--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
Consolidated STATEMENTS
of INCOME
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Year Ended December 31
................................................................................
millions, except per common share data 1994 1993 1992
................................................................................
REVENUES $54,559 $51,486 $53,110
................................................................................
EXPENSES
Costs and expenses 51,390 47,898 53,253
Restructuring (note 6) 154 -- 2,782
Interest 1,339 1,400 1,389
................................................................................
Total expenses 52,883 49,298 57,424
................................................................................
Operating income (loss) 1,676 2,188 (4,314)
Other income (loss) 36 149 (71)
Gain on sales of subsidiaries' stock (note 4) -- 635 91
................................................................................
Income (loss) before income taxes (benefit) and
minority interest 1,712 2,972 (4,294)
Income taxes (benefit) (note 10) 358 404 (1,965)
Minority interest (110) (148) 18
................................................................................
INCOME (LOSS) FROM CONTINUING OPERATIONS 1,244 2,420 (2,311)
Discontinued operations (note 5) 15 165 252
................................................................................
Income (loss) before extraordinary gain (loss) and
cumulative effect of accounting changes 1,259 2,585 (2,059)
Extraordinary gain (loss) related to early
extinguishment of debt (note 12) 195 (211) --
Cumulative effect of accounting changes (note 2) -- -- (1,873)
................................................................................
Net income (loss) $ 1,454 $ 2,374 $(3,932)
................................................................................
EARNINGS (LOSS) PER COMMON SHARE, after allowing for
dividends on preferred shares (note 1)
Income (loss) from continuing operations $3.12 $6.25 $ (6.33)
Discontinued operations 0.04 0.43 0.68
................................................................................
Income (loss) before extraordinary gain (loss) and
cumulative effect of accounting changes 3.16 6.68 (5.65)
Extraordinary gain (loss) 0.50 (0.55) --
Cumulative effect of accounting changes -- -- (5.07)
................................................................................
Net income (loss) $3.66 $6.13 $(10.72)
................................................................................
Average common and common equivalent shares
outstanding 388.9 382.9 369.6
................................................................................
See accompanying notes and the summarized Group financial statements.
ANALYSIS OF CONSOLIDATED OPERATIONS
The consolidated statements of income present the results of all the businesses
of Sears, Roebuck and Co. Refer to note 18 to the consolidated financial
statements for the relative contributions to the consolidated results. Further
analysis is provided in the Sears Merchandise Group and Allstate Insurance Group
summarized financial results and discussions beginning on page 48. In November
1994, the Company announced its intention to:
. distribute to the Company's common shareholders its 80.2% ownership interest
of The Allstate Corporation, and
. pursue a divestiture of Homart Development Co. and affiliated entities
(Homart).
The distribution is expected to occur in the middle of 1995, subject to
shareholder approval at a special meeting on Mar. 31, 1995, market conditions,
final approval by the Company's Board of Directors, any required regulatory
approvals and a favorable tax ruling or opinion on the tax-free nature of the
distribution. Refer to note 3 to the consolidated financial statements for
further information.
In September 1992, the Company announced a strategic repositioning. The
highlights of the repositioning, which was completed in 1993, were as follows:
. Dean Witter, Discover & Co. was spun-off as a separate company in June 1993,
following the primary initial public offering of 19.9% of its common stock in
March 1993.
20
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ANALYSIS OF CONSOLIDATED OPERATIONS CONTINUED
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------.
The Allstate Corporation completed a primary initial public offering of 19.9%
of its common stock in June 1993, resulting in a gain of $635 million to the
Company.
. The sales of the Coldwell Banker residential services businesses, consisting
of the residential brokerage and relocation businesses and mortgage banking
operations, were completed in the fourth quarter of 1993.
The repositioning decision was followed by a restructuring charge in the
fourth quarter of 1992, which related primarily to the streamlining of
Merchandise Group operations to focus on profitable core retail operations.
Refer to note 6 to the consolidated financial statements for further
discussion.
The consolidated financial statements present the results of Dean Witter,
Discover & Co., the Coldwell Banker residential services businesses and Homart
as discontinued operations as discussed in note 5 to the consolidated financial
statements.
Consolidated revenues were $54.56 billion in 1994, an increase of $3.07
billion, or 6.0%, compared with 1993 revenues of $51.49 billion. Sears
Merchandise Group revenues increased $2.58 billion, or 8.5%, in 1994, to $33.02
billion compared with 1993 revenues of $30.44 billion, reflecting improvements
in domestic merchandising. Allstate Insurance Group revenues of $21.46 billion
increased $518 million, or 2.5%, in 1994 compared with 1993 revenues of $20.95
billion, due to growth in premium and investment income.
Consolidated revenues increased $3.11 billion, or 6.4%, to $51.49 billion in
1993 compared with 1992 revenues of $48.38 billion, excluding revenues of $4.73
billion from Merchandise Group exited businesses. Sears Merchandise Group
revenues of $30.44 billion increased $2.23 billion, or 7.9%, in 1993 compared
with 1992 revenues of $28.21 billion, excluding exited businesses, reflecting
improvements in domestic merchandising. Allstate's revenues were $20.95 billion
in 1993, an increase of $718 million, or 3.6%, compared with 1992 revenues of
$20.23 billion, due to growth in premium and investment income.
Operating income was $1.68 billion in 1994 compared with operating income of
$2.19 billion in 1993. The change between years was primarily due to losses of
$1.63 billion from the California earthquake. Excluding the earthquake, 1994
operating income rose $1.12 billion, or 50.9%, compared with 1993. The
Merchandise Group's operating income of $1.52 billion in 1994 rose $438 million,
or 40.5%, compared with 1993 operating income of $1.08 billion. The increase was
principally due to higher revenues, lower selling and
administrative expenses as a percent of revenues and a lower provision for
uncollectible accounts. Allstate's operating income of $1.85 billion, excluding
the California earthquake losses, increased $476 million, or 34.6%, over 1993
operating income of $1.38 billion, due primarily to improved underwriting
results and stronger life operating income.
Operating income increased $6.50 billion in 1993 compared with 1992,
reflecting the impact on 1992 operations of $2.78 billion of restructuring
charges, Hurricane Andrew losses of $2.50 billion and an operating loss of $387
million from domestic merchandising exited businesses. Excluding the
restructuring charges, Hurricane Andrew losses and domestic merchandising exited
businesses, 1993 operating income rose $833 million, or 61.5%, over 1992
operating income of $1.36 billion. The Merchandise Group's operating income was
$1.08 billion, an increase of $370 million, or 52.0%, over 1992 operating income
of $711 million, adjusted for restructuring charges and exited
businesses. This increase was primarily due to higher domestic merchandising
results. Allstate's operating income rose $301 million, or 28.0%, over 1992
operating income of $1.08 billion excluding Hurricane Andrew, due to improved
underwriting results and higher investment income.
Interest expense declined $61 million in 1994 and increased $11 million in
1993. Interest expense at Corporate decreased $274 million to $25 million in
1994, compared with $299 and $537 million in 1993 and 1992, respectively.
Corporate interest expense reflects interest on debt that has either not been
specifically allocated to a business group or supports Corporate investments.
The decrease in Corporate interest expense in 1994 and 1993 was primarily due
to the paydown of debt from the proceeds of the strategic repositioning
transactions and a reduction in Corporate investments. The reduction in
Corporate interest expense was partially offset by increases in the Merchandise
Group's interest expense of $212 and $154 million for 1994 and 1993,
respectively. These increases were primarily due to the higher level of debt
needed to fund increases in owned retail customer receivables.
Since the Company uses securitizations of retail customer receivables as a
significant funding source, its total funding costs include interest expense and
funding cost of securitized receivables. The changes in funding cost were as
follows:
--------------------------------------------------------------------------------
millions 1994 1993
-----------------------------------------------------------------------
Increase (decrease) in interest expense $ (61) $ 11
Decrease in funding cost of securitized receivables(/1/) (173) (114) ---------
--------------------------------------------------------------
Funding cost reductions $(234) $(103) ---------
--------------------------------------------------------------
(1) Funding costs of securitized receivables are reported as a reduction of
revenues in the statement of income.
Funding costs declined in 1994 and 1993 primarily due to lower funding needs
resulting from the strategic repositioning. The effective interest rate
associated with the funding costs declined in 1994 and increased in 1993
primarily due to changes in the funding mix.
21
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SEARS, ROEBUCK AND CO.
ANALYSIS OF CONSOLIDATED OPERATIONS CONTINUED
------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Other income decreased in 1994 primarily due to lower gains from property sales
and sales of investments. In 1993, other income increased primarily due to
higher gains from property sales, security sales and improved joint venture
results. Improved joint venture results in 1993 reflect the first year of
operations for Advantis and a lower Prodigy loss. A summary of other income
(loss) by type follows:
-----------------------------------------------------------------------
millions 1994 1993 1992
-----------------------------------------------------------------------
Gain on sales of property $22 $ 63 $ 18
Gain (loss) on sales/writedowns of securities -- 54 (30)
Equity in joint ventures and unconsolidated companies 19 25 (75)
Other gains (losses), net (5) 7 16
-----------------------------------------------------------------------
Total $36 $149 $(71) ---------
--------------------------------------------------------------
During 1992, the Company sold a minority interest in Sears Mexico through an
initial public offering and recognized a gain of $96 million ($55 million after-
tax). In addition, a $5 million loss resulted from a primary offering of common
stock by Sears Canada that diluted the Company's ownership.
Income tax expense in 1994 and 1993 was 20.9% and 13.6% of pretax income
respectively. The 1992 income tax benefit on operations was 45.8% of pretax
loss. These rates differed from the statutory rate mainly due to tax-exempt
securities income. The rates vary between years primarily due to the relative
proportion of tax-exempt income included in pretax income. The 1993 rate was
also favorably impacted by an $87 million tax credit and the gain from the
initial public offering of The Allstate Corporation. The tax credit resulted
from the adjustment of deferred tax assets due to the 1% increase in the federal
income tax rate resulting from the Omnibus Budget Reconciliation Act of 1993.
Income taxes were not provided on the gain from the Allstate primary initial
public offering as it was realized on a tax-free basis.
The following table summarizes the impact on income from continuing
operations of certain significant items in 1994, 1993 and 1992, net of taxes and
minority interest.
----------------------------------------------------------
millions 1994 1993 1992
----------------------------------------------------------
Restructuring $ (80) $ -- $(1,745)
California earthquake (846) -- --
Gain on sales of subsidiaries' stock -- 635 50
Tax rate change -- 87 --
Hurricane Andrew -- -- (1,650)
Merchandising exited businesses -- -- (244)
----------------------------------------------------------
Income from continuing operations in 1994 was $1.24 billion, compared with
$2.42 billion in 1993. Results reflect the impact of the California earthquake
and a restructuring charge at Allstate in 1994 and the gain on the Allstate
initial public offering and deferred tax asset adjustment in 1993. Excluding the
significant items noted in the table, 1994 income from continuing
operations increased $472 million, or 27.8%, to $2.17 billion from $1.70 billion
in 1993 and 1993 income from continuing operations increased $420 million, or
32.9%, from 1992 income of $1.28 billion.
Results for 1994 also included a $195 million extraordinary gain related to
the early extinguishment of debt associated with the Company's transfer of Sears
Tower and all related assets and liabilities to a third party as trustee of a
trust in November 1994. The elimination of the related mortgages reduced
Corporate debt by $845 million and will result in annual interest savings of
approximately $75 million.
An extraordinary loss of $211 million related to the early extinguishment of
debt was included in 1993 results. This extraordinary loss included the call of
a $300 million, 7% deep-discount bond issue ($66 million) and payments to
terminate interest rate swaps associated with retired commercial paper that was
allocated to the funding of discontinued operations ($145 million). The 7% deep-
discount bond issue carried an effective yield of 14.6%, and the interest rate
swaps, which converted variable to fixed-rate debt, carried an average fixed
rate of 9.2%.
In 1992, net income included a $1.87 billion, or $5.07 per common share,
cumulative effect of accounting changes related to the adoption of new
accounting for postretirement and postemployment benefits.
Reported earnings have been impacted by inflation; however, there is no simple
way of separating those effects. Competitive and regulatory conditions
permitting, the Company modifies the prices charged for its goods and services
in order to recognize cost changes as incurred or as anticipated. By also
attempting to control costs and efficiently utilize resources, the Company
strives to minimize the effects of inflation on its operations.
22
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ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Below, and on pages 25 and 27, is a discussion of consolidated financial
condition, liquidity, and capital resources. Summarized statements of financial
position and cash flows and supplemental analyses for the business groups can be
found beginning on page 48.
---
QUALITY AND LIQUIDITY OF ASSETS
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.
At Dec. 31, 1994, Allstate Insurance Group comprised 67% of total
consolidated assets, Sears Merchandise Group comprised 32% and Corporate assets
and the net assets of discontinued operations comprised 1%.
Allstate Insurance Group
The financial position of Allstate is highly liquid, with over 71% of total
assets in fixed income securities, equity securities, short-term investments and
cash. Nearly 95% of the $38.04 billion of fixed income securities are rated
investment grade. The equity securities portfolio of $4.85 billion is recorded
at fair value, with unrealized gains of $571 million, and well-diversified.
Mortgage loans of $3.23 billion are diversified geographically and by property
type. Separate Accounts of $2.80 billion are carried at fair value.
1994 ASSETS CHART
Sears Merchandise Group
The Merchandise Group's retail customer receivables portfolio includes $18.20
billion of owned receivable balances and $4.46 billion of receivables sold
through securitization. Domestic and international accounts represent $17.04 and
$1.16 billion of the owned portfolio, respectively. The portfolio is
geographically diversified in the U.S., Canada and Mexico. The Group extends and
monitors retail customer credit based on extensive use of proprietary and
commercially available credit histories and scoring models. The Group promptly
recognizes uncollectible accounts and emphasizes maintenance of an adequate loss
allowance, which is assessed using multiple modeling approaches based on
portfolio risk characteristics. Domestic accounts are systematically written off
at 210 days delinquent or upon receipt of a bankruptcy notice.
Merchandise inventories are primarily valued on the last-in, first-out or LIFO
method. Inventories would have been $692 million higher at Dec. 31, 1994 if
valued on the first-in, first-out or FIFO method.
---
CAPITAL RESOURCES
Strong fundamental operating results and the breadth and depth of capital
resources of the Company contributed to a strengthening financial position in
1994.
FUNDING BY BUSINESS CHART
Total net funding for the Company at Dec. 31, 1994 was $21.40 billion compared
with $21.66 billion at Dec. 31, 1993. Net funding includes debt reflected on the
statement of financial position and investor certificates related to retail
customer receivables sold through securitizations, less investments related to
funding. At Dec. 31, 1994, the Merchandise Group's total net funding was $20.49
billion, which was used primarily to fund retail customer receivables, and
Allstate's total net funding was $869 million. During 1994, the Company
eliminated debt of $845 million through the transfer of Sears Tower and all
related assets and liabilities to a third party as trustee of a trust. Debt was
reduced by $1.54 billion as a result of the classification of
23
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SEARS, ROEBUCK AND CO.
Consolidated STATEMENTS
of FINANCIAL POSITION
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
December 31
................................................................................
millions 1994 1993
................................................................................
ASSETS
Investments (note 7)
Fixed income securities
Available for sale, at fair value (amortized cost $30,733
and $28,549) $30,033 $30,955
Held to maturity, at amortized cost (fair value $7,869 and
$8,857) 8,008 7,933
...............................................................................
38,041 38,888
Equity securities, at fair value (cost $4,281 and $3,626) 4,852 4,555
Mortgage loans 3,234 3,563
Real estate 815 747
...............................................................................
Total investments 46,942 47,753
................................................................................
Receivables
Retail customer 18,201 15,906
Insurance premium installment and other receivables 3,768 4,113
...............................................................................
Total receivables 21,969 20,019
................................................................................
Cash and invested cash 1,421 1,819
Merchandise inventories 4,044 3,518
Property and equipment, net 5,041 5,223
Deferred income taxes (note 10) 3,334 2,369
Other assets 5,872 5,490
Net assets of discontinued operations (note 5) 473 452
Separate Accounts 2,800 2,282
................................................................................
TOTAL ASSETS $91,896 $88,925
................................................................................
LIABILITIES
Insurance reserves $40,136 $37,444
Long-term debt (note 12) 10,854 11,640
Short-term borrowings (note 12) 6,190 4,636
Unearned revenues 7,259 7,009
Postretirement benefits (note 11) 3,413 3,302
Accounts payable and other liabilities 8,509 8,614
Separate Accounts 2,800 2,282
................................................................................
TOTAL LIABILITIES 79,161 74,927
................................................................................
MINORITY INTEREST 1,934 2,334
COMMITMENTS AND CONTINGENT LIABILITIES (notes 9, 13, 14, 16,
17)
SHAREHOLDERS' EQUITY (note 17)
Preferred shares ($1 par value, 50 shares authorized)
8.88% Preferred Shares, First Series (3.25 shares issued and
outstanding) 325 325
Series A Mandatorily Exchangeable Preferred Shares (7.1875
shares issued and outstanding) 1,236 1,236
Common shares ($.75 par value, 1,000 shares authorized, 351.7
and 350.8 shares outstanding) 294 294
Capital in excess of par value 2,385 2,354
Retained income 8,918 8,163
Treasury stock (at cost) (1,690) (1,704)
Deferred ESOP expense (note 11) (558) (614)
Unrealized net capital gains (note 7) 32 1,674
Cumulative translation adjustments (141) (64)
................................................................................
TOTAL SHAREHOLDERS' EQUITY 10,801 11,664
................................................................................
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $91,896 $88,925
................................................................................
See accompanying notes and the summarized Group financial statements.
24
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ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Homart as a discontinued operation. Funding related to customer receivables of
the Merchandise Group grew during the year as gross customer receivables
increased, reflecting the continuing strength of the SearsCharge business. The
Company's debt-to-equity ratio, excluding unrealized net capital gains, was 1.6
at Dec. 31, 1994 and 1993.
FUNDING SOURCES CHART
The Company accesses a variety of capital markets to preserve flexibility and
diversify its funding sources. The broad access to capital markets also allows
the Company to effectively manage liquidity and repricing risk. Liquidity risk
is the measure of the Company's ability to fund maturities and provide for the
operating needs of its businesses. Repricing risk is the impact on net income
due to changes in interest rates. The Company's cost of funds is affected by a
variety of general economic conditions, including the level and volatility of
interest rates. To aid in the management of repricing risk, the Company uses
off-balance-sheet instruments, such as interest rate swaps and caps. The
Company has policies that centrally govern the use of off-balance-sheet
instruments.
The current debt ratings of the Company appear in the table below. The Company
believes that its debt ratings continue to afford cost-effective access to the
capital markets and it will continue to obtain funds on a competitive and cost-
effective basis if the proposed Allstate distribution occurs.
----------------------------------------------------------------------
Moody's Duff & Fitch
Investors Phelps Investors
Services, Standard Credit Service
Inc. & Poor's Rating Co. Inc.
----------------------------------------------------------------------
Unsecured long-term debt A2 BBB A- A
Unsecured commercial paper P-1 A-2 D-1 F-1
Term securitization Aaa AAA AAA AAA
Asset-backed commercial paper P-1 A-1+/A-1 NR NR
----------------------------------------------------------------------
NR--Not rated.
The Company issues commercial paper through Sears Roebuck Acceptance Corp.
(SRAC) and through the Sears Credit Corp. (SCC) entities. SRAC's total
commercial paper outstandings were $4.91 and $2.48 billion at Dec. 31, 1994 and
1993, respectively. The increase in 1994 supported the Company's 1994
refinancing goal of raising the percentage of floating-rate funding to total
funding from the level at Dec. 31, 1993. Commercial paper outstandings
decreased by $6.04 billion in 1993 due to the paydown of commercial paper from
strategic repositioning proceeds and lower funding needs to support continuing
businesses. With ratings in the highest category from three nationally
recognized debt rating agencies, SRAC is a tier one issuer of commercial paper,
which broadens access within the commercial paper market.
Commercial paper issuance is supported by SRAC's $4.50 billion syndicated
credit facility that expires in 1999 and $600 million in uniform bilateral
credit agreements. In 1994, SRAC borrowed $845 million of term loans with
original maturities between two and five years.
The commercial paper issued by SCC is collateralized by SearsCharge
receivables and allows for the cost-effective management of certain of the
Company's term securitization issues. At Dec. 31, 1994 and 1993, SCC commercial
paper outstandings were $1.75 billion, supported by syndicated credit
facilities of $1.82 billion.
The Company uses a continuously offered medium-term note program to average
interest rates on a portion of its term senior unsecured financings. Variable-
rate notes totaling $705 million were issued in 1994 at an average maturity of
2.3 years. Fixed-rate issuances in 1994 totaled $476 million with a weighted
average coupon of 6.6% and an average term of 4.3 years. The Company also issues
larger discrete senior debt offerings from time to time. In January 1994, it
issued $300 million of 6.25% notes, due in 2004.
The Company securitizes credit card receivables to access intermediate-term
investors in a cost-effective manner. These securities are rated in the highest
category by the national rating agencies. The Company issued $1.31 billion of
domestic, fixed-rate term securitizations in 1994 at an average coupon of 7.1%.
As of Dec. 31, 1994, there were $7.22 billion of investor certificates
outstanding, which were backed by $3.95 billion of sold domestic retail customer
receivables and $3.27 billion of other investments.
On Mar. 20, 1995, the Company will exchange all of its 28.8 million Series A
Mandatorily Exchangeable Preferred Shares (PERCS) for 35.7 million common shares
of the Company. The exchange will not dilute earnings per share as the PERCS are
reflected in the Company's earnings per share calculation.
