 $ 317 - -------------------------------------------------------------------------- Comparable store sales increase 5.8% 4.7% 8.3% - --------------------------------------------------------------------------
(1) Retail store selling square footage has been restated to conform with current year presentation. Sears annual report 1996 p.21 S E A R S , R O E B U C K A N D C O . ANALYSIS OF CONSOLIDATED OPERATIONS (Continued) One of the primary objectives of the Company's strategy has been to improve the sales productivity of its Full-line Stores. The success of this strategy can be measured by the comparable store sales increases, which have remained strong over the past three years. The strength of the comparable store sales increases becomes even more evident considering the intense competition in the retail industry during the period. Full-line Stores revenues increased 7.7% in 1996, which built on a 6.3% increase in 1995. Full-line Stores revenues have increased substantially since the Company's restructuring announced in 1993 and have benefited from the remodeling and modernization of approximately 470 Full-line Stores, an increase in apparel selling square feet as non-selling square feet and space formerly occupied by furniture departments have been converted, and a more targeted, customer-focused merchandise selection. In 1996, revenues also benefited as 27 Full-line Stores were opened and 12 were closed. In 1995, 16 Full-line Stores were opened and 10 were closed. [Comparable Store Bar Graph] The 1996 increase in Full-line Stores revenues was paced by substantial apparel sales increases over 1995. Sales gains were strongest in women's ready-to-wear, children's and men's fashions, footwear and cosmetics. The Company has undertaken several initiatives to grow the apparel business. They include remodeling the Full-line Stores, offering more varied national brand-name merchandise and developing private brand fashion merchandise for select lines. Hardlines merchandise had solid revenue growth in 1996 led by sales of Craftsman tools, hardware, and lawn and garden merchandise. Also contributing to the hardlines sales increase were sales growth in home appliances and home office merchandise. In 1995, the increase in Full-line Stores revenues was led by significant gains in apparel sales. Sales increases were strongest in women's dresses, juniors, cosmetics, jewelry and men's fashions. Hardlines merchandise had improved revenues primarily from strong sales in home electronics, appliances and home office merchandise. Sales of hardware and exercise equipment also increased in 1995. While the Full-line Stores have made considerable productivity improvements, the Company is providing for additional growth by expanding its various off-the-mall store formats. Off-the-mall store revenues in 1996 increased 16.9% over 1995. Home Stores contributed the largest portion of this revenue growth. The increase was attributable to the expansion of the Sears Hardware stores (71 new stores) and the acquisition of 61 Orchard Supply Hardware stores. In addition to new store openings, Sears Hardware had low-teen comparable store sales increases in 1996. Sears Dealer stores and HomeLife furniture stores also helped drive off-the-mall revenues by opening 120 and 12 new stores, respectively. The automotive business also generated revenue growth in 1996. The Sears Tire Group experienced strong revenue increases with the opening of 20 NTW and 6 Tire America stores in addition to 14 new Sears Auto Centers in 1996 and mid-single-digit comparable store sales increases over 1995. Parts Group opened 67 new stores throughout 1996 and converted 50 Western Auto stores to the new parts format. In 1995, off-the-mall revenues increased 10.2% over 1994. The increase was primarily due to revenue growth in Home Stores as the Company opened 98 new Sears Dealer stores, 45 Sears Hardware stores and 26 HomeLife furniture stores. Revenues at the Auto Stores also improved as the Company aggressively expanded this business by opening 49 and acquiring 166 automotive parts stores. The Sears Tire Group experienced significant revenue growth with the opening of 15 NTW and 6 Tire America stores and 16 Sears Auto Centers in 1995. Because of their diverse products and design, the Company's various store formats have different sales productivity (revenue per selling square foot). In 1996, the decrease in overall retail store revenues per selling square foot is attributable to a change in the store mix. Services and other revenues, which are generated primarily by the Home Services business, increased 4.1% in 1996 on top of an 8.0% increase in 1995. Home Services revenues improved on increased maintenance agreement sales and in-store installation sales which leveraged off the Company's strong retail sales performance, partially offset by a decline in installed home improvements due to termination of a licensee agreement. In 1995, services and other revenue increased primarily due to increases in maintenance agreement sales, which benefited from the strong hardlines sales. The domestic credit card receivables portfolio contributes significantly to domestic operations' profitability. The key components that determine profitability of the portfolio (before administrative expenses and income taxes) are net credit revenues (gross revenues less the funding cost on securitized receivables), interest expense and the provision for uncollectible accounts. p.22 Sears annual report 1996 S E A R S , R O E B U C K A N D C O . ANALYSIS OF CONSOLIDATED OPERATIONS (Continued) Key domestic credit portfolio information:
- ---------------------------------------------------------------------------------------------- millions 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Gross credit revenues (1) $ 4,454 3,781 3,528 Funding cost on securitized receivables $ (348) (326) (351) Net credit revenues $ 4,106 3,455 3,177 Sears Card sales as a % of sales (2) 60.2% 59.7 58.3 Gross credit card receivables $26,731 23,742 21,306 Receivable balances sold at year end $6,330 4,549 3,946 Owned credit card receivables at year end $20,401 19,193 17,360 Average gross receivables $24,303 21,667 20,094 Average owned receivables $19,257 17,362 15,718 Average account balance (dollars) $971 912 842 Net credit charge-offs to average gross credit card receivables (1) 4.24% 3.15 2.96 Gross credit card receivables delinquent sixty days or more at year end 5.43% 4.19 3.86 Allowance for uncollectible accounts as a percentage of gross credit card receivables at year end 3.63% 3.87 4.32 Provision for uncollectible accounts (1) $ 1,081 682 578 - ----------------------------------------------------------------------------------------------
(1) Prior year balances have been reclassified to present finance charges on charged-off accounts as a reduction of credit revenues. (2) For Full-line and HomeLife stores only. In 1996, gross credit revenues increased 17.8% reflecting higher gross receivable balances resulting from strong merchandise sales and the positive impact of uniform pricing. The ongoing uniform pricing initiative began in 1995 and will result in a uniform finance charge rate of 21% and standardization in other fees and charges on most Sears Card receivables. The percentage of merchandise sales and services transacted with the Sears Card in 1996 improved to 60.2% from 59.7%. The Sears Card continues to have the dominant market share of credit retail sales generated in the Full-line and off-the-mall stores. Gross credit revenues for 1995 increased 7.2% due to higher gross receivable balances driven by strong merchandise sales and a reduction in the minimum required monthly payment rate. Key operating measures for domestic operations:
- ----------------------------------------------------------------------------------- millions 1996 1995 1994 - ----------------------------------------------------------------------------------- Gross margin $8,122 7,265 6,919 Percent of merchandise sales and services 26.4% 25.8 26.3 Selling and administrative expense $7,232 6,613 6,535 Percent of total revenues 20.8% 20.9 22.2 Interest expense $1,191 1,183 1,120 Funding cost on securitized receivables $ 348 326 351 Total funding costs $1,539 1,509 1,471 Percent of total revenues 4.4% 4.8 5.0 Provision for uncollectible accounts $1,081 682 578 Percent of total revenues 3.1% 2.2 2.0 Operating income $2,094 1,729 1,400 Percent of total revenues 6.0% 5.5 4.8 - -----------------------------------------------------------------------------------
Gross margin as a percentage of merchandise sales and services improved to 26.4% in 1996 from 25.8% in 1995. The domestic gross margin rate benefited from a shift in sales to higher margin apparel merchandise, improved logistics costs and savings realized from merchandise sourcing initiatives. In 1995, gross margin as a percentage of merchandise sales and services declined to 25.8% from 26.3% in 1994. Gross margins were pressured by intense competition in the retail marketplace throughout the year. Domestic operations selling and administrative expense as a percentage of revenues in 1996 improved 10 basis points to 20.8% from 20.9% in 1995. This improvement resulted from a decline in payroll and marketing costs as a percentage of revenues. Partially offsetting these improvements was the non-recurring impact on 1995 selling and administrative expense related to the prior year $11 million net benefit from restructuring activities discussed below. [Domestic Operations Bar Graph] In 1995, selling and administrative expense as a percentage of revenues improved 130 basis points to 20.9% from 22.2% in 1994. The improvement was primarily attributable to the Company's cost control measures and revenue growth. Payroll, store operating and general overhead costs declined as a percentage of revenues in 1995. Included in domestic operations selling and administrative expense in 1995 was a $51 million pretax restructuring charge related to the Company's realignment initiative. This initiative better aligned the Company's structure with its growth strategy, particularly the creation of separate tire and auto parts divisions and the consolidation of certain distribution facilities. Beginning in 1997, resulting after-tax savings from the restructuring are expected to be $30 to $35 million annually. In 1995, the Company also reversed $62 million of pretax reserves, previously established as part of its $2.65 billion restructuring announced in 1993, which were no longer needed based on the settlement of obligations and the adjustment of the carrying values of certain properties to be disposed of in connection with that restructuring. This reserve adjustment was also included in domestic operations selling and administrative expense in 1995. Sears annual report 1996 p.23 S E A R S , R O E B U C K A N D C O . ANALYSIS OF CONSOLIDATED OPERATIONS (Continued) [Domestic Operations Bar Graph] Total domestic funding costs, comprised of interest expense and the cost associated with securitized receivables, as a percentage of revenues improved from 4.8% in 1995 to 4.4% in 1996. The improvement was attributable to the strong domestic revenue performance coupled with only a 2.0% increase in funding costs. The slight increase in total domestic funding costs reflects higher funding requirements due to a larger receivable portfolio partially offset by lower effective funding rates resulting from the refinancing of long-term, higher rate debt. In 1995, funding costs as a percentage of revenues improved to 4.8% from 5.0%. Total funding costs increased 2.6% to $1.51 billion. The 2.6% increase reflects the growth in gross credit card receivables partially offset by a lower effective funding rate resulting from the favorable interest rate environment in 1995. The reserve for uncollectible gross credit card receivables was $971 million and $920 million at Dec. 28, 1996 and Dec. 30, 1995, respectively. The domestic provision for uncollectible accounts increased 58.6% and net charge-offs increased 51.1% from 1995. These increases reflect the 12.6% growth in gross domestic credit card receivables from 1995 levels and the continuing industry-wide trend of increased delinquencies and bankruptcies. The Company has responded to the aforementioned trend by implementing an aggressive action plan which includes enhanced collection efforts and increased investment in technology designed to improve collection staff productivity. In 1995, the domestic provision for uncollectible accounts was 17.9% above 1994, reflecting the growth in domestic credit card receivables and the increase in net account charge-offs. The key measure of the improved profit performance of domestic operations is the growth in operating income from 1994 through 1996. The improved performance is attributable to the strong revenue growth and the reduction in selling and administrative expense and funding costs as a percentage of revenues partially offset by an increase in the provision for uncollectible accounts. In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement provides consistent guidance for distinguishing transfers of financial assets (securitizations) that are sales from transfers that are secured borrowings and is effective for securitizations occurring after Dec. 31, 1996. SFAS No. 125 requires the Company to recognize gains on securitizations which qualify as sales. The statement also indicates that an allowance for uncollectible accounts should not be maintained for receivables which are sold effective after Dec. 31, 1996. The Company expects the allowance for doubtful accounts related to the domestic securitized receivables, which is included in accounts payable and