UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
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For the fiscal year ended January 3, 2004 | |
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OR | |
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-416
SEARS, ROEBUCK AND CO.
New York
36-1750680
(State of Incorporation)
(I.R.S. Employer Identification No.)
3333 Beverly Road, Hoffman Estates,Illinois
60179
(Address of principal executive offices)
(Zip Code)
Registrants telephone number, including area code: (847) 286-2500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of Each Exchange on Which Registered
New York Stock Exchange
Common Shares, par value $0.75 per share
Chicago Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
On January 31, 2004, the Registrant had 222,926,291 common shares outstanding. The aggregate market value (based on the closing price of the Registrants common share as reported in a summary of composite transactions in The Wall Street Journal for stocks listed on the New York Stock Exchange on June 27, 2003) of the Registrants common shares owned by non-affiliates (which are assumed to be shareholders other than (i) directors and executive officers of the Registrant and (ii) any person known by the Registrant to beneficially own five percent or more of Registrants common shares), as of June 27, 2003 was approximately $6.0 billion.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Documents Incorporated By Reference
Part III of this Form 10-K incorporates by reference certain information from the Registrants proxy statement relating to its Annual Meeting of Shareholders to be held on May 13, 2004 (the 2004 Proxy Statement).
PART I
Item 1. Business
Sears, Roebuck and Co. (Sears, and together with its consolidated
subsidiaries, the Company) originated from an enterprise established in 1886
and incorporated under the laws of New York in 1906. Its principal executive
offices are located at 3333 Beverly Road, Hoffman Estates, Illinois. The
Company is a multi-line retailer that offers a wide array of merchandise and
related services and is among the largest retailers in North America. In
addition, through its Credit and Financial Products businesses, the Company has
offered its customers various credit, financial and related insurance products.
For the year ended January 3, 2004, the Company was organized into four
principal business segments - Retail and Related Services, Credit and Financial
Products, Corporate and Other, and Sears Canada.
On November 3, 2003, the Company sold its domestic Credit and Financial
Products business, including its clubs and services business, to Citicorp, a
global financial services holding company. The sale resulted in the transfer
of responsibility and control of all credit underwriting and funding risk, as
well as processing and customer support activities for the products, to
Citicorp and its affiliates. With the sale, the Company has become more
focused as a retailer and has used the proceeds generated from the sale to
strengthen its balance sheet and return value to its shareholders.
The Companys Annual Reports on Form 10-K, including this Form 10-K, as well as
the Companys Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
any amendments to such reports are available, free of charge, on the Investor
Relations portion of the Companys internet website, www.sears.com. These
reports are available as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange
Commission.
The Corporate Governance Guidelines of the Companys Board of Directors, the
charters of the Audit, Compensation and Nominating Committees of the Board of
Directors and the Companys Core Values and Code of Conduct are also available
on the Investor Relations portion of www.sears.com, and will be provided, free
of charge, to any shareholder who requests a copy by calling 1-800-SEARS80.
References to the Companys website address do not constitute incorporation by
reference of the information contained on the website, and the information
contained on the website is not part of this document.
The Companys business segments are defined as follows:
Retail and Related Services
- consisting of:
Full-line Stores
- 871 Full-line Stores, averaging 91,000 net selling square
feet, located primarily in shopping malls across the nation and offering:
2
Specialty Stores
- Approximately 1,100 Specialty Stores, located primarily in
free-standing, off-the-mall locations or high-traffic neighborhood shopping
centers.
Direct to Customer
- The Direct to Customer business includes the direct
merchant business of Lands End, Inc. (Lands End), which was acquired by the
Company in June 2002. Lands End is a leading direct merchant of traditionally
styled, casual clothing, accessories and footwear for men, women and children,
as well as home fashion products and soft luggage. These products are offered
through multiple selling channels consisting of regular monthly mailings of its
primary, prospecting and specialty catalogs as well as through the internet,
international businesses and 16 retail stores. These retail stores, averaging
6,400 net selling square feet, also offer traditionally-styled casual clothing
for men, women and children primarily from overstocks of the catalog and
internet channels. Direct to Customer also includes direct marketing of Sears
goods through specialty catalogs as well as other impulse and continuity
merchandise.
Product Repair Services
- Product Repair Services, the nations largest product
repair service provider, is a key element in the Companys active relationship
with more than 48 million households. With over 10,000 service technicians
making over 14 million service calls annually, this business delivers a broad
range of retail related residential and commercial services in all 50 states of
the United States and Puerto Rico under the Sears Parts & Repair Services and
A&E Factory Service brand names. Commercial and residential customers can
obtain parts and repair services for all major brands of products such as home
appliances, lawn and garden equipment, home electronics, floorcare products,
and heating and cooling systems. Smaller items for repair can be brought into
Sears Parts & Repair Centers located throughout the United States or to any
Sears Full-line Store. Customers can also purchase service contracts, product
protection agreements, product installation services and Kenmore and Carrier
residential heating and cooling systems.
3
Credit and Financial Products
This segment formerly managed the Companys domestic portfolio of credit card
receivables, which was sold on November 3, 2003. The domestic credit card
receivables portfolio consisted primarily of the proprietary Sears Card and
Sears ChargePlus (collectively, Sears Card) and Sears Gold MasterCard and The
Great Indoors Gold MasterCard (collectively, MasterCard) account balances.
Sears Card receivables were generated primarily from purchases of merchandise
and services from the Companys domestic operations. The MasterCard credit
card receivables were generated from purchases from the Company and other
merchants, balance transfers and the use of convenience checks and cash
advances. The MasterCard products are widely accepted by merchants outside the
Company. This segment also sold related financial products such as credit
protection and insurance products. The results of operations for this segment
are included in the Companys financial statements through November 2, 2003.
The Company and Citibank (USA) N.A. have entered into a long-term marketing and
servicing alliance with an initial term of 10 years, with an option to renew.
Revenues earned under this alliance are being reported within the Retail and
Related Services segment.
Corporate and Other
Corporate and Other operations include activities that are of an overall
holding company nature, primarily consisting of administrative activities, the
costs of which are not allocated to the Companys domestic businesses. This
segment also includes home improvement services (primarily siding and windows
through Sears Home Improvement Services).
Sears Canada
The Company conducts similar retail, credit and corporate operations in Canada
through Sears Canada, Inc. (Sears Canada), a consolidated, 54.4% owned
subsidiary of Sears. As of January 3, 2004, Sears Canada conducted retail
operations through 122 department stores, 47 furniture and appliance stores,
144 dealer stores, operated under independent local ownership, 14 outlet
stores, 53 floor covering centers, 49 automotive centers, approximately 2,200
catalog pick-up locations, 110 travel offices and over the internet through
sears.ca.
Information regarding revenues, operating income, total assets and capital
expenditures of the Companys business segments for each of the three fiscal
years ended January 3, 2004, December 28, 2002 and December 29, 2001 is
contained in Note 15 of the Notes to Consolidated Financial Statements.
Information on the components of revenue is included in Item 7,
Managements Discussion and Analysis.
Seasonality and Inflation
Due to consumer holiday buying patterns, merchandise sales traditionally are
higher in the fourth quarter than in the other quarterly periods, and the
Company typically earns a disproportionate share of its annual operating income
in the fourth quarter.
The moderate rate of inflation over the past three years has not had a
significant effect on the Companys revenues and profitability.
Trademarks and Tradenames
The name SEARS trade name and mark is used by the Company. The name is the
subject of numerous United States and foreign trademark and service mark
registrations. This trademark is material to the Companys domestic operations
and other related businesses.
Sears sells proprietary branded merchandise under a number of brand names which
are important to its domestic
4
operations. The Companys LANDS END®, KENMORE®, CRAFTSMAN® and DIEHARD®
brands are among the most recognized proprietary brands in retailing. These
names are the subject of numerous United States and foreign trademark
registrations. Other important and well-recognized Company trademarks and
service marks include THE GREAT INDOORS®, OSH®, CANYON RIVER BLUES®,
APOSTROPHE®, TKS BASICS®, COVINGTON
TM
, STRUCTURE®, A&E FACTORY
SERVICE®, WISHBOOK® and SEARS. GOOD LIFE. GREAT PRICE.
TM
. The
Companys right to use all of its trade names continues so long as it uses the
names.
Competition
The domestic retail business is highly competitive. The Company competes with
other national and local department stores, specialty stores, discount stores,
consumer electronics retailers, home improvement retailers and national and
local product repair specialists. The Company also competes with other
internet and catalog businesses which carry similar merchandise offerings.