25
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SEARS, ROEBUCK AND CO.
Consolidated STATEMENTS
of CASH FLOWS
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Year Ended December 31
................................................................................
millions 1994 1993 1992
................................................................................
CASH
FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,454 $ 2,374 $(3,932)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation, amortization and other noncash items 649 671 832
Cumulative effect of accounting changes -- -- 2,934
Restructuring charges 154 -- 2,782
Extraordinary (gain) loss related to early extin-
guishment of debt (319) 107 --
Provision for uncollectible accounts 698 821 910
Gain on sales of subsidiaries' stock -- (635) (91)
Gain on sales of property and investments (224) (293) (126)
Increase in insurance reserves 2,692 1,555 4,221
Change in deferred income taxes 187 199 (2,782)
Increase in retail customer receivables (3,199) (2,868) (1,325)
Decrease (increase) in merchandise inventories (594) 514 357
Increase in other operating assets (545) (1,705) (1,217)
Increase in other operating liabilities 992 1,313 691
Discontinued operations (15) (165) (215)
...............................................................................
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,930 1,888 3,039
................................................................................
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of securities:
Fixed income securities available for sale 5,200 -- --
Fixed income securities held to maturity 5 -- --
Fixed income securities -- 5,927 5,157
Equity securities 1,944 1,574 1,352
Maturities of securities:
Fixed income securities available for sale 3,042 -- --
Fixed income securities held to maturity 949 -- --
Fixed income securities -- 5,424 2,974
Mortgage loans 399 233 113
Purchases of securities:
Fixed income securities available for sale (10,211) -- --
Fixed income securities held to maturity (1,116) -- --
Fixed income securities -- (15,426) (10,001)
Equity securities (2,359) (1,769) (1,566)
Mortgage loans (221) (306) (382)
Change in other investments (24) 316 26
Proceeds from sales of property and equipment 60 41 28
Purchases of property and equipment (1,120) (668) (957)
Discontinued operations--net (6) 986 (447)
...............................................................................
NET CASH USED IN INVESTING ACTIVITIES (3,458) (3,668) (3,703)
................................................................................
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 2,817 1,557 1,348
Repayments of long-term debt (2,717) (2,516) (1,678)
Increase (decrease) in short-term borrowings, pri-
marily 90 days or less 1,617 159 (938)
Proceeds from sales of subsidiaries' stock -- 2,287 162
Repayments from ESOP 69 15 10
Mandatorily exchangeable preferred shares issued -- -- 1,205
Common shares issued for employee stock plans 45 193 81
Dividends paid to shareholders (698) (727) (779)
...............................................................................
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 1,133 968 (589)
................................................................................
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND IN-
VESTED CASH (3) (1) (3)
................................................................................
NET DECREASE IN CASH AND INVESTED CASH (398) (813) (1,256)
CASH AND INVESTED CASH AT BEGINNING OF YEAR 1,819 2,632 3,888
................................................................................
CASH AND INVESTED CASH AT END OF YEAR $ 1,421 $ 1,819 $ 2,632
................................................................................
See accompanying notes and the summarized Group financial statements.
26
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ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION CONTINUED
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--------------------------------------------------------------------------------
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OPERATING, INVESTING AND FINANCING ACTIVITIES
Cash flows from operating activities consist primarily of net income adjusted
for certain noncash expense items, including depreciation and the provision for
uncollectible accounts, increases in insurance reserves and changes in
receivables, inventories and deferred taxes.
Cash provided by operations in 1994 increased $42 million, compared with 1993.
An increase in insurance reserves due to the California earthquake and an
increase in other operating liabilities were partially offset by the reduction
in net income and increases in retail customer receivables, merchandise
inventories and other operating assets. The increase in other operating
liabilities in 1994 was primarily due to the increase in Separate Accounts and
unearned revenues, which was partially offset by a decrease in the
restructuring reserve. Net liquidations of outstanding domestic pass-through
certificates increased owned receivables by $1.23 billion in 1994. The increase
in other operating assets in 1994 was due primarily to the increase in Separate
Accounts.
Cash provided by operations declined $1.15 billion in 1993 compared with 1992.
The decline was primarily due to an increase in retail customer
receivables. Net liquidations of outstanding domestic pass-through certificates
increased owned receivables by $1.94 billion in 1993. Cash payments in 1993
related to the restructuring reserve were mainly offset by the decrease in the
corresponding deferred tax asset and the liquidation of exited businesses'
inventories.
Net cash used in investing activities declined in 1994 primarily due to larger
investment purchases in 1993 due to a higher level of funds available as a
result of the Allstate initial public offering. The payment of claims relating
to the California earthquake also reduced the 1994 level of investment
purchases. A higher level of expenditures for property and equipment at the
Merchandise Group related to the store remodeling program was partially offset
by Allstate's reduced investment purchases.
The most significant investing activities in 1993 were the growth of
Allstate's investment portfolio and purchases of property and equipment.
Increases in Allstate's investments were funded by insurance premium receipts,
the sale of investment-oriented products and borrowings by The Allstate
Corporation and a portion of the proceeds from the initial public offering of
The Allstate Corporation.
Net cash provided by financing activities in 1994 increased primarily due to
increases in short-term borrowings supporting higher owned retail customer
receivable balances, resulting from the decrease in receivables sold through
securitizations.
In 1993, financing activities consisted primarily of sales of subsidiaries'
stock and repayment of debt from proceeds of the Company's strategic
repositioning. Cash used in financing activities was also affected by an
increased level of debt due to the increase in the amount of owned retail
customer receivables.
The Company paid cash dividends of $1.60 per common share in 1994, the 59th
consecutive year of payout. It is currently expected that, if the proposed
Allstate distribution occurs, the sum of the annual dividends to be received by
a Sears common shareholder who retains the Allstate common stock received in the
distribution will be approximately $1.64. It is expected that the Company will
pay approximately $0.92 of this amount. The payment of common dividends is
dependent upon the Company's earnings and internal investment opportunities.
27
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
Consolidated STATEMENTS
of SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Year Ended December 31
..............................................................................
....... 1994 1993 1992 1994
1993 1992
..............................................................................
....... $ millions shares in
thousands
8.88% PREFERRED SHARES, FIRST
SERIES (note 17)
Balance, beginning of year $ 325 $ 325 $ 325 3,250 3,250
3,250 Issued during year -- -- -- -- -
- --
..............................................................................
....... Balance, end of year $ 325 $ 325 $ 325 3,250
3,250 3,250
..............................................................................
....... SERIES A MANDATORILY
EXCHANGEABLE
PREFERRED SHARES (note 17)
Balance, beginning of year $ 1,236 $ 1,236 $ -- 7,188 7,188
--Issued during year -- -- 1,236 -- --
7,188
..............................................................................
....... Balance, end of year $ 1,236 $ 1,236 $ 1,236 7,188
7,188 7,188
..............................................................................
....... COMMON SHARES
Balance, beginning of year $ 294 $ 291 $ 290 391,752 387,514
386,057 Stock options exercised and
other changes -- 3 1 558 4,238
1,457
..............................................................................
....... Balance, end of year 294 294 291 392,310
391,752 387,514
..............................................................................
....... CAPITAL IN EXCESS OF PAR VALUE
Balance, beginning of year 2,354 2,195 2,154
Stock options exercised and
other changes 31 159 41
..............................................................................
....... Balance, end of year 2,385 2,354 2,195
..............................................................................
....... RETAINED INCOME
Balance, beginning of year 8,163 8,772 13,514
Net income (loss) 1,454 2,374 (3,932)
Preferred share dividends
(note 17) (137) (137) (120)
Common share dividends ($1.60,
$1.60 and $2.00 per share) (562) (558) (690)
Distribution of Dean Witter,
Discover & Co. shares -- (2,288) --
..............................................................................
Balance, end of year 8,918 8,163 8,772
..............................................................................
TREASURY STOCK (AT COST)
Balance, beginning of year (1,704) (1,734) (1,746) (40,904) (41,670) (41,961)
Reissued under compensation plans 14 30 12 334 766 291
..............................................................................
Balance, end of year (1,690) (1,704) (1,734) (40,570) (40,904) (41,670)
..............................................................................
DEFERRED ESOP EXPENSE (note 11)
Balance, beginning of year (614) (700) (740)
Reductions 56 86 40
..............................................................................
Balance, end of year (558) (614) (700)
..............................................................................
UNREALIZED NET CAPITAL GAINS
(note 7)
Balance, beginning of year 1,674 428 365
Net increase (decrease) (1,642) 1,246 63
..............................................................................
Balance, end of year 32 1,674 428
..............................................................................
CUMULATIVE TRANSLATION
ADJUSTMENTS
Balance, beginning of year (64) (40) 26
Net unrealized loss during
year (77) (24) (66)
..............................................................................
Balance, end of year (141) (64) (40)
..............................................................................
TOTAL COMMON SHAREHOLDERS'
EQUITY AND
SHARES OUTSTANDING $ 9,240 $10,103 $ 9,212 351,740 350,848 345,844
..............................................................................
TOTAL SHAREHOLDERS' EQUITY $10,801 $11,664 $10,773
..............................................................................
See accompanying notes.
28
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
------------------------------------------------------------------------------1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Sears, Roebuck and
Co. and all significant domestic and international companies in which the
Company has more than a 50% equity ownership. Investments in companies in
which the Company has a 20% to 50% ownership are accounted for using the
equity method. Dean Witter, Discover & Co. (Dean Witter), the Coldwell Banker
residential services businesses and Homart Development Co. and affiliated
entities (Homart) are presented as discontinued operations.
Included as an integral part of the consolidated financial statements are
separate summarized financial statements of the Company's business groups, Sears
Merchandise Group and Allstate Insurance Group (Allstate) beginning on page 48.
Refer to note 3 for information regarding the Allstate distribution proposal.
Although not a part of the financial statements, also included with the
consolidated statements and the summarized group statements are unaudited
analyses of operations and financial condition and a ten-year summary of
consolidated financial data.
Certain reclassifications have been made in the 1993 and 1992 financial
statements to conform to current accounting classifications.
---
FISCAL YEAR
In 1994, the Company changed its fiscal year-end from Dec. 31 to a 52 or 53 week
year ending on the Saturday closest to Dec. 31. Allstate's year-end continues to
be Dec. 31.
---
MERCHANDISE SALES AND SERVICES
Revenues from merchandise sales and services are net of returns and allowances
and exclude sales tax. Revenues from licensed departments, which previously were
recorded based on net commissions received, are included on a gross basis.
Included in merchandise sales and services are gross revenues from licensed
departments of $1.07, $1.03 and $1.15 billion for 1994, 1993 and 1992,
respectively.
---
MAINTENANCE AGREEMENTS
The Company sells extended service contracts with terms of coverage between 12
and 36 months. Revenue and incremental direct acquisition costs from the sale of
these contracts are deferred and amortized on a straight-line basis over the
lives of the contracts. Costs related to servicing the contracts are expensed as
incurrred.
---
STORE PRE-OPENING EXPENSES
Costs associated with the opening of new stores are expensed in the year
incurred.
SALE OF SUBSIDIARY'S STOCK
Gains or losses are recognized on the sale of a subsidiary's stock based on the
difference between the offering price and the Company's carrying amount of such
stock, unless the sale is part of a broader corporate reorganization.
---
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share is computed based on the weighted average
number of common and common equivalent shares (dilutive stock options)
outstanding and after adjustment for dividends of $29 million in 1994, 1993 and
1992 on the 8.88% Preferred Shares. The Series A Mandatorily Exchangeable
Preferred Shares (PERCS) are considered common stock due to their mandatory
conversion into common stock and the dividends thereon are not deducted from net
income (loss) for purposes of calculating earnings (loss) per common share.
Refer to note 17 for discussion of the Company's election to exchange the
PERCS on March 20, 1995.
For the year ended Dec. 31, 1992, the inclusion of the PERCS as common shares
resulted in an anti-dilutive impact on the loss per common share calculation.
Excluding the PERCS from common shares, the loss from continuing operations and
net loss per common share would have been $7.03 and $11.73, respectively. The
net loss applicable to common shares, including all preferred share
dividends, for the year ended Dec. 31, 1992 was $4.05 billion.
---
CASH AND INVESTED CASH
Cash and invested cash is defined to include all highly liquid investments with
maturities of three months or less.
---
RETAIL CUSTOMER RECEIVABLES
Retail customer receivables at Dec. 31, 1994 include approximately $8.3 billion
of domestic accounts and $382 million of Canadian accounts which will not become
due within one year. These receivables are expected to earn finance charge
revenue at annual percentage rates ranging from 9.75% to 21.0% for domestic
accounts and 28.8% for Canadian accounts.
Retail customer receivables are shown net of an allowance for uncollectible
accounts. When receivables are securitized and sold with recourse, the portion
of the allowance for uncollectible accounts pertaining to such receivables is
transferred to a recourse liability at the date of sale. Factors such as prior
account loss experience, changes in the volume of the account portfolio and
overall portfolio quality are considered in determining the allowance and the
recourse liability.
29
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
MERCHANDISE INVENTORIES
Merchandise inventories of domestic operations are valued primarily at the lower
of cost (using the last-in, first-out or LIFO method) or market by application
of internally developed price indices to estimate the effects of inflation in
merchandise inventories.
The LIFO adjustment to cost of sales was a credit of $34 million in 1994,
compared with a charge of $5 million in 1993 and a credit of $18 million in
1992. Partial liquidation of merchandise inventories valued under the LIFO
method in all three years resulted in credits of $3, $74 and $39 million in
1994, 1993 and 1992, respectively. If the first-in, first-out (FIFO) method of
inventory valuation had been used instead of the LIFO method, merchandise
inventories would have been $692 and $726 million higher at Dec. 31, 1994 and
1993, respectively.
Merchandise inventories of international operations, Western Auto and Puerto
Rico, which represent approximately 16% of merchandise inventories, are stated
at the lower of cost (using the first-in, first-out or FIFO method) or market.
---
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is provided principally by the straight-line method over the
estimated useful lives of the related assets, generally 5 to 10 years for
equipment and 40 to 50 years for real property. Accumulated depreciation was
$5.08 and $5.09 billion at Dec. 31, 1994 and 1993, respectively.
---
INCOME TAXES
The consolidated federal income tax return of Sears, Roebuck and Co. includes
results of the domestic operations of both the continuing business groups and
discontinued operations. Tax liabilities and benefits are allocated as
generated by the respective businesses, whether or not such benefits would be
currently available on a separate return basis.
---
INVESTMENTS
Fixed income securities which the Company has the ability and positive intent to
hold to maturity are carried at amortized cost. Fixed income securities which
are available for sale and equity securities are carried at fair value. The
difference between amortized cost and fair value, less deferred income taxes, a
portion of deferred policy acquisition costs and minority interest, is reflected
as a component of shareholders' equity. Provisions are made to write down the
value of fixed income securities for declines in value that are other than
temporary. Mortgage loans are carried at outstanding principal balance, net of
unamortized premium or discount and valuation reserves. Valuation reserves are
based on the estimated uncollectible amounts, considering the cash flows and
estimated fair value of the underlying collateral, borrower financial strength
and other factors.
Accrual of income is suspended for fixed income securities and mortgage loans
that are in default or when the receipt of interest payments is in doubt.
Realized capital gains and losses are determined on a specific identification
basis.
Real estate acquired through foreclosure and held for sale is carried at the
lower of fair value or depreciated cost, less a valuation allowance for
estimated selling expenses.
---
PROPERTY-LIABILITY INSURANCE ACCOUNTING
Premiums are deferred and earned on a pro rata basis over the terms of the
policies.
Certain costs of acquiring insurance business, principally agents'
compensation and premium taxes, are deferred and amortized to income as premiums
are earned. Future investment income is considered in determining the
recoverability of deferred policy acquisition costs.
The reserve for claims and claims expense is the estimated amount necessary to
settle both reported and unreported claims of insured losses, based upon the
facts in each case and the Company's experience with similar cases. Estimated
amounts of salvage and subrogation are deducted from the reserve for claims and
claims expense. The establishment of appropriate reserves, including reserves
for catastrophes, is an inherently uncertain process. Reserve estimates are
reviewed regularly and updated using the most current information available.
Any resulting adjustments, which may be material, are reflected in current
operations.
On a statutory basis, capital of the property-liability operations was $6.53
and $7.15 billion at Dec. 31, 1994 and 1993, respectively. Statutory net income
(loss) of the property-liability operations was $146 million, $1.12 and $(1.06)
billion for 1994, 1993 and 1992, respectively.
The Company's insurance operations prepare their statutory financial
statements in accordance with the accounting principles and practices
prescribed or permitted by the insurance departments of the applicable state of
domicile. The Company's insurance operations do not follow any permitted
statutory accounting practices that have a material effect, individually or in
the aggregate, on statutory surplus or risk-based capital of any of the
Company's insurance subsidiaries.
30
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
LIFE INSURANCE ACCOUNTING
The Company writes traditional life, accident and disability insurance. The
Company also writes long-duration insurance contracts with terms that are not
fixed and guaranteed and single premium life insurance contracts, which are
considered universal life-type contracts. The Company also sells long-duration
contracts that do not involve significant risk of policyholder mortality or
morbidity (principally single and flexible premium annuities, guaranteed
investment contracts and structured settlement annuities, when sold without life
contingencies) which are considered investment contracts. Limited payment
contracts (policies with premiums paid over a period shorter than the contract
period) primarily consist of group annuities and structured settlement
annuities, when sold with life contingencies.
Premiums for traditional life insurance are recognized as revenue when due.
Accident and disability premiums are earned on a pro rata basis over the policy
period. Revenues on universal life-type contracts are comprised of contract
charges and fees and are recognized when assessed against the policyholder
account balance. Revenues on investment contracts include contract charges and
fees for contract administration and surrenders. These revenues are recognized
when levied against the contract balances. Gross premium in excess of the net
premium on limited payment contracts are deferred and recognized over the
contract period.
Reserve for life insurance policy benefits, which relates to traditional life,
group annuities and structured settlement annuities with life
contingencies, disability and accident insurance, is computed on the basis of
assumptions as to future investment yields, mortality, morbidity, terminations
and expenses. These assumptions, which for traditional life are applied using
the net level premium method, include provisions for adverse deviation and
generally vary by such characteristics as plan, year of issue and policy
duration. Reserve interest rates generally range from 4.0% to 11.7%. Policy
benefit reserves for accident insurance include claim reserves and unearned
premium.
Contractholder funds are reserves for universal life-type and investment
contracts. Reserves for these contracts are equal to the account balance that
accrues to the benefit of the contractholder. Credited interest rates on
contractholder funds ranged from 3.0% to 12.7% for fixed-rate contracts and 2.5%
to 11.3% for variable-rate contracts.
Certain costs of acquiring insurance business, principally agents'
compensation, certain underwriting costs and direct mail solicitation expenses,
are deferred and amortized to income. For traditional life, limited payment
contracts and accident and disability, these costs are amortized in proportion
to the estimated revenues on such business. For universal life-type and
investment contracts, the costs are amortized in relation to the present value
of estimated gross profits on such business. Changes in the amount or timing of
estimated gross profits will result in adjustments in the cumulative
amortization of these costs. To the extent that unrealized gains or losses on
available for sale securities would result in an adjustment of deferred policy
acquisition costs had those gains or losses actually been realized, the related
unamortized deferred policy acquisition costs are recorded as a reduction of the
unrealized gains or losses included in shareholders' equity.
On a statutory basis, capital of the life operations was $1.45 and $1.19
billion at Dec. 31, 1994 and 1993, respectively. Statutory net income of the
life operations was $56, $89 and $196 million for 1994, 1993 and 1992,
respectively. Refer to property-liability insurance accounting for a discussion
of the Company's statutory financial statements.
---
SEPARATE ACCOUNTS
The Company issues flexible premium deferred variable annuity contracts, the
assets and liabilities of which are legally segregated as assets and
liabilities of the Separate Accounts. The assets of the Separate Accounts are
carried at fair value. Investment income and gains and losses of the Separate
Accounts accrue directly to the contractholders and are, therefore, not included
in the Company's operating results. Revenues to the Company from the Separate
Accounts consist of administration fees and mortality and expense risk charges.
31
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The Company utilizes various off-balance-sheet financial instruments to manage
the interest rate and market risk associated with its investment portfolio and
borrowings, fund its investment commitments and improve its asset/liability
management. The counterparties to these instruments are major financial
institutions with credit ratings of primarily AA.
Investment-related
Amounts receivable or payable under interest rate swap, commodity swap, and
interest rate cap and floor agreements are accrued and reported in income. The
cost of interest rate cap and floor agreements and debt warrants are reported as
fixed income securities and amortized as an offset to investment income over the
life of the agreements. The cost of options on equity securities are amortized
as a realized capital loss over the option period. Any gains upon disposition of
options on equity securities are recognized in income. The remaining unamortized
premiums of debt warrants exercised are amortized against income over the life
of the related securities.
Gains and losses on open futures and forward contracts designated as hedges of
anticipatory transactions are deferred. Once the anticipated transactions are
completed, the deferred gains or losses are amortized in income over the lives
of the related securities or included in the recognition of gain or loss from
disposition. Gains and losses on early contract terminations that modify the
characteristics of designated securities are amortized to income over the
securities' remaining life. Otherwise, immediate recognition of gain or loss
occurs.
Debt-related
Interest rate swap agreements modify the interest characteristics of a portion
of the Company's debt. The differential to be paid or received is accrued as
interest rates change and recognized as an adjustment to interest expense in the
statement of income. The related accrued receivable or payable is included in
other assets or liabilities. The fair values of the swap agreements are not
recognized in the financial statements.