other liabilities as a recourse obligation, to be depleted during 1997 and 1998. The Company anticipates an increase in net income of approximately $100 to $150 million in 1997 resulting from the implementation of the new statement, although the precise amount will be dependent on a number of factors such as interest rates and levels of securitization. INTERNATIONAL OPERATIONS Revenues in U.S. dollars remained unchanged from 1995. Sears Canada revenues improved 2.6% in 1996 due to a modest recovery in consumer spending. Offsetting this improvement was a decline in revenues of 11.8% at Sears Mexico resulting primarily from decreased credit revenues. Gross margins as a percentage of merchandising revenues increased to 24.9% in 1996 from 23.9% in 1995. Sears Canada gross margin rates improved in 1996, reflecting decreased markdowns and a favorable comparison against 1995 occupancy expense. This was partially offset by a decline in gross margin rates at Sears Mexico. Selling and administrative expense as a percentage of total revenues increased to 23.5% in 1996 from 23.1% in 1995. Selling and administrative expenses at Sears Canada increased primarily due to a restructuring charge. On July 23, 1996 Sears Canada announced a plan to eliminate certain positions and close a warehouse and other support facilities as part of its ongoing cost containment initiative. The Company recorded a $27 million pretax restructuring charge (before minority interest) related to this initiative. The restructuring initiatives are projected to generate annualized pretax savings of $35 to $45 million (before minority interest). Selling and administrative expense as a percentage of revenues decreased at Sears Mexico in 1996 due to reduced promotion expenses and lower benefit costs. International operating income as a percentage of revenues improved 40 basis points, or $13 million, in 1996 due primarily to the improved performance at Sears Canada. p.24 Sears annual report 1996 S E A R S , R O E B U C K A N D C O . ANALYSIS OF CONSOLIDATED OPERATIONS (Continued) In 1995, revenues in U.S. dollars declined 7.7% compared to 1994, largely reflecting unfavorable Mexican Peso exchange rates. In local currencies, revenues at Sears Canada decreased 3.5% from 1994 as continued slow economic conditions depressed sales. Revenues at Sears Mexico declined 0.2% in constant pesos in 1995 as consumer demand was stifled under government economic controls aimed at curbing inflation. Gross margins as a percentage of merchandising revenues declined to 23.9% in 1995 from 24.3% in 1994. Sears Canada gross margin rates declined in 1995 on higher markdown trends at the retail stores, lower initial margins at catalog and higher occupancy costs due to a writedown of certain warehouse facilities. Gross margin rates also declined at Sears Mexico in 1995 as increased markdowns were taken in an effort to stimulate sales growth in response to lower consumer spending. Selling and administrative expense as a percentage of total revenues increased to 23.1% in 1995 from 22.0% in 1994. Selling and administrative expenses at Sears Canada declined in total dollars in 1995, reflecting continued cost control efforts, but increased as a percentage of revenues due to year-over-year sales declines. Selling and administrative expense as a percentage of revenues increased at Sears Mexico in 1995 as inflationary cost increases outpaced sales growth in the post-devaluation economic environment. International operating income declined $78 million in 1995 as operating performance suffered at Sears Canada and Sears Mexico in difficult economic conditions. INTEREST EXPENSE AND FUNDING COSTS Since the Company uses securitizations of credit card receivables as a significant funding source, total funding costs include interest expense, as shown on the consolidated statements of income, and the funding cost of securitized receivables. Total funding costs were as follows:
- ------------------------------------------------------------------- millions 1996 1995 1994 - ------------------------------------------------------------------- Interest expense $1,365 $1,373 $1,279 Funding cost of securitized receivables (1) 371 364 380 - ------------------------------------------------------------------- Total funding costs $1,736 $1,737 $1,659 - -------------------------------------------------------------------
(1) Funding costs of securitized receivables are reported as a reduction of credit revenues in the consolidated statements of income. Consolidated funding costs were unchanged in 1996. Domestic funding costs increased slightly due primarily to higher interest expense associated with a larger credit card receivables portfolio offset by lower domestic effective funding rates resulting from the refinancing of long-term higher rate debt. Lower international effective financing rates offset the domestic increase. The increase in funding costs in 1995 reflects a higher level of debt required to fund increases in credit card receivables and a higher interest rate environment in Mexico and Canada, partially offset by a lower domestic effective funding rate which benefited from a favorable domestic interest rate environment in 1995. OTHER INCOME Other income consists of: - ----------------------------------------------------------- millions 1996 1995 1994 - ----------------------------------------------------------- Gain on sales of property and investments $ 36 $ 35 $ 22 Minority interest (8) (4) (14) Interest income -- -- 14 Miscellaneous (6) (8) (5) - ----------------------------------------------------------- Total $ 22 $ 23 $ 17 - -----------------------------------------------------------
Included in miscellaneous other income is the Company's share of the results of Advantis, a joint venture between International Business Machines ("IBM") and the Company, which provides data and voice networking and information processing services to the Company and others, and Prodigy. The Company sold its 50% interest in Prodigy, a partnership with IBM, in June 1996. INCOME TAX EXPENSE Income tax expense as a percentage of pretax income was 39.6% in 1996, 40.7% in 1995 and 41.7% in 1994. The decrease in 1996 was primarily attributable to a lower effective tax rate on international earnings. In addition, both 1996 and 1995 effective tax rates benefited from the fact that domestic pretax income has increased at a faster rate than non-deductible expenses. EXTRAORDINARY ITEMS Results for 1994 included a $195 million extraordinary gain related to the early extinguishment of debt associated with the Company's transfer of Sears Tower and all related assets and liabilities to a third party as trustee of a trust in November 1994. The elimination of the related mortgages reduced corporate debt by $845 million and resulted in annual interest savings of approximately $75 million. INFLATION Reported earnings have been impacted by inflation; however, there is no simple way of identifying the amount of the impact. Competitive and regulatory conditions permitting, the Company modifies the prices charged for its goods and services in order to recognize cost changes as incurred or as anticipated. By also attempting to control costs and efficiently utilize resources, the Company strives to minimize the effects of inflation on its operations. Sears annual report 1996 p.25 S E A R S , R O E B U C K A N D C O . CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------- millions 1996 1995 - ----------------------------------------------------------------------------------------------------------------- ASSETS Current Assets Cash and invested cash $ 660 $ 606 Credit card receivables 22,371 20,932 Less: Allowance for uncollectible accounts 808 826 - ----------------------------------------------------------------------------------------------------------------- 21,563 20,106 Other receivables 335 444 Merchandise inventories 4,646 4,033 Prepaid expenses and deferred charges 348 360 Deferred income taxes 895 892 - ----------------------------------------------------------------------------------------------------------------- Total current assets 28,447 26,441 Property and equipment Land 445 387 Buildings and improvements 5,080 4,382 Furniture, fixtures and equipment 4,279 3,775 Capitalized leases 433 313 - ----------------------------------------------------------------------------------------------------------------- 10,237 8,857 Less accumulated depreciation 4,359 3,780 - ----------------------------------------------------------------------------------------------------------------- Total property and equipment, net 5,878 5,077 Deferred income taxes 905 879 Other assets 937 733 - ----------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $36,167 $33,130 - ----------------------------------------------------------------------------------------------------------------- LIABILITIES Current Liabilities Short-term borrowings $ 3,533 $ 5,349 Current portion of long-term debt and capitalized lease obligations 2,737 1,730 Accounts payable and other liabilities 7,225 6,133 Unearned revenues 840 887 Other taxes 615 508 - ----------------------------------------------------------------------------------------------------------------- Total current liabilities 14,950 14,607 Long-term debt and capitalized lease obligations 12,170 10,044 Postretirement benefits 2,748 2,825 Minority interest and other liabilities 1,354 1,269 - ----------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 31,222 28,745 - ----------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Preferred shares ($1 par value, 50 shares authorized) 8.88% Preferred Shares, First Series (3.25 shares issued and outstanding as of Dec. 30, 1995) -- 325 Common shares ($.75 par value, 1,000 shares authorized, 391.4 and 390.5 shares outstanding) 323 322 Capital in excess of par value 3,618 3,634 Retained income 3,330 2,444 Treasury stock--at cost (1,655) (1,634) Minimum pension liability (277) (285) Deferred ESOP expense (230) (253) Cumulative translation adjustments (164) (168) - ----------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 4,945 4,385 - ----------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $36,167 $33,130 - -----------------------------------------------------------------------------------------------------------------
See accompanying notes. p.26 Sears annual report 1996 S E A R S , R O E B U C K A N D C O . ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION The Company's significant financial capacity and flexibility are exemplified by the quality and liquidity of its assets and by its ability to access multiple sources of capital. The owned credit card receivables portfolio of $21.56 billion excludes $6.60 billion of receivables sold through securitizations. Domestic and international accounts represent $20.14 billion and $1.42 billion of the owned portfolio, respectively. The portfolio is geographically diversified within the U.S., Canada and Mexico. The Company grants retail consumer credit based on an extensive use of proprietary and commercially available credit histories and scoring models. The Company promptly recognizes uncollectible accounts and emphasizes the maintenance of an adequate allowance for uncollectible accounts, which is assessed using multiple modeling approaches based on the portfolio risk characteristics. Domestic accounts are generally charged off automatically at the beginning of the billing cycle for which a customer's balance is deemed to be more than 209 days past due, except that accounts may be charged off sooner in the event of customer bankruptcy. Merchandising inventories are primarily valued on the last-in, first-out or LIFO method. Inventories would have been $730 million higher if valued on the first-in, first-out or FIFO method at Dec. 28, 1996. Inventories on a FIFO basis totaled $5.38 billion at Dec. 28, 1996 as compared to $4.74 billion at Dec. 30, 1995. The increase in inventory levels reflects the growth in new stores, both Full-line and off-the-mall. 1996 Assets [PIE CHART] Net Receivables 61% Property & Equipment 16% Inventory 13% OTHER 10% CAPITAL RESOURCES Total net funding for the Company at Dec. 28, 1996 was $24.81 billion compared with $22.06 billion at Dec. 30, 1995, and was used primarily to fund the credit card receivables portfolio. Net funding includes debt reflected on the balance sheet and investor certificates related to credit card receivables sold through securitizations. Funding related to credit card receivables grew during the year, as gross credit card receivables increased, reflecting the strong domestic operations performance. The Company's debt-to-equity ratio was 3.7 at Dec. 28, 1996 and 3.9 at Dec. 30, 1995. The Company accesses a variety of capital markets to preserve flexibility and diversify its funding sources. The broad access to capital markets also allows the Company to effectively manage liquidity and repricing risk. Liquidity risk is the measure of the Company's ability to fund maturities and provide for the operating needs of its businesses. Repricing risk is the impact on net income due to changes in interest rates. The Company's cost of funds is affected by a variety of general economic conditions, including the level and volatility of interest rates. To aid in the management of repricing risk, the Company uses off-balance sheet instruments, such as interest rate swaps and caps. The Company has policies that centrally govern the use of such off-balance sheet instruments. Funding Sources at Year-End 1996 [PIE CHART] Medium-Term Notes 36% Securitization 28% Senior Unsecured 20% Unsecured Commercial Paper 12% Other 4% The current debt ratings of the Company appear in the table below.