The principal factors that differentiate retail competitors include convenience
of shopping facilities, quality of merchandise, competitive prices, brand names
and availability of retail related services such as access to credit, product
delivery, repair and installation. The Company believes its business model and
the strength of its proprietary brands enables it to compete effectively
despite strong competitive pressures in recent years.
Employees
The Company employs approximately 201,000 people in the United States and
Puerto Rico, and 48,000 people in Canada, including part-time employees.
5
Item 1A. Executive Officers of the Registrant
The following table sets forth the names of the executive officers of the
Company, their current positions and offices with the Company, the date they
first became executive officers of the Company and their current ages:
Messrs. Lacy, Good, Pagonis and White have held the positions set forth in the
above tables for at least the last five years or have served the Company in
various executive or administrative capacities for at least that length of
time. The remaining executive officers have held the following positions for
such five-year period:
6
Ms. Baier joined Sears
as Vice President - Tax in December 2000. She was named
Vice President, Finance - Credit and Financial Products in November 2001 and
held that position until 2003. She became Senior Vice President and General
Manager - Sears Credit in March 2003. Ms. Baier has served as Senior Vice
President and General Manager - Credit and Financial Products since August
2003. Prior to joining Sears, Ms. Baier was Senior Vice President,
Merchandising for US Office Products, a distributor of wholesale office
products, from 1999 to 2000.
Ms. Bousquette joined Sears as Executive Vice President, Chief Customer and
Marketing Officer, in October 2002. Prior to joining Sears, she was Chief
Marketing Officer and Executive Vice President of eToys Inc., a Web-based
retailer, from 1999 to 2001. From 1995 to 1999, she was Vice President,
Marketing with Pepsi-Cola Division of PepsiCo, Inc., a snack and beverage
manufacturer and distributor, serving as Vice President of Marketing for
Trademark Pepsi Brands from 1997 to 1999.
Mr. Cosby joined Sears as Executive Vice President, Sears, Roebuck and Co. and
President, Full-line Stores in November 2002. Prior to joining Sears, he was
Chief Operating Officer, KFC of TRICON Global Restaurants, Inc. (now Yum!
Brands, Inc.), a restaurant operating company, from 2001 to 2002 and
Chief Development Officer from 1997 to 2001.
Mr. Kelly joined Sears as Senior Vice President and Chief Information Officer
in October 2002. Prior to joining Sears, he was Senior Vice President -
Logistics, Information Systems and Technology at Payless Shoesource, Inc., a
footwear retailer, from 1996 to 2001.
Ms. LaPorta joined Sears as Senior Vice President, Strategy in December 2002.
Prior to joining Sears, she was Vice President of The Boston Consulting Group,
an international strategy and general management consulting firm, from 1986 to
2002.
Mr. Lee joined Sears as Senior Vice President, Human Resources in January 2001.
Prior to joining Sears, he was Senior Vice President, Human Resources of
Whirlpool Corporation, a manufacturer of major home appliances, since June
1998. Prior to joining Whirlpool, Mr. Lee served in the same capacity for The
St. Paul Companies, a property and casualty insurance company.
Ms. Manto joined Sears as Executive Vice President and General Manager, Apparel
in February 2004. Prior to joining Sears, she was Vice Chairman/Chief
Merchandising Officer of Stein Mart, an off-price specialty retailer from 2000
to 2003. From 1998 to 2000, Ms. Manto served as President of Kids Foot Locker,
a specialty retailer of childrens athletic footwear and apparel.
Ms. Meads joined Sears as Executive Vice President and General Manager,
Softlines in April 2003. Ms. Meads was named Executive Vice President, Sears,
Roebuck and Co. and President and Chief Executive Officer, Lands End in
February 2004. Prior to joining Sears, she was Executive Vice President of
Merchandising and Design for Lands End, Inc., a catalog and online retailer of
clothing, accessories and home fashions, from 1998 to 2003.
Mr. OLeary joined Sears as Senior Vice President, Public Relations, Communications
and Government Affairs in July 2003. Prior to joining Sears, he was Senior
Vice President, Global Communications for The Goodyear Tire and Rubber Company,
a manufacturer and distributor of engineered rubber products and chemicals,
from 2002 to 2003. From 2000 to 2002, Mr. OLeary was a seed investor and board
member of several startup business groups, primarily responsible for marketing,
branding and communications strategy. He also served as General Manager of
Global Public Affairs for Mobil Corporation, a global energy and petrochemical
company, from 1995 to 1999.
7
Mr. Richter joined Sears as Vice President and Controller in February 2000. He
was named Senior Vice President, Finance in July 2001 and held that position
until October 2002. Mr. Richter has served as Senior Vice President and Chief
Financial Officer since October 2002. Prior to joining Sears, Mr. Richter was
Senior Vice President and Chief Financial Officer of Dade Behring
International, a manufacturer of medical testing systems, from 1998 to 2000,
and Senior Vice President and Corporate Controller from 1997 to 1998.
Ms. Zopp joined Sears as Senior Vice President and General Counsel in July
2003. Prior to joining Sears, she was Vice President and Deputy General
Counsel of Sara Lee Corporation, a global manufacturer and marketer of
consumer products, from 2000 to 2003, and Partner at Sonnenschein Nath &
Rosenthal from 1997 to 2000.
8
Home Group
- A full assortment of products for the home including
appliances, electronics, home fashions and home improvement products,
such as tools, fitness and lawn and garden equipment; products range
from leading national brands to proprietary Company brands such as
Kenmore, Craftsman and WeatherBeater.
Apparel/Accessories
- A complete selection of fashionable, quality
apparel, footwear and accessories for the whole family and fine
jewelry at value prices; includes leading national brands as well as
exclusive proprietary Company brands such as Lands End, Covington,
Canyon River Blues, Apostrophe and TKS Basics.
Sears Auto Centers
- A full selection of automotive services including
the sale of major national brands of tires and batteries including the
Companys proprietary DieHard branded products.
sears.com
Sears extension of its product selection through internet
channels offering a limited assortment
Table of Contents
of home and accessories
merchandise and providing customers the option of buying through the
internet and picking up their merchandise in Full-line Stores.
Dealer Stores
- 792 primarily independently-owned stores,
predominately located in smaller communities and averaging 5,600 net
selling square feet, offering home goods including appliances,
electronics, lawn and garden merchandise, hardware and automotive
batteries. Dealer Stores carry proprietary Company brands such as
Craftsman, Kenmore and DieHard as well as a wide assortment of
national brands.
Hardware Stores -
245 neighborhood Hardware Stores under the Sears
Hardware and Orchard Supply Hardware brands averaging 21,000 and
41,000 net selling square feet, respectively, that carry Craftsman
tools and lawn and garden equipment, a wide assortment of national
brands and other home improvement products. Approximately 60 Sears
Hardware Stores also offer a limited selection of home appliances.
The Great Indoors (TGI) -
18 stores specializing in home decorating
and remodeling, averaging 104,000 net selling square feet, dedicated
to the four main rooms of the house: kitchen, bedroom, bathroom and
great room.
Sears Outlet Stores
- 45 stores averaging 27,000 net selling square
feet offering overstock and/or distressed appliances, electronics and
lawn and garden merchandise at a discount.
Commercial Sales
- This business primarily targets home builders,
remodelers and property managers for appliance purchases as well as
vocational schools, factory maintenance and service companies for
industrial tool purchases.
National Tire & Battery (NTB) -
These stores offer major national
brands of tires, DieHard and other brands of batteries and related
services. This business was sold to TBC Corporation (TBC) on
November 29, 2003.
Table of Contents
Table of Contents
Table of Contents
Date First Became
an Executive
Name
Position
Officer
Age
Chairman of the Board of Directors, President and
Chief Executive Officer
1995
50
Senior Vice President and General Manager, Credit and
Financial Products
2003
39
Executive Vice President, Chief Customer and
Marketing Officer
2002
43
Executive Vice President, Sears, Roebuck and Co. and
President, Full-line Stores - Sears Retail
2002
45
Executive Vice President and General Manager, Product
Repair Services
2002
47
Senior Vice President and Chief Information Officer
2002
56
Senior Vice President, Strategy
2002
43
Senior Vice President, Human Resources
2001
54
Executive Vice President and General Manager - Apparel
2004
49
Executive Vice President, Sears Roebuck and Co. and
President and Chief Executive Officer, Lands End
2003
52
Senior Vice President, Public
Relations, Communications
and Government Affairs
2003
53
Senior Vice President, Supply Chain Management
1995
62
Senior Vice President and Chief Financial Officer
2001
42
Executive Vice President and General Manager,
Full-line Store Operations - Sears Retail
2003
56
Senior Vice President and General Counsel
2003
47
Table of Contents
Table of Contents
Table of Contents
Item 2. Properties
The Companys principal executive offices are located on a 200-acre site owned by the Company at the Prairie Stone office park, in Hoffman Estates, Illinois. The complex consists of six interconnected office buildings totaling approximately two million gross square feet of office space.