Interest rate caps are used to lock in a maximum rate if rates rise, but
enable the Company to otherwise pay lower market rates. The cost of interest
rate caps is amortized to interest expense over the life of the caps.
Payments received due to the interest rate caps reduce interest expense. The
unamortized cost of the interest rate caps is included in other assets.
2. ACCOUNTING CHANGES
Effective Dec. 31, 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." SFAS No. 115 requires securities that are available for sale be
carried at fair value, with changes in net unrealized gains and losses recorded
directly to shareholders' equity. Previously, fixed income securities classified
as available for sale were carried at the lower of amortized cost or fair value,
determined in the aggregate. The adoption of SFAS No. 115 had no impact on net
income, but increased shareholders' equity by $1.18 billion at Dec. 31, 1993.
Effective Jan. 1, 1992, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions" and SFAS No. 112,
"Employers' Accounting for Postemployment Benefits," for all domestic and
foreign postretirement and postemployment benefit plans by immediately
recognizing the transition amounts. The Company previously expensed the cost of
these benefits, which consist of health care and life insurance, as claims were
incurred.
---
3. DISTRIBUTION PROPOSAL
In November 1994, the Company announced it intends to distribute in a tax-free
dividend to the Company's common shareholders its 80.2% ownership interest of
The Allstate Corporation. The distribution proposal will be considered at a
special shareholders' meeting to be held on Mar. 31, 1995. The distribution is
expected to occur in mid-1995, but is subject to market conditions, final
approval by the Company's Board of Directors, any required regulatory approvals
and a favorable tax ruling or opinion on the tax-free nature of the
distribution.
The following pro forma condensed consolidated statement of income for the
year ended Dec. 31, 1994 assumes Allstate had been treated as a discontinued
operation as of the end of the year.
32
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
---------------------------------------------------------------------
Year Ended December 31
---------------------------------------------------------------------
millions, except per common share data 1994
---------------------------------------------------------------------
REVENUES
Merchandise sales and services $29,450
Credit revenues 3,575
---------------------------------------------------------------------
Total revenues 33,025
---------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales, buying and occupancy 21,568
Selling and administrative 7,513
Depreciation and amortization 541
Provision for uncollectible accounts 698
Interest 1,279
---------------------------------------------------------------------
Total costs and expenses 31,599
---------------------------------------------------------------------
Operating income 1,426
Other income 59
---------------------------------------------------------------------
Income before income taxes and minority interest 1,485
Income taxes 614
Minority interest (14)
---------------------------------------------------------------------
Income from continuing operations $ 857
---------------------------------------------------------------------
Earnings from continuing operations per common share $ 2.13
Average common and common equivalent shares outstanding 388.9
---------------------------------------------------------------------
The Company has historically not classified its statement of financial
position because of its significant insurance operations. The following pro
forma condensed consolidated balance sheet presents a classified balance sheet
assuming Allstate was treated as a discontinued operation on Dec. 31, 1994.
-------------------------------------------------------------------------------
millions December 31, 1994
-----------------------------------------------------------------------------------
ASSETS
Current assets
Cash and invested cash $ 548
Retail customer receivables 18,201
Other receivables 321
Inventories 4,044
Deferred income taxes 998
Other current assets 303
-----------------------------------------------------------------------------------
Total current assets 24,415
-----------------------------------------------------------------------------------
Property and equipment, net 4,253
Deferred income taxes 607
Other assets 806
Net assets of discontinued operations 7,231
-----------------------------------------------------------------------------------
TOTAL ASSETS $37,312
-----------------------------------------------------------------------------------
LIABILITIES
Current liabilities
Short-term borrowings $ 6,190
Current portion of long-term debt and capitalized lease
obligations 1,141
Accounts payable and other current liabilities 6,582
-----------------------------------------------------------------------------------
Total current liabilities 13,913
-----------------------------------------------------------------------------------
Long-term debt and capitalized lease obligations 8,844
Postretirement benefits, minority interest and other liabilities 3,754
-----------------------------------------------------------------------------------
TOTAL LIABILITIES 26,511
-----------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 10,801
-----------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'EQUITY $37,312
-----------------------------------------------------------------------------------
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the results of operations or financial position
that would have occurred; nor is the pro forma information intended to be
indicative of the Company's future results of operations or financial position.
If the distribution is approved by the Board, shareholders' equity will be
reduced by approximately the Company's investment in Allstate. At Dec. 31, 1994,
the Company's investment in Allstate was $6.76 billion. In addition, the Savings
and Profit Sharing Fund of Sears Employees, which includes an Employee Stock
Ownership Plan (the ESOP) will be split into two different plans, a plan for
employees of the Company and its affiliates other than Allstate and a plan for
Allstate employees. The ESOP will be split with 50% of the unallocated shares in
the ESOP and 50% of the ESOP debt being transfered to the Allstate plan. In
connection with this transfer, Allstate will purchase from the Company 50% of
the Company's remaining loan to the ESOP. The purchase price is expected to be
$327 million. See note 11 for further information on the ESOP. In addition, the
Company will repay a $450 million note payable to Allstate related to a capital
contribution in 1990.
---
4. SALES OF SUBSIDIARIES' STOCK
In June 1993, The Allstate Corporation completed a primary initial public
offering of 89.5 million, or 19.9%, of its common shares at an initial offering
price of $27 per share. The proceeds from the sale, net of expenses, amounted to
$2.29 billion and resulted in a gain of $635 million. Income taxes have not been
provided on the gain as it was realized on a tax-free basis.
In March 1992, the Company and Sears, Roebuck de Mexico, S.A. de C.V. (Sears
Mexico) sold, in a series of transactions, common stock of Sears Mexico
representing 25% of the Company's ownership. These transactions resulted in an
after-tax gain of $55 million.
In September 1992, Sears Canada Inc. (Sears Canada), a subsidiary of the
Company, completed a primary offering of common stock diluting the Company's
ownership in Sears Canada to 61.2%, resulting in a $5 million loss to the
Company.
33
--------------------------------------------------------------------------------
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SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
5. DISCONTINUED OPERATIONS
Income from discontinued operations was as follows:
---------------------------------------------------------------
Year Ended December 31
---------------------------------------------------------------
millions 1994 1993 1992
---------------------------------------------------------------
Operating income, less income tax expense
of $1, $165 and $151 $15 $229 $252
Loss on disposal, including income tax expense
of $22 -- (64) --
---------------------------------------------------------------
Total $15 $165 $252
---------------------------------------------------------------
The Company is pursuing a divestiture of Homart. The Company anticipates that
the divestiture will be completed by Dec. 30, 1995 and no loss is expected to be
incurred.
In March 1993, Dean Witter completed a primary initial public offering of
19.9% of its common stock. The Company did not recognize a gain on this
transaction. On June 18, 1993, the Company's Board of Directors approved a
tax-free spin-off of Dean Witter to the Company's common shareholders. Sears
common shareholders of record on June 28, 1993 received, effective June 30,
1993, .39 shares of Dean Witter for each Sears common share owned. This
transaction resulted in a noncash dividend to Sears common shareholders totaling
$2.29 billion.
In May 1993, the Company entered into separate agreements to sell the Coldwell
Banker residential business and the mortgage banking operations. A $64 million
after-tax loss was recorded in the second quarter of 1993 primarily due to
adverse income tax effects related to the sale of Sears Savings Bank. These
sales were completed in the fourth quarter of 1993.
The operating results of the discontinued operations are summarized below:
---------------------------------------------------------------------
Year Ended December 31
---------------------------------------------------------------------
millions 1994 1993 1992
---------------------------------------------------------------------
Dean Witter
Revenues -- $2,832 $5,233
Income -- 248 434
Coldwell Banker residential services businesses
Revenues -- $1,204 $1,523
Income (loss) -- (8) 74
Homart
Revenues $266 $ 234 $ 222
Income (loss) 15 (11) (256)
---------------------------------------------------------------------
---
6. RESTRUCTURING
During 1994, approximately 600 Allstate employees accepted a voluntary early
retirement program offer. The total pretax cost of the program was $154 million.
The Merchandise Group recorded a pretax charge in the fourth quarter of 1992
of $2.65 billion related to discontinuing its domestic catalog operations,
offering a voluntary early retirement program to certain salaried associates,
closing unprofitable retail department and specialty stores, streamlining or
discontinuing various unprofitable merchandise lines and the writedown of
underutilized assets to market value. Corporate also recorded a $24 million
pretax charge related to offering termination and early retirement programs to
certain associates.
During the first quarter of 1992, the Merchandise Group recorded a $106
million pretax charge for severance costs related to cost reduction programs for
commission sales and headquarters staff in domestic merchandising.
---
7. INVESTMENTS
The amortized cost, unrealized gains and losses, and fair value of fixed income
securities were as follows:
---------------------------------------------------------------
millions December 31, 1994
---------------------------------------------------------------
Gross
Unrealized
Amortized -------------- Fair
AVAILABLE FOR SALE Cost Gains (Losses) Value
---------------------------------------------------------------
U.S. Government and agencies $ 1,095 $ 3 $ (69) $ 1,029
Municipal 16,265 614 (585) 16,294
Corporate 6,836 69 (337) 6,568
Foreign government 415 3 (34) 384
Mortgage-backed securities 5,975 28 (390) 5,613
Redeemable preferred stock 147 1 (3) 145
---------------------------------------------------------------
Total $30,733 $718 $(1,418) $30,033
---------------------------------------------------------------
HELD TO MATURITY
---------------------------------------------------------------
U.S. Government and agencies $ 1,062 $ 27 $ (85) $ 1,004
Corporate 6,338 121 (195) 6,264
Foreign government 1 -- -- 1
Mortgage-backed securities 607 12 (19) 600
---------------------------------------------------------------
Total $ 8,008 $160 $ (299) $ 7,869
---------------------------------------------------------------
----------------------------------------------------------------
millions December 31, 1993
----------------------------------------------------------------
Gross
Unrealized
Amortized --------------- Fair
AVAILABLE FOR SALE Cost Gains (Losses) Value
----------------------------------------------------------------
U.S. Government and agencies $ 781 $ 47 $ (3) $ 825
Municipal 15,670 1,817 (12) 17,475
Corporate 5,901 386 (32) 6,255
Foreign government 364 16 (5) 375
Mortgage-backed securities 5,625 209 (19) 5,815
Redeemable preferred stock 208 4 (2) 210
----------------------------------------------------------------
Total $28,549 $2,479 $(73) $30,955
----------------------------------------------------------------
HELD TO MATURITY
----------------------------------------------------------------
U.S. Government and agencies $ 853 $ 161 $ (8) $ 1,006
Corporate 6,198 689 (12) 6,875
Foreign government 1 -- -- 1
Mortgage-backed securities 881 95 (1) 975
----------------------------------------------------------------
Total $ 7,933 $ 945 $(21) $ 8,857
----------------------------------------------------------------
34
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The scheduled maturities for fixed income securities were as follows at Dec. 31,
1994:
--------------------------------------------------------------
Available for
Sale Held to Maturity
millions ----------------- ----------------
Amortized Fair Amortized Fair
Due in Cost Value Cost Value
--------------------------------------------------------------
1 year or less $ 1,026 $ 1,056 $ 448 $ 447
1-5 years 5,421 5,555 2,028 2,000
6-10 years 6,037 5,966 1,985 1,917
After 10 years 12,274 11,843 2,940 2,905
--------------------------------------------------------------
24,758 24,420 7,401 7,269
Mortgage-backed securities 5,975 5,613 607 600
--------------------------------------------------------------
Total $30,733 $30,033 $8,008 $7,869
--------------------------------------------------------------
Actual maturities may differ from those scheduled due to prepayments by the
issuers.
Unrealized capital gains and losses on fixed income securities available for
sale and equity securities included in shareholders' equity at Dec. 31, 1994
were as follows:
-----------------------------------------------------------------------
Gross Net
Unrealized Unrealized
Amortized Fair --------------- Gains/
millions Cost Value Gains (Losses) (Losses)
-----------------------------------------------------------------------
Fixed income securities
available for sale $30,733 $30,033 $ 718 $(1,418) $(700)
Common stocks 3,969 4,547 719 (141) 578
Preferred stocks 312 305 2 (9) (7)
-----------------------------------------------------------------------
$35,014 $34,885 $1,439 $(1,568) $(129)
-----------------------------------------------------------------------
Deferred income taxes, deferred policy acquisition costs
and minority interest 161
-----------------------------------------------------------------------
Total $ 32
-----------------------------------------------------------------------
The change in unrealized capital gains and losses, net of applicable income
taxes, deferred policy acquisition costs and minority interest, for fixed income
securities and equity securities carried at fair value was a decrease of $1.64
billion for the year ended Dec. 31, 1994 and an increase of $1.25 billion and
$63 million for the years ended Dec. 31, 1993 and 1992, respectively. The change
in net unrealized capital gains and losses on fixed income securities carried at
amortized cost or the lower of amortized cost or fair value was a decrease of
$1.06 billion, $1.24 billion and $74 million for the years ended Dec. 31, 1994,
1993 and 1992, respectively.
Investment income by investment type for Allstate was as follows:
-------------------------------------------------------------------
Year Ended December 31
-------------------------------------------------------------------
millions 1994 1993 1992
-------------------------------------------------------------------
Fixed income securities $2,917 $2,820 $2,735
Equity securities 134 112 100
Mortgage loans 321 354 331
Other 103 113 92
-------------------------------------------------------------------
Investment income, before expense 3,475 3,399 3,258
Investment expense 74 75 58
-------------------------------------------------------------------
Investment income, less investment expense $3,401 $3,324 $3,200
-------------------------------------------------------------------
Allstate realized capital gains and losses on investments were as follows:
-------------------------------------------------------------
Year Ended December 31
-------------------------------------------------------------
millions 1994 1993 1992
-------------------------------------------------------------
Fixed income securities $ 31 $137 $ 216
Equity securities 240 180 112
Other investments (69) (97) (166)
-------------------------------------------------------------
Realized capital gains 202 220 162
Income taxes 70 77 55
-------------------------------------------------------------
Realized capital gains, net of tax $132 $143 $ 107
-------------------------------------------------------------
Gross gains of $132, $197 and $225 million and gross losses of $105, $29 and
$36 million were realized on sales of fixed income securities during 1994, 1993
and 1992, respectively.
The pretax income effect of provisions for investment losses, principally
provisions for other than temporary declines in value on fixed income
securities and valuation reserves on mortgage loans was $92, $253 and $270
million in 1994, 1993 and 1992, respectively.
Valuation reserves on mortgage loans and real estate were $97 and $93 million
at Dec. 31, 1994 and 1993, respectively.
35
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
------------------------------------------------------------------------------8.
REINSURANCE
The Company assumes and cedes insurance to participate in the reinsurance
market, limit maximum losses and minimize exposure on large risks. Reinsurance
ceded arrangements do not discharge the Company as the primary insurer. The
effects of reinsurance on premiums written and earned were as follows:
-----------------------------------------------------------------------------
Year Ended December 31
-----------------------------------------------------------------------------
millions
1994 1993 1992
-----------------------------------------------------------------------------
Property-liability premiums written
Direct $16,746 $16,194 $15,652
Assumed 880 857 860
Ceded (617) (436) (501)
-----------------------------------------------------------------------------
Property-liability premiums written,
net of reinsurance $17,009 $16,615 $16,011
-----------------------------------------------------------------------------
Property-liability premiums earned
Direct $16,550 $15,922 $15,383
Assumed 867 831 835
Ceded (609) (430) (480)
-----------------------------------------------------------------------------
Property-liability premiums earned,
net of reinsurance $16,808 $16,323 $15,738
-----------------------------------------------------------------------------
Life insurance premiums and contract charges
Direct $ 1,092 $ 1,120 $ 1,156
Assumed 9 6 10
Ceded (48) (47) (38)
-----------------------------------------------------------------------------
Life insurance premiums and contract charges, net
of reinsurance $ 1,053 $ 1,079 $ 1,128
-----------------------------------------------------------------------------
The recoverable amounts at Dec. 31, 1994 and 1993 include $121 and $117
million related to losses paid by the Company and billed to reinsurers and $1.75
and $1.80 billion estimated by the Company with respect to unpaid losses which
are not billable until the losses are paid. Amounts recoverable from pools,
associations and facilities included above were $297 and $339 million at Dec.
31, 1994 and 1993, respectively. No amount due or estimated due from any one
reinsurer was in excess of $130 and $132 million at Dec. 31, 1994 and 1993,
respectively.
Amounts recoverable are regularly evaluated by the Company and an allowance
for uncollectible reinsurance is provided when collection is in doubt. The
pretax income effect of provisions for uncollectible reinsurance were $26, $9
and $37 million in 1994, 1993 and 1992, respectively. The allowance for
uncollectible reinsurance was $126 and $110 million at Dec. 31, 1994 and 1993,
respectively.
9. RESERVE FOR PROPERTY-LIABILITY INSURANCE CLAIMS AND CLAIMS EXPENSE
Activity in the reserve for property-liability insurance claims and claims
expense was as follows:
----------------------------------------------------------------
millions 1994 1993 1992
----------------------------------------------------------------
Reserve at Jan. 1 $15,683 $15,299 $13,533
Less reinsurance recoverables 1,442 1,490 1,162
----------------------------------------------------------------
Net reserve at Jan. 1 14,241 13,809 12,371
Incurred claims and claims expense:
Current year 15,387 13,297 15,296
Prior years (722) (375) (91)
----------------------------------------------------------------
Total incurred 14,665 12,922 15,205
----------------------------------------------------------------
Claims and claims expense paid:
Current year 8,803 7,455 9,200
Prior years 4,541 5,035 4,567
----------------------------------------------------------------
Total paid 13,344 12,490 13,767
----------------------------------------------------------------
Net reserve at Dec. 31 15,562 14,241 13,809
Plus reinsurance recoverables 1,371 1,442 1,490
----------------------------------------------------------------
Reserve at Dec. 31 (1) $16,933 $15,683 $15,299
----------------------------------------------------------------
(1) Loss development information for Allstate's British reinsurance subsidiary
is not available on a comparable basis. In 1994, the net claims and claims
expense was $98 million and net payments were $57 million. These amounts
were treated as attributable to the current year.
Favorable reserve development in 1994, 1993 and 1992 with respect to prior
years was consistent with the Company's conservative reserving philosophy and
the result of favorable severity trends (average cost per claim) which more than
offset adverse development on asbestos and environmental claims. If the
favorable trends continue, additional reserve releases will occur.
Insurance reserves for asbestos and environmental claims are subject to
greater uncertainties than those presented by other types of claims. Management
believes that its exposure to asbestos and environmental claims have been
effectively limited to risks assumed as well as primary commercial coverages
written prior to 1986. Reserves for asbestos and environmental claims were $1.64
and $1.61 billion at Dec. 31, 1994 and 1993, respectively. Reinsurance
recoverable for these claims were $785 and $756 million at Dec. 31, 1994 and
1993, respectively. Net asbestos and environmental losses paid in 1994 and 1993
as a percent of ending reserves at Dec. 31, 1994 and 1993 were 9.3% and 5.2%,
respectively.
While management believes that its reserves for asbestos and environmental
claims are appropriately established, due to the inconsistencies of court
coverage decisions, plaintiffs' expanded theories of liability, the risks
inherent in major litigation and other uncertainties, the ultimate cost of these
claims may vary materially from the amounts currently recorded, resulting in an
increase in the loss reserves. Due to the uncertainties and factors described
above, management believes it is not practicable to develop a meaningful range
for any such additional reserves that may be required.
36
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
10. INCOME TAXES
Income (loss) before income taxes (benefit) and minority interest was as
follows:
---------------------------------
Year Ended December 31
---------------------------------
millions 1994 1993 1992
---------------------------------
Domestic $1,633 $2,902 $(4,244)
Foreign 79 70 (50)
---------------------------------
Total $1,712 $2,972 $(4,294)
---------------------------------
Federal, state and foreign taxes were as follows:
-------------------------------------------------------------
Year Ended December 31
-------------------------------------------------------------
millions 1994 1993 1992
-------------------------------------------------------------
Federal income tax
Current $ 245 $ 196 $ (414)
Deferred (7) 135 (1,367)
State income tax
Current 45 (5) (14)
Deferred 38 57 (152)
Foreign income tax
Current 49 12 (4)
Deferred (12) 9 (14)
-------------------------------------------------------------
Income tax provision (benefit) $ 358 $404 $(1,965)
-------------------------------------------------------------
A reconciliation of the statutory federal income tax rate to the effective
rate was as follows:
------------------------------------------------
Year Ended December 31
------------------------------------------------
1994 1993 1992
------------------------------------------------
Statutory federal income
tax rate (benefit) 35.0% 35.0% (34.0)%
State income taxes, net
of federal income taxes 3.2 1.1 (2.6)
Tax-exempt income (20.5) (12.0) (9.0)
Gain on The Allstate
Corporation initial
public offering -- (7.5) --
Deferred income taxes
adjustment for rate
change -- (2.9) --
Other 3.2 (0.1) (0.2)
------------------------------------------------
Effective income tax rate
(benefit) 20.9% 13.6% (45.8)%
------------------------------------------------
Deferred taxes were recorded based upon differences between the financial
statement and tax bases of assets and liabilities and available tax
carryforwards. The following deferred taxes were recorded:
------------------------------------------------
December 31
------------------------------------------------
Assets/(Liabilities) in millions 1994 1993
------------------------------------------------
Insurance loss reserves $1,087 $ 993
Unearned maintenance income 294 336
Loan loss reserves 362 346
Unearned insurance premiums 436 422
Alternative minimum tax credit 571 452
Postretirement benefit liability 1,359 1,304
Restructuring reserves 237 400
Other deferred tax assets 908 986
Fixed assets (573) (435)
Policy acquisition costs (568) (499)
Prepaid pension (187) (183)
LIFO (169) (134)
Unrealized securities gains (11) (1,120)
Other deferred tax liabilities (412) (499)
------------------------------------------------
Total $3,334 $2,369
------------------------------------------------
U.S. income and foreign withholding taxes were not provided on certain
unremitted earnings of international affiliates which the Company considers to
be permanent investments. The cumulative amount of unremitted income
for which income taxes have not been provided totaled $341 million at Dec. 31,
1994. Upon remittance of these earnings, taxes of $160 million would be paid.
Income taxes of $293, $(456) and $262 million were paid (refunded) in 1994, 1993
and 1992, respectively. The Company has $571 million of tax credits that can be
carried forward indefinitely resulting from alternative minimum tax payments.