- ------------------------------------------------------------------------------------- Moody's Duff & Fitch Investors Phelps Investors Services, Standard Credit Service 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 - -------------------------------------------------------------------------------------
The Company utilizes Sears Roebuck Acceptance Corp. ("SRAC"), a wholly-owned subsidiary, to issue commercial paper, to maintain a continuously offered medium-term note program, to issue intermediate-term notes and to issue long-term underwritten debt. SRAC issued term debt securities totaling $4.35 billion in 1996. SRAC commercial paper outstandings were $3.32 billion and $4.45 billion at Dec. 28, 1996 and Dec. 30, 1995, respectively. SRAC commercial paper is supported by a $5.0 billion syndicated credit facility which expires in 2001. In 1996, SRAC issued debt instruments as part of its on-going effort to cost effectively fund the Company. The weighted average interest rate on SRAC debt was 6.26% for 1996 compared to 6.31% for 1995. The following issuances were placed during 1996: - - $3.04 billion fixed-rate medium-term notes, weighted average coupon of 6.6% and average term of 5.0 years - - $412 million medium-term variable-rate notes, weighted average maturity of 1.6 years - - $800 million discrete underwritten notes, weighted average coupon of 6.58% and average term of 9.1 years - - $95 million intermediate-term loans, variable-rate and weighted average maturity of 3.9 years Sears annual report 1996 p.27 S E A R S , R O E B U C K A N D C O . CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------- millions 1996 1995 1994 - -------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,271 $ 1,801 $ 1,454 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation, amortization and other noncash items 893 713 673 Extraordinary gain related to early extinguishment of debt -- -- (319) Provision for uncollectible accounts 1,136 744 626 Gain on sales of property and investments (36) (35) (22) Change in (net of acquisitions): Deferred income taxes (31) 50 359 Credit card receivables (2,705) (2,807) (3,199) Merchandise inventories (475) 30 (594) Other operating assets 111 (106) 638 Other operating liabilities 1,025 801 (148) Discontinued operations -- (776) (402) - -------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,189 415 (934) - -------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of business, net of cash acquired (296) (53) -- Proceeds from sales of property and investments 42 41 26 Purchases of property and equipment, net (1,189) (1,183) (954) Discontinued operations, net -- 483 233 - -------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (1,443) (712) (695) - -------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt 4,683 2,588 2,798 Repayments of long-term debt (1,832) (1,124) (2,717) Increase (decrease) in short-term borrowings, primarily 90 days or less (1,814) (637) 1,617 Repayments of ESOP note receivable 21 44 69 Preferred stock redemption (325) -- -- Common shares purchased for employee stock plans (164) -- -- Common shares issued for employee stock plans 134 97 45 Dividends paid to shareholders (394) (607) (698) - -------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 309 361 1,114 - -------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND INVESTED CASH (1) (6) (3) - -------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND INVESTED CASH 54 58 (518) - -------------------------------------------------------------------------------------------------- CASH AND INVESTED CASH AT BEGINNING OF YEAR 606 548 1,066 - -------------------------------------------------------------------------------------------------- CASH AND INVESTED CASH AT END OF YEAR $ 660 $ 606 $ 548 - --------------------------------------------------------------------------------------------------
See accompanying notes. p.28 Sears annual report 1996 S E A R S , R O E B U C K A N D C O . ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION (Continued) The Company, through its subsidiary Sears Receivables Financing Group, Inc., securitizes domestic credit card receivables to access intermediate-term funding in a cost-effective manner. These securities are rated in the highest category by the national rating agencies. In 1996, the Company issued $2.09 billion of fixed-rate term securitizations at a weighted average coupon of 6.74% and $525 million of variable-rate term securitizations. As of Dec. 28, 1996, there were $6.33 billion of investor certificates outstanding which were backed by sold domestic credit card receivables. On Nov. 12, 1996, all the outstanding 8.88% Preferred Shares, First Series were redeemed at a redemption price of $25 per depository share plus accrued dividends to the redemption date. On Mar. 20, 1995, the Company exchanged all of its 28.8 million Series A Mandatorily Exchangeable Preferred Shares ("PERCS") for 35.7 million common shares of the Company. The exchange did not dilute earnings per share as the PERCS were reflected in the Company's earnings per share calculation in prior years. CAPITAL SPENDING The Company is approximately 60% through a five-year, $4 billion capital expenditure program for renovating and updating Full-line Stores. In addition, the Company plans to grow its off-the-mall businesses. Capital expenditures during the past three years were as follows:
- -------------------------------------------------------------------- millions 1996 1995 1994 - -------------------------------------------------------------------- Full-line Stores, primarily remodeling and expansion efforts $ 848 $ 868 $673 Off-the-mall stores 181 111 106 Other - distribution centers/support functions 160 204 175 - -------------------------------------------------------------------- Total capital expenditures $1,189 $1,183 $954 - --------------------------------------------------------------------
The Company plans capital expenditures of $1.5 billion for 1997, which include remodeling and expansion of approximately 85 existing and opening 15 to 25 new Full-line Stores, 40 to 50 hardware stores, 5 to 10 furniture stores and 145 to 175 automotive stores. The Company may also pursue selective strategic acquisitions as a means to accelerate growth. OPERATING, INVESTING AND FINANCING ACTIVITIES Cash flows from operating activities consist primarily of net income adjusted for certain noncash expense items including depreciation, the provision for uncollectible accounts, changes in receivables, inventories and deferred taxes. Net cash provided by the Company's operating activities in 1996 improved $774 million to $1.19 billion. The improvement was due to higher income from continuing operations and an increase in noncash expenses (provision for uncollectible accounts and depreciation) as compared to 1995. In 1995, net cash provided by the Company's operating activities totaled $415 million, an improvement of $1.35 billion from 1994. The improvement was due to an increase in other operating liabilities and lower levels of inventory growth as compared to 1994, partially offset by an increase in other operating assets. Net cash used in investing activities totaled $1.44 billion in 1996 compared to $712 million in 1995. The increase in net cash used resulted from the acquisition of the Orchard Supply Hardware Stores Corporation in September 1996 and the fact that cash was realized in 1995 from discontinued operations. In 1996, cash used for property and equipment related to the Company's Full-line Stores remodeling program and the expansion of its store base was $1.19 billion as compared to $1.18 billion in 1995. In 1995, net cash used in investing activities increased $17 million over 1994 due to higher store remodeling capital expenditures and the acquisition of Wheels, Inc. and Nationwise, Inc., partially offset by higher cash realized from discontinued operations. The cash realized from discontinued operations in 1995 relates primarily to the proceeds from the sale of Homart. Net cash provided by financing activities in 1996 totaled $309 million as compared to $361 million in 1995. Financing activities in 1996 were primarily long-term borrowings to support the growth in credit card receivables. During 1996, the Company implemented a share repurchase program for the purpose of acquiring up to ten million Sears common shares for distribution under employee stock-based incentive plans. Through Dec. 28, 1996, 3.4 million common shares had been acquired under the repurchase program. In November 1996, the Company redeemed for cash all the outstanding 8.88% Preferred Shares, First Series. Dividends paid to shareholders in 1996 included common dividends based on a quarterly payout rate of $0.23 per common share. In the first nine months of 1995, the common share dividend payment was based on a quarterly payout rate of $0.40 per common share reflective of the Company's structure prior to the spin-off of Allstate. The payment of future common dividends is dependent upon the Company's earnings and investment opportunities. In 1995, net cash provided by financing activities decreased $753 million from 1994 primarily due to a shift in the funding mix for credit card receivables from on-book debt to securitization in 1995. Sears annual report 1996 p.29 S E A R S , R O E B U C K A N D C O . CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- dollars in millions shares in thousands 8.88% PREFERRED SHARES, FIRST SERIES Balance, beginning of year $ 325 $ 325 $ 325 3,250 3,250 3,250 Retired during year (325) -- -- (3,250) -- -- - --------------------------------------------------------------------------------------------------------------------------- Balance, end of year $ -- $ 325 $ 325 -- 3,250 3,250 - --------------------------------------------------------------------------------------------------------------------------- SERIES A MANDATORILY EXCHANGEABLE PREFERRED SHARES (PERCS) Balance, beginning of year $ -- $ 1,236 $ 1,236 -- 7,188 7,188 Issued during year -- -- -- -- -- -- Exchanged to common shares during year -- (1,236) -- -- (7,188) -- - --------------------------------------------------------------------------------------------------------------------------- Balance, end of year $ -- $ -- $ 1,236 -- -- 7,188 - --------------------------------------------------------------------------------------------------------------------------- COMMON SHARES Balance, beginning of year $ 322 $ 294 $ 294 429,683 392,310 391,752 Conversion of PERCS -- 27 -- -- 35,673 -- Stock options exercised and other changes 1 1 -- 932 1,700 558 - --------------------------------------------------------------------------------------------------------------------------- Balance, end of year 323 322 294 430,615 429,683 392,310 - --------------------------------------------------------------------------------------------------------------------------- CAPITAL IN EXCESS OF PAR VALUE Balance, beginning of year 3,634 2,385 2,354 Stock options exercised and other changes (16) 40 31 Conversion of PERCS -- 1,209 -- - --------------------------------------------------------------------------------------------------------------------------- Balance, end of year 3,618 3,634 2,385 - --------------------------------------------------------------------------------------------------------------------------- RETAINED INCOME Balance, beginning of year 2,444 8,918 8,163 Net income 1,271 1,801 1,454 Preferred share dividends (25) (53) (137) Common share dividends ($.92, $1.26 and $1.60 per share) (360) (475) (562) Distribution of The Allstate Corporation shares -- (7,747) -- - --------------------------------------------------------------------------------------------------------------------------- Balance, end of year 3,330 2,444 8,918 - --------------------------------------------------------------------------------------------------------------------------- TREASURY STOCK-AT COST Balance, beginning of year (1,634) (1,690) (1,704) (39,195) (40,570) (40,904) Repurchased for employee stock plans (164) -- -- (3,449) -- -- Reissued under compensation plans and other changes 143 56 14 3,423 1,375 334 - --------------------------------------------------------------------------------------------------------------------------- Balance, end