The following table sets forth information concerning stores operated by the
Companys Retail and Related Services segment.
Full-line Stores
Specialty Stores
Lands' End
Total
NTB
Hardware
Dealer
Other
(1)
516
18
1
23
558
355
227
15
45
16
658
776
776
871
(3)
245
792
68
16
1,992
863
229
274
790
43
2,199
13
1
4
33
14
65
(9
)
(7
)
(30
)
(30
)
(3
)
(79
)
867
223
248
793
54
2,185
15
2
3
13
10
43
15
15
(10
)
(2
)
(39
)
(51
)
872
225
249
767
64
15
2,192
4
2
31
9
1
47
(5
)
(2
)
(4
)
(6
)
(5
)
(22
)
(225
)
(225
)
871
245
792
68
16
1,992
square feet in millions
127.4
9.2
6.7
4.4
0.1
147.8
127.6
2.6
9.3
6.4
4.4
0.1
150.4
127.3
2.5
9.1
6.6
3.4
148.9
square feet in millions
79.4
6.7
4.4
3.2
0.1
93.8
79.1
0.3
6.8
4.1
3.3
0.1
93.7
79.2
0.3
6.7
4.3
2.4
92.9
$
302
$
303
$
318
(1) | Consists of specialty appliance and electronic stores, retail outlet stores and TGI stores. Excludes Other facilities owned or leased as part of Full-line Store properties. | |
(2) | Many of the leases contain renewal options and contingent rentals (for additional information, see Note 7 of the Notes to Consolidated Financial Statements). | |
(3) | Includes Sears Auto Centers. | |
(4) | Includes net commissions earned from licensed businesses operating within the Retail stores. |
9
In addition, at January 3, 2004, there were 888 other sales offices and service facilities, most of which are occupied under short-term leases or are a part of other Sears facilities included in the above table. There were also 137 distribution facilities, most of which are leased for terms ranging from one to 10 years.
As of January 3, 2004, Sears Canada operated 122 department stores, 47 furniture and appliance stores, 144 dealer stores, operated under independent local ownership, 14 outlet stores, 53 floor covering centers, 49 automotive centers, approximately 2,200 catalog pick-up locations and 110 travel offices.
Item 3. Legal Proceedings
Pending against the Company and certain of its officers and directors are a number of lawsuits, described below, that relate to the credit card business and public statements about it. The Company believes that all of these claims lack merit and is defending against them vigorously.
§ | On and after October 18, 2002, several actions were filed in the United States District Court for the Northern District of Illinois against the Company and certain current and former officers alleging that certain public announcements by the Company concerning its credit card business violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Court has consolidated the actions and appointed the Department of the Treasury of the State of New Jersey and its Division of Investments as lead plaintiff. The Court has more recently denied defendants motions to dismiss the complaint and certified the consolidated action as a class action on behalf of a class of all persons who purchased securities of the Company between October 24, 2001 and October 17, 2002, inclusive. The Court has scheduled trial to begin on April 4, 2005. A similar case filed in the United States District Court for the Northern District of California was transferred to the Northern District of Illinois and subsequently voluntarily dismissed by the plaintiffs in that action. | |||
§ | On and after November 15, 2002, several actions were filed in the United States District Court for the Northern District of Illinois against the Company, certain officers and directors, and alleged fiduciaries of Sears 401(k) Savings Plan (the Plan), seeking damages and equitable relief under the Employee Retirement Income Security Act of 1974 (ERISA). The plaintiffs purport to represent participants in the Plan, and allege breaches of fiduciary duties under ERISA in connection with the Plans investment in the Companys common shares and alleged communications made to Plan participants regarding the Companys financial condition. These actions have been consolidated into a single action. A motion to dismiss the consolidated complaint is pending. A motion for certification of the action as a class action was ordered withdrawn pending the courts decision on the motion to dismiss. | |||
§ | On October 23, 2002, a purported derivative action was filed in the Supreme Court of the State of New York against the Company (as a nominal defendant) and certain current and former directors seeking damages on behalf of the Company. The complaint purports to allege a breach of fiduciary duty by the directors with respect to the Companys management of the credit card business. A motion to dismiss is pending. Two similar actions were subsequently filed in the Circuit Court of Cook County, Illinois, and a third was filed in the United States District Court for the Northern District of Illinois. These actions have been stayed pending disposition of the action in New York. The plaintiffs in the Northern District of Illinois action have appealed the stay order to the United States Court of Appeals for the Seventh Circuit. | |||
§ | On June 17, 2003, an action was filed in the Northern District of Illinois against the Company and certain officers, purportedly on behalf of a class of all persons who, between June 21, 2002 and October 17, 2002, purchased the 7% notes that Sears, Roebuck Acceptance Corp. (SRAC) issued on June 21, 2002. An amended complaint has been filed, naming as additional defendants certain former officers, SRAC and several investment banking firms who acted as underwriters for SRACs March 18, May 21 and June 21, 2002 notes offerings. The amended complaint alleges that the defendants made misrepresentations or omissions concerning its credit business during the class period and in the registration statements and prospectuses |
10
relating to the offerings. The amended complaint alleges that these misrepresentations and omissions violated Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder, and Sections 11, 12 and 15 of the Securities Act of 1933 and purports to be brought on behalf of a class of all persons who purchased any security of SRAC between October 24, 2001 and October 17, 2002, inclusive. Motions to dismiss the amended complaint are pending. |
The Company is subject to various other legal and governmental proceedings, many involving litigation incidental to the businesses. Some matters contain class action allegations, environmental and asbestos exposure allegations and other consumer-based claims that involve compensatory, punitive or treble damage claims in very large amounts as well as other types of relief. The consequences of these matters are not presently determinable but, in the opinion of management of the Company after consulting with legal counsel, and taking into account insurance and reserves, the ultimate liability is not expected to have a material adverse effect on annual results of operations, financial position, liquidity or capital resources of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters
Description of Sears Common Shares
The summary contained herein of certain provisions of the Restated Certificate of Incorporation, as amended (the Certificate of Incorporation), of Sears does not purport to be complete and is qualified in its entirety by reference to the provisions of such Certificate of Incorporation incorporated as Exhibit 3.1 hereto and incorporated by reference herein.
The Certificate of Incorporation authorizes the issuance of 1,000,000,000 common shares, par value $0.75 per share, and 50,000,000 preferred shares, par value $1.00 per share. As of the date hereof, there are no preferred shares outstanding. Preferred shares may be issued in series with rights and privileges as authorized by the Board of Directors.
Subject to the restrictions on dividends mentioned below and the rights of the holders of any preferred shares which may hereafter be issued, each holder of common shares is entitled to one vote per share, to vote cumulatively for the election of directors, to dividends declared by the Board of Directors and, upon liquidation, to share in the assets of Sears pro rata in accordance with his, her or its holdings after payment of all liabilities and obligations. The holders of common shares have no preemption, redemption, subscription or conversion rights.
Sears Board of Directors is divided into three classes serving staggered three-year terms. Because the Board is classified, shareholders wishing to exercise cumulative voting rights to assure the election of one or more directors must own approximately two to three times as many shares (depending on the number of directors in the class and on the Board as a whole) as would be required if the Board were not classified. Directors may be removed only for cause upon the affirmative vote of at least 75% of the shares entitled to vote. Such a vote is also required to alter, amend or repeal, or to adopt any provision inconsistent with, Article 5 of the Certificate of Incorporation concerning directors, or to fix the number of directors by shareholder vote.