Net operating loss carryforwards from Canadian operations of $11 and $43
million will expire in 1999 and 2000, respectively.
37
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
11. BENEFIT PLANS
Expenses for retirement and savings-related benefit plans were as follows:
-------------------------------------------------------------------
Year Ended December 31
-------------------------------------------------------------------
millions 1994 1993 1992
-------------------------------------------------------------------
Savings and Profit Sharing Fund of Sears Employees
Defined contribution $ 75 $127 $ 1
Additional ESOP expense (benefit) 5 (23) 68
Pension plans 50 45 94
Retiree insurance benefits 302 312 300
Other plans 9 18 18
-------------------------------------------------------------------
Total $441 $479 $481
-------------------------------------------------------------------
---
PROFIT SHARING FUND
Most domestic employees are eligible to become members of The Savings and Profit
Sharing Fund of Sears Employees (the Fund). Beginning in 1994, Company
contributions are calculated separately for Allstate employees and for
employees of other participating companies. The Company contribution is based on
6% of consolidated income of Allstate as defined for Allstate employees and 6%
of consolidated income, as defined, for the remaining participating
companies for all other employees. Company contributions are limited to 70% of
eligible deposits. Contributions are allocated to participating companies based
on eligible deposits made by their employees.
In 1993 and 1992, the Company contributed up to 35% of eligible deposits by
Fund participants, and at the Company's discretion an additional contribution of
up to 35% of eligible deposits. Total Company contributions could not exceed 6%
of consolidated income, as defined.
The Fund includes an Employee Stock Ownership Plan (the ESOP) to prefund a
portion of the Company's anticipated contribution through 2004. The Company
loaned the ESOP $800 million which it used to purchase 21.9 million (increased
to 27.2 million as a result of the Dean Witter spin-off) Sears common shares in
the open market. The loan is repaid with dividends on ESOP shares and Company
contributions. The additional ESOP expense (benefit) included in the benefit
plan expense table was computed as follows:
-------------------------------------------------------------------------
Year Ended December 31
-------------------------------------------------------------------------
millions
1994 1993 1992
-------------------------------------------------------------------------
Interest expense recognized by ESOP $ 64 $ 71 $ 72
Less dividends accrued on ESOP shares (43) (40) (46)
Cost of shares allocated to employees
and plan expenses 56 71 42
-------------------------------------------------------------------------
77 102 68
-------------------------------------------------------------------------
Reduction of defined contribution
due to ESOP (72) (125)
---------------------------------------------------------------------------
Additional ESOP expense (benefit) $ 5 $ (23) $ 68
-------------------------------------------------------------------------
The Company contributed $91, $45 and $36 million to the ESOP in 1994, 1993 and
1992, respectively. At Dec. 31, 1994, total committed to be released, allocated
and unallocated ESOP shares were 2.0, 5.6 and 19.6 million,
respectively. Refer to note 3 for a discussion of the proposed split of the
ESOP.
---
PENSION PLANS
Substantially all domestic full-time and certain part-time employees are
eligible to participate in noncontributory defined benefit plans after meeting
age and service requirements. Substantially all Canadian employees are
eligible to participate in contributory defined benefit plans. Pension benefits
are based on length of service, compensation and, in certain plans, Social
Security or other benefits. Funding for the various plans of the Company is
determined using various actuarial cost methods, and amounted to $200, $134 and
$127 million for 1994, 1993 and 1992, respectively.
Pension expense was comprised of the following:
-----------------------------------------------------------
Year Ended December 31
-----------------------------------------------------------
millions 1994 1993 1992
-----------------------------------------------------------
Benefits earned during the period $212 $177 $192
Interest on projected benefit obligation 385 418 395
Actual return on plan assets 15 (808) (331)
Net amortization and deferral (562) 258 (162)
-----------------------------------------------------------
Pension expense $50 $ 45 $ 94
-----------------------------------------------------------
The weighted average discount rate and rate of increase in compensation used
in determining the actuarial present value of the projected benefit obligations
were 9.0% and 4.75% in 1994, 7.5% and 4.5% in 1993 and 8.5% and 5.5% in
38
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
1992. The expected long-term rate of return on plan assets used in determining
net periodic pension cost was 9.5% in 1994, 1993 and 1992.
The plans' funded status was as follows:
------------------------------------------------------------------------------
December 31
-----------------------------------------------------------------------------
1994 1993
------------------------------------------------------------------------------
Assets Accumu- Assets Accumu-
exceed lated exceed lated
accumu- benefits accumu- benefits
lated exceed lated exceed
millions benefits assets benefits assets
------------------------------------------------------------------------------
Actuarial present value of benefit
obligations
Vested benefit obligation $3,421 $ 111 $4,620 $ 151
------------------------------------------------------------------------------
Accumulated benefit obligation $3,663 $ 113 $4,920 $ 169
------------------------------------------------------------------------------
Projected benefit obligation (PBO) $4,325 $ 130 $5,719 $ 260
Plan assets at fair value, primarily
publicly traded stocks and bonds 4,338 6 5,618
------------------------------------------------------------------------------
PBO less than (in excess of) plan
assets 13 (124) (101) (260)
Unrecognized net loss 547 29 888 49
Unrecognized prior service cost (2) 14 -- 19
Unrecognized transitional (asset)
obligation (98) -- (197) 1
Adjustment required to recognize
minimum liability -- (32) -- (33) -
-----------------------------------------------------------------------------
Prepaid (accrued) pension
cost in the Statement of Financial
Position at Dec. 31 $ 460 $(113) $ 590 $(224) -
-----------------------------------------------------------------------------
Included in the Company's 1992 restructuring charges were pension termination
costs and settlement charges of $233 and $141 million, respectively, which were
partially offset by curtailment gains of $75 million.
---
RETIREE INSURANCE BENEFITS
The Company provides certain health care and life insurance benefits for retired
employees. Generally, qualified employees may become eligible for these benefits
if they retire in accordance with the Company's established retirement policy
and are continuously insured under the Company's group plans or other approved
plans for 10 or more years immediately prior to retirement. The Company shares
the cost of the retiree medical benefits with retirees based on years of
service. The Company's share is subject to a 5% limit on annual medical
inflation after retirement. The Company's postretirement benefit plans are not
funded. The Company has the right to modify or terminate these plans.
Postretirement benefit expense was comprised of the following:
------------------------------------------------------
Year Ended December 31
------------------------------------------------------
millions 1994 1993 1992
------------------------------------------------------
Benefits earned during the period $ 58 $ 48 $ 52
Interest on accumulated postretirement
benefit obligation 244 264 248
------------------------------------------------------
Postretirement benefit expense $302 $312 $300
------------------------------------------------------
Included in the Company's 1992 restructuring charges were postretirement
termination costs of $76 million and postretirement curtailment losses of $61
million.
The plans' funded status was as follows:
-----------------------------------------------------------------------
December 31
-----------------------------------------------------------------------
millions 1994 1993
-----------------------------------------------------------------------
Accumulated postretirement benefit obligation
Retirees $2,384 $2,699
Fully eligible active plan participants 258 355
Other active plan participants 438 641
-----------------------------------------------------------------------
Accumulated postretirement benefit obligation 3,080 3,695
Unrecognized gain (loss) 333 (393)
-----------------------------------------------------------------------
Accrued postretirement benefit cost in the Statement of
Financial Position at Dec. 31 $3,413 $3,302
-----------------------------------------------------------------------
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 9.0% in 1994 and 7.5% in 1993.
The weighted average health care cost trend rate used in measuring the
postretirement benefit expense was 12.5% in 1995 gradually declining to 6% in
2007 and remaining at that level thereafter. A one percentage point increase in
the assumed health care cost trend rate for each year would increase the
accumulated postretirement benefit obligation by $75 million and would increase
the annual postretirement benefit expense by $11 million.
39
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
12. BORROWINGS
Short-term borrowings consisted of:
-----------------------------------------------------------------------------
December 31
-----------------------------------------------------------------------------
millions 1994 1993
-----------------------------------------------------------------------------
Commercial paper $5,919 $4,133
Bank loans 98 107
Agreements with bank trust departments 87 140
Other loans (principally foreign) 86 256
-----------------------------------------------------------------------------
Total short-term borrowings $6,190 $4,636
Weighted average interest rate at Dec. 31 6.1% 4.2%
Weighted average interest rate at Dec. 31, including
effects of swaps and caps 6.5% 5.2%
-----------------------------------------------------------------------------
At Dec. 31, 1994, the Company had credit agreements totaling $8.01 billion.
SRAC's credit facilities totaled $5.10 billion, including $4.50 billion in
syndicated credit agreements and $600 million in uniform credit agreements with
individual banks. The Sears Credit Corp. entities, in support of asset-backed
commercial paper, had $1.82 billion in credit lines. The Allstate Corporation
and Sears Canada had credit agreements totaling $1.00 billion and $95 million,
respectively. These syndicated and uniform credit agreements provide for loans
at prevailing interest rates and mature at various dates through September 1999.
The Company pays commitment fees in connection with these credit agreements.
The Company had interest rate swap agreements which established fixed rates on
$752 and $824 million of short-term variable rate debt at Dec. 31, 1994 and
1993, resulting in weighted average interest rates of 9.1% and 9.0%,
respectively. The weighted average maturity of agreements in effect on Dec. 31,
1994 was approximately fifteen years. Due to interest rate caps, the Company had
maximum weighted average interest rates of 9.0% on $450 million of debt at Dec.
31, 1994 and 7.7% on $900 million of debt at Dec. 31, 1993. The weighted average
maturity of cap agreements in effect on Dec. 31, 1994 was approximately two
years.
Long-term debt was as follows:
------------------------------------------------------------------------------
millions December 31
------------------------------------------------------------------------------
ISSUE 1994 1993
------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
6.25% to 9.5% Notes, due 1994 to 2004 $ 1,950 $ 2,231
8.2% Extendable Notes, due 1999 31 31 6%
Debentures, $300 million face value, due 2000, effective
rate 14.8% 205 194
9.375% Debentures, due 2011 300 300
4.85% to 10.0% Medium-Term Notes,
due 1994 to 2021 3,963 3,656
Capitalized lease obligations 40 43
SEARS ROEBUCK ACCEPTANCE CORP.
6.05% to 6.6% term loans, due 1996 to 1999 845 --
SEARS DC CORP.
5.19% to 9.26% Medium-Term Notes,
due 1994 to 2012 1,521 2,148
SEARS OVERSEAS FINANCE N.V. (GUARANTEED BY
SEARS, ROEBUCK AND CO.)
Zero Coupon Bonds, $400 million face value,
due 1994, effective rate 12.8% -- 382
Zero Coupon Bonds, $500 million face value,
due 1998, effective rate 12.0% 336 300
THE ALLSTATE CORPORATION
5 7/8% and 6 3/4% Notes, due 1998 and 2003 600 600
7 1/2% Debentures, due 2013 250 250
Floating rate notes, due 2009 19 --
SEARS CANADA INC.
9 1/4% to 11 3/4% Debentures, due 1994 to 2000 328 357
Notes, mortgages, bonds and capitalized leases 138 237
SEARS CANADA RECEIVABLES TRUST
5.65% to 8.95% Receivables Trusts,
due 1997 to 2004 302 113
SEARS ACCEPTANCE CO. LTD.
9 5/8% to 15 1/8% Secured Debentures,
due 1994 to 2000 59 99
SEARS, ROEBUCK DE MEXICO, S.A. DE C.V.
16% Bank Notes, due 1996 120 --
Notes payable to banks 21 38
OTHER SUBSIDIARIES
Participating mortgages, $850 million face value, due 2005,
effective rate 8.7%, collateralized by Sears Tower and
related properties -- 835
Notes and capitalized leases 41 41
Long-term debt attributed to discontinued operations, 7.0%
weighted average rate (215) (215) -
-----------------------------------------------------------------------------
Total long-term debt $10,854 $11,640
------------------------------------------------------------------------------
40
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On Nov. 7, 1994, the Company transferred Sears Tower and all related assets and
liabilities to a third party as trustee of a trust and was released from the
related non-recourse mortgages encumbering the building. The second mortgagee is
the residual beneficiary of the trust. The Company is the current income
beneficiary, but cannot receive distributions as beneficiary until all debt
which encumbers Sears Tower is repaid. An affiliate of the second
mortgagee is responsible for operating Sears Tower. As a result of this
transfer, assets and long-term debt were reduced by $501 and $845 million,
respectively, and other liabilities were increased by $25 million, resulting in
an after-tax extraordinary gain of $195 million ($319 million pretax) related to
the early extinguishment of debt.
During the second quarter of 1993, the Company recorded an extraordinary loss
of $145 million after taxes ($234 million pretax) related primarily to payments
to terminate interest rate swaps associated with retired commercial paper that
was allocated to the funding of discontinued operations.
In the third quarter of 1993, the Company recorded an extraordinary loss of
$66 million after taxes ($107 million pretax) related to the call of 7% deep-
discount debentures due to mature Nov. 15, 2001.
As of Dec. 31, 1994, long-term debt maturities for the next five years were as
follows:
-----------------------------------------------------------------------------
Year Ended December 31 millions
-----------------------------------------------------------------------------
1995 $1,141
1996 1,726
1997 1,957
1998 2,014
1999 1,126
-----------------------------------------------------------------------------
The Company's continuing operations paid interest of $1.3 billion for each
year ended Dec. 31, 1994, 1993 and 1992, respectively. Interest capitalized was
$1, $3 and $23 million for the years ended Dec. 31, 1994, 1993 and 1992.
13. LEASE AND SERVICE AGREEMENTS
The Company leases certain stores, office facilities, computers and automotive
equipment.
Operating and capital lease obligations are based upon contractual minimum
rates and, for certain stores, amounts in excess of these minimum rates are
payable based upon specified percentages of sales. Certain leases include
renewal or purchase options. Operating lease rentals were $626, $600 and $769
million, including contingent rentals of $62, $53 and $48 million, for the years
ended Dec. 31, 1994, 1993 and 1992.
Minimum fixed lease obligations, excluding taxes, insurance and other expenses
payable directly by the Company, for leases in effect as of Dec. 31, 1994 were:
-----------------------------------------------------------------------------
millions Capital Operating
Year Ended December 31 leases leases
-----------------------------------------------------------------------------
1995 $ 33 $ 289
1996 32 204
1997 30 158
1998 30 136
1999 29 121
After 1999 346 474
-----------------------------------------------------------------------------
Minimum payments 500 $1,382
-----------------------------------------------------------------------------
Executory costs (principally taxes) 39
Imputed interest 291
-------------------------------------------------------------------
Present value of minimum lease payments, principally long-
term $170
-------------------------------------------------------------------
The Company has a minority interest in Advantis, which began operations in
December 1992. Advantis provides data and voice networking and information
processing services to the Company. Total expenses incurred by the Company for
these services during the years ended Dec. 31, 1994 and 1993 were $409 and $427
million, respectively. The Company has committed to purchase services of at
least $380 million annually through 2002.
41
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
14. FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets, incurs various financial liabilities and enters into agreements
involving off-balance-sheet financial instruments. The fair value estimates of
financial instruments presented below are not necessarily indicative of the
amounts the Company might pay or receive in actual market transactions.
Potential taxes and other transaction costs have also not been considered in
estimating fair value. As a number of the Company's significant assets,
including merchandise inventories, property and equipment, real estate and
deferred income taxes, and liabilities, including property-liability, universal
life and traditional life insurance reserves, are not considered financial
instruments, the disclosures below do not reflect the fair value of the Company
as a whole.
---
FINANCIAL ASSETS
The Company had the following financial assets:
--------------------------------------------------------------------------
December 31
--------------------------------------------------------------------------
1994 1993
--------------------------------------------------------------------------
Carrying Fair Carrying Fair
millions Value Value Value Value
--------------------------------------------------------------------------
Fixed income securities $38,041 $37,902 $38,888 $39,812
Equity securities 4,852 4,852 4,555 4,555
Mortgage loans 3,234 3,184 3,563 3,622
Retail customer receivables 18,201 19,758 15,906 18,058
Insurance premium installment
and other receivables 3,768 3,768 4,113 4,113
Cash and invested cash 1,421 1,421 1,819 1,819
Separate Accounts 2,800 2,800 2,282 2,282
Other 296 296 354 354
--------------------------------------------------------------------------
Fair values for fixed income and equity securities are based on quoted market
prices when available. Non-quoted fixed income securities are valued based on
discounted cash flows using current interest rates for similar securities.
Mortgage loans are valued based on discounted estimated cash flows or the
estimated fair value of the underlying collateral. Discount rates are selected
using current rates at which similar loans would be made.
Retail customer receivables are valued by discounting estimated cash flows.
The estimated cash flows reflect the historical cardholder payment experience
and are discounted at a risk-adjusted market rate.
Insurance premium installment receivables and other financial assets are
short-term in nature and as such, their carrying value approximates fair value.
Assets of the Separate Accounts are recorded at fair value.
FINANCIAL LIABILITIES
The Company had the following financial liabilities:
-------------------------------------------------------------------------------
December 31
-------------------------------------------------------------------------------
1994 1993
-------------------------------------------------------------------------------
Carrying Fair Carrying Fair
millions Value Value Value Value
-------------------------------------------------------------------------------
Contractholder funds on investment contracts $14,772 $14,429 $14,164 $14,432
Long-term debt (excluding capitalized
leases) 10,684 10,629 11,672 12,638
Short-term borrowings 6,190 6,190 4,636 4,636
Separate Accounts 2,800 2,800 2,282 2,282
Other 4,873 4,873 4,729 4,729
-------------------------------------------------------------------------------
The fair value of contractholder funds on investment contracts is based on the
terms of the underlying contracts. Funds related to contracts with no stated
maturities are valued at the underlying fund balance less applicable surrender
charges. The fair value of funds related to all other investment contracts is
estimated based on discounted cash flows using interest rates currently offered
for contracts with similar terms and durations.
Long-term debt and other long-term financial liabilities are valued based on
quoted market prices when available or discounted cash flows, using interest
rates currently available to the Company on similar borrowings. Short-term
borrowings and other short-term financial liabilities are short-term in nature
and as such, their carrying value approximates fair value. Separate Accounts
liabilities are carried at the fair value of the underlying assets.
---
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The Company is a party to off-balance-sheet financial instruments to manage
market and interest rate risk, fund its investment commitments and improve its
asset/liability management. These financial instruments involve, to varying
degrees, elements of market, credit and interest rate risk in excess of amounts
recognized in the statement of financial position. The Company does not require
collateral or other security to support the financial instruments with credit
risk, unless noted otherwise.
42
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Investment-related
The Company had the following off-balance-sheet financial instruments related to
its investment activities at Dec. 31, 1994 and 1993:
---------------------------------------------------------------------
December 31, 1994
---------------------------------------------------------------------
Contract or
Notional Fair Carrying
millions Amount Value Value
---------------------------------------------------------------------
Interest rate swap agreements:
Pay floating rate, receive fixed rate $408 $(14) $(7)
Pay fixed rate, receive floating rate 10 1 1
Interest rate cap and floor agreements 358 6 5
Commodity swap agreements 32 2 --
Financial futures and forward contracts 444 (2) 2
Options and warrants 225 28 25
Commitments to invest 277 N/A --
Commitments to extend mortgage loans 75 1 --
Financial guarantees 23 (5) --
---------------------------------------------------------------------
December 31, 1993
---------------------------------------------------------------------
Contract or
Notional Fair Carrying
millions Amount Value Value
---------------------------------------------------------------------
Interest rate swap agreements:
Pay floating rate, receive fixed rate $303 $ 9 $ 4
Pay fixed rate, receive floating rate 48 (7) --
Interest rate cap and floor agreements 63 4 4
Commodity swap agreements 32 -- --
Financial futures and forward contracts 383 5 1
Options and warrants 202 19 19
Commitments to invest 183 N/A --
Commitments to extend mortgage loans 90 1 --
Financial guarantees 31 (4) --
---------------------------------------------------------------------
N/A--Not available.
The fair value of interest rate swap, cap and floor, and commodity swap
agreements, financial futures and forward contracts, options and warrants are
based on either quoted market or dealer prices. At Dec. 31, 1994, the carrying
value of swaps, caps and floors relating to fixed income securities classified
as available for sale is the same as fair value. For all other swaps, caps and
floors, and all other options and warrants, carrying value represents the amount
of unamortized premium.
The Company generally enters into interest rate swap agreements for
investment purposes to change the interest rate characteristics of existing
assets to match the corresponding liabilities. Gross unrealized gains and losses
on open swap positions were $2 and $15 million at Dec. 31, 1994 and $12 and $10
million at Dec. 31, 1993. For pay floating rate, receive fixed rate swaps, the
Company paid a weighted average rate of 4.3% and received a weighted average
rate of 5.9% in 1994. For pay fixed rate, receive floating rate swaps, the
Company paid a weighted average rate of 7.0% and received a weighted average
rate of 5.4% in 1994. At Dec. 31, 1994, interest rate swap agreements with
notional amounts of $35, $298 and $85 million had maturity dates within one
year, from two to five years and greater than five years, respectively. The
Company purchases interest rate cap and floor agreements to offset rising or
falling interest rates relative to certain existing assets in conjunction with
its asset/liability management. At Dec. 31, 1994, none of these
instruments mature within one year and 81% mature in years seven through ten.