of year (1,655) (1,634) (1,690) (39,221) (39,195) (40,570) - --------------------------------------------------------------------------------------------------------------------------- MINIMUM PENSION LIABILITY Balance, beginning of year (285) -- -- Net decrease (increase) 8 (285) -- - --------------------------------------------------------------------------------------------------------------------------- Balance, end of year (277) (285) -- - --------------------------------------------------------------------------------------------------------------------------- DEFERRED ESOP EXPENSE Balance, beginning of year (253) (558) (614) Reductions 23 305 56 - --------------------------------------------------------------------------------------------------------------------------- Balance, end of year (230) (253) (558) - --------------------------------------------------------------------------------------------------------------------------- UNREALIZED NET CAPITAL GAINS Balance, beginning of year -- 32 1,674 Net unrealized gain (loss) during the year -- 1,176 (1,642) Distribution of The Allstate Corporation shares -- (1,208) -- - --------------------------------------------------------------------------------------------------------------------------- Balance, end of year -- -- 32 - --------------------------------------------------------------------------------------------------------------------------- CUMULATIVE TRANSLATION ADJUSTMENTS Balance, beginning of year (168) (141) (64) Net unrealized gain (loss) during year 4 (7) (77) Distribution of The Allstate Corporation shares -- (20) -- - --------------------------------------------------------------------------------------------------------------------------- Balance, end of year (164) (168) (141) - --------------------------------------------------------------------------------------------------------------------------- TOTAL COMMON SHAREHOLDERS' EQUITY AND SHARES OUTSTANDING $ 4,945 $ 4,060 $ 9,240 391,394 390,488 351,740 - --------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY $ 4,945 $ 4,385 $10,801 - ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes. p.30 Sears annual report 1996 S E A R S , R O E B U C K A N D C O . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of Sears, Roebuck and Co. (the "Company") and all significant domestic and international companies in which the Company has more than a 50% equity ownership. Investments in companies in which the Company has a 20% to 50% ownership are accounted for using the equity method. The Allstate Corporation ("Allstate") and Homart Development Co. and affiliated entities ("Homart") are presented as discontinued operations in 1995 and 1994. 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. Although not a part of the financial statements, included with the consolidated statements is a five-year summary of consolidated financial data. Certain reclassifications have been made in the 1995 and 1994 financial statements to conform with current year presentation. FISCAL YEAR The Company's fiscal year ends on the last Saturday in December. Fiscal year 1996 ended on Dec. 28, fiscal year 1995 ended on Dec. 30, and fiscal year 1994 ended on Dec. 31. MERCHANDISE SALES AND SERVICES Revenues from merchandise sales and services are net of returns and allowances and exclude sales tax. Included in merchandise sales and services are gross revenues from licensees of $1.32, $1.25 and $1.17 billion for 1996, 1995 and 1994, respectively. MAINTENANCE AGREEMENTS The Company sells extended service contracts with terms of coverage between 12 and 36 months. Revenue and incremental direct acquisition costs from the sale of these contracts are deferred and amortized on a straight-line basis over the lives of the contracts. Costs related to servicing the contracts are expensed as incurred. STORE PRE-OPENING EXPENSES Costs associated with the opening of new stores are expensed in the year incurred. EARNINGS PER COMMON SHARE Earnings per common share is computed based on the weighted average number of common and common equivalent shares (dilutive stock options) outstanding and after adjustment for dividends of $25 million in 1996, and $29 million in both 1995 and 1994 on the 8.88% Preferred Shares, First Series. In early 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." The statement is effective for financial statements for periods ending after Dec. 15, 1997, and changes the method in which earnings per share will be determined. Adoption of this statement by the Company will not have a material impact on earnings per share. CASH AND INVESTED CASH Cash and invested cash includes all highly liquid investments with maturities of three months or less. CREDIT CARD RECEIVABLES Credit card receivables arise primarily under open-end revolving credit accounts used to finance purchases of merchandise and services offered by the Company. These accounts have various billing and payment structures, including varying minimum payment levels and finance charge rates. Based on historical payment patterns, the full receivable balance will not be realized within one year. Credit card receivables are shown net of an allowance for uncollectible accounts. The Company provides an allowance for uncollectible accounts which is determined based on a number of factors, including the risk characteristics of the portfolio, historical charge-off patterns, and management judgement. When receivables are securitized and sold with limited recourse, the portion of the allowance for uncollectible accounts pertaining to such receivables is transferred to a recourse liability at the date of sale. Uncollectible accounts are generally charged off against the allowance or recourse liability automatically at the beginning of the billing cycle in which the customer's balance is deemed to be more than 209 days past due, except that accounts may be charged off sooner in the event of customer bankruptcy. Finance charge revenue is recorded until such time an account is charged off and finance charges on charged-off accounts are presented as a reduction of credit revenues. In June 1996, SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" was issued. This statement provides consistent guidance for distinguishing transfers of financial assets (securitizations) that are sales from transfers that are secured borrowings and is effective for securitizations occurring after Dec. 31, 1996. SFAS No. 125 requires the Company to recognize gains on securitizations which qualify as sales. The statement also indicates that an allowance for uncollectible accounts should not be maintained for receivables which are sold (securitized) effective after Dec. 31, 1996. The Company expects the allowance for doubtful accounts related to the domestic securitized (sold) receivables to be depleted during 1997 and 1998. The Company anticipates an increase in net income of approximately $100 to $150 million in 1997 resulting from the implementation of the new statement, although the precise amount will be dependent on a number of factors such as interest rates and levels of securitization. Sears annual report 1996 p.31 S E A R S , R O E B U C K A N D C O . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) MERCHANDISE INVENTORIES Approximately 84% 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 charge of $19 million in 1996 and 1995 and a credit of $34 million in 1994. Partial liquidation of merchandise inventories valued under the LIFO method resulted in credits of $15 and $3 million in 1995 and 1994. No layer liquidation credits resulted in 1996. If the first-in, first-out (FIFO) method of inventory valuation had been used instead of the LIFO method, merchandise inventories would have been $730 and $711 million higher at Dec. 28, 1996 and Dec. 30, 1995, respectively. Merchandise inventories of international operations, the Parts Group, certain Sears Tire Group formats and Puerto Rico, which represent approximately 16% of merchandise inventories, are recorded based on the FIFO method. PROPERTY AND EQUIPMENT Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided principally by the straight-line method over the estimated useful lives of the related assets, generally 5 to 10 years for equipment and 40 to 50 years for real property. Accumulated depreciation was $4.36 and $3.78 billion at Dec. 28, 1996 and Dec. 30, 1995, respectively. 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 various periods not exceeding 40 years. INCOME TAXES The consolidated federal income tax return of the Company includes results of the domestic operations of both the continuing businesses and discontinued operations. Tax liabilities and benefits are allocated as generated by the respective businesses, whether or not such benefits would be currently available on a separate return basis. ADVERTISING Costs for newspaper, television, radio and other media advertising are expensed as incurred. Specialty catalog book preparation and other direct response advertising costs (printing costs and advertising inserts) are charged to expense over the expected period of future benefits. For specialty catalogs, amortization of costs occurs over the life of the catalog, not to exceed one year. For advertising inserts and other direct response advertising, the amortization period ranges from six months to five years depending on the period of future benefits. In 1996, the total cost of advertising charged to expense was $1.28 billion, compared with $1.22 billion in 1995, and $1.18 billion in 1994. The consolidated balance sheets include deferred direct-response advertising costs of $59 million at Dec. 28, 1996, $46 million at Dec. 30, 1995, and $37 million at Dec. 31, 1994, which are included in other assets. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The Company utilizes various off-balance sheet financial instruments to manage the interest rate and foreign currency risk associated with its borrowings. The counterparties to these instruments are major financial institutions with credit ratings primarily of AA. Interest rate swap agreements modify the interest characteristics of a portion of the Company's debt. The differential to be paid or received is accrued as interest rates change and recognized as an adjustment to interest expense in the statement of income. The related accrued receivable or payable is included in other assets or liabilities. The fair values of the swap agreements are not recognized in the financial statements. Interest rate caps are used to lock in a maximum rate if rates rise, but enable the Company to otherwise pay lower market rates. The cost of interest rate caps is amortized to interest expense over the life of the caps. Payments received due to the interest rate caps reduce interest expense. The unamortized cost of the interest rate caps is included in other assets. 2. DISCONTINUED OPERATIONS Income from discontinued operations was $776 million (net of income tax expense of $249 million) in 1995 and $402 million (net of income tax benefit of $256 million) in 1994. On November 10, 1994, the Company announced its intention to distribute in a tax-free dividend to the Company's common shareholders its 80% ownership interest in The Allstate Corporation. The distribution was approved by shareholders at a special meeting on March 31, 1995. On June 20, 1995, the Company's Board of Directors approved the distribution to Sears shareholders in a tax-free dividend. Sears shareholders of record on June 30, 1995 received, effective June 30, 1995, .93 shares of The Allstate Corporation for each Sears common share owned. This transaction resulted in a noncash dividend to Sears shareholders totaling $8.98 billion. In July 1995, the Company completed the sale of Homart's commercial office building portfolio to an operating partnership composed of the Morgan Stanley Real Estate Fund II, L.P. and Hines Interests Limited Partnership. In December 1995, the Company completed the sale of the retail shopping center and community development businesses of Homart to a wholly-owned subsidiary of General Growth Properties, Inc. No gain or loss to the Company resulted from these transactions.