There are no restrictions on repurchases or redemption of shares by Sears except for an agreement pursuant to which Sears has provided a credit facility in support of certain tax increment revenue bonds issued by the Village of Hoffman
11
Estates, Illinois, in connection with the construction of its headquarters facility. This agreement provides that Sears will not take certain actions, including the declaration of cash dividends and the repurchase of shares, which would cause Unencumbered Assets plus certain Capitalized Rentals to drop below 150% of Liabilities plus such Capitalized Rentals (as such terms are defined in the agreement). The amount by which such Unencumbered Assets plus Capitalized Rentals exceeds 150% of such Liabilities plus Capitalized Rentals, as computed under certain of the agreement provisions, is set forth in Note 8 of the Notes to Consolidated Financial Statements.
Information regarding the principal market for Sears common shares, the number
of shareholders and the prices of, and dividends paid on, Sears common shares
is included below.
Common Stock Market Information and Dividend Highlights
dollars
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year
2003
2002
2003
2002
2003
2002
2003
2002
2003
2002
28.54
$
54.29
34.80
59.90
46.35
54.87
55.94
40.69
55.94
59.90
18.50
46.55
24.15
47.79
32.91
39.75
43.59
19.71
18.50
19.71
23.75
51.27
33.36
54.30
44.83
40.62
44.87
23.15
44.87
23.15
0.23
0.23
0.23
0.23
0.23
0.23
0.23
0.23
0.92
0.92
Stock price ranges are for the New York Stock Exchange (trading symbol - S), which is the principal market for the Companys common stock. In addition to the New York Stock Exchange, the Companys common stock is listed on the following exchanges: Chicago; Pacific, San Francisco; London, England; Amsterdam, the Netherlands; Swiss EBS; and Dusseldorf, Germany.
The number of registered common shareholders as of February 27, 2004 was 149,591.
Options to purchase common shares of the Company have been granted to employees
and non-employee directors under various stock-based compensation plans. The
following table summarizes the number of stock options issued, the
weighted-average exercise price and the number of securities remaining to be
issued under all outstanding equity compensation plans as of January 3, 2004.
Number of securities to be
Weighted-average exercise
Number of securities remaining
issued upon exercise of
price of outstanding
available for future issuance
outstanding options,
warrants
options, warrants
under equity compensation
Plan Category
and rights
and rights
plans
(2)
security holders
16,961,216
$
40.01
8,567,753
security holders
10,452,718
(1)
$
29.01
4,326,745
27,413,934
$
35.82
12,894,498
(1) | The sole equity compensation plan not previously submitted to the Companys shareholders for approval is the 2001 Broad Based Stock Option Plan. The Company adopted this plan in 2001 to further enable Sears to align the interests of shareholders with employees by motivating participants to achieve long-range goals while simultaneously providing a program to attract and retain eligible associates. The plan provides for the grant of stock options to eligible associates of Sears with the exception of senior management, which is excluded from participation. Stock options granted under the plan are nonqualified stock options for tax purposes, expire 10 years from the date of grant and may contain conditions requiring participants to satisfy employment, performance or certain other criteria. The exercise price of the options granted is equal to 100% of the fair market value of Sears stock on the date of the grant. | |
(2) | Excludes the securities to be issued upon exercise of outstanding options, warrants and rights. |
12
Item 6. Selected Financial Data
Five-Year Summary of Consolidated Financial Data
millions, except per common share and shareholders
2003
(1)
2002
(2)
2001
2000
1999
$
41,124
$
41,366
$
40,990
$
40,848
$
39,430
39,926
39,285
39,812
38,661
37,017
1,198
2,081
1,178
2,187
2,413
4,224
27
372
45
36
6
cumulative effect of change in accounting principle
5,449
2,453
1,223
2,223
2,419
2,007
858
467
831
904
3,397
1,584
735
1,343
1,453
(208
)
$
3,397
$
1,376
$
735
$
1,343
$
1,453
$
1,956
$
30,731
$
28,155
$
17,317
$
18,033
3,105
3,211
5,335
5,115
4,912
5,618
5,069
6,788
6,910
6,824
6,653
6,450
27,723
50,409
44,317
36,899
36,954
1,033
4,525
3,557
4,280
2,989
7,168
26,112
22,078
13,580
15,049
8,201
30,637
25,635
17,860
18,038
$
6,401
$
6,753
$
6,119
$
6,769
$
6,839
150,759
157,378
164,354
209,101
220,749
286
321
329
346
381
$
11.86
$
4.94
$
2.24
$
3.88
$
3.81
$
11.86
$
4.94
$
2.24
$
3.88
$
3.81
(0.65
)
$
11.86
$
4.29
$
2.24
$
3.88
$
3.81
$
0.92
$
0.92
$
0.92
$
0.92
$
0.92
55.94-
59.90-
48.93-
43.50-
53.19-
18.50
19.71
29.90
25.25
26.69
$
45.49
$
23.15
$
47.64
$
34.75
$
30.38
(1) | Includes the results of operations for Credit and Financial Products through November 2, 2003 and the results of operations for NTB through November 29, 2003, the respective dates of divestiture, and fifty-three weeks. | |
(2) | Includes results of operations for Lands End effective June 17, 2002, the date of acquisition. | |
(3) | On November 3, 2003, the Company sold its domestic Credit and Financial Products business to Citicorp. (See Note 2 of the Notes to Consolidated Financial Statements). | |
(4) | On November 17, 2003 the Company completed cash tender offers to purchase unsecured public term debt securities maturing after 2003 (See Note 4 of the Notes to Consolidated Financial Statements). |
Certain prior year information has been reclassified to conform with current year presentation.
13
Item 7. Managements Discussion and Analysis
Managements Discussion and Analysis is designed to provide the reader of the financial statements with a narrative on the Companys results of operations, financial position and liquidity, risk management activities, significant accounting policies and critical estimates, and the future impact of accounting standards that have been issued but are not yet effective. Managements Discussion and Analysis is presented in five sections: Overview and Consolidated Operations, Segment Operations, Analysis of Consolidated Financial Condition, Critical Accounting Estimates and Outlook. It is useful to read Managements Discussion and Analysis in conjunction with the Consolidated Financial Statements and related notes thereto contained elsewhere in this document.
Unless otherwise noted, 2003 results reflect a 53-week period while 2002 and 2001 results reflect a 52-week period. All references to earnings per share relate to diluted earnings per common share.
OVERVIEW AND CONSOLIDATED OPERATIONS
Sears, Roebuck and Co. is one of the largest retailers in the United States and Canada with a 118 year history of providing high quality merchandise and related services to a broad array of customers. The Company was founded on the concept of satisfaction guaranteed or your money back. This fundamental concept, executed daily by over 240,000 associates, has contributed to the Companys significant brand recognition and equity. The Companys vision is to be the preferred and most trusted resource for products and services that enhance our customers homes and family life. We will be differentiated from most competitors by offering customers high quality national brands similar to other retailers, as well as the Companys proprietary brands which enjoy high levels of consumer awareness, trust and integrity. Sears is the primary retailer where consumers can find each of the Kenmore, Craftsman, DieHard, Lands End and Covington brands. The Company also offers customers an extensive level of retail related services such as delivery, installation, product repair, product warranty and protection services. These products and services are provided to the customer through a wide network reaching the consumer through multiple channels, including over 2,300 Sears-brand and affiliated stores in the United States and Canada, a product repair services system with over 10,000 technicians, leading internet channels of sears.com, sears.ca and landsend.com, and direct to customer catalog programs.
Fundamentally, the Companys business model is to offer the customer a compelling price/value relationship through the combination of high quality products and services at a competitive price. The Company seeks to deliver a high level of profitability and cash flow by:
| maximizing the effectiveness of its retail product pricing through promotional activity and advertising programs enhancing brand awareness; | |||
| minimizing its product and service costs through economies of scale as one of the nations largest retailers and related services providers while leveraging its centralized overhead expense structure; | |||
| reinvesting operating cash flows into necessary capital projects that create future revenues, realize cost savings or improve product quality in its proprietary brands; and | |||
| returning profits to shareholders through dividends, share repurchases and increased share price. |
The retail industry is highly competitive and has been in each year of the Companys 118 year life. The industry continuously faces market driven challenges as new and existing competitors seek areas of growth to expand their businesses. The Company has succeeded in the retail industry due to its proprietary brands and the importance of its related product and service offerings to customers. An important challenge for the Company is to identify new growth vehicles to extend the reach of its product and service offerings. Historically, the Company has shown innovation in new products and services and new distribution channels to reach our customers. In the recent past, the Companys efforts to grow have become more challenging as its primary retail stores are within a mall-based format, which has seen a reduced preference to the consumer versus other formats. The Company is further challenged by competitors that specialize in certain types of consumer goods and are focused on being the lowest cost provider in those categories.