The Company enters into commodity swap transactions to mitigate market risk on
certain fixed income and equity securities. The Company generally utilizes
future and forward contracts to hedge its market or interest rate risk
related to anticipatory investment purchases and sales. Hedges of anticipatory
transactions pertain to identified transactions which are probable to occur and
generally are completed within ninety days.
The Company purchases options on equity securities to achieve equity
appreciation. In certain instances, counterparties are required to post
collateral to minimize credit risk. Debt warrants are purchased to protect
against call risk on fixed income securities.
Commitments to invest generally represent commitments to make equity
investments in various limited partnerships. The Company enters these
agreements to allow for additional participation in certain investments. It is
not practicable to estimate the fair value of these commitments.
Commitments to extend mortgage loans, which are secured by the underlying
properties, are valued based on fees charged by other institutions to make
similar commitments to similar borrowers. The contract amounts represent credit
risk, with creditworthiness evaluated on a case-by-case basis. Commitments to
extend mortgage loans generally have fixed expiration dates or other
termination clauses.
Financial guarantees written represent conditional commitments to repurchase
notes from a creditor upon default by the debtor. The Company enters these
agreements primarily to provide financial support for certain equity
investments. The fair value of financial guarantees are based on estimates of
payments that may occur over the lives of the guarantees.
43
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Debt-related
The Company had the following off-balance-sheet financial instruments related to
its outstanding borrowings at Dec. 31, 1994 and 1993:
------------------------------------------------------------------
December 31, 1994
------------------------------------------------------------------
Contract or
Notional Fair Carrying
millions Amount Value Value
------------------------------------------------------------------
Interest rate swap agreements:
Pay floating rate, receive fixed rate $805 $ (37) $ --
Pay fixed rate, receive floating rate 752 (180) --
Interest rate cap agreements 450 2 --
------------------------------------------------------------------
December 31, 1993
------------------------------------------------------------------
Contract or
Notional Fair Carrying
millions Amount Value Value
------------------------------------------------------------------
Interest rate swap agreements:
Pay fixed rate, receive floating rate $824 $(384) $ --
Interest rate cap agreements 900 1 --
------------------------------------------------------------------
The Company uses interest rate swaps and caps to manage the interest rate risk
associated with its borrowings and to manage the Company's allocation of fixed
and variable rate debt. For pay floating rate, receive fixed rate swaps, the
Company paid a weighted average rate of 5.13% and received a weighted average
rate of 6.76% in 1994. For pay fixed rate, receive floating rate swaps, the
Company paid a weighted average rate of 9.03% and received a weighted average
rate of 4.63% in 1994. The fair value of interest rate swaps and caps are based
on prices quoted from dealers. At Dec. 31, 1994, the Company had unrealized
gains and losses relating to such instruments of $2 and $217 million,
respectively. At Dec. 31, 1993, the Company's unrealized gains and losses were
$1 and $384 million, respectively. If a counterparty fails to meet the terms of
a swap or cap agreement, the Company's exposure is limited to the net amount
that would have been received, if any, over the agreement's
remaining life. At Dec. 31, 1994, interest rate swap agreements with notional
amounts of $36, $733 and $788 million had maturity dates within one year, from
two to five years and greater than five years, respectively. At Dec. 31, 1994,
interest rate cap agreements with notional amounts of $250 and $200 million had
maturity dates within one year and from two to five years, respectively.
Credit-related
The Company had outstanding securitized retail customer receivables sold with
recourse of $3.95 and $5.17 billion at Dec. 31, 1994 and 1993, respectively.
These receivables represent conditional commitments of the Company to guarantee
performance to a third party. A portion of the securitized receivables are
collateralized by personal property. The Company's credit risk exposure was
contractually limited to $473 and $616 million at Dec. 31, 1994 and 1993,
respectively. The Company had accrued liabilities associated with this credit
exposure included in the statement of financial position of $170 and $244
million at Dec. 31, 1994 and 1993, respectively.
The Company had a financial guaranty of $78 and $75 million at Dec. 31, 1994
and 1993, respectively. This guaranty represents a commitment by the Company to
guarantee the performance of certain municipal bonds that were issued in
connection with the Sears Merchandise Group's headquarters building. No amounts
were accrued in the statement of financial position for any potential loss
associated with this guaranty at Dec. 31, 1994 and 1993.
---
15. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The Company invests in state and municipal bond holdings and grants credit to
customers throughout the nation. The five states in which the Company had the
largest amount of retail customer receivables, including those sold with
recourse, state and municipal bond holdings and mortgage loans were as follows:
--------------------------------------------------------------------------
December 31
--------------------------------------------------------------------------
millions 1994 1993
--------------------------------------------------------------------------
California $4,121 $3,931
Texas 3,690 3,633
Florida 2,944 3,201
Illinois 2,712 2,513
New York 2,696 2,390
--------------------------------------------------------------------------
44
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
16. REGULATIONS AND LEGAL PROCEEDINGS
Various legal and regulatory actions and governmental proceedings are pending
against the Company, many involving routine litigation incidental to the
businesses. Other matters contain allegations which are nonroutine and involve
compensatory, punitive or antitrust treble damage claims in very large amounts,
as well as other types of relief.
The consequences of these matters are not presently determinable but, in the
opinion of management, the ultimate liability in excess of reserves currently
recorded will not have a material effect on the results of operations,
financial position, liquidity or capital resources of the Company, except for
possibly the class action suits described below.
Allstate's insurance businesses are subject to the effects of a changing
social, economic and regulatory environment. Public and regulatory initiatives
have varied and included efforts to restrict premium rates, restrict the ability
to cancel policies in connection with management of catastrophe exposure, impose
underwriting standards and expand overall regulation. The ultimate changes and
eventual effects, if any, of these initiatives are uncertain.
Two class action suits have been brought against Allstate by certain former
California sales agents. These cases are coordinated and pending before the same
judge in Alameda County, California. The plaintiffs allege that Allstate
violated the California Labor Code with respect to how Allstate reimburses its
California Neighborhood Office Agent office expenses. The plaintiffs in both
cases seek both compensatory and punitive damages. Due to the early stage of
development of these proceedings, it is not practicable to presently develop a
meaningful range of potential loss. While the final resolution of this matter
may have a material impact on Allstate's results of operations, management
believes the matter will not have a material adverse effect on Allstate's
financial position.
Allstate is a defendant, along with a number of other insurers and entities,
in antitrust litigation filed by the attorneys general of various states. In
October 1994, the defendants in this case, including Allstate, agreed to pay $36
million in settlement of the antitrust litigation. The settlement agreement is
subject to court approval.
17. SHAREHOLDERS' EQUITY
DIVIDEND PAYMENTS
Certain indentures relating to the long-term debt of Sears, Roebuck and Co.,
which represent the most restrictive contractual limitation on the payment of
dividends, provide that the Company cannot take specified actions, including the
declaration of cash dividends, which would cause its consolidated
unencumbered assets, as defined, to fall below 150% of its consolidated
liabilities, as defined. At Dec. 31, 1994, approximately $8.0 billion could be
paid in dividends to shareholders under the most restrictive indentures. The
capital of certain foreign operations and Allstate Life Insurance Company at
Dec. 31, 1994 included $422 million which, if distributed, would be subject to
taxes of $188 million. It is not contemplated that distributions will be made
in an amount which would require such tax payments.
The Illinois Insurance Holding Company Systems Act permits Allstate Insurance
Company to pay, without regulatory approval, dividends to Sears 80.2% owned
subsidiary, The Allstate Corporation, during any 12-month period in an amount up
to the greater of 10% of surplus (as regards policyholders) or its net income
(as defined) as of the preceding Dec. 31. Approximately $650 million of
Allstate's retained income at Dec. 31, 1994 had no restriction relating to
distribution during 1995 which would require prior approval.
As of Dec. 31, 1994, subsidiary companies could remit to Sears, Roebuck and
Co. in the form of dividends approximately $5.0 billion, after payment of all
related taxes, without prior approval of regulatory bodies or violation of
contractual restrictions.
45
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, ROEBUCK AND CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PREFERRED SHARES
The 8.88% Preferred Shares, First Series (8.88% Preferred Shares) were issued in
the form of 13 million depositary shares having cumulative dividends of $2.22
annually and a liquidation preference of $25 per depositary share, plus accrued
and unpaid dividends. On or after Nov. 9, 1996, the Company may, at its option,
redeem the 8.88% Preferred Shares, in whole or in part, at any time at a
redemption price of $25 per depositary share, plus accrued and unpaid dividends
to the redemption date.
The Series A Mandatorily Exchangeable Preferred Shares (PERCS) were issued in
the form of 28.75 million depositary shares having an annual, cumulative
dividend of $3.75 per depositary share. The PERCS have voting rights
(equivalent to one-fourth of a vote for each depositary share) and a
liquidation preference of $43 per depositary share. The Company has elected to
exchange the PERCS for common shares on Mar. 20, 1995. Holders of depositary
shares will receive 1.24 common shares for each depositary share. The total
number of common shares deliverable upon exchange is 35.7 million.
In the event that dividends payable on either series of preferred stock are in
arrears for six quarterly periods, holders of such stock together shall have the
right to elect two additional directors of the Company until all cumulative
dividends have been paid or set apart for payment. Additionally, dividends
cannot be paid on the Company's common shares if dividends on either series of
preferred shares are in arrears.
---
STOCK OPTION PLANS
Options to purchase common stock of the Company have been granted to employees
under various plans at prices equal to the fair market value of the stock on the
dates the options were granted. In addition, the Company may pay to the optionee
in connection with certain options an amount generally equal to the maximum
statutory corporate federal income tax rate then in effect (not to exceed 46%)
times the difference between the market price and the option price. Options are
generally exercisable in not more than four equal, annual
cumulative installments beginning one year after the date of grant, and
generally expire in 10 or 12 years.
Changes in stock options were as follows:
-------------------------------------------------------------------------------
Year Ended December 31
-------------------------------------------------------------------------------
thousands of shares 1994 1993 1992
-------------------------------------------------------------------------------
Beginning balance 6,800 11,335 13,305
Granted 6,351 2,281 220
Exercised (953) (5,689) (1,728)
Canceled or expired (675) (2,587) (462)
Adjustment due to Dean Witter
distribution -- 1,460 --
-------------------------------------------------------------------------------
Ending balance 11,523 6,800 11,335
-------------------------------------------------------------------------------
Reserved for future
grant at year-end 8,855 2,551 3,059
Exercisable 3,480 2,894 7,722 -
------------------------------------------------------------------------------
Option prices per share:
Granted $46.32-$51.19 $34.01-$58.00 $41.25-$45.75
Exercised 20.09- 39.68 19.90- 47.57 26.69- 43.13
Canceled or expired 22.91- 48.57 22.91- 57.88 26.69- 51.25
-------------------------------------------------------------------------------
Exercise prices of ending balance $19.90-$58.00 $19.90-$58.00 $25.94-$57.88 -
------------------------------------------------------------------------------
In 1993, the number and exercise price of outstanding stock options were
adjusted to account for the dilutive effect of the spin-off of Dean Witter.
During 1994 and 1993, Allstate issued options to purchase common stock of The
Allstate Corporation to its employees. At Dec. 31, 1994 and 1993, there were 3.0
and 2.7 million shares, respectively, under option at exercise prices from
$24.75 to $31.69 per share. The options vest ratably over a three-year period
and expire 10 years after the grant date.
46
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
18. SUMMARY OF BUSINESS GROUP DATA
The Company operates primarily in two businesses-retailing and insurance. While
the consolidated financial statements reflect the total financial resources and
operating results of the Company, analysis of the operations of the industry
components within the Company is facilitated by separate business group
statements. Therefore, beginning on page 48 are supplemental summarized
financial statements and analyses of operations and financial condition. The
following three-year summary of pertinent business group data, derived from the
accompanying statements, includes a further refinement within industry segments.
Corporate assets are principally investments, real estate and ventures not
included in the business groups. Corporate results include revenues and expenses
of such operations, and items of an overall holding company nature including the
portion of administrative costs and interest not allocated to the Company's
businesses.
---------------------------------------------------------------------------
millions 1994 1993 1992
---------------------------------------------------------------------------
REVENUES
---------------------------------------------------------------------------
Sears Merchandise Group
Domestic operations $29,376 $26,776 $29,108
International operations 3,649 3,668 3,835
---------------------------------------------------------------------------
Sears Merchandise Group total 33,025 30,444 32,943
--------------------------------------------------------------------------
Allstate Insurance Group
Property-liability 18,607 18,013 17,458
Life 2,856 2,927 2,770
Corporate 1 6 --
---------------------------------------------------------------------------
Allstate Insurance Group total 21,464 20,946 20,228
---------------------------------------------------------------------------
Corporate 110 169 229
---------------------------------------------------------------------------
Intergroup transactions (40) (73) (290)
---------------------------------------------------------------------------
Total $54,559 $51,486 $53,110
---------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) AND
MINORITY INTEREST
---------------------------------------------------------------------------
Sears Merchandise Group
Domestic operations $ 1,484 $ 1,141 $ 384
International operations 60 39 54
Restructuring -- -- (2,758)
---------------------------------------------------------------------------
Sears Merchandise Group total 1,544 1,180 (2,320)
---------------------------------------------------------------------------
Allstate Insurance Group
Property-liability 108 1,205 (1,551)
Life 334 247 126
Restructuring (154) -- --
Corporate (61) (76) --
---------------------------------------------------------------------------
Allstate Insurance Group total 227 1,376 (1,425)
---------------------------------------------------------------------------
Corporate (59) (219) (549)
Gain on The Allstate Corporation initial public
offering -- 635 --
---------------------------------------------------------------------------
Total $ 1,712 $ 2,972 $(4,294)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
millions 1994 1993 1992
---------------------------------------------------------------------------
NET INCOME (LOSS)
---------------------------------------------------------------------------
Sears Merchandise Group
Domestic operations $ 897 $ 744 $ 229
International operations (7) 8 29
Restructuring -- -- (1,730)
Cumulative effect of accounting changes -- -- (1,505)
---------------------------------------------------------------------------
Sears Merchandise Group total 890 752 (2,977)
---------------------------------------------------------------------------
Allstate Insurance Group
Property-liability 398 1,188 (589)
Life 225 163 89
Corporate (39) (50) --
Restructuring (100) -- --
Minority interest (96) (141) --
Cumulative effect of accounting changes -- -- (325)
---------------------------------------------------------------------------
Allstate Insurance Group total 388 1,160 (825)
---------------------------------------------------------------------------
Corporate (34) (127) (345)
Gain on The Allstate Corporation initial public
offering -- 635 --
---------------------------------------------------------------------------
Discontinued operations 15 165 215
---------------------------------------------------------------------------
Extraordinary gain (loss) 195 (211) --
---------------------------------------------------------------------------
Total $ 1,454 $ 2,374 $(3,932)
---------------------------------------------------------------------------
ASSETS
---------------------------------------------------------------------------
Sears Merchandise Group
Domestic operations $27,035 $24,995 $24,405
International operations 2,527 2,691 2,564
---------------------------------------------------------------------------
Sears Merchandise Group total 29,562 27,686 26,969
---------------------------------------------------------------------------
Allstate Insurance Group
Property-liability 32,612 32,709 28,523
Life 28,716 26,577 23,576
Corporate 41 72 --
---------------------------------------------------------------------------
Allstate Insurance Group total 61,369 59,358 52,099
---------------------------------------------------------------------------
Corporate 527 1,974 2,910
---------------------------------------------------------------------------
Intergroup eliminations and reclassifications (35) (545) (1,580)
---------------------------------------------------------------------------
Net assets of discontinued operations 473 452 3,549
---------------------------------------------------------------------------
Total $91,896 $88,925 $83,947
-------------------------------------------------------------------------
47
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-- SEARS MERCHANDISE
GROUP
Summarized
STATEMENTS
of
INCOME
-----------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-- Year Ended December
31
...............................................................................
millions 1994 1993 1992
..............................................................................
REVENUES
Merchandise sales and services $29,451 $27,171 $29,829
Credit revenues 3,574 3,273 3,114
..............................................................................
Total revenues 33,025 30,444 32,943
..............................................................................
COSTS AND EXPENSES
Cost of sales, buying and occupancy 21,568 19,918 22,218
Selling and administrative 7,468 7,088 8,108
Depreciation and amortization 517 493 494
Provision for uncollectible accounts 698 821 910
Restructuring -- -- 2,758
Interest 1,255 1,043 889
..............................................................................
Total costs and expenses 31,506 29,363 35,377
..............................................................................
Operating income (loss) 1,519 1,081 (2,434)
Other income 25 99 23
Gain on sales of subsidiaries' stock -- -- 91
..............................................................................
Income (loss) before income taxes (benefit) and
minority interest 1,544 1,180 (2,320)
Income taxes (benefit) 640 421 (830)
..............................................................................
904 759 (1,490)
Minority interest (14) (7) 18
..............................................................................
Income (loss) before cumulative effect of
accounting changes 890 752 (1,472)
Cumulative effect of accounting changes -- -- (1,505)
..............................................................................
GROUP INCOME (LOSS) $ 890 $ 752 $(2,977)
..............................................................................
See notes to Consolidated financial statements.
ANALYSIS OF OPERATIONS
Operating results for the Sears Merchandise Group are reported for two business
segments: domestic operations and international operations. Domestic operations
are comprised of domestic merchandising and domestic credit operations. Domestic
merchandising includes the core merchandising and product services and direct
response businesses in the United States and Puerto Rico. International
operations consists of similar merchandising and credit operations conducted in
Canada through Sears Canada Inc. (Sears Canada), a 61.1% owned subsidiary, and
in Mexico through Sears Roebuck de Mexico; S.A. de C.V. (Sears Mexico), a 75.2%
owned subsidiary.
Group revenues for 1994, 1993, and 1992 were as follows:
--------------------------------------------------
millions 1994 1993 1992
--------------------------------------------------
Domestic operations:
Domestic merchandising
Continuing businesses $26,127 $23,806 $21,549
Exited businesses -- -- 4,732
--------------------------------------------------
26,127 23,806 26,281
Domestic credit 3,249 2,970 2,827
--------------------------------------------------
Total domestic operations 29,376 26,776 29,108
International operations 3,649 3,668 3,835
--------------------------------------------------
Group revenues $33,025 $30,444 $32,943
--------------------------------------------------
Group revenues in 1994 increased $2.58 billion, or 8.5%. Domestic revenues
rose $2.60 billion, or 9.7%, primarily due to strong durable goods and apparel
sales during the year. International revenues declined $19 million, or 0.5%,
due to adverse changes in exchange rates. In local currencies, international
revenues increased 5.5%.
48
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
ANALYSIS OF OPERATIONS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
In 1993, Group revenues decreased $2.50 billion, or 7.6%, primarily due to the
impact of exited businesses. Exited businesses included the domestic catalog
operations, Sears Business Centers, selected retail department and specialty
stores and certain home improvement services. Excluding exited businesses,
domestic revenues increased $2.40 billion, or 9.8%, primarily due to more
focused and aggressive merchandising and marketing strategies and enhanced
customer service. International revenues declined 4.4%, reflecting a weak
Canadian economy and an unfavorable Canadian exchange rate.
Group income for 1994, 1993 and 1992 was as follows:
---------------------------------------------
millions 1994 1993 1992
---------------------------------------------
Domestic operations $897 $744 $(2,967)
International operations (7) 8 (10)
---------------------------------------------
Group income $890 $752 $(2,977)
---------------------------------------------
Group income for 1994 increased 18.4% to $890 million from $752 million in
1993. Income in 1993 included a $56 million tax credit from the adjustment of
deferred tax assets due to the 1% increase in the federal income tax rate
resulting from the Omnibus Budget Reconciliation Act of 1993. Excluding the tax
adjustment from 1993 results, 1994 Group income increased 28.0% over 1993.
Domestic income increased $153 million, or 20.7%, primarily due to higher
revenues, a decreased ratio of selling and administrative expenses to revenues
and a lower provision for uncollectible accounts. The lower 1994 results for
international operations were due to Sears Mexico's merchandise inventory
repositioning program and the peso devaluation.
Group income in 1993 increased $3.73 billion over a 1992 loss of $2.98
billion. The 1992 loss included $1.73 billion in after-tax restructuring
charges, a $1.50 billion noncash after-tax charge to record the cumulative
effect of changes in accounting for certain postretirement and postemployment
benefits, after-tax losses of $244 million from exited businesses and a $50
million net gain on the sales of subsidiaries' stock.
The Group made several reclassifications to the 1993 and 1992 statements of
income to conform to the 1994 classifications. Revenues from licensed
departments, which previously were recorded based on net commissions received,
are included on a gross basis. Refer to note 1 of the consolidated financial
statements for further information. Distribution costs which previously were
recorded in selling and administrative expenses, are included in cost of sales,
buying and occupancy. Depreciation and amortization expense, which previously
was recorded in cost of sales, buying and occupancy and selling and
administrative expense, is included as a separate caption in the Group's
statement of income.