The operating results of the discontinued operations are summarized below: - -------------------------------------------------------------------------- millions 1995 1994 - -------------------------------------------------------------------------- Allstate Revenues $11,244 $21,464 Net income 776 388 Homart Revenues $ 256 $ 266 Net income -- 14 - --------------------------------------------------------------------------
p.32 Sears annual report 1996 S E A R S , R O E B U C K A N D C O . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. RESTRUCTURING In 1996, international operations selling and administrative expenses included a $27 million pretax restructuring charge (before minority interest) related to Sears Canada cost containment initiatives that included elimination of certain positions and the closing of a warehouse and other support facilities. Beginning in 1997, the restructuring initiatives at Sears Canada are estimated to generate annualized pretax savings of $35 to $45 million (before minority interest). Included in domestic operations selling and administrative expenses in 1995 was a $51 million pretax restructuring charge associated with the Company's organizational realignment. This initiative better aligns the Company's structure with its growth strategy, particularly the creation of separate tire and auto parts divisions and the consolidation of certain distribution facilities. Beginning in 1997, resulting after-tax savings from the restructuring are expected to be an estimated $30 to $35 million annually. In 1995, the Company also reversed $62 million of pretax reserves related to the $2.65 billion domestic restructuring announced in 1993. The reserves which were released are no longer needed due to the settlement of obligations and the adjustment of the carrying values of certain properties to be disposed of in connection with that restructuring. 4. INCOME TAXES Income before income taxes was as follows:
- -------------------------------------------------------------------------------- millions 1996 1995 1994 - -------------------------------------------------------------------------------- Domestic $2,091 $1,727 $1,411 Foreign 14 1 60 - -------------------------------------------------------------------------------- Total $2,105 $1,728 $1,471 - --------------------------------------------------------------------------------
Federal, state and foreign taxes were as follows:
- -------------------------------------------------------------------------------- millions 1996 1995 1994 - -------------------------------------------------------------------------------- Federal income tax Current $ 720 $ 571 $ 324 Deferred (12) 31 171 State income tax Current 133 93 45 Deferred (8) 10 38 Foreign income tax Current 25 23 51 Deferred (24) (25) (15) - -------------------------------------------------------------------------------- Income tax provision $ 834 $ 703 $ 614 - --------------------------------------------------------------------------------
A reconciliation of the statutory federal income tax rate to the effective rate was as follows:
- -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit 3.9 3.9 3.8 Other .7 1.8 2.9 - -------------------------------------------------------------------------------- Effective income tax rate 39.6% 40.7% 41.7% - --------------------------------------------------------------------------------
Deferred taxes based upon differences between the financial statement and tax bases of assets and liabilities and available tax carryforwards consists of:
- ------------------------------------------------------------------------ millions 1996 1995 - ------------------------------------------------------------------------ Deferred tax assets: Unearned maintenance income $ 445 $ 430 Allowance for uncollectible accounts 437 377 Self insurance reserves 169 150 Postretirement benefit liability 1,143 1,161 Minimum pension liability 155 183 Other deferred tax assets 670 680 - ------------------------------------------------------------------------ Gross deferred tax assets 3,019 2,981 Less valuation allowance -- -- - ------------------------------------------------------------------------ Net deferred tax assets 3,019 2,981 - ------------------------------------------------------------------------ Deferred tax liabilities: Property and equipment 336 389 Prepaid pension 153 187 LIFO 131 125 Other deferred tax liabilities 599 509 - ------------------------------------------------------------------------ Gross deferred tax liabilities 1,219 1,210 - ------------------------------------------------------------------------ Net deferred taxes $1,800 $1,771 - ------------------------------------------------------------------------
Management believes that the realization of the net deferred tax asset of $1.8 billion 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 which the Company considers to be permanent investments. The cumulative amount of unremitted income for which income taxes have not been provided totaled $349 million at Dec. 28, 1996. If these earnings were to be remitted, taxes of $106 million would be due. Income taxes of $386, $616, and $470 million were paid in 1996, 1995, and 1994, respectively. Sears annual report 1996 p.33 S E A R S , R O E B U C K A N D C O . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. BENEFIT PLANS Expenses for retirement and savings-related benefit plans were as follows:
- ---------------------------------------------------------------------------------------- millions 1996 1995 1994 - ---------------------------------------------------------------------------------------- Savings and Profit Sharing Fund of Sears Employees Defined contribution $ 64 $ 61 $ 61 ESOP benefit (33) (19) (4) Pension plans 99 38 (61) Retiree insurance benefits 76 185 232 Other plans 8 10 8 - ---------------------------------------------------------------------------------------- Total $214 $275 $236 - ----------------------------------------------------------------------------------------
PROFIT SHARING FUND Most domestic employees are eligible to become members of The Savings and Profit Sharing Fund of Sears Employees ("the Fund"). The Company contribution is based on 6% of consolidated income, as defined, for the participating companies. Company contributions are limited to 70% of eligible employee contributions. The Fund includes an Employee Stock Ownership Plan ("the ESOP") to prefund a portion of the Company's anticipated contribution through 2004. The Company loaned the ESOP $800 million at an interest rate of 9.2% which it used to purchase 25.9 million of Sears common shares. The loan is repaid with dividends on ESOP shares and Company contributions. In conjunction with the 1995 Allstate spin-off, The Savings and Profit Sharing Fund of Sears Employees, which includes the ESOP, was split into two separate plans, a plan for employees of the Company and its affiliates other than Allstate and a plan for Allstate employees. The ESOP was split with 50% of the unallocated shares in the ESOP and 50% of the ESOP debt transferred to the Allstate plan. In connection with this transfer, Allstate purchased from the Company 50% of the Company's remaining loan to the ESOP at a purchase price of $327 million. The ESOP benefit included in the benefit plan expense table was computed as follows:
- ------------------------------------------------------------------------------- millions 1996 1995 1994 - ------------------------------------------------------------------------------- Interest expense recognized by ESOP $ 29 $ 45 $ 64 Less dividends accrued on ESOP shares (21) (31) (43) Cost of shares allocated to employees and plan expenses 23 28 56 - ------------------------------------------------------------------------------- 31 42 77 - ------------------------------------------------------------------------------- ESOP expense attributable to discontinued operations -- -- (24) Reduction of defined contribution due to ESOP (64) (61) (57) - ------------------------------------------------------------------------------- ESOP benefit $(33) $(19) $ (4) - -------------------------------------------------------------------------------
The Company contributed $28, $62 and $91 million to the ESOP in 1996, 1995 and 1994, respectively. At Dec. 28, 1996, total committed to be released, allocated and unallocated ESOP shares were 1.5, 9.3 and 15.1 million, respectively. All ESOP shares are considered outstanding in the calculation of earnings per share. PENSION PLANS Substantially all domestic full-time and certain part-time employees are eligible to participate in noncontributory defined benefit plans after meeting age and service requirements. Substantially all Canadian employees are eligible to participate in contributory defined benefit plans. Pension benefits are based on length of service, compensation and, in certain plans, Social Security or other benefits. Funding for the various plans is determined using various actuarial cost methods, and amounted to $172, $76 and $81 million for 1996, 1995 and 1994, respectively. Pension expense (benefit) was comprised of the following:
- ------------------------------------------------------------------------------ millions 1996 1995 1994 - ------------------------------------------------------------------------------ Benefits earned during the period $ 72 $ 68 $ 81 Interest on projected benefit obligation 189 181 196 Actual return on plan assets (322) (383) 12 Net amortization and deferral 160 172 (350) - ------------------------------------------------------------------------------ Pension expense (benefit) $ 99 $ 38 $ (61) - ------------------------------------------------------------------------------
The Company uses October 31 as the measurement date for purposes of determining pension plan assets and obligations. The weighted average discount rate and rate of increase in compensation used in determining the actuarial present value of the projected benefit obligations were 7.75% and 4.25% in 1996, 7.75% and 3.75% in 1995 and 9.0% and 4.0% in 1994. The expected long-term rate of return on plan assets used in determining net periodic pension cost was 9.5% in 1996, 1995 and 1994. The plans' funded status was as follows:
- ----------------------------------------------------------------------------------- 1996 1995 - ----------------------------------------------------------------------------------- Assets Accumulated Assets Accumulated exceed benefits exceed benefits accumulated exceed accumulated exceed millions benefits assets benefits assets - ----------------------------------------------------------------------------------- Actuarial present value of benefit obligations Vested benefit obligation $478 $1,787 $419 $1,743 - ----------------------------------------------------------------------------------- Accumulated benefit obligation $479 $1,984 $420 $1,975 - ----------------------------------------------------------------------------------- Projected benefit obligation (PBO) $554 $2,123 $469 $2,241 Plan assets at fair value, primarily publicly traded stocks and bonds 714 1,776 635 1,626 - ----------------------------------------------------------------------------------- PBO less than (in excess of) plan assets 160 (347) 166 (615) Unrecognized net loss 37 636 30 734 Unrecognized prior service cost 1 (65) -- 54 Unrecognized transitional asset (17) -- (25) -- Minimum pension liability -- (432) -- (522) - ----------------------------------------------------------------------------------- Prepaid (accrued) pension cost in the Balance Sheet at year end $181 $ (208) $171 $ (349) - -----------------------------------------------------------------------------------