14
The Company has responded to these challenges by launching several strategic initiatives which are expected to return the Company to a more profitable growth path, including:
| improving its merchandise offerings through the acquisition of Lands End and the launch of Covington in 2002; | |||
| enhancing the customers experience in the stores through various actions such as the standardization and simplification of merchandise presentation, store signage, fixturing and store layouts, and the installation of centralized checkouts; | |||
| investing in alternative channels of distribution including direct to customer through the internet and direct mail, dealer stores, and other off-mall formats; | |||
| launching Sears Grand in 2003, an off-mall pilot format combining the Companys traditional branded and proprietary goods with expanded offerings such as convenience goods and other new services, which seeks to assess the viability of an off-mall Sears store, much larger in square footage, and with a higher level of consumer convenience and accessibility; and | |||
| focusing the Company as a retailer through the sale of its domestic Credit and Financial Products business in 2003 while continuing to offer access to credit services and financial products to its customers through its strategic alliance with Citibank (USA) N.A. |
These strategic initiatives are necessary as our most successful competitors enjoy lower operating cost structures outside of the mall, or higher gross margins within the mall from a more specialized merchandise mix. The Company believes it can succeed by further differentiating its products and services, lowering its operating and sourcing costs and investing in new growth vehicles.
Fiscal 2003 was a defining year for the Company. On November 3, 2003, the Company completed the sale of its domestic Credit and Financial Products business, including its clubs and services business, to Citicorp and entered into a long-term marketing and servicing alliance with Citibank (USA) N.A. Under the long-term marketing and servicing alliance, Citibank (USA) N.A. will provide credit and customer service benefits to the Companys proprietary and Gold MasterCard holders. In addition, Citibank (USA) N.A. will support the Companys current zero-percent financing program.
The sale generated total proceeds of $32 billion, consisting of the assumption by Citicorp of $10 billion of securitized debt and cash proceeds received by the Company of $22 billion. The Company recorded a pretax gain on the sale of $4 billion. Using proceeds from the sale of the Credit and Financial Products business, the Company repaid $5.5 billion of outstanding short-term borrowings and allocated $10.5 billion for the retirement of unsecured term debt (of which $6.4 billion was retired during the fourth quarter of 2003 through a tender offer for such debt). In connection with the debt retirement activities, the Company recorded a pretax loss of $791 million, representing premiums paid on early retirement of debt, gains on the termination of associated derivative instruments to hedge interest rate risk, the write-off of unamortized debt discount and debt issuance costs and the loss on a previously terminated derivative contract. Of the total debt retirement loss of $791 million, $420 million represented a non-cash charge. After taxes and transaction costs of $1.5 billion, and an additional after-tax contribution of $500 million to the domestic pension plan, the Company expects net cash proceeds from the sale of approximately $4 billion.
The divestiture of its domestic Credit and Financial Products business significantly strengthened the Companys financial position and liquidity. At January 3, 2004, the Company had domestic term debt outstanding of $5.3 billion. The Company plans to repay $2.6 billion of domestic term debt in 2004, through either scheduled maturities or optional early retirements. In addition, the Company expects to return approximately $4 billion of the cash proceeds received from the sale of the Credit and Financial Products business to its shareholders. Through January 3, 2004, the Company had returned $2.7 billion through the repurchase of the Companys common shares.
This divestiture, along with the beginning of a new strategic relationship with Citibank (USA) N.A., has created a Company with a pure retail focus. The Companys financial position has been significantly strengthened through the reduction of over $21 billion of debt. These steps place the Company in a more sound financial position to
15
invest in important growth opportunities.
Overall, the Companys operating results for 2003 reflect the challenging retail environment and a restrained level of consumer spending early in the year. A summary of consolidated results of operations is as follows:
millions, except per share data
2003
2002
2001
$
36,372
$
35,698
$
35,755
-2.7%
-5.6%
-2.3%
4,752
5,668
5,235
$
41,124
$
41,366
$
40,990
27.9%
28.2%
26.6%
22.2%
22.4%
21.7%
$
1,198
$
2,081
$
1,178
$
4,224
$
$
$
27
$
372
$
45
$
3,397
$
1,376
$
735
$
11.86
$
4.29
$
2.24
§ | Total revenues decreased 0.6% from 2002, which in turn were 0.9% higher than 2001. The decrease in 2003 reflects the decline in credit and financial products revenues as a result of the sale of the domestic Credit and Financial Products business, partially offset by an increase in merchandise sales and services due to the inclusion of Lands End for the full year of 2003 as well as the additional fiscal week in 2003. The 53 rd week favorably impacted merchandise sales and services revenues by approximately two percent. The Company noted an improvement in domestic comparable store sales trends in certain key categories, particularly in the second half of 2003. This improvement is attributed to the previously mentioned key strategic initiatives taken by the Company as well as improvements in various economic indicators such as increasing consumer confidence levels and declining unemployment rates. | |||
The increase in 2002 total revenues compared to 2001 reflected an increase in revenues generated by the domestic Credit and Financial Products business due to growth in the MasterCard portfolio and the revenues generated from the Lands End direct to customer business, which was acquired in June 2002. This increase was partially offset by a decline in merchandise sales and services in both the Retail and Related Services and Sears Canada segments, attributable to disruptions caused by the Full-line Store repositioning efforts, a highly competitive and promotional retail environment and the effects of a softening economy which included declining consumer confidence and increasing unemployment. | ||||
§ | The decline in 2003 gross margin rate compared with 2002 is reflective of inventory clearance activities and a highly competitive retail environment, which resulted in a significant increase in promotional activity. The improvement in gross margin rate in 2002 from 2001 resulted from the exit of certain, lower margin and unprofitable merchandise categories, improved inventory management and sourcing and the inclusion of Lands Ends results in 2002, whose business has a higher gross margin rate. | |||
§ | Overall, selling and administrative expenses decreased $138 million in 2003 primarily due to lower expenses for the domestic Credit and Financial Products business. The savings realized from the Companys productivity improvements were more than offset by higher expenses in Sears Canada due to the stronger Canadian dollar and the inclusion of Lands End for the full year of fiscal 2003. | |||
§ | Special charges and impairments reflect costs incurred from strategic actions implemented by the Company to restructure its operations and charges for asset impairments. Such charges amounted to $112 million in 2003, |
16
$111 million in 2002 and $542 million in 2001. The actions taken over the past three years are as follows: |
4 | During 2003, the Company announced a refinement of the business strategy for TGI, which included its decision to close three TGI stores and cease development of four future locations. In addition, the carrying value of the long-lived assets for the remaining eighteen locations were reviewed for recoverability. As a result, the Company recorded a pretax charge of $141 million. Of the $141 million charge, $112 million was recorded in special charges and impairments and $29 million in cost of sales, buying and occupancy. | |||
4 | During 2002, Sears Canada converted its seven stores operating under the Eatons banner to Sears Canada stores, resulting in a restructuring charge of $111 million for severance, asset impairment and other exit costs. Financial performance of the Eatons stores had not met expectations, and the customer base was smaller than anticipated. The conversion of these stores to the Sears banner has allowed Sears Canada to focus on managing its business. The restructuring was principally designed to improve the Sears Canada brand equity and improve sales results in these stores. While the Company anticipated better leverage of its existing buying and marketing activities, the expected cost savings to Sears from this conversion were not expected to be material. | |||
4 | During 2001, special charges and impairments amounted to $542 million. Such costs consisted of the following: |
| $151 million restructuring charge for the exit of unprofitable and non-strategic Full-line Store business categories (including cosmetics, installed floor coverings and custom window treatments) and a restructuring charge of $123 million for productivity initiatives primarily related to employee termination costs for staff reductions at the Companys headquarters and in its Full-line Stores. These two restructurings, which were part of a series of initiatives designed to improve profitability, generated approximately $350 million in cost reductions in 2002 and an additional $100 million in 2003 largely as a result of the elimination of approximately 5,950 positions; | |||
| $205 million for impairment and other losses primarily resulting from the insolvency of Homelife, a former operating division of Sears which was sold in 1998; and | |||
| $63 million for the cost of a civil legal settlement relating to selling practices in 1994 and 1995 of certain automotive batteries manufactured by Exide Technologies. |
§ | Gain on the sale of businesses consisted of a $4 billion pretax gain on the sale of the Companys domestic Credit and Financial Products business and an $81 million pretax gain on the sale of the Companys NTB business. See Note 2 of the Notes to Consolidated Financial Statements for further discussion. | |||
§ | Other income in 2002 included a $336 million pretax gain on the sale of the Companys holdings in Advance Auto Parts, Inc. | |||
§ | During 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible Assets, resulting in a charge of $208 million (net of income taxes and minority interest), representing the cumulative effect of the change in accounting for goodwill as of the beginning of 2002. The charge reflected goodwill impairment primarily related to NTB and Orchard Supply Hardware, offset by the reversal of negative goodwill related to Sears Canadas purchase of Eatons. | |||
§ | The Companys net income and earnings per share results for fiscal years 2003, 2002 and 2001 were impacted by significant items, which include costs incurred from strategic actions implemented by the Company to restructure its operations, changes in accounting and costs due to asset impairments. |
17
4 | Results of operations for fiscal year 2003 included a gain on the sale of the Companys domestic Credit and Financial Products, whose 2003 results included a gain from the sale of previously charged-off receivable accounts, the gain on the sale of its NTB business, a loss on early retirement of debt and a charge related to the refinement of the business strategy for TGI. In aggregate, these items increased net income for fiscal year 2003 by $2.2 billion, or $7.50 per share. | |||
4 | The Companys fiscal year 2002 results were also affected by significant items including the adoption of new accounting standards for goodwill, a charge for the conversion of Eatons stores to Sears Canada stores, a gain on the sale of investments and a change in accounting estimate related to the refinement of the Companys method for determining its domestic allowance for uncollectible accounts. In aggregate, these items reduced net income for fiscal year 2002 by $202 million, or $0.63 per share. | |||
4 | The Companys fiscal year 2001 results were affected by business category exits, productivity initiatives, impairment and other losses related to Homelife, and costs related to the settlement of a civil legal case. In addition, the Company recorded a $522 million provision for uncollectible accounts for previously securitized receivables to establish an allowance for uncollectible accounts related to $12 billion of securitized receivables reinstated on the Companys balance sheet as a result of the adoption of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. In aggregate, these items reduced net income for fiscal year 2001 by $650 million, or $1.98 per share. |
These items had a significant impact on continuing operations in the periods reported. The Company believes that an understanding of its reported results and its ongoing financial performance is not complete without considering the impact these items and other transactions, as described within Managements Discussion and Analysis, had on the Companys overall performance.