DOMESTIC OPERATIONS
Supplementary domestic merchandising information:
-------------------------------------------------------------------------------
millions, except number of stores 1994 1993 1992(1)
-------------------------------------------------------------------------------
Department store revenues $21,090 $19,433 $17,673
Free-standing store revenues 3,184 2,649 2,301
-------------------------------------------------------------------------------
Core merchandising revenues 24,274 22,082 19,974
Other revenues 1,853 1,724 1,575
-------------------------------------------------------------------------------
Domestic merchandise sales and services $26,127 $23,806 $21,549
-------------------------------------------------------------------------------
Number of department stores 800 799 859
Number of free-standing stores 1,140 1,018 842
-------------------------------------------------------------------------------
Core merchandising stores 1,940 1,817 1,701(2)
Core merchandising revenues per selling square foot $ 346 $ 321 $ 289
-------------------------------------------------------------------------------
(1) Includes continuing businesses only.
(2) 1992 store counts include 113 stores which were part of the restructuring
actions announced in January 1993 and exclude the closed catalog and
specialty merchandising operations.
In 1994 and 1993, the Group's revenue growth strategy focused on improving the
productivity of its department stores. The success of this strategy can be
measured in the comparable store sales percentages which have remained strong
over the past two years, as shown in the following chart:
COMPARABLE STORE SALES CHART
In addition to strong comparable store sales increases, core merchandising
revenues per selling square foot have also shown steady increases in 1994 and
1993, up 7.8% and 11.1%, respectively.
Department store revenues increased 8.5% in 1994, which built on a 10.0%
increase in 1993. This strong revenue performance reflects the continued
revitalization and repositioning of the Group's base business, the department
stores. Actions taken to drive this revenue growth included the exiting of
unprofitable merchandise and service lines, the remodeling and modernization of
240 department stores in 1993 and 1994, the conversion of 2.9 million square
feet of non-selling space and 1.5 million square feet of selling space formerly
occupied by furniture departments to apparel selling
49
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS MERCHANDISE GROUP
ANALYSIS OF OPERATIONS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
space and a more target customer focused merchandise selection.
Increased sales of home-related products paced the growth in department store
revenues in 1994. Brand Central contributed the greatest share of the increase
in home product sales on the strength of excellent consumer demand for
appliances and home electronics. Strong consumer demand coupled with good in-
stock inventory positions resulted in double digit sales growth for the home
improvement business during 1994 as well.
Despite weak fashion industry conditions, apparel sales, which are entirely
department store based, increased significantly in 1994. Sales gains were
strongest in women's dresses and juniors, fine jewelry and cosmetics. These
departments benefited the most from the store remodeling and selling floor space
expansion programs in 1994. Men's apparel and footwear also provided significant
sales gains during 1994.
Automotive revenues declined in 1994 as a result of the discontinuation of
unprofitable product lines and services, which were partially offset by gains in
the base automotive product lines--tires and batteries.
In 1993, the increase in department store revenues was led by double-digit
percentage increases in women's, children's and men's apparel, accessories and
jewelry, footwear and electronics. The gains were primarily attributable to more
competitive values, an extensive brand advertising campaign and a greater
emphasis on customer service. Automotive department revenues declined against
1992 due to the elimination of unprofitable operations.
With the department stores making considerable progress, the Group has also
planned the expansion of a variety of free-standing store concepts such as the
Homelife furniture stores, Sears Hardware stores, Dealer stores and Western Auto
stores.
Free-standing store revenues in 1994 increased 20.2% over 1993. Dealer stores,
which are primarily independently-owned and operated and focus on a home-related
product assortment, contributed the largest portion of the revenue growth. The
Group opened 98 new Dealer stores in 1994 and 192 new stores in 1993. Western
Auto, a wholly-owned subsidiary which participates in the retail and wholesale
automotive products and services business, also contributed to the revenue
growth with increases from its free-standing formats. The Group opened 22 new
Homelife stores and 11 Sears Hardware stores in 1994 which also helped drive
revenue increases over 1993.
In 1993, free-standing store revenues increased 15.1% over 1992. The growth in
revenues was attributable to increases at Western Auto, a new revenue stream
from the creation of the Dealer store concept in 1993 and growth at the Homelife
stores.
Other revenues, which are generated by the product services and direct
response businesses, increased 7.5% in 1994 and 9.5% in 1993. Increases in
product services maintenance agreement sales, which benefitted from strong
appliance sales, and higher revenues at direct response, on the addition of 12
new specialty catalogs, accounted for the 1994 and 1993 revenue growth.
Supplementary domestic credit information:
-------------------------------------------------------------------------
millions 1994 1993 1992
-------------------------------------------------------------------------
Gross revenues $ 3,600 3,486 3,446
Funding cost on securitized receivables $ (351) (516) (619)
Net revenues $ 3,249 2,970 2,827
SearsCharge sales as a % of sales (1) 58.3% 58.0 54.5
Gross customer receivables $21,325 20,351 20,287
Balances sold at Dec. 31 $ 3,946 5,174 7,116
Owned customer receivables at Dec. 31 $17,379 15,177 13,171
Average gross receivables $20,094 19,649 19,510
Average owned receivables $15,718 13,471 12,428
Average account balance (dollars) $ 842 795 752
-------------------------------------------------------------------------
(1) For department and Homelife stores only.
In 1994, gross credit revenues increased 3.3% due to increased merchandise
sales and a lower liquidation rate. The increase in domestic credit revenues
comes despite the Group's decision in 1993 to provide customers a choice of
payment vehicles by accepting third party payment products in the retail stores.
Despite the strategic decision to accept third party credit cards, the
percentage of merchandise sales and services transacted with the SearsCharge
card in 1994 was comparable to that experienced in 1993. The Group has
implemented a variety of marketing initiatives to offset any negative impact on
SearsCharge market share relative to the acceptance of third party payment
products. In 1993, gross credit revenues increased 1.2% compared with 1992
reflecting the strong merchandise sales performance and higher gross receivable
balances.
In 1994, the Group established Sears National Bank, a credit card bank limited
to engaging in credit card operations, to provide a more unified pricing
environment. The Bank is subject to certain restrictions applicable to credit
card banks under federal law. In 1994, the Bank became the issuer of the
SearsCharge card in the state of Arizona and plans to expand to other states in
1995.
50
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
ANALYSIS OF OPERATIONS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Key operating measures for domestic operations:
-----------------------------------------------------------------------------
millions 1994 1993 1992(1)
-----------------------------------------------------------------------------
Gross margin $7,093 6,548 5,871
Percent of merchandise sales and services 27.1% 27.5 27.2
Selling and administrative expense $6,680 6,288 5,936
Percent of total revenues 22.7% 23.5 24.4
Interest expense $1,095 883 733
Funding cost on securitized receivables $ 351 516 619
Total funding costs $1,446 1,399 1,352
Provision for uncollectible accounts $ 650 795 872
Operating income $1,465 1,117 779
Percent of total revenues 5.0% 4.2 3.2
Net credit charge-offs to average gross customer
receivables 3.32% 3.45 3.57
Gross credit customer receivables delinquent sixty
days or more 3.86% 3.55 2.99
Allowance for uncollectible accounts as a percentage
of gross credit customer receivables at Dec. 31 4.31% 4.72 4.23
-----------------------------------------------------------------------------
(1) Includes continuing businesses only.
Gross margin as a percentage of merchandise sales declined slightly in 1994 to
27.1% from 27.5% in 1993. The decline is attributable to the strong 1994 sales
performance in the Brand Central and home improvement departments, which provide
a lower gross margin rate than domestic merchandising as a whole. The gross
margin rate in these businesses was further pressured due to competition from
specialty retailers. The gross margin rate on apparel sales was
successfully maintained in 1994, despite the heavy promotional environment that
plagued the apparel industry throughout 1994. Automotive department gross margin
rates improved in 1994 due to the discontinuation of unprofitable product lines
and services and the strategic sourcing initiatives that lowered product costs.
In 1993, gross margin as a percent of merchandising sales and services
increased to 27.5% from 27.2% in 1992 as a decrease in buying and occupancy
costs as a percent of merchandise sales and services was partially offset by
higher markdowns due to a continued emphasis on growing market share by offering
competitive values.
SELLING AND ADMINISTRATIVE EXPENSES AS % OF REVENUE CHART
Domestic selling and administrative expenses as a percent of revenues in 1994
improved approximately 80 basis points to 22.7% from 23.5%. The improvement in
the selling and administrative expense ratio reflects the Group's continued
emphasis on controlling expenses and leveraging its fixed cost base with strong
revenue growth. Store operating costs continued to decline as a percent of
revenues in 1994.
In 1993, selling and administrative expenses applicable to continuing domestic
operations as a percent of revenues declined approximately 90 basis points to
23.5% from 24.4% in 1992. The improvement was primarily attributable to a
reduction in payroll as a percent of revenues related to previously announced
restructuring initiatives, partially offset by higher advertising costs.
Total funding costs, comprised of interest expense and the funding cost of
securitized receivables, increased 3.3% as compared to 1993 reflecting the
growth in gross credit receivables. In 1993, total funding costs increased 3.6%
reflecting higher effective interest rates attributable to a change in the
funding mix resulting from the Company's repositioning.
The provision for uncollectible accounts was 18.2% lower than 1993 due to
favorable customer receivable write-off trends. Despite the improvement in
write-offs, delinquencies trended upward in the fourth quarter of 1994 and the
Group responded by increasing its collection staff and implementing additional
collection strategies. In 1993, the provision for uncollectible accounts
declined 8.9% primarily due to a decline in customer bankruptcies.
OPERATING INCOME CHART
A key measure of domestic operations' improved profit performance is growth in
operating income. The improvement from 1992 through 1994 resulted from strong
merchandising revenue growth, a relatively stable gross margin rate, the
reduction in selling and administrative expenses as a percent of revenues and
the strong credit performance.
51
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, MERCHANDISE GROUP
ANALYSIS OF OPERATIONS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
INTERNATIONAL OPERATIONS
Revenues in local currencies increased 5.5% in 1994. The improvement in local
currency revenues was attributable to a 1.7% revenue increase at Sears Canada
coupled with a 27.5% increase at Sears Mexico as sales benefited from the
opening of two new stores. Revenues in U.S. dollars declined slightly against
1993 due mainly to an unfavorable Canadian exchange rate.
Gross margin as a percent of revenues in 1994 increased to 23.8% from 20.9% in
1993 due to improved inventory control at Sears Canada partially offset by lower
gross margins at Sears Mexico as a result of a repositioning of that business.
Selling and administrative expense as a percent of revenues was slightly lower
at 21.6% in 1994 compared with 21.8% in 1993, as expense reductions at Sears
Canada were partially offset by cost increases at Sears Mexico. Operating income
as a percent of revenues improved approximately 250 basis points over 1993 due
primarily to improved performance at Sears Canada partially offset by lower
operating income at Sears Mexico stemming from the merchandise inventory
repositioning.
In 1993, revenues in local currency increased 1.4% as compared to 1992. Local
currency revenue increases at Sears Mexico, which benefited from the opening of
three new retail stores were partially offset by lower local currency revenues
at Sears Canada due to a soft Canadian economy. Revenues in U.S. dollars
declined in 1993 due to an unfavorable Canadian exchange rate. Gross margin as a
percent of revenues declined to 20.9% in 1993 as compared with the 1992 gross
margin rate of 21.4% due to increased inventory shrinkage at Sears Canada,
primarily in the catalog business. Selling and administrative expenses as a
percent of revenues decreased to 21.8% from 22.5% in 1992 due to cost
containment efforts at Sears Canada. Operating income as a percent of revenues
improved approximately 140 basis points in 1993 over 1992 due largely to
improved results at Sears Canada.
During 1992, a net after-tax gain of $50 million was recorded as the Company
sold a minority interest in Sears Mexico and Sears Canada completed a primary
offering of common stock.
52
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Summarized STATEMENTS
of FINANCIAL POSITION
-------------------------------------------------------------------------------
December 31
................................................................................
millions 1994 1993
................................................................................
ASSETS
Current assets
Cash and invested cash $ 445 $ 215
Retail customer receivables 19,033 16,695
Less: Allowance for uncollectible accounts and unearned
finance charges 832 789
................................................................................
18,201 15,906
Other receivables 266 1,346
Inventories 4,044 3,518
Prepaid expenses and deferred charges 274 328
Deferred income taxes 966 1,213
................................................................................
Total current assets 24,196 22,526
Property and equipment
Land 355 361
Buildings and improvements 3,717 3,598
Furniture, fixtures and equipment 3,729 3,626
Capitalized leases 229 239
................................................................................
8,030 7,824
Less accumulated depreciation 4,065 4,064
................................................................................
Total property and equipment, net 3,965 3,760
Deferred income taxes 685 616
Other assets 716 784
................................................................................
TOTAL ASSETS $29,562 $27,686
................................................................................
LIABILITIES
Current liabilities
Short-term borrowings $ 6,151 $ 4,433
Restructuring reserves 184 647
Accounts payable and other liabilities 4,603 4,468
Unearned revenues 780 762
Other taxes 474 403
................................................................................
Total current liabilities 12,192 10,713
Long-term debt and capitalized lease obligations 9,978 9,955
Postretirement benefits 2,795 2,729
Minority interest and other 816 866
................................................................................
TOTAL LIABILITIES 25,781 24,263
................................................................................
CAPITAL 3,781 3,423
................................................................................
TOTAL LIABILITIES AND CAPITAL $29,562 $27,686
................................................................................
See notes to Consolidated financial statements.
ANALYSIS OF FINANCIAL CONDITION
The Group has ready access to liquidity with cash and invested cash,
receivables and inventories comprising over 77% of the Group's assets at Dec.
31, 1994. The $20.6 billion net funding portfolio at Dec. 31, 1994, comprised of
$16.1 billion in debt and $4.5 billion of securitized receivables, was primarily
used to fund the Group's $23.5 billion of gross credit card
receivables.
Net cash used in operating activities was $330 million in 1994, compared with
$986 million in 1993. The improvement in operating cash flow is attributable to
higher income and lower cash payments relative to the restructuring reserve less
the corresponding reduction in the deferred income tax asset associated with
those payments. Offsetting this improvement was the growth in owned retail
customer receivables and the
53
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEARS, MERCHANDISE GROUP
Summarized STATEMENTS
of CASH FLOWS
-------------------------------------------------------------------------------
Year Ended December 31
................................................................................
millions 1994 1993 1992
....................................................................
CASH FLOWS FROM OPERATING ACTIVITIES
Group income (loss) $ 890 $ 752 $ (2,977)
Adjustments to reconcile group income (loss) to
net cash used in operating activities
Depreciation and amortization 517 493 494
Cumulative effect of accounting changes -- -- 2,430
Restructuring charges -- -- 2,758
Provision for uncollectible accounts 698 821 910
Gain on sales of property and investments (22) (73) (86)
Change in deferred income taxes 218 416 (2,053)
Increase in retail customer receivables (3,199) (2,868) (1,325)
Decrease (increase) in merchandise inventories (594) 514 357
Change in net other operating assets and
liabilities 1,162 (1,041) (908)
................................................................................
NET CASH USED IN OPERATING ACTIVITIES (330) (986) (400)
................................................................................
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchases of property and equipment (894) (487) (585)
Net (purchases) sales of investments (9) 80 10
................................................................................
NET CASH USED IN INVESTING ACTIVITIES (903) (407) (575)
................................................................................
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in long-term debt 138 1,530 67
Net increase in short-term borrowings, primarily
90 days or less 1,781 215 1,165
Proceeds from sales of subsidiaries' stock -- -- 162
Net capital transfers to Corporate (453) (421) (235)
................................................................................
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,466 1,324 1,159
................................................................................
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
INVESTED CASH (3) (1) (3)
................................................................................
NET INCREASE (DECREASE) IN CASH AND INVESTED
CASH 230 (70) 181
CASH AND INVESTED CASH AT BEGINNING OF YEAR 215 285 104
................................................................................
CASH AND INVESTED CASH AT END OF YEAR $ 445 $ 215 $ 285
................................................................................
See notes to Consolidated financial statements.
ANALYSIS OF FINANCIAL CONDITION CONTINUED
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
increased investment in inventory, which was partially offset by the
corresponding increase in merchandise payables. Inventories on a FIFO basis
totaled $4.74 billion as of Dec. 31, 1994, as compared to $4.24 billion at Dec.
31, 1993. The increase in inventory levels reflects the expansion of selling
space in the department stores and the growth of the free-standing store
businesses. The following inventory turnover chart reflects core merchandising's
improvement in managing inventory productivity over the past few years.
INVENTORY TURNOVER CHART
54
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
ANALYSIS OF FINANCIAL CONDITION CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
In the fourth quarter of 1992, the Group recorded a pretax restructuring
charge of $2.65 billion to streamline its domestic merchandising operations by
focusing on profitable core retail operations. The restructuring program
included discontinuing domestic catalog operations, a voluntary early retirement
incentive program, closing 113 unprofitable retail department and specialty
stores, streamlining or discontinuing various unprofitable merchandise lines and
the write-down of underutilized assets to market value.
The restructuring program was intended to reduce operating costs and improve
the Group's competitive position and earnings potential. The restructuring
program eliminated approximately 50,000 full-time and part-time positions. The
following represents the reserve activity during 1994 and 1993:
------------------------------------------------------------------------
millions 1994 1993
------------------------------------------------------------------------
Beginning balance $647 $2,150
Cash charges 247 1,216
Non-cashcharges 216 287
------------------------------------------------------------------------
Ending balance $184 $ 647
------------------------------------------------------------------------
For 1994, the cash charges related primarily to employee termination
benefits. For 1993, the cash charges related primarily to operating losses
associated with the catalog and other exited businesses. The remaining reserve
balance at Dec. 31, 1994 related primarily to commitments remaining under
contractual obligations. Management believes that the remaining reserve balance
at Dec. 31, 1994 is adequate.
The Group is currently in the middle of a five-year, $4 billion capital
expenditure program, which began in 1993. The program is primarily focused on
expanding the Group's revenue opportunities. The capital expended during the
past three years has been used as follows:
--------------------------------------------------------
millions 1994 1993 1992
--------------------------------------------------------
Department stores, primarily remodel and
expansion efforts $673 $306 $339
Free-standing formats 106 82 70
Cost and productivity initiatives 141 109 179
--------------------------------------------------------
Total capital expenditures $920 $497 $588
--------------------------------------------------------
The Group plans capital expenditures for 1995 of approximately $1.2 billion
(including leases) which includes the remodeling and upgrade of merchandise
presentations in approximately 109 existing department stores, 17 new
department stores, 50 new Sears Hardware stores, 30 new Homelife stores and 62
new Western Auto stores.
Net cash provided by financing activities was $1.47 billion in 1994 compared
to $1.32 billion in 1993, due primarily to increased debt levels, which were
required to fund the growth in credit receivables.
55
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
ALLSTATE INSURANCE GROUP
Summarized STATEMENTS
of INCOME
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Year Ended December 31
................................................................................
millions 1994 1993 1992
....................................................................
REVENUES
Property-liability insurance premiums (net of
reinsurance ceded of $609, $430 and $480) $16,808 $16,323 $15,738
Life insurance premium income and contract
charges (net of reinsurance ceded of $48, $47
and $38) 1,053 1,079 1,128
Investment income, less investment expense 3,401 3,324 3,200
Realized capital gains 202 220 162
................................................................................
Total revenues 21,464 20,946 20,228
................................................................................
COSTS AND EXPENSES
Property-liability insurance claims and claims
expense (net of reinsurance recoveries of $330,
$443 and $917) 14,665 12,922 15,205
Life insurance policy benefits (net of
reinsurance recoveries of $29, $26 and $22) 2,031 2,103 2,154
Policy acquisition costs (including amortization
of $2,019, $2,047 and $1,944) 3,198 3,279 3,154
Early retirement program 154 -- --
Interest 59 82 --
Other operating costs and expenses 1,130 1,184 1,140
................................................................................
Total costs and expenses 21,237 19,570 21,653
................................................................................
Income (loss) before income taxes (benefit) 227 1,376 (1,425)
Income taxes (benefit) (257) 75 (926)
................................................................................
The Allstate Corporation income (loss) before
cumulative effect of accounting changes 484 1,301 (499)
Minority interest (96) (141) --
Cumulative effect of accounting changes -- -- (326)
................................................................................
GROUP INCOME (LOSS) $ 388 $ 1,160 $ (825)
................................................................................
See notes to Consolidated financial statements.
ANALYSIS OF OPERATIONS
Allstate's revenues totaled $21.46, $20.95 and $20.23 billion for 1994, 1993 and
1992, respectively. Revenues increased 2.5% in 1994 due to increases in
property-liability earned premiums and investment income which were partially
offset by a decrease in life insurance premium income and contract charges and
lower realized capital gains. Revenues increased 3.6% in 1993 due to increases
in property-liability premiums earned, investment income and realized capital
gains which were partially offset by a decrease in life insurance premium income
and contract charges.
Allstate's 1994 income was $388 million, after minority interest of $96
million, compared with $1.16 billion, after minority interest of $141 million,
in 1993 and a loss of $825 million in 1992. The decline in income in 1994 from
1993 resulted primarily from a significant increase in catastrophe losses,
including losses of $846 million after taxes and minority interest from the
California earthquake, which more than offset the benefit of favorable
property-liability trends in claim severity and expense reductions, and improved
life operating income. Income in 1994 also includes a charge of $80 million
after taxes and minority interest for the cost of an early retirement program
offer accepted by approximately 600 employees during the fourth quarter. The
program provides one year of salary continuation and related benefits during the
salary continuation period, and an enhanced retirement benefit. Allstate
estimates that this program will result in annual cost savings of approximately
$28 million after taxes and minority interest, commencing in 1996.