p.34 Sears annual report 1996 S E A R S , R O E B U C K A N D C O . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The provisions of Statement of Financial Accounting Standards ("SFAS") No. 87 "Employers' Accounting For Pensions" require the recognition of a minimum pension liability for each defined benefit plan for which the accumulated benefit obligation exceeds plan assets. The amount of minimum pension liability was $432 million at Dec. 28, 1996 and $522 million at Dec. 30, 1995. The Company also had an intangible asset of $54 million at Dec. 30, 1995 for unrecognized prior service cost. In 1996, no such intangible asset existed. The minimum pension liability in excess of unrecognized prior service cost is recorded as a reduction to shareholders' equity, net of tax, of $277 million at Dec. 28, 1996 and $285 million at Dec. 30, 1995. RETIREE INSURANCE BENEFITS The Company provides certain health care and life insurance benefits for retired employees. Generally, qualified employees may become eligible for these benefits if they retire in accordance with the Company's established retirement policy and are continuously insured under the Company's group plans or other approved plans for 10 or more years immediately prior to retirement. The Company shares the cost of the retiree medical benefits with retirees based on years of service. Through 1995, the Company's share is subject to a 5% limit on annual medical inflation after retirement. Beginning in 1996, the Company's share of these costs were capped at 1995 levels for employees who retired before 1996. For employees who retire after 1995, the Company's share of these benefit costs will be capped based on the Company contribution calculated during the first year of retirement. The effect of this plan change reduces postretirement benefit expense commencing in 1996. The Company's postretirement benefit plans are not funded. The Company has the right to modify or terminate these plans. Postretirement benefit expense was comprised of the following:
- --------------------------------------------------------------------------------------------------- millions 1996 1995 1994 - --------------------------------------------------------------------------------------------------- Benefits earned during the period $ 18 $ 24 $ 35 Interest on accumulated postretirement benefit obligation 125 188 197 Net amortization and deferral (67) (27) -- - --------------------------------------------------------------------------------------------------- Postretirement benefit expense $ 76 $185 $232 - ---------------------------------------------------------------------------------------------------
The plans' funded status was as follows:
- --------------------------------------------------------------------------------------------------- millions 1996 1995 - --------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation Retirees $1,495 $1,646 Fully eligible active plan participants 107 114 Other active plan participants 114 161 - --------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation 1,716 1,921 Unrecognized gain 441 301 Unrecognized prior service cost 591 603 - --------------------------------------------------------------------------------------------------- Accrued postretirement benefit cost in the Balance Sheet at year end $2,748 $2,825 - ---------------------------------------------------------------------------------------------------
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.75% in 1996 and 1995. The weighted average health care cost trend rate used in measuring the postretirement benefit expense is 11.0% for 1997, gradually declining to 6.0% in 2007 and remaining at that level thereafter. A one percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation by $38 million and would increase the annual postretirement benefit expense by $5 million. 6. BORROWINGS Short-term borrowings consisted of:
- --------------------------------------------------------------------- millions 1996 1995 - --------------------------------------------------------------------- Commercial paper $3,208 $4,961 Bank loans 97 101 Agreements with bank trust departments 82 137 Other loans (principally foreign) 146 150 - --------------------------------------------------------------------- Total short-term borrowings $3,533 $5,349 Weighted average interest rate at year end 6.4% 7.2% Weighted average interest rate at year end, including effects of swaps and caps 7.3% 7.8% - ---------------------------------------------------------------------
At Dec. 28, 1996, the Company had credit agreements totaling $5.61 billion. SRAC's credit facilities totaled $5 billion in syndicated credit agreements. Sears Canada had credit agreements totaling $609 million. These syndicated and uniform credit agreements provide for loans at prevailing interest rates and mature at various dates through June 2001. The Company pays commitment fees in connection with these credit agreements. The Company had interest rate swap agreements which established fixed rates on $996 million and $1.41 billion of short-term variable rate debt at Dec. 28, 1996 and Dec. 30, 1995, resulting in weighted average interest rates of 8.5% and 8.0%, respectively. The weighted average maturity of agreements in effect on Dec. 28, 1996 was approximately eleven years. Due to interest rate caps, the Company had maximum weighted average interest rates of 9.0% on $200 million of debt at Dec. 28, 1996 and at Dec. 30, 1995. The maturity of cap agreements in effect on Dec. 28, 1996 is approximately one year. P. 35 Sears annual report 1996 S E A R S , R O E B U C K A N D C O . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Long-term debt was as follows:
SEARS, ROEBUCK AND CO. 6.25% to 9.5% Notes, due 1997 to 2004 $ 1,550 $ 1,950 8.2% Extendable Notes, due 1999 31 31 6% Debentures, $300 million face value, due 2000, effective rate 14.8% 233 218 9.375% Debentures, due 2011 300 300 4.85% to 10.0% Medium-Term Notes, due through 2021 3,236 3,737 Capitalized lease obligations 211 127 SEARS ROEBUCK ACCEPTANCE CORP. 5.66% to 6.07% Term Loans, due 1997 to 2001 715 895 6.13% and 6.90% Notes, due 2000 to 2006 1,298 499 5.40% to 7.19% Medium-Term Notes, due 1997 to 2006 4,834 1,383 SEARS DC CORP. 7.67% to 9.26% Medium-Term Notes, due through 2012 779 1,229 SEARS OVERSEAS FINANCE N.V. (GUARANTEED BY SEARS, ROEBUCK AND CO.) Zero Coupon Bonds, $500 million face value, due 1998, effective rate 12.0% 421 376 SEARS CANADA INC. 8.25% to 11.70% Debentures, due 1997 to 2001 420 348 Notes, mortgages, bonds and capitalized leases 135 139 SEARS CANADA RECEIVABLES TRUST 3.25% to 9.18% Receivables Trusts, due 1997 to 2006 541 325 SEARS ACCEPTANCE CO. LTD. 15 1/8% Secured Debentures, due 1996 -- 49 SEARS ROEBUCK DE MEXICO, S.A. DE C.V. 16% Bank Notes, due 1996 -- 78 Notes payable to bank due 1998 50 -- OTHER SUBSIDIARIES Notes, mortgage and capitalized leases 153 90 ---------------------------------------------------------------------- 14,907 11,774 Less current maturities 2,737 1,730 ---------------------------------------------------------------------- Total long-term debt $12,170 $10,044 ----------------------------------------------------------------------
As of Dec. 28, 1996, long-term debt maturities for the next five years were as follows:
- ------------------------ millions - ------------------------ 1997 $2,737 1998 2,598 1999 1,748 2000 1,826 2001 2,260 - ------------------------
The Company paid interest of $1.3 billion for the years ended Dec. 28, 1996 and Dec. 30, 1995, and $1.2 billion for year ended Dec. 31, 1994. Interest capitalized was $5, $4 and $1 million for the years ended Dec. 28, 1996, Dec. 30, 1995, and Dec. 31, 1994, respectively. 7. LEASE AND SERVICE AGREEMENTS The Company leases certain stores, office facilities, warehouses, computers and transportation equipment. Operating and capital lease obligations are based upon contractual minimum rates and, for certain stores, amounts in excess of these minimum rates are payable based upon specified percentages of sales. Certain leases include renewal or purchase options. Operating lease rentals were $365, $357 and $341 million, including contingent rentals of $66, $66 and $62 million, for the years ended Dec. 28, 1996, Dec. 30, 1995 and Dec. 31, 1994, respectively. Minimum lease obligations, excluding taxes, insurance and other expenses payable directly by the Company, for leases in effect as of Dec. 28, 1996, were:
- ----------------------------------------------------------------- Capital Operating millions leases leases - ----------------------------------------------------------------- 1997 $ 56 $ 279 1998 52 259 1999 49 231 2000 47 207 2001 44 189 After 2001 611 1,006 - ----------------------------------------------------------------- Minimum payments $859 $2,171 - ----------------------------------------------------------------- Executory costs (principally taxes) 26 Imputed interest 493 - ----------------------------------------------------------------- Present value of minimum lease payments, principally long-term $340 - -----------------------------------------------------------------
The Company has a minority interest in Advantis, which began operations in December 1992. Advantis is a joint venture between International Business Machines ("IBM") and the Company which provides data and voice networking and information processing services to the Company and others. Total expenses incurred by the Company for these services during the years 1996, 1995 and 1994 were $327, $270 and $311 million, respectively. The Company has committed to purchase services of at least $216 million annually through 2004. 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 fair value estimates of financial instruments presented are not necessarily indicative of the amounts the Company might pay or receive in actual market transactions. Potential taxes and other transaction costs have also not been considered in estimating fair value. As a number of the Company's significant assets (including merchandise inventories, property and equipment, and deferred income taxes) and liabilities are not considered financial instruments, the following disclosures do not reflect the fair value of the Company as a whole. p. 36 Sears annual report 1996 S E A R S , R O E B U C K A N D C O . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) For financial instruments which are short-term in nature, such as other receivables, short-term borrowings, accounts payable and other liabilities, carrying value approximates fair value. The fair value of other financial instruments is as follows:
- --------------------------------------------------------------------- 1996 1995 - --------------------------------------------------------------------- Carrying Fair Carrying Fair millions Value Value Value Value - --------------------------------------------------------------------- Credit card receivables $21,563 $22,185 $20,106 $20,763 Long-term debt (excluding capitalized leases) 14,554 14,867 11,461 12,212 - ---------------------------------------------------------------------
Credit card receivables are valued by discounting estimated future cash flows. The estimated cash flows reflect the historical cardholder payment experience and are discounted at market rate. Long-term debt is valued based on quoted market prices when available or discounted cash flows, using interest rates currently available to the Company on similar borrowings. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS 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, exchange and interest rate risk in excess of amounts recognized in the balance sheet. The Company does not require collateral or other security to support the financial instruments with credit risk, unless noted otherwise. Debt-related The Company had the following off-balance sheet financial instruments related to its outstanding borrowings at Dec. 28, 1996 and Dec. 30, 1995:
December 28, 1996 - ------------------------------------------------------------------------ Contract or Notional Fair Carrying millions Amount Value Value - ------------------------------------------------------------------------- Interest rate swap agreements: Pay floating rate, receive fixed rate $805 $16 $ -- Pay fixed rate, receive floating rate 996 (394) -- Interest rate cap agreement 200 -- -- Foreign currency hedge agreements 110 (4) -- - -------------------------------------------------------------------------
December 30, 1995 - ------------------------------------------------------------------------ Contract or Notional Fair Carrying millions Amount Value Value - ------------------------------------------------------------------------ Interest rate swap agreements: Pay floating rate, receive fixed rate $805 $35 $-- Pay fixed rate, receive floating rate 1,411 (504) -- Interest rate cap agreement 200 -- -- Foreign currency hedge agreements 110 -- -- - ------------------------------------------------------------------------
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 5.50% and received a weighted average rate of 6.80% in 1996. For pay fixed rate, receive floating rate swaps, the Company paid a weighted average rate of 8.02% and received a weighted average rate of 5.44% in 1996. The fair values of interest rate swaps and caps are based on prices quoted from dealers. If a counterparty fails to meet the terms of a swap or cap agreement, the Company's exposure is limited to the net amount that would have been received, if any, over the agreement's remaining life. Maturity dates of the off-balance sheet financial instruments outstanding at Dec. 28, 1996 were as follows:
Notional amount - ------------------------------------------------------------ Over millions 1 year 2-5 years 5 years - ------------------------------------------------------------ Interest rate swap agreements $127 $1,078 $596 Interest rate cap agreement 200 -- -- Foreign currency hedge agreements 100 10 -- - ------------------------------------------------------------
Credit-related The Company had outstanding domestic securitized credit card receivables sold with limited recourse of $6.33 and $4.55 billion at Dec. 28, 1996 and Dec. 30, 1995, respectively. The Company's credit risk exposure was contractually limited to $522 million at Dec. 28, 1996. The Company had estimated accrued liabilities associated with this credit exposure included in the balance sheet of $230 and $176 million at Dec. 28, 1996 and Dec. 30, 1995, respectively. A portion of the securitized receivables is collateralized by personal property. Other The Company had a financial guaranty of $84 million at Dec. 28, 1996. 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 Dec. 28, 1996 and Dec. 30, 1995. Sears annual report 1996 37 S E A R S , R O E B U C K A N D C O . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK The Company grants credit to customers throughout North America. The five states in which the Company had the largest amount of gross credit card receivables, including those sold with recourse, were as follows:
- ----------------------------------- millions 1996 1995 - ----------------------------------- California $2,680 $2,337 Texas 2,191 1,912 Florida 1,982 1,785 New York 1,552 1,358 Pennsylvania 1,478 1,364 - -----------------------------------
10. LEGAL PROCEEDINGS Various legal and governmental proceedings are pending against the Company, many involving routine litigation incidental to the businesses. Other matters contain allegations which are nonroutine and involve compensatory, punitive or antitrust treble damage claims in very large amounts, as well as other types of relief. The consequences of these matters are not presently determinable but, in the opinion of the management of the Company after consulting with legal counsel, the ultimate liability in excess of reserves currently recorded is not expected to have a material effect on annual results of operations, financial position, liquidity or capital resources of the Company. 11. ACQUISITION OF BUSINESS During September 1996, the Company acquired the outstanding stock of Orchard Supply Hardware Stores Corporation ("Orchard") for $309 million. As of Dec. 28, 1996, Orchard operated 65 hardware superstores in California. The acquisition was recorded using the purchase method of accounting and resulted in goodwill of approximately $220 million, which is included in other assets. Orchard's results of operations are not material to the Company's consolidated results of operations. 12. EXTRAORDINARY GAIN On Nov. 7, 1994, the Company transferred Sears Tower and all related assets and liabilities to a third party as trustee of a trust and was released from the related non-recourse mortgages encumbering the building. In connection with this transaction, the Company recorded an after-tax extraordinary gain of $195 million ($319 million pretax) related to the early extinguishment of debt. 13. SHAREHOLDERS' EQUITY DIVIDEND PAYMENTS Certain indentures relating to the long-term debt of Sears, Roebuck and Co., which represent the most restrictive contractual limitation on the payment of dividends, provide that the Company cannot take specified actions, including the declaration of cash dividends, which would cause its consolidated unencumbered assets, as defined, to fall below 150% of its consolidated liabilities, as defined. At Dec. 28, 1996, approximately $1.9 billion could be paid in dividends to shareholders under the most restrictive indentures. PREFERRED SHARES The 8.88% Preferred Shares, First Series ("8.88% Preferred Shares") were issued in the form of 13 million depository shares having cumulative dividends of $2.22 annually and a liquidation preference of $25 per depository share plus accrued dividends. The Company redeemed all the 8.88% Preferred Shares on November 12, 1996, at a redemption price of $25 per depository share plus accrued dividends to the redemption date. The Series A Mandatorily Exchangeable Preferred Shares were issued in the form of 28.75 million depository shares having an annual, cumulative dividend of $3.75 per depository share. The Company exchanged the PERCS for common shares on Mar. 20, 1995. Holders of depository shares received 1.24 common shares for each depository share. The total number of common shares delivered upon exchange was 35.7 million. SHARE REPURCHASE PROGRAM On March 13, 1996, the Board of Directors approved a common share repurchase program for the purpose of acquiring shares for distribution under employee stock-based incentive plans. The Company plans to acquire up to ten million Sears common shares on the open market. Through Dec. 28, 1996, 3.4 million common shares have been acquired under the repurchase program. p. 38 Sears annual report 1996 S E A R S , R O E B U C K A N D C O . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) STOCK OPTION PLANS In October 1995, SFAS No. 123, "Accounting For Stock-Based Compensation," was issued and is effective for financial statements for fiscal years beginning after December 1995. As permitted by the statement, the Company will continue to measure compensation cost for stock option plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued to Employees." Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's stock option plans been determined consistent with the fair value method outlined in SFAS No. 123, the impact on the Company's net income and earnings per common share would not have been material. Options to purchase common stock of the Company have been granted to employees under various plans at prices equal to the fair market value of the stock on the dates the options were granted. Options are generally exercisable in not more than four equal, annual installments beginning one year after the date of grant, and generally expire in 10 or 12 years. 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:
- ------------------------------------------------------------------------------- 1996 1995 - ------------------------------------------------------------------------------- Dividend yield 1.86% 3.08% Expected volatility 28% 28% Risk-free interest rate 6.23% 6.43% Expected life of options 6 years 6 years - -------------------------------------------------------------------------------
Changes in stock options were as follows:
- ------------------------------------------------------------------------------------------------------------------ 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Weighted Weighted Average Average Exercise Exercise thousands of shares Shares Price Shares Price - ------------------------------------------------------------------------------------------------------------------ Beginning balance 18,721 $22.83 11,523 $40.08 Granted 750 48.65 3,018 27.52 Exercised (4,358) 19.71 (3,121) 25.14 Canceled or expired (724) 25.12 (1,319) 30.13 Adjustment due to Allstate distribution -- -- 8,620 21.84 - ------------------------------------------------------------------------------------------------------------------ Ending balance 14,389 $25.00 18,721 $22.83 - ------------------------------------------------------------------------------------------------------------------ Reserved for future grant at year end 16,655 16,795 Exercisable 6,560 $22.65 6,812 $19.43 - ------------------------------------------------------------------------------------------------------------------ Weighted average fair value of options granted during the year $16.33 $10.63 - ------------------------------------------------------------------------------------------------------------------
The following table summarizes information about fixed stock options outstanding at Dec. 28, 1996:
- ------------------------------------------------------------------------------------------------------------------ Options Outstanding Options Exercisable - ------------------------------------------------------------------------------------------------------------------ Number Weighted-Avg. Range of Remaining Weighted-Avg. Number Weighted-Avg. Exercise Outstanding Contractual Life Exercise Exercisable Exercise Prices at 12/28/96 in Years Price at 12/28/96 Price - ------------------------------------------------------------------------------------------------------------------ $10.00 to $20.00 1,941 6.7 15.64 1,441 15.30 20.01 to 30.00 10,443 7.8 24.23 4,699 24.08 30.01 to 40.00 1,269 10.5 31.91 420 31.91 40.01 to 52.00 736 9.2 48.69 -- -- - ------------------------------------------------------------------------------------------------------------------ $10.00 to $52.00 14,389 N/A N/A 6,560 N/A - ------------------------------------------------------------------------------------------------------------------
In 1995, the number and exercise price of outstanding stock options were adjusted for the dilutive effect of the spin-off of Allstate. 14. SUMMARY OF SEGMENT DATA The Company operates primarily in the retailing industry. A summary by segment is as follows:
- ------------------------------------------------------------------------------------------- millions 1996 1995 1994 - ------------------------------------------------------------------------------------------- REVENUES Domestic operations $34,848 $31,628 $29,461 International operations 3,388 3,367 3,649 - ------------------------------------------------------------------------------------------- Total $38,236 $34,995 $33,110 - -------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES Domestic operations $ 2,106 $ 1,739 $1,425 International operations (1) (11) 46 - -------------------------------------------------------------------------------------------- Total $ 2,105 $ 1,728 $1,471 - -------------------------------------------------------------------------------------------- NET INCOME (LOSS) Domestic operations $ 1,276 $ 1,055 $ 864 International operations (5) (30) (7) Discontinued operations -- 776 402 Extraordinary gain -- -- 195 - -------------------------------------------------------------------------------------------- Total $ 1,271 $ 1,801 $1,454 - -------------------------------------------------------------------------------------------- ASSETS Domestic operations $33,228 $30,519 $27,554 International operations 2,939 2,611 2,527 Net assets of discontinued operations -- -- 7,231 - -------------------------------------------------------------------------------------------- Total $36,167 $33,130 $37,312 - --------------------------------------------------------------------------------------------
Sears annual report 1996 p. 39 S E A R S , R O E B U C K A N D C O . Five-Year Summary of Consolidated Financial Data
- ----------------------------------------------------------------------------------------------------------------------------- millions, except per common share and shareholder data 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS Revenues $ 38,236 $ 34,995 $ 33,110 $ 30,518 $ 33,007 Costs and expenses 34,788 31,917 30,377 28,356 31,816 Restructuring -- -- -- -- 2,782 Interest 1,365 1,373 1,279 1,318 1,389 Operating income (loss) 2,083 1,705 1,454 844 (2,980) Other income 22 23 17 110 129 Income (loss) before income taxes (benefit) 2,105 1,728 1,471 954 (2,851) Income taxes (benefit) 834 703 614 329 (1,039) Income (loss) from continuing operations 1,271 1,025 857 625 (1,812) Income (loss) from discontinued operations -- 776 402 1,960 (247) Extraordinary gain (loss) -- -- 195 (211) -- Cumulative effect of accounting changes -- -- -- -- (1,873) Net income (loss) 1,271 1,801 1,454 2,374 (3,932) FINANCIAL POSITION Credit card receivables $ 21,563 $ 20,106 $ 18,201 $ 15,906 $ 13,878 Property and equipment, net 5,878 5,077 4,253 4,401 4,574 Merchandise inventories 4,646 4,033 4,044 3,518 4,048 Net assets of discontinued operations -- -- 7,231 8,701 10,731 Total assets 36,167 33,130 37,312 37,911 39,540 Short-term borrowings 3,533 5,349 6,190 4,636 4,469 Long-term debt 14,907 11,774 9,985 10,790 12,432 Total debt 18,440 17,123 16,175 15,426 16,901 Percent of debt to equity 373% 391% 453% 521% N/M Shareholders' equity $ 4,945 $ 4,385 $ 10,801 $ 11,664 $ 10,773 SHAREHOLDERS' COMMON STOCK INVESTMENT Book value per common share (year end) $ 12.63 $ 10.40 $ 29.78 $ 32.32 $ 30.21 Shareholders 243,986 256,624 262,387 291,320 337,892 Average common and equivalent shares outstanding 399 394 389 383 370 Earnings (loss) per common share Income (loss) from continuing operations $ 3.12 $ 2.53 $ 2.13 $ 1.56 $ (4.98) Income (loss) from discontinued operations -- 1.97 1.03 5.12 (0.67) Extraordinary gain (loss) -- -- 0.50 (0.55) -- Cumulative effect of accounting changes -- -- -- -- (5.07) Net income (loss) 3.12 4.50 3.66 6.13 (10.72) Cash dividends declared per common share $ .92 $ 1.26 $ 1.60 $ 1.60 $ 2.00 Cash dividend payout percent 29.5% 28.0% 43.7% 26.1% N/M Market price - common stock (high-low) 53 7/8-38 1/4 60-30 55 1/8-42 1/8 60 1/8-39 7/8 48-37 - ----------------------------------------------------------------------------------------------------------------------- Closing market price at December 31 46 39 46 52 45 - ----------------------------------------------------------------------------------------------------------------------- Price/earnings ratio (high-low) 17- 12 16-12 15-12 10-7 N/M - -----------------------------------------------------------------------------------------------------------------------
Operating results and financial position reflect as discontinued operations the following entities and the year of disposition: Allstate - 1995, Homart - 1995, Dean Witter, Discover & Co. - 1993, Coldwell Banker residential services businesses - 1993. The cumulative effect of accounting changes in 1992 reflects the adoption of SFAS No. 106 "Employers Accounting for Postretirement Benefits Other Than Pensions." The percent of debt to equity is calculated using equity from continuing operations. The 1995 price/earnings ratio was calculated on a continuing operations basis. Stock prices have not been restated to reflect the Allstate and Dean Witter distributions. N/M--Not meaningful. p.40 Sears annual report 1996 S E A R S , R O E B U C K A N D C O . QUARTERLY RESULTS (Unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter Year - --------------------------------------------------------------------------------------------------------------------------------- millions, except per common share data 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Revenues $7,995 $7,463 $9,132 $8,226 $9,067 $8,440 $12,042 $10,866 $38,236 $34,995 - --------------------------------------------------------------------------------------------------------------------------------- Operating income 246 209 436 345 446 374 955 777 2,083 1,705 - --------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations 151 124 274 218 279 228 567 455 1,271 1,025 Discontinued operations -- 435 -- 341 -- -- -- -- -- 776 Net income $151 $559 $274 $559 $279 $228 $567 $455 $1,271 $1,801 - --------------------------------------------------------------------------------------------------------------------------------- Earnings per common share Income from continuing operations 0.36 0.30 0.67 0.54 0.68 0.56 1.42 1.13 3.12 2.53 Discontinued operations -- 1.11 -- 0.87 -- -- -- -- -- 1.97 Net income $0.36 $1.41 $0.67 $1.41 $0.68 $0.56 $1.42 $1.13 $3.12 $4.50 - ---------------------------------------------------------------------------------------------------------------------------------
The fourth quarter pretax LIFO adjustments were credits of $27 and $5 million in 1996 and 1995, compared with charges of $46 and $24 million for the first nine months of the respective years. Total of quarterly earnings per common share may not equal the annual amount as net income per common share is calculated independently for each quarter. COMMON STOCK MARKET INFORMATION AND DIVIDEND HIGHLIGHTS (Unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter Year - ------------------------------------------------------------------------------------------------------------------- dollars 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Stock price range High 51 7/8 54 1/8 53 7/8 60 49 1/8 37 5/8 51 3/4 40 3/4 53 7/8 60 Low 38 1/4 44 1/8 46 1/4 51 1/4 39 7/8 30 44 32 1/2 38 1/4 30 Close 48 3/4 53 3/8 48 5/8 59 1/2 44 3/4 36 7/8 47 3/8 39 47 3/8 39 Cash dividends declared .23 .40 .23 .40 .23 .23 .23 .23 .92 1.26 - -------------------------------------------------------------------------------------------------------------------
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 1995 third-quarter prices reflect the when-issued price for the Company's common stock due to the Allstate spin-off. Stock prices prior to July 1, 1995 have not been restated to reflect the Allstate distribution. The number of registered common shareholders at Feb. 28, 1997 was 242,246. 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. Sears annual report 1996 p.41 EX-21 7 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 at December 28, 1996: Place of Name Organization - -------------------------------------- ------------------ Consolidated Subsidiaries: Circle of Beauty Delaware Maxserv. Inc. Texas Orchard Supply Hardware Corporation Delaware Sears Canada Inc. Canada Sears Acceptance Company Inc. Canada Sears DC Corp. Delaware Sears Logistics Services, Inc. Delaware Sears National Bank United States Sears Overseas Finance N.V. Netherlands Antilles Sears Receivables Financing Group, Inc. Delaware Sears Roebuck Acceptance Corp. Delaware Sears, Roebuck de Mexico, S.A. de C.V. Mexico Sears, Roebuck de Puerto Rico, Inc. Delaware Sears Wishbook, Inc.. Delaware Western Auto Supply Company Delaware Tire America Inc. Delaware NTW Incorporated Delaware 83 other companies Various The Company owns 20% to 50% of the outstanding voting securities of 28 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. EX-24 8 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, MICHAEL D. LEVIN, JAMES A. BLANDA and ALICE M. PETERSON, with full power to each of them to act alone, as the true and lawful attorneys and agents of the undersigned, with full power of substitution and resubstitution to each of said attorneys, to execute, file and deliver any and all instruments and to do any and all acts and things which said attorneys and agents, or any of them, deem advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any requirements of the Securities and Exchange Commission in respect thereto, relating to annual reports on Form 10-K, including specifically, but without limitation of the general authority hereby granted, the power and authority to sign his or her name in the name and on behalf of the Company or as a director or officer, or both, of the Company, as indicated below opposite his or her signature, to annual reports on Form 10-K or any amendment or papers supplemental thereto; and each of the undersigned does hereby fully ratify and confirm all that said attorneys and agents, or any of them, or the substitute of any of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has subscribed these presents, as of this 12th day of March, 1997. NAME TITLE /S/Arthur C. Martinez Director, Chairman of the Arthur C. Martinez Board of Directors, President and Chief Executive Officer (Principal Executive Officer) /S/Alan J. Lacy Executive Vice President and Alan J. Lacy Chief Financial Officer (Principal Financial Officer) /S/James A. Blanda Vice President and Controller James A. Blanda (Principal Accounting Officer) /S/Hall Adams, Jr. Director Hall Adams, Jr. /S/Warren L. Batts Director Warren L. Batts /S/Alston D. Correll, Jr. Director Alston D. Correll, Jr. /S/Michael A. Miles Director Michael A. Miles /S/Richard C. Notebaert Director Richard C. Notebaert /S/Nancy C. Reynolds Director Nancy C. Reynolds /S/Clarence B. Rogers, Jr. Director Clarence B. Rogers, Jr. /S/Donald H. Rumsfeld Director Donald H. Rumsfeld /S/Dorothy A. Terrell Director Dorothy A. Terrell EX-23 9 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, 33-58139, 33-58851, 33-64215, 33-64345, 333-8141; of Sears, Roebuck and Co.; Registration Statement No. 333-9817 of Sears, Roebuck and Co. and Sears Roebuck Acceptance Corp; Registration Statement Nos. 33-64775 and 333-18591 of Sears, Roebuck and Co. and Sears, Roebuck and Co. Deferred Compensation Plan; Registration Statement Nos. 33-57205 and 333-11973 of Sears Roebuck and Co. and The 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 10, 1997, appearing in, and incorporated by reference in, the Annual Report on Form 10-K of Sears, Roebuck and Co. for the year ended December 28, 1996. /S/Deloitte & Touche LLP Deloitte & Touche LLP Chicago, Illinois March 24, 1997 EX-27 10
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AND CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS YEAR DEC-28-1996 DEC-28-1996 660 0 22,371 808 4,646 28,447 10,237 4,359 36,167 14,950 12,170 0 0 323 4,622 36,167 33,812 38,236 24,925 24,925 8,727 1,136 1,365 2,105 834 1,271 0 0 0 1,271 3.12 0.00 (1) Not applicable
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