SEGMENT OPERATIONS
During fiscal 2003, the Company was organized into four principal business segments - Retail and Related Services, Credit and Financial Products, Corporate and Other, and Sears Canada. Following is a discussion of results of operations by business segment.
18
Retail and Related Services
Retail and Related Services results and key statistics were as follows:
millions, except number of stores and Retail store
revenues
per net selling square foot
2003
2002
2001
$
22,863
$
23,028
$
24,314
5,072
5,106
4,747
1,752
1,175
223
2,155
2,150
2,062
31,842
31,459
31,346
23,164
22,743
23,081
27.3%
27.7%
26.4%
6,914
6,816
6,628
21.7%
21.7%
21.1%
740
710
704
84
35
32
112
484
31,014
30,304
30,929
$
828
$
1,155
$
417
2003
2002
2001
871
872
867
1,105
1,305
1,318
16
15
1,992
2,192
2,185
$
302
$
303
$
318
-1.6%
-5.7%
-1.3%
-4.2%
-10.2%
-6.8%
-2.7%
-6.7%
-3.0%
-2.7%
0.9%
2.5%
-2.7%
-5.6%
-2.3%
(1)
|
For purposes of determining comparable store sales, a store is considered to be comparable at the beginning of the 13th month after the store is opened. | |
(2)
|
2003 comparable store sales results were calculated for the 52 weeks ended December 27, 2003 compared with the 52 weeks ended December 28, 2002. |
STRATEGIC ACTIONS
On August 28, 2003, the Company announced a refinement to the business strategy for TGI, which included its decision to close three TGI stores and cease development of four future locations. In addition, the carrying value of the long-lived assets for the remaining eighteen TGI stores were reviewed for recoverability. As a result, the Company recorded a pretax charge of $141 million. The $141 million pretax charge consisted of $99 million related to asset impairments, $29 million related to inventory clearance costs, $11 million related to other contractual obligations and $2 million related to employee termination costs. Of the $141 million charge, $112 million was recorded in special charges and impairments and $29 million was recorded in cost of sales, buying and occupancy both within the Retail and Related Services segment. The three stores were closed and all related employees terminated by the end of fiscal 2003. The strategy was undertaken in an effort to increase the profitability of TGI. The Company does not anticipate that these actions will result in a material impact on the consolidated results of operations.
19
On November 3, 2003, the Company completed the sale of its domestic Credit and Financial Products business, to Citicorp and entered into a long-term marketing and servicing alliance with Citibank (USA) N.A. In connection with the long-term alliance, the Retail and Related Services segment will earn revenues by generating credit sales and new accounts for Citicorp and selling other Citicorp products. In 2003, the Company earned approximately $30 million under the long-term alliance, which is reflected within Full-line Store revenue. The Company estimates that it will earn approximately $150 million in 2004 from Citibank for these services. In addition, historical level zero-percent receivable balances will be supported by Citibank at no cost to the Company. Zero-percent expense reported within the Retail and Related Services segment was $211 million, $212 million and $191 million in 2003, 2002 and 2001, respectively.
On November 29, 2003, the Company sold its NTB business and related inventory
to TBC for total cash consideration of $264 million. The Company recognized a
pretax gain of $81 million. Upon completion of the transaction, substantially
all of the approximately 3,900 employees of NTB became employees of TBC.
Revenues for NTB were $400 million, $465 million and $494 million in 2003, 2002
and 2001, respectively.
2003 Compared with 2002
During 2003, the Company continued to focus on improving its merchandise
offerings, particularly its apparel offerings, as well as enhancing the
customers shopping experience. Lands End was rolled out to an additional 218
Full-line Stores in the Spring of 2003 and to the remaining Full-line Stores in
September 2003, with Lands End merchandise now available in all Full-line
Stores. The Companys exclusive Covington brand was well received in 2003 with
sales reaching over $500 million. In the fall, the Company launched an
exclusive Lucy Pereda apparel collection in a select number of stores, and
announced the purchase of the Structure brand, a trendier mens apparel brand,
to broaden the depth of its current apparel offerings. In relation to its Home
Group business, the Company initiated a relaunch initiative for the home
appliance business in June 2003, which focused on defending market share and
accelerating growth of this business. The impact of these initiatives, as well
as improvements in various economic indicators such as increasing consumer
confidence and declining unemployment rates, resulted in improvements in
comparable store sales trends in certain key categories in the second half of
2003.
Total Retail and Related Services revenues increased 1.2% over the prior year.
The additional fiscal week in 2003 favorably impacted revenues by approximately
two percent. In addition, revenues from the Lands End direct to customer
business, which was acquired in June 2002, contributed approximately $600
million of incremental revenues over 2002 as the revenues from this business
were included in the Companys results of operations for the full year of 2003.
While the retail environment remained highly competitive and promotionally
intense throughout 2003, improvements in Full-line Store sales were seen across
several key businesses. The lawn and garden business had an exceptional year,
posting double-digit comparable store sales increases over the prior year.
These increases were offset by declines in other Home Group categories
including home electronics, which continues to be impacted by price deflation
and competition, and home fashions. Home appliance sales showed a modest
increase in 2003 with trend improvements seen in the second half of the year as
a result of the Companys home appliance relaunch initiative. Finally, notable
improvements were seen in key womens ready-to-wear categories as a result of
the Companys actions to improve its merchandise offering. These improvements
were offset by weak sales in fine jewelry, mens and intimate apparel.
Specialty Stores revenues in 2003 were relatively flat to the prior year,
despite the benefit received from the 53
rd
week and the net increase
of 25 Dealer stores in 2003. A comparable store sales increase of 2.2% in
Dealer Stores, which was driven by double-digit increases in lawn and garden
sales and a low-single digit increase in appliance sales, was more than offset
by comparable store sales declines within all other off-mall retail formats
including
20
Hardware stores, outlet stores, TGI and NTB.