Improved income in 1993 over 1992 resulted from stronger operating income from
both the property-liability and life operations and higher realized capital
gains. Income in 1993 also benefited from a nonrecurring tax credit of $28
million resulting from the adjustment of deferred tax assets due to the 1%
increase in the federal income tax rate imposed by the Omnibus Budget
Reconciliation Act of 1993. The loss in 1992 resulted from a $1.65 billion
after-tax loss from Hurricane Andrew and a onetime $326 million after-tax 56
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
ANALYSIS OF OPERATIONS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
charge as the result of a change in accounting for certain postretirement
benefits and postemployment benefits.
---
PROPERTY-LIABILITY OPERATIONS
Premiums written in 1994 increased 2.4% over 1993 levels, which in turn,
increased 3.8% over 1992. The increases were due to an increase in average
premium. Average premium increased primarily due to a shift to newer and more
expensive autos, rate increases and the effect of policy provisions adjusting
for inflation. In general, rate increases are limited by competition, favorable
loss cost trends and regulatory factors.
Over the past two years, policies in force have remained relatively unchanged
as increases in areas targeted for growth and improved retention of existing
customers were substantially offset by policy reductions in catastrophe exposure
areas. Premiums earned increased 3.0% and 3.7% in 1994 and 1993, respectively.
Supplementary income statement information:
------------------------------------------------------------------------------
millions 1994 1993 1992
------------------------------------------------------------------------------
Premiums written $17,009 $16,615 $16,011
------------------------------------------------------------------------------
Premiums earned $16,808 $16,323 $15,738
Claims and claims expense 14,665 12,922 15,205
Other costs and expenses 3,834 3,885 3,805
Early retirement program 132 -- --
------------------------------------------------------------------------------
Underwriting loss (1,823) (484) (3,272)
Net investment income 1,573 1,460 1,468
Realized capital gains,after-tax 147 149 167
Income tax benefit on operations (excluding tax on
realized capital gains) (415) (63) (1,049)
Cumulative effect of accounting changes -- -- (312) -
-----------------------------------------------------------------------------
Income (loss) $ 312 $ 1,188 $ (900) -
-----------------------------------------------------------------------------
Catastrophe losses $ 1,988 $ 546 $ 3,300
------------------------------------------------------------------------------
Claims and claims expense ("loss") ratio 87.2% 79.2% 96.6%
Expense ratio 23.6 23.8 24.2
------------------------------------------------------------------------------
Combined ratio 110.8% 103.0% 120.8%
------------------------------------------------------------------------------
Effect of catastrophe losses on combined ratio 11.8% 3.3% 21.0%
------------------------------------------------------------------------------
The underwriting loss increased in 1994 from 1993 primarily due to a
significant increase in catastrophe losses, including the California
earthquake, which more than offset the favorable trends in claim severity
(average cost per claim) for auto injury coverages and a lower expense ratio.
The Northridge, California earthquake resulted in the second highest total
losses from a single catastrophe incurred by Allstate in its history. Since
Allstate's preliminary provision for losses on February 1, 1994 and based on its
ongoing evaluation of ever increasing claim data and changing
circumstances, Allstate revised its provision for earthquake losses a number of
times. Allstate's cumulative provision for earthquake losses was $1.63 billion
($846 million after taxes and minority interest). The establishment of reserves
is an inherently uncertain process and there can be no assurance that ultimate
losses with respect to the California earthquake will not exceed recorded
reserves. However, management believes the possibility of additional material
loss is remote.
Underwriting results in 1993 improved from 1992 with decreases in both the
loss ratio and expense ratio. The improvement in the loss ratio was
attributable to lower catastrophe losses partially offset by modest increases in
severity and frequency. Underwriting results in 1992 include losses from
Hurricane Andrew of $2.5 billion, net of reinsurance.
P-L COMBINED RATIO
CHART
Catastrophes are an inherent risk of the property-liability insurance business
which have contributed, and will continue to contribute, to material year-to-
year fluctuations in Allstate's results of operations and financial condition.
The level of catastrophe loss experienced in any year cannot be predicted and
could be material to the results of operations and financial condition. Due to
the current unavailability of reinsurance at acceptable rates, Allstate has no
reinsurance in place to lower its exposure to
catastrophes at this time. However, Allstate continues to evaluate the
reinsurance market for appropriate coverage at acceptable rates. Allstate has
initiated a strategy to limit, over time, its insurance exposures in certain
regions prone to catastrophe occurrences. Allstate has declined to renew some
policies for property coverages, although the extent of such nonrenewals is
constrained by state insurance laws and regulations. In addition, Allstate has
filed for selective rate increases as well as for limitations on policy
coverages in catastrophe exposure areas, subject to the requirements of
insurance laws and regulations and as limited by competitive considerations.
While management believes that these actions will reduce Allstate's exposure to
catastrophes in certain geographic regions, the extent of such reductions is
uncertain.
Changes in claim severity are generally influenced by inflation in the medical
and auto repair sectors of the economy and company loss control initiatives.
Injury claims are affected by medical cost inflation while non-injury claims are
affected largely by auto repair cost inflation. Management
57
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
ALLSTATE INSURANCE GROUP
ANALYSIS OF OPERATIONS CONTINUED
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
believes that the favorable injury severity trends in 1994 and 1993 are due in
part to Allstate initiatives. These include initiatives to improve the claims
settlement process, medical management programs and the use of special
investigative units to reduce fraud. Injury coverage severity declined slightly
in 1994 from 1993. Although injury coverage severity in 1993 was higher than
1992, the rate of increase was lower than the corresponding increase in the
inflation rate for the Medical Care index as measured by the Bureau of Labor
Statistics during the same time period. For non-injury coverages, Allstate
monitors its rate of increase in average cost per claim against the Auto
Maintenance and Repair (AMR) index. Although 1994 and 1993 rates of increase in
non-injury severity were higher than the AMR index, they did not deviate
significantly from historical trends.
Auto injury frequencies decreased slightly during 1994, while non-injury
frequency trends were up due to adverse weather experienced during the first
quarter of the year. Frequencies for both injury and non-injury coverages
increased slightly in 1993. Excluding claims related to catastrophes, frequency
for homeowners coverages decreased in 1994 and 1993, while the severity of
claims increased slightly.
The cost of the early retirement program added eight-tenths of a percentage
point to the 1994 expense ratio. Excluding the cost of this program, the expense
ratio steadily declined over the three-year period as management continued to
improve efficiency and control the growth of back-office operation expenses.
Pretax investment income increased 7.7% in 1994 from 1993 due to growth in
investment balances that more than offset a decline in portfolio yields. Pretax
investment income decreased slightly in 1993 from 1992, primarily due to a
decline in portfolio yields, which were partially offset by the benefit of
higher investment balances. Year-to-year fluctuations in realized capital gains
are largely a function of timing of sales decisions reflecting management's view
of individual securities and overall market conditions.
---
LIFE OPERATIONS
Premium income is recognized as revenue for traditional life products and
annuities with life contingencies, and contract charges are recognized as
revenue for universal life contracts and investment contracts. Therefore,
premium income and contract charges are significantly influenced by the type of
products sold. Premium income and contract charges decreased 2.4% in 1994 and
4.3% in 1993. The decreases were due to lower sales of structured settlements
with life contingencies and group pension retirement annuities, which were
partially offset by higher contract charges resulting from growth in universal
life insurance inforce and variable annuity and other investment contract
account balances.
Supplementary income statement information:
----------------------------------------------------------------
millions 1994 1993 1992
----------------------------------------------------------------
Statutory premiums $4,539 $4,086 $3,851
----------------------------------------------------------------
Premium income and contract charges $1,053 $1,079 $1,128
Net investment income 1,827 1,858 1,732
Benefits and expenses 2,523 2,681 2,643
Early retirement program 22 -- --
----------------------------------------------------------------
Income from operations 335 256 217
Income tax on operations 109 87 68
----------------------------------------------------------------
Net operating income 226 169 149
Realized capital losses, after-tax (15) (6) (60)
Cumulative effect of accounting changes -- -- (14)
----------------------------------------------------------------
Income $ 211 $ 163 $ 75
----------------------------------------------------------------
Because of the manner in which life premiums and contract charges are
recognized under generally accepted accounting principles, statutory premiums
are a better measure of sales volume. Statutory premiums, which include premiums
and deposits for all products, increased 11.1% in 1994 from 1993 due to higher
sales of guaranteed investment contracts and increased sales and renewals of
life insurance policies. Sales of guaranteed investment contracts may vary based
on management's assessment of market opportunities. Increased sales of annuities
through banks were offset by reduced sales of structured settlements and other
individual annuities. In 1993, statutory premiums increased 6.1% from 1992
levels. Sales of individual annuity products,
including variable annuities, and sales and renewals of life insurance
increased during the period. Premiums from group pension products decreased in
1993.
Pretax net investment income decreased 1.6% in 1994 compared with 1993
primarily due to reduced portfolio yields, which were partially offset by the
impact of increased invested assets. Invested assets grew 7.7% and 5.6% for 1994
and 1993, respectively. Higher levels of invested assets resulted in a 7.2%
increase in investment income in 1993. Investment income was also
favorably impacted in 1993 by adjustments totaling $23 million resulting from
accelerated discount accretion on certain mortgage-backed securities.
LIFE OPERATING INCOME
CHART
58
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Summarized STATEMENTS
of FINANCIAL POSITION
-------------------------------------------------------------------------------
December 31
..............................................................................
.........................................
millions 1994 1993
.......................................................................................................................
ASSETS
Investments
Fixed income securities
Available for sale, at fair value (amortized cost $30,733 and
$28,549) $30,033 $30,955 Held to maturity, at
amortized cost (fair value $7,869 and $8,857)
8,008 7,933
..............................................................................
.........................................
38,041 38,888
Equity securities, at fair value (cost $4,281 and $3,626)
4,852 4,554 Mortgage loans
3,234 3,563
Real estate
814 722 Short-term
806 673
Other
432 391
..............................................................................
......................................... Total investments
48,179 48,791
Premium installment receivables
2,316 1,964 Deferred policy acquisition costs
2,074 1,511
Reinsurance recoverables
1,867 1,916 Property and equipment, net
788 822
Accrued investment income
710 705 Deferred income taxes
1,728 444
Cash
68 81 Other assets
839 842
Separate Accounts
2,800 2,282
..............................................................................
......................................... TOTAL ASSETS
$61,369 $59,358
..............................................................................
......................................... LIABILITIES
Reserve for property-liability
insurance claims and claims expense $16,933
$15,683 Reserve for life insurance policy benefits
5,224 4,942 Contractholder funds
17,974
16,811 Unearned premiums
5,908 5,729 Claim payments outstanding
607
492 Other liabilities and accrued expenses
2,628 2,269 Debt
869
850 Separate Accounts
2,800 2,282
..............................................................................
......................................... TOTAL LIABILITIES
52,943 49,058
..............................................................................
......................................... MINORITY INTEREST
1,666 2,049
CAPITAL
6,760 8,251
..............................................................................
......................................... TOTAL LIABILITIES AND CAPITAL
$61,369 $59,358
..............................................................................
.........................................
See notes to Consolidated financial statements.
ANALYSIS OF OPERATIONS CONTINUED
Net operating income increased 33.9% in 1994 from 1993, which in turn increased
13.6% from 1992. Net operating income in 1994 included a $14 million charge
related to the cost of the early retirement program and in 1993 included an $18
million charge resulting from management's decision to discontinue use of a
policy processing system. The increases in 1994 and 1993 were primarily due to
increased volume of contract charges on individual annuity products and lower
operating expenses. Additionally, net operating income in 1992 was adversely
affected by foregone interest on commercial mortgage loans.
Realized capital losses after taxes increased in 1994 compared with 1993. While
the life operations experienced significantly lower asset writedowns in 1994,
realized capital gains from sales of securities and bond calls were also
significantly lower than the prior year. Realized capital gains in 1993 included
the effect of sales related to repositioning a portion of the
investment portfolio to improve the matching of assets with related
liabilities. Realized capital losses after taxes were lower in 1993 compared to
1992 due to lower commercial mortgage loan losses and higher gains from bond
calls and sales of securities.
59
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ALLSTATE INSURANCE GROUP
ANALYSIS OF FINANCIAL CONDITION
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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CAPITAL
The capacity for Allstate's growth in property-liability premiums is in part a
function of its operating leverage. The premium to surplus ratio for Allstate
Insurance Company, Allstate's property-liability subsidiary, was 2.5x and 2.3x
at Dec. 31, 1994 and 1993, respectively. The increase resulted from a decline in
statutory surplus resulting from higher catastrophe losses in 1994.
The National Association of Insurance Commissioners has adopted a new standard
for assessing the solvency of insurance companies, which are referred to as
risk-based capital (RBC). The requirement consists of a formula for determining
each insurer's RBC and a model law specifying regulatory actions if an insurer's
RBC falls below specified levels. The RBC formula for property-liability
companies includes asset and credit risk, but places more emphasis on
underwriting factors for reserving and pricing. The RBC formula for life
insurance companies establishes capital requirements relating to insurance,
business, asset and interest rate risks. At Dec. 31, 1994, risk-based capital
for each of Allstate's individual property-liability and life companies was in
excess of the required capital levels.
In January 1995, Allstate announced that it intends to sell up to 70% of the
common stock of The PMI Group, Inc., an indirect wholly-owned subsidiary, in an
initial public offering. This decision is in keeping with its strategic
direction to focus on its core property-liability and life insurance businesses
and to realize the return on its long-term investment. Concurrently with the
initial public offering, Allstate will offer exchangeable notes due in 1998
which are mandatorily exchangeable into shares of PMI Group common stock
(subject to Allstate's right to deliver cash in lieu of such shares). Upon the
mandatory exchange, all or substantially all of Allstate's remaining ownership
interest in PMI Group will be eliminated. The foregoing offerings are subject to
market and other conditions, and there can be no assurance that the
offerings will be consummated.
---
INVESTMENTS
Allstate follows an investment strategy that combines the goals of safety,
stability, liquidity, growth and total return. It seeks to balance preservation
of principal with after-tax yield while maintaining portfolio diversification.
Investment strategies for the property-liability and life insurance segments
vary based on the nature of the respective insurance operations.
Invested assets contributed income constituting 15.8% and 15.9% of total
revenues in 1994 and 1993, respectively. The composition of the investment
portfolio at Dec. 31, 1994 is presented in the table below.
-------------------------------------------------------------
Property-
millions Liability Life Total
-------------------------------------------------------------
Fixed income
securities
Available for
sale $19,705 79.6% $10,328 44.2% $30,033 62.4%
Held to
maturity -- -- 8,008 34.2 8,008 16.6
Equities 4,124 16.6 728 3.1 4,852 10.1
Mortgage loans 68 0.3 3,167 13.6 3,235 6.7
Real estate 459 1.8 355 1.5 814 1.7
Short-term 389 1.6 404 1.7 793 1.6
Other 25 0.1 406 1.7 431 0.9
-------------------------------------------------------------
Total $24,770 100.0% $23,396 100.0% 48,166 100.0%
-------------------------------------------------------------
Corporate 13 --
-------------------------------------------------------------
$48,179 100.0%
-------------------------------------------------------------
---
FIXED INCOME SECURITIES
The fixed income securities portfolio consists of tax-exempt municipal bonds,
publicly traded corporate bonds, private placement securities, mortgage-backed
securities and U.S. Government bonds. Allstate generally holds its fixed income
securities long-term, but has classified the majority of these securities as
available for sale, which are carried in the statement of financial condition at
fair value, to allow maximum flexibility in portfolio management. At Dec. 31,
1994, unrealized capital losses on the available for sale portfolio totaled $700
million compared to unrealized capital gains of $2.41 billion at Dec. 31, 1993.
The significant change in the unrealized gain/loss position of the fixed income
available for sale securities portfolio was attributable to rising interest
rates.
FIXED INCOME SECURITIES
AVAILABLE FOR SALE
CHART
60
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ANALYSIS OF FINANCIAL CONDITION CONTINUED
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--------------------------------------------------------------------------------
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FIXED INCOME SECURITIES
HELD TO MATURITY
CHART
Nearly 95% of the $38.04 billion of fixed income securities are rated
investment grade. Included among the securities that are rated below investment
grade are securities that were purchased at investment grade but have since been
downgraded, high yield bonds and certain private placements of debt. The
majority of these securities are included in the available for sale portfolio
and are carried in the statement of financial position at fair value. The net
unrealized loss on below investment grade securities was $12 million at Dec. 31,
1994.
At Dec. 31, 1994 and 1993, $6.22 and $6.70 billion, respectively, of the fixed
income securities portfolio were invested in mortgage-backed securities. These
securities provide higher-than-average credit quality and liquidity. Allstate
mitigates credit risk by primarily purchasing securities with
underlying collateral that is guaranteed by U.S. Government entities.
Mortgage-backed securities are subject to risks associated with repayment of
principal. This may result in the securities having a different actual maturity
than anticipated at the time of purchase. Securities that have an amortized cost
greater than par which are backed by mortgages that repay faster (or slower)
than expected will incur a reduction (or increase) in yield. Those securities
that have an amortized cost lower than par that repay faster (or slower) than
expected will generate an increase (or decrease) in yield. The degree to which a
security is susceptible to changes in yields is influenced by the difference
between its amortized cost and par, the relative sensitivity to repayment of the
underlying mortgages backing the securities in a changing interest rate
environment, and the repayment priority of the securities in the overall
securitization structure. Prepayment of principal may result in a loss on
certain high-risk mortgage-backed securities. At Dec. 31, 1994, Allstate held $2
million of these higher risk securities.
Allstate attempts to limit repayment risk by purchasing securities whose cost
is below or does not significantly exceed par, and by purchasing structured
securities with repayment protection to provide a more certain cash flow to the
investor. At Dec. 31, 1994, the amortized cost of the mortgage-backed
securities portfolio was below par value by $155 million.
Allstate closely monitors its fixed income portfolio for declines in value that
are other than temporary. Securities are placed on non-accrual status when they
are in default or when the receipt of interest payments is in doubt. The total
pretax income effect of provisions for losses attributable to fixed income
securities for 1994, 1993 and 1992 was $26, $136 and $77 million, respectively.
The high level of writedowns in 1993 reflects changes in
estimated future cash flows for certain mortgage-backed securities. The fair
value of total problem, restructured and potential problem fixed income
securities at Dec. 31, 1994 was $95, $23 and $161 million, respectively. These
securities are carried at fair value. Potential problem fixed income securities
included $24 million of Orange County, California securities.
---
MORTGAGE LOANS
Allstate's $3.23 billion investment in mortgage loans at Dec. 31, 1994 is
comprised primarily of loans secured by first mortgages on developed commercial
real estate, and is primarily held in the life operations. Geographical and
property diversification are key considerations used to manage Allstate's
mortgage loan risk. Property diversification at Dec. 31, 1994 was 37% retail,
22% office building, 19% warehouse, 14% apartment complexes and 8% other. The
portfolio is geographically diversified throughout the U.S. and Canada.
Allstate closely monitors its commercial mortgage loan portfolio on a loan-by-
loan basis. Loans with an estimated collateral value less than the loan balance
as well as loans with other characteristics indicative of higher than normal
credit risk are reviewed by financial and investment management at least
quarterly for purposes of establishing valuation reserves and placing loans on
non-accrual status. The underlying collateral values are estimated using
discounted cash flow projections, and are updated as conditions change or at
least annually. The total pretax income effect of provisions for loan losses was
$62, $84 and $157 million in 1994, 1993 and 1992, respectively.
61
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ALLSTATE INSURANCE GROUP
Summarized STATEMENTS
of CASH FLOWS
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Year Ended December 31
................................................................................
millions 1994 1993 1992
................................................................................
CASH
FLOWS FROM OPERATING ACTIVITIES
Group income (loss) $ 388 $ 1,160 $ (825)
Adjustments to reconcile Group income (loss) to
net cash
provided by operating activities
Depreciation, amortization and other noncash
items 52 26 112
Cumulative effect of accounting changes -- -- 494
Early retirement program 154 -- --
Realized capital gains (202) (220) (162)
Increase in policy benefit and other insurance
reserves 1,779 1,156 2,182
Increase in deferred income taxes (173) (142) (620)
Change in other operating assets and
liabilities (7) 613 (368)
................................................................................
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,991 2,593 813
................................................................................
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales
Fixed income securities 5,205 5,927 5,157
Equity securities 1,944 1,574 1,352
Investment maturities
Fixed income securities 3,991 5,424 2,974
Mortgage loans 399 233 113
Investment purchases
Fixed income securities (11,327) (15,426) (10,001)
Equity securities (2,359) (1,769) (1,566)
Mortgage loans (221) (306) (382)
Net change in short-term investments (139) 423 (235)
Change in other investments (40) (48) (33)
Net purchases of property and equipment (132) (76) (120)
................................................................................
NET CASH USED IN INVESTING ACTIVITIES (2,679) (4,044) (2,741)
................................................................................
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt assumed from Sears -- (1,800) --
Proceeds from issuance of debt 19 850 --
Proceeds from issuance of common stock -- 2,287 --
Payments received under investment contracts 2,839 2,359 2,771
Interest credited to investment contracts 924 959 1,034
Payments on maturity of investment contracts and
other charges (2,847) (2,919) (1,766)
Dividends paid to Sears (260) (330) (202)
................................................................................
NET CASH PROVIDED BY FINANCING ACTIVITIES 675 1,406 1,837
................................................................................
NET DECREASE IN CASH (13) (45) (91)
CASH AT BEGINNING OF YEAR 81 126 217
................................................................................
CASH AT END OF YEAR $ 68 $ 81 $ 126
................................................................................
See notes to Consolidated financial statements.