Direct to Customer revenues increased to $1.8 billion in 2003 from $1.2 billion
in 2002, primarily due to the revenues from the Lands End direct to customer
business. Lands End contributed approximately $1.6 billion in direct to
customer revenues in 2003 compared with $1.0 billion in 2002.
Product Repair Services revenues of $2.2 billion in 2003 were relatively flat
to the prior year as increased revenues generated from service contracts, were
offset by decreased revenues from the cooling and heating business. The
cooling and heating business was adversely affected by unseasonable
temperatures in both the summer and winter of 2003.
The decline in gross margin as a percentage of revenues in 2003 occurred as a
result of a significant increase in promotional markdowns and clearance
activities, primarily in apparel categories, partially offset by continued
improvements in vendor sourcing and the inclusion of Lands End, which has a
higher gross margin rate.
Selling and administrative expense savings recognized in 2003 from the
Companys ongoing productivity initiatives were offset by the inclusion of a
full year of operating expenses of the Lands End direct to customer business.
The overall decrease in operating income was primarily the result of reduced
gross margins due to a significant increase in promotional activity in the
highly competitive retail environment, as well as the charge related to the TGI
strategic refinement.
2002 Compared with 2001
In order to enhance the customer experience and improve operating performance,
the Company undertook a repositioning of Full-line Stores in 2002 to improve
merchandise presentation and provide easier, more convenient shopping. The
repositioning effort included installation of centralized checkouts, simplified
store signage, and standardization of fixturing and store layouts. The Company
also improved its merchandise offerings by reducing the number of brands and
labels it carried after reviewing every brand to determine customer relevancy
and profitability. To improve the quality of apparel offerings, Lands End was
acquired in June 2002, which added a nationally recognized apparel brand to the
Companys merchandise assortment, and the Covington brand was rolled out in
2002. The Company exited unprofitable businesses, including cosmetics,
installed carpet and custom window treatments. The repositioning led to a
disruptive sales environment, contributing to comparable store sales declines.
However, significant progress was made towards the repositioning plan,
resulting in an increase in the overall profitability of the segment.
Retail and Related Services revenues increased 0.4% in 2002, primarily due to
the acquisition of Lands End and the opening of seven new TGI stores, offset
by a decline of 5.6% in comparable store sales. Full-line Store revenues
decreased 5.3%, as a result of store-level disruptions caused by the
repositioning effort, a highly competitive and promotional retail environment
and a weak U.S. economy. In the Home Group, sales of home appliances,
electronics and other big-ticket items slowed in the second half of 2002. Home
Group sales were also negatively impacted by the exit of certain lines
including bicycles and the editing of product offerings, such as home
computers. As discussed above, the Company reduced the number of brands it
carried which negatively impacted 2002 total revenues and apparel/accessories
comparable store sales.
Specialty Stores revenues increased 7.6% in 2002 due to the addition of seven
TGI stores (bringing the total to 20) and a comparable store sales increase of
0.9%. Comparable store sales increases of 4.2% in Dealer Stores were partially
offset by comparable store sales declines of 4.1% in NTB and 0.3% in Hardware
stores. Direct to Customer revenues increased over the prior year primarily
due to the acquisition of Lands End, which contributed approximately $1.0
billion in revenues in 2002. Product Repair Services revenues increased to
$2.2 billion in 2002 due to increased product repair revenues resulting from a
vendor product recall and an agreement to provide repair services for an
appliance manufacturer.
21
Gross margin as a percentage of revenues improved 130 basis points in 2002.
The improvement occurred as a result of the exit of unprofitable merchandise
categories in Full-line Stores, improved inventory management and strategic
sourcing initiatives across all formats and the inclusion of Lands End, which
has a higher margin rate.
Selling and administrative expense as a percentage of revenues increased 60
basis points in 2002 from 2001. While the Company continued to recognize
expense savings from its productivity initiatives in 2002, selling and
administrative expense leverage was unfavorably affected by decreases in
Full-line Store revenues, the rollout of the additional TGI stores and the
inclusion of Lands End, which has a higher expense rate.
Operating income was $1.2 billion in 2002, $738 million higher than 2001, due
to the benefits of the Full-line Store repositioning, strategic sourcing
initiatives, margin rate improvements and the inclusion of Lands End. In
addition, results for fiscal year 2001 included special charges and impairments
of $484 million related to various Company restructuring initiatives.
On November 3, 2003, the Company sold substantially all the assets and
liabilities of its domestic Credit and Financial Products business, including
its clubs and services business, to Citicorp. The 2003 segment results include
the results of operations of the Credit and Financial Products business through
November 2, 2003, as well as a $791 million pretax loss related to retirement
of debt. The Company concluded its debt tender offers to purchase unsecured
domestic term debt securities on November 17, 2003.
Credit and Financial Products results were as follows:
A summary of credit information is as follows:
22
Below is a summary of 60-plus day delinquency rates, net charge-off rates and
bankruptcy filings for each respective fiscal period.
2003 Compared with 2002
In 2003, Credit and Financial Products revenues decreased 17.9% from the prior
year primarily due to the sale of the Credit and Financial Products business.
The portfolio yield declined in 2003 compared to 2002 as the portfolio
composition shifted from an average of approximately 30% MasterCard balances in
2002 to an average of approximately 43% in 2003. The MasterCard product
generally carried a risk-based variable finance charge rate that was typically
lower than the finance charge rate on the Sears Card. In addition, MasterCard
account holders typically repaid their accounts more quickly, which reduced the
yield generated on the portfolio. The average per card balance continued to
increase in 2003 primarily due to the MasterCard, which carried a higher
average credit line and outstanding balances, and had greater utility due to
its global acceptance and cash access features.
Selling and administrative expenses were 14.6% of credit and financial products
revenues in 2003 compared to 17.7% in 2002. The decrease was primarily due to
decreased operating costs reflective of ongoing productivity efforts, lower
marketing costs related to the MasterCard product, and increased reimbursement
from the Retail and Related Services segment for zero-percent financing.
The provision for uncollectible accounts was 38.3% of revenues in 2003 compared
to 40.9% in 2002. The decrease was primarily attributable to reduced
adjustments to the allowance for uncollectible accounts in 2003 as compared to
2002 as well as the recoveries attributable to the sale of previously
charged-off receivable accounts in the second quarter of 2003. During 2003,
the Company increased its allowance for uncollectible accounts by $110 million
to reflect increased delinquencies and higher charge-off rates due to the
seasoning of the MasterCard portfolio and an increase in the domestic credit
card receivable balances. During 2003, the Company sold approximately $2.5
billion of previously charged-off credit card receivable accounts, and
recognized a pretax gain of $93 million. During 2002, the Company increased
its allowance for uncollectible accounts by $665 million to reflect higher
delinquency and charge-off patterns, and a refinement to its allowance
methodology.
Interest costs were 18.4% of revenues in 2003 compared to 18.8% in 2002. The
decrease was attributable to the Companys use of variable rate funding in a
lower interest rate environment, partially offset by higher funding
23
levels to support receivables growth as well as a widening of Company credit
spreads over applicable reference rates.
The decline in operating income in 2003 was primarily due to the inclusion of
ten months results in 2003, as compared to a full year in 2002 as well as the
loss on early retirement of debt of $791 million in 2003.
2002 Compared with 2001
In 2002, Credit and Financial Products revenues increased 9.1% from the prior
year. The increase in revenues was primarily due to a 7.8% increase in average
balances, partially offset by an 85 basis point decline in portfolio yield. The
decline in portfolio yield was primarily the result of the shift of the
portfolio composition from an average of 9.5% MasterCard balances in 2001 to
30.1% in 2002. The increase in average per card balances was primarily
attributable to the growth of the MasterCard portfolio, which carried a higher
average credit line and outstanding balances, and had greater utility due to
its global acceptance and cash access features.
Selling and administrative expense increased 20.3% in 2002 from 2001 levels.
The increase was primarily due to increases in costs associated with the
continued roll-out of the MasterCard product, marketing, payroll and benefits
expense and consumer fraud costs. These increases were partially offset by
increased reimbursement from Retail and Related Services for zero-percent
financing.
The provision for uncollectible accounts increased by $393 million in 2002
compared to 2001. The Company increased its allowance for uncollectible
accounts by $365 million to reflect increased delinquencies and higher expected
charge-offs resulting from a difficult economy, the seasoning of the MasterCard
portfolio and an increase in the domestic credit card receivable balances. In
addition, the Company recorded an increase of $300 million in the domestic
allowance for uncollectible accounts as a result of refining the allowance
methodology to include current accounts and credit card fees. The provision
for uncollectible accounts in 2001 included a non-cash, pretax charge of $522
million to establish an allowance for uncollectible accounts related to
previously securitized credit card receivables reinstated on the Companys
balance sheet as a result of the Companys adoption of SFAS No. 140 in the
second quarter of 2001.