62
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ANALYSIS OF FINANCIAL CONDITION CONTINUED
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Allstate defines problem commercial mortgage loans as loans that are in
foreclosure, loans for which a principal or interest payment is over 60 days
past due, or are current with interest payments, but considered in-substance
foreclosed. Restructured commercial mortgage loans have modified terms and
conditions that were not at prevailing market rates or terms at the time of
restructuring. Potential problem commercial mortgage loans are current with
interest payments, or less than 60 days delinquent as to contractual principal
and interest payments, but because of other facts and circumstances, management
has serious doubts regarding the borrower's ability to pay future interest and
principal which causes management to believe these loans may be classified as
problem or restructured in the future. Interest foregone on problem and
restructured loans was $4, $6 and $17 million for 1994, 1993 and 1992,
respectively.
The following table summarizes the net carrying values of problem,
restructured and potential problem commercial mortgage loans at Dec. 31, 1994
and 1993.
------------------------------------------------------------
December 31,
------------------------------------------------------------
millions 1994 1993
------------------------------------------------------------
Problem $127 $ 92
Restructured 161 161
Potential problem 222 383
------------------------------------------------------------
Total net carrying value $510 $636
------------------------------------------------------------
Reserves $ 92 $ 91
------------------------------------------------------------
Reserves as a % of gross carrying value (1) 15.3% 12.5%
------------------------------------------------------------
(1) Calculated as total reserves divided by the gross carrying value, which is
the total net carrying value plus the reserves.
In 1994, overall real estate market conditions generally stabilized
nationwide, and some geographic regions showed improvement. The decline in the
industry delinquency rates, which began in 1993, continued throughout 1994. The
net carrying value of problem, restructured and potential problem loans
decreased primarily due to loan foreclosures and discounted loan payoffs, write-
offs and improved loan circumstances consistent with the improvement in certain
real estate markets. Problem loans experienced a net increase due to potential
problem loans moving to the problem loan category. Contributing to the decrease
in potential problem loans was improvement in the circumstances surrounding
certain loans. Allstate's restructured loans carrying value remained constant as
loans added were offset by loans which met the
restructured contractual obligations, were paid off early, or moved into the
problem category. Allstate expects to continue to extend the maturity and adjust
the interest rates to market of certain maturing loans where the borrower is
unable to obtain financing elsewhere. If interest rates continue to rise, it
will likely be more difficult to obtain market-adjusted rates on maturing
mortgages and may result in an increase of restructured loans. Management's
commercial mortgage loan monitoring procedures as well as the frequency of
estimating collateral values for each loan provide a reasonable basis for
establishing reserves. Management is encouraged by the positive real estate
market trends in some geographic locations; however, further declines in certain
market or specific property conditions may cause changes in estimates of cash
flows and may result in additional losses. While Allstate believes its
commercial mortgage loans were carried at appropriate levels at Dec. 31, 1994,
no assurance can be given that further additions to the reserves will not be
required.
---
CLAIMS AND CLAIM EXPENSE RESERVES
Underwriting results of the property-liability operations are significantly
influenced by estimates of claims and claims expense reserves. Allstate
regularly updates its reserve estimates as new facts become known and further
events occur that may impact the resolution of unsettled claims.
Reserves for asbestos and environmental claims are subject to greater
uncertainties than those presented by other types of claims. Reserves for
asbestos were $486 and $503 million, net of reinsurance recoverable of $293 and
$283 million, at Dec. 31, 1994 and 1993, respectively. Reserves for
environmental claims were $370 and $354 million, net of reinsurance recoverable
of $492 and $473 million, for the same periods.
Pending asbestos and environmental claims were approximately 16,200 and 15,500
at Dec. 31, 1994 and 1993, respectively. Approximately 2,700 and 3,000 new
claims were reported during 1994 and 1993, respectively. Approximately 2,000 and
1,450 claims were closed during 1994 and 1993, respectively, of which
approximately 1,400 and 1,250 claims were settled without payment.
Refer to note 9 of the consolidated financial statements for further
discussion on reserves for asbestos and environmental claims.
---
LIQUIDITY
Allstate's operations generate substantial positive cash flow from operations as
a result of premiums and deposits received in advance of the time claims and
policyholder benefits are paid. Positive operating cash flows, along with the
portion of the investment portfolio that is held in cash and highly liquid
securities, have historically met the liquidity requirements of the operations.
Catastrophe claims, the timing and amount of which are inherently
unpredictable, may create increased liquidity requirements. Allstate was able to
meet the cash requirements of the California earthquake with operating cash
flows.
Under a shelf registration filed with the Securities and Exchange Commission,
Allstate may issue up to $650 million of debt or preferred stock. In addition,
at Dec. 31, 1994, Allstate had unused lines of credit of $1.00 billion.
63
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SEARS, ROEBUCK AND CO.
Ten-year SUMMARY
of CONSOLIDATED FINANCIAL DATA
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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$ millions, except per common
share data 1994 1993 1992
...............................................................................
OPERATING RESULTS
...............................................................................
Revenues $54,559 $51,486 $53,110
Costs and expenses 51,390 47,898 53,253
Restructuring 154 -- 2,782
Interest 1,339 1,400 1,389
Operating income (loss) 1,676 2,188 (4,314)
Other income (loss) 36 784 20
Income (loss) before income taxes
(benefit) and minority interest 1,712 2,972 (4,294)
Income taxes (benefit)
Current operations 358 404 (1,965)
Fresh start and deferred tax
benefits -- -- --
Income (loss) from continuing
operations 1,244 2,420 (2,311)
Income (loss) from discontinued
operations 15 165 252
Extraordinary gain (loss) 195 (211) --
Cumulative effect of accounting
changes -- -- (1,873)
Net income (loss) 1,454 2,374 (3,932)
................................................................................
FINANCIAL POSITION
................................................................................
Investments $46,942 $47,753 $40,304
Receivables 21,969 20,019 18,116
Property and equipment, net 5,041 5,223 5,479
Merchandise inventories 4,044 3,518 4,048
Net assets of discontinued
operations 473 452 3,549
Total assets 91,896 88,925 83,947
Insurance reserves 40,136 37,444 35,889
Short-term borrowings 6,190 4,636 4,469
Long-term debt 10,854 11,640 12,432
Total debt 17,044 16,276 16,901
Percent of debt to equity 158% 163% 157%
Shareholders' equity $10,801 $11,664 $10,773
................................................................................
SHAREHOLDERS' COMMON STOCK
INVESTMENT
................................................................................
Book value per common share (year-
end) $ 26.91 $ 29.58 $ 27.89
Shareholders 262,387 291,320 337,892
Average common shares outstanding
(millions) 389 383 370
Earnings (loss) per common share
Income (loss) from continuing
operations $3.12 $6.25 $(6.33)
Income (loss) from discontinued
operations .04 .43 .68
Extraordinary gain (loss) .50 (.55) --
Cumulative effect of accounting
changes -- -- (5.07)
Net income (loss) 3.66 6.13 (10.72)
Cash dividends declared per common
share $1.60 $1.60 $2.00
Cash dividend payout percent 43.7% 26.1% N/M
Market price--common stock (high-
low) 55 1/8-42 1/8 60 1/8-39 7/8 48-37
Closing market price at year-end 46 52 7/8 45 1/2
Price/earnings ratio (high-low) 15-12 10-7 N/M
................................................................................
Operating results and financial position reflect Homart Development Co. and
affiliated entities, Dean Witter, Discover & Co. and the Coldwell Banker
residential services businesses as discontinued operations. See note 5 to the
consolidated financial statements. Operating results for 1990 and prior years
also reflect the group life-health business of Allstate Insurance Group and the
commercial division of Coldwell Banker as discontinued operations.
Financial position for 1994 and 1993 reflects the adoption of new accounting
rules for certain investments in debt securities. Operating results and
financial position for 1994, 1993 and 1992 reflect the adoption of new
accounting rules for postretirement and postemployment benefits. See note 2 to
the consolidated financial statements. Net income in 1988 reflects adoption of
new income tax accounting rules.
64
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.........................................................................................................
1991 1990 1989 1988 1987 1986 1985
.........................................................................................................
.........................................................................................................
$51,592 $50,889 $49,049 $45,784 $41,691 $38,687 $36,393
49,181 48,681 45,952 42,800 38,419 35,836 33,771
-- 265 -- 751 105 -- --
1,568 1,651 1,570 1,338 1,164 1,218 1,280
843 292 1,527 895 2,003 1,633 1,342
(22) (38) (82) (25) (33) 108 152
821 254 1,445 870 1,970 1,741 1,494
(57) (263) 181 (40) 461 424 271
-- (139) -- -- (172) -- --
883 646 1,221 879 1,644 1,292 1,193
396 256 288 31 (11) 47 101
-- -- -- -- -- -- --
-- -- -- 544 -- -- --
1,279 902 1,509 1,454 1,633 1,339 1,294
..............................................................................
..............................................................................
$37,724 $31,785 $27,268 $23,103 $19,340 $15,742 $13,136
16,677 18,215 18,419 17,186 16,586 14,584 14,119
5,846 5,488 5,022 4,748 4,399 4,267 4,251
4,459 4,074 4,358 3,716 4,115 4,013 4,115
2,887 2,581 2,398 2,390 2,331 1,874 1,509
77,845 71,050 63,935 57,420 52,124 45,676 41,359
31,612 27,184 22,331 18,521 14,257 11,075 8,876
1,775 7,462 6,880 4,359 3,996 1,545 2,106
16,398 10,782 8,434 8,274 8,507 8,871 9,023
18,173 18,244 15,314 12,633 12,503 10,416 11,129
128% 142% 112% 90% 92% 80% 95%
$14,188 $12,824 $13,622 $14,055 $13,541 $13,017 $11,776
..............................................................................
..............................................................................
$ 40.29 $ 37.38 $ 39.77 $ 37.75 $ 35.77 $ 33.90 $ 31.66
342,851 345,071 348,597 351,999 328,446 319,686 326,201
344 343 351 379 378 369 363
$2.56 $1.88 $3.48 $2.32 $4.33 $3.46 $3.23
1.15 .75 .82 .08 (.03) .12 .28
-- -- -- -- -- -- --
-- -- -- 1.44 -- -- --
3.71 2.63 4.30 3.84 4.30 3.58 3.51
$2.00 $2.00 $2.00 $2.00 $2.00 $1.76 $1.76
53.9% 76.0% 46.5% 52.1% 46.5% 49.2% 50.1%
43 1/2-24 3/8 41 7/8-22 48 1/8-36 1/2 46-32 1/4 59 1/2-29 3/4 50 3/8-35 7/8 41 1/8-30 7/8
37 7/8 25 3/8 38 1/8 40 7/8 33 1/2 39 3/4 39
12-7 16-8 11-8 12-8 14-7 14-10 12-9
..............................................................................
Operating results and financial position for 1986 and thereafter
may not be comparable to 1985 due to adoption of new pension
accounting rules.
Series A Mandatorily Exchangeable Preferred Shares are considered
common shares for purposes of calculating book value per common
share, average common shares outstanding and earnings (loss) per
common share. See note 1 to the consolidated financial statements.
The percent of debt to equity for 1994 and 1993 is calculated using
equity excluding unrealized net capital gains.
N/M--Not meaningful.
65
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SEARS, ROEBUCK AND CO.
MANAGEMENT'S Report
-------------------------------------------------------------------------------
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The financial statements, including the financial analysis and all other
information in this annual report, were prepared by management which is
responsible for their integrity and objectivity. Management believes the
financial statements, which require the use of certain estimates and judgments,
fairly and accurately reflect the Company's financial position and operating
results, in accordance with generally accepted accounting principles. All
financial information in this annual report is consistent with the financial
statements.
Management maintains a system of internal controls which it believes provides
reasonable assurance that, in all material respects, assets are maintained and
accounted for in accordance with management's authorizations and transactions
are recorded accurately in the books and records. The concept of reasonable
assurance is based on the premise that the cost of internal controls should not
exceed the benefits derived. To assure the effectiveness of the internal control
system, the organizational structure provides for defined lines of
responsibility and delegation of authority. The Company's formally stated and
communicated policies demand of employees high ethical standards in their
conduct of its business. These policies address, among other things, potential
conflicts of interest; compliance with all domestic and foreign laws, including
those related to financial disclosure; and the confidentiality of proprietary
information. As a further enhancement of the above, the Company's comprehensive
internal audit program is designed for continual evaluation of the adequacy and
effectiveness of its internal controls and measures adherence to established
policies and procedures.
Deloitte & Touche LLP, independent certified public accountants, have audited
the financial statements of the Company and their report is presented below.
Their audit also includes a study and evaluation of the Company's control
environment, accounting systems and control procedures. The independent
accountants and internal auditors advise management of the results of their
reviews, and make recommendations to improve the system of internal controls.
Management evaluates the audit recommendations and takes appropriate action.
The Audit Committee of the Board of Directors is comprised entirely of directors
who are not employees of the Company. The committee reviews audit plans,
internal control reports, financial reports and related matters and meets
regularly with the Company's management, internal auditors and
independent accountants. The independent accountants and the internal auditors
advise the committee of any significant matters resulting from their audits of
our financial statements and internal controls and have free access to the
committee without management being present.
Edward A. Brennan
Chairman and Chief Executive Officer
James M. Denny
Vice Chairman and Acting Chief Financial Officer
James A. Blanda
Vice President and Controller
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Sears, Roebuck and Co.
We have audited the accompanying Consolidated Statements of Financial Position
of Sears, Roebuck and Co. as of December 31, 1994 and 1993, and the related
Consolidated Statements of Income, Shareholders' Equity and Cash Flows for each
of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sears, Roebuck and Co. as of
December 31, 1994 and 1993, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1994 in conformity
with generally accepted accounting principles.
As discussed in note 2 to the consolidated financial statements, the Company
changed its method of accounting for certain investments in debt securities in
1993 and postretirement benefits in 1992.
Deloitte & Touche LLP
February 24, 1995 Chicago, Illinois
66
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Quarterly RESULTS (Unaudited)
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter Year
..............................................................................
millions, except per
common share data 1994 1993 1994 1993 1994 1993 1994 1993 1994 1993
..................................................................................................................
Revenues,prior basis $12,266 $11,298 $13,008 $12,157 $13,206 $12,719 $15,440 $14,664 $53,920 $50,838
Discontinued operations 61 53 62 55 67 56 74 67 264 231
Reclassification of
revenues of licensed
departments 235 211 205 208 203 192 260 268 903 879
As restated 12,440 11,456 13,151 12,310 13,342 12,855 15,626 14,865 54,559 51,486
..................................................................................................................
Operating income (loss),
prior basis (389) 318 786 599 470 518 753 671 1,620 2,106
Discontinued operations (15) (16) (16) (31) (11) (15) (14) (20) (56) (82)
As restated (374) 334 802 630 481 533 767 691 1,676 2,188
..................................................................................................................
Income (loss) from continuing operations,
prior basis (98) 317 503 1,093 364 454 490 545 1,259 2,409
Discontinued operations 5 (8) (10) (18) 17 (5) 3 20 15 (11)
As restated:
Income (loss) from
continuing operations (103) 325 513 1,111 347 459 487 525 1,244 2,420
Net income (loss) $ (98) $ 435 $ 503 $ 1,006 $ 364 $ 388 $ 685 $ 545 $ 1,454 $ 2,374
..................................................................................................................
Earnings (loss) per common
share, prior basis
Continuing operations $ (0.27) $ 0.82 $ 1.27 $ 2.86 $ 0.91 $ 1.15 $ 1.24 $ 1.39 $ 3.16 $ 6.22
Discontinued operations 0.01 (0.02) (0.03) (0.04) 0.04 (0.01) 0.01 0.05 0.04 (0.03)
As restated:
Income (loss) from
continuing operations $ (0.28) $ 0.84 $ 1.30 $ 2.90 $ 0.87 $ 1.16 $ 1.23 $ 1.34 $ 3.12 $ 6.25
Net income (loss) $ (0.27) $ 1.13 $ 1.27 $ 2.63 $ 0.91 $ 0.98 $ 1.74 $ 1.39 $ 3.66 $ 6.13
..................................................................................................................
Revenues, operating income, net income and
related per common share amounts for 1994 and 1993 have been restated to reflect
Homart Development Co. and
affiliated entities as a discontinued business.
The fourth quarter pretax LIFO adjustments were credits of $58 and $31 million
in 1994 and 1993, compared with charges of $24 and $36 million for the first
nine months of the respective years.
Fourth quarter 1994 results included an $80 million charge (after taxes and
minority interest) for Allstate's early retirement program. See note 6 to the
consolidated financial statements.
Fourth quarter 1994 results included an extraordinary gain of $195 million
related to the early extinguishment of debt. Second and third quarter 1993
results included extraordinary losses related to early extinguishment of debt of
$145 and $66 million, respectively. See note 12 to the consolidated financial
statements.
Second quarter 1993 results included a $635 million gain on the initial public
offering of The Allstate Corporation.
Total of quarterly earnings per common share may not equal the annual amount as
net income per common share is calculated independently for each quarter.
COMMON STOCK MARKET INFORMATION AND DIVIDEND HIGHLIGHTS (Unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter Year
..................................................................................................................
dollars 1994 1993 1994 1993 1994 1993 1994 1993 1994 1993
..................................................................................................................
Stock price range
High 55 1/8 55 3/4 51 7/8 56 1/4 51 1/8 57 3/4 52 3/8 60 1/8 55 1/8 60 1/8
Low 42 7/8 43 7/8 42 1/8 50 3/8 45 5/8 39 7/8 43 1/2 51 3/8 42 1/8 39 7/8
Close 43 1/8 54 3/4 48 55 48 53 7/8 46 52 7/8 46 52 7/8
Cash dividends declared .40 .40 .40 .40 .40 .40 .40 .40 1.60 1.60
..................................................................................................................
Stock price ranges are for transactions reported in a summary of
composite transactions for stocks listed on the New York Stock
Exchange (trading symbol - S), which is the principal market for
the Company's common stock.
The 1993 third quarter stock prices reflect the when-issued price
for the Company's common stock due to the Dean Witter spin-off.
The number of registered common shareholders at Feb. 28, 1995 was
262,605.
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; Basel, Geneva, Lausanne and Zurich,
Switzerland; Amsterdam, The Netherlands; Tokyo, Japan; Paris,
France; and Frankfurt, Germany.
67
APPENDIX
GRAPHIC AND IMAGE MATERIAL
Chart (1st Chart on PAGE 23)
Two three-dimensional pie charts showing composition of 1994 assets for the
Allstate Insurance Group and Sears Merchandise Group. Top chart shows 1994
Allstate assets as follows: Fixed Income Securities, 62%; Equity Securities, 8%;
Mortgage Loans, 5%; Other Investments, 3%; Separate Accounts, 5%; and Other
Assets, 17%. Bottom chart shows 1994 Sears Merchandise Group assets as follows:
Net Receivables, 63%; Inventory, 14%; Property and Equipment, 13%; and Other
Assets, 10%.
Chart (2nd Chart on PAGE 23)
Three-dimensional pie chart showing the dollar amount (in billions) of funding
by business at year-end 1994 as follows: Domestic Operations, $18.8 net of
investments; International Operations, $1.7; and Allstate, $0.9. Total funding
at year-end 1994 was $21.4 billion.
Chart (PAGE 25)
Three-dimensional pie chart showing the percentage of various funding sources at
year-end 1994 as follows: Unsecured Commercial Paper, 22%; Asset-Backed
Commercial Paper, 8%; Securitization, 20%; Medium Term Notes, 26%; Senior
Unsecured, 18%; and Other, 6%.
Chart (PAGE 49)
Three-dimensional bar graph showing Domestic Operations' comparable store sales
growth for 1992 through 1994 as follows: 1992, 3.6%; 1993, 8.9%; and 1994, 8.3%.
Chart (1st Chart on PAGE 51)
Three-dimensional bar graph showing Domestic Operations selling and
administrative expense percent to revenues for 1992 through 1994 as follows:
1992, 24.4% (continuing businesses only); 1993, 23.5%; and 1994, 22.7%.
Chart (2nd Chart on PAGE 51)
Three-dimensional bar graph showing Domestic Operations operating income percent
to revenues for 1992 through 1994 as follows: 1992, 3.2% (continuing businesses
only); 1993, 4.2%; and 1994, 5.0%.
Chart (PAGE 54)
Three-dimensional bar graph showing core merchandising inventory turnover for
1992 through 1994 as follows: 1992, 3.37; 1993, 3.69; and 1994, 3.74.
Chart (PAGE 57)
Three-dimensional stacked bar graph showing the property-liability combined
ratio excluding catastrophe losses and the impact of catastrophes losses on the
combined ratio, respectively, for 1992 through 1994 as follows: 1992, 99.8 and
21.0; 1993, 99.7 and 3.3; and 1994, 99.0 and 11.8. The total combined ratio was
as follows: 1992, 120.8; 1993, 103.0; and 1994, 110.8.
Chart (PAGE 58)
Three-dimensional bar graph showing life operating income (in millions) for 1992
through 1994 as follows: 1992, $149; 1993, $169; and 1994, $226.
Chart (PAGE 60)
Three-dimensional pie chart showing the percentage distribution of fixed income
securities available for sale as follows: U.S. Government Bonds, 3.4%; Municipal
Bonds, 54.3%; Publicly-Traded Corporate Bonds, 13.3%; Privately-Placed Corporate
Bonds, 8.5%; Mortgage-Backed Securities, 18.7%; and Other, 1.8%.
Chart (PAGE 61)
Three-dimensional pie chart showing the percentage distribution of fixed income
securities held to maturity as follows: Privately-Placed Corporate Bonds, 66.9%;
Publicly-Traded Corporate Bonds, 12.2%; U.S. Government Bonds, 13.3%; and
Mortgage-Backed Securities, 7.6%.