Interest expense decreased by $258 million in 2002 compared to the prior year.
The decrease was attributable to the Companys use of variable rate funding in
a lower interest rate environment, partially offset by higher funding levels to
support receivables growth as well as a widening of Company credit spreads over
applicable reference rates.
Operating income increased by $155 million in 2002 from 2001 as increased
revenues and lower funding costs were partially offset by increases in the
provision for uncollectible accounts and selling and administrative costs.
Corporate and Other segment results were as follows:
24
Revenues from the home improvement services businesses included in the
Corporate and Other segment increased by 14.1% to $372 million in 2003
primarily due to increased revenues generated from cabinet refacing and kitchen
remodeling. Interest expense in 2003 represents the portion of interest
expense incurred after November 2, 2003 on the remaining domestic term debt
that was related to the Credit and Financial Products segment (credit legacy
debt). Segment operating loss improved by $29 million, or 9.9%, primarily
reflecting the benefits of productivity initiatives.
Revenues from the home improvement services businesses decreased by 13.8% in
2002 to $326 million primarily due to the sale of Sears Termite and Pest
Control, Inc. on October 1, 2001 to the ServiceMaster Company. Segment
operating loss improved $78 million reflecting the benefits of productivity
initiatives and the absence of the 2001 $58 million pretax charge related to
productivity initiatives, which included eliminating store support positions at
the Companys headquarters.
Sears Canada results were as follows:
2003 Compared with 2002
Merchandise sales and services revenues increased 6.3% in 2003 due to the
benefit of exchange rates, partially offset by a decrease in
comparable store sales. Comparable store sales, on a Canadian dollar (C$) basis, decreased 4.6%
in 2003. Full-line Stores revenues decreased 6.2%, and comparable store sales
declined 5.2%. Sales in most merchandise categories declined from the previous
year, including furniture, hardware, sporting goods, toys and electronics.
Sales in major appliances were positive compared to 2002, which is consistent
with industry growth brought about by strong housing starts.
Specialty Stores revenues increased 1.0% in 2003, due to exchange rate
benefits. Comparable store sales, on a C$ basis, for Specialty Stores
decreased 2.0% in 2003 with a comparable store sales increase of 4.4% in Dealer
Stores and decreases of 2.9% in Sears Home stores and 6.1% in Outlet stores.
Credit revenues increased 17.0% compared to the prior year due to an increase
in balances, specifically for Sears Canada MasterCard, and the effects of
foreign exchange. Within Sears Canada credit operations, the net charge-off
rate increased to 5.3% in 2003 from 4.5% in 2002, however, improvements in
delinquency trends resulted in a reduction in the provision for uncollectible
accounts in 2003.
Gross margin as a percentage of merchandise sales and services revenues was
29.8% in 2003 compared to 28.9%
25
in 2002. The increase occurred as a result of a decline in promotional
markdowns and improvements in vendor sourcing.
Selling and administrative expense as a percentage of total revenues increased
50 basis points in 2003. While Sears Canada continued to recognize expense
savings from its productivity initiatives in 2003, selling and administrative
expense leverage was unfavorably affected by the decline in C$ revenues.
Depreciation and amortization increased by $20 million due to the change in the
exchange rate. Interest expense increased $16 million compared to the prior
year as Canadian dollar based interest expense from reduced funding
requirements was offset by the variance in the exchange rate.
Operating income for 2003 improved by $146 million over the prior year, due to
an increase in revenues, as well as an improved margin rate. In addition,
segment results for 2002 included a pretax charge of $111 million associated
with the conversion of seven stores operating under the Eatons banner to Sears
Canada stores.
2002 Compared with 2001
Similar to the domestic segments, Sears Canada focused on improving its
business model in 2002 in order to increase profitability in a challenging
environment. During 2002, the Company completed its conversion of the
remaining Eatons stores to Sears Canada Stores.
Merchandise sales and services revenues decreased 2.9% in 2002 while comparable
store sales on a C$ basis declined 4.3%. Full-line Stores revenues decreased
5.4%, while comparable store sales declined 5.2%. The decline in revenue
reflected reduced promotional activity as well as disruption caused by store
renovations. Sales in most merchandise categories declined from the previous
year, with the decline in electronics sales being most significant. Sales in
major appliances, however, were positive compared to 2001 due to the growth
brought about by strong housing starts.
Specialty Stores revenues increased 5.3% in 2002 due to exchange rate benefits.
Comparable store sales for Specialty Stores decreased 0.6% in 2002 with
comparable store sales increases of 5.6% in Dealer Stores, offset by declines
of 1.0% in Sears Home stores and 5.0% in Outlet stores.
Credit revenues were down 6.1% compared to the prior year primarily due to
customers carrying lower charge account receivable balances. Within Sears
Canada credit operations, the net charge-off rate increased to 4.5% in 2002
from 4.1% in 2001. Canada experienced similar economic conditions as the U.S.,
and as a result, charge-offs increased.
Gross margin as a percentage of merchandise sales and services revenues
improved by 320 basis points in 2002 reflecting improved inventory levels,
leading to lower liquidation losses and a reduction in the level of
unprofitable promotional activity.
Selling and administrative expense as a percentage of total revenues increased
160 basis points in 2002, despite operating expense reductions in several areas
such as payroll and benefits. The increase resulted from higher performance
based incentive expense as a result of its improved profitability.
Depreciation and amortization increased by $9 million, or 10.8%, due to the
absence of the amortization of negative goodwill, which was written off upon
adoption of SFAS No. 142. Interest expense declined $17 million or 15.3%
compared to the prior year due to lower funding needs.
Operating income in 2002 declined $68 million from the prior year primarily due
to the pretax charge of $111 million related to the conversion of the seven
stores operating under the Eatons banner to Sears Canada stores. The negative
impact of this charge was partially offset by an improvement in the margin rate
during 2002.
26
ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
The Company ended the year with approximately $9.1 billion of cash and cash
equivalents, an increase of $7.1 billion from the prior year, primarily due to
proceeds from the sale of the Companys domestic Credit and Financial Products
business less cash used to retire debt, repurchase shares and contribute to the
Companys domestic pension plan. As a result of the sale and related liability
management actions, the Companys domestic long-term debt position has been
reduced to $5.3 billion as of the end of the current fiscal year, down from
$23.9 billion last year-end. The Company expects to retire an additional $2.6
billion of domestic term debt by year-end 2004, $2.4 billion of which is
expected in the first half of 2004, and pay $1.5 billion for taxes and other
expenses associated with the sale of the domestic Credit and Financial Products
business. The Company plans to target, exclusive of seasonal working capital
requirements, domestic funded term debt, less cash and investments, of
approximately $1.5 billion.
The cash provided by 2003 operating activities resulted from the decline in
outstanding balances within the credit card receivables portfolio, partially
offset by cash used to fund inventory increases and operating liabilities. The
cash used in 2002 resulted from the growth of the domestic credit card
receivables portfolio. Investments in credit card receivables are reported as
reductions of operating cash flows in the Companys financial statements.
The increase in cash provided by investing activities during 2003 was due to
the sale of the domestic Credit and Financial Products and NTB businesses. The
increase in cash used for investing activities in 2002 compared with the prior
year is the result of the $1.8 billion acquisition of Lands End, partially
offset by proceeds from the disposition of holdings in Advance Auto Parts.
The Company has an ongoing capital expenditure program to renovate and update
its long-term assets, primarily focused on Full-line Stores. In addition, the
Company has opened new Full-line and Specialty Stores. Total capital
expenditures for property, plant and equipment for the past three years were as
follows:
The Company plans capital expenditures of approximately $1.1 billion for 2004.
The 2004 domestic capital plan contemplates the opening of two Full-line Stores
and three Sears Grand stores as well as the remodeling of approximately 110
Full-line Stores. The Company may also from time to time consider selective
transactions to create value and improve performance, which may include
acquisitions, dispositions, restructurings, joint ventures and partnerships.
Financing Activities
The Companys financing activities include net borrowings, dividend payments
and share issuances and repurchases. The Companys total debt balances as of
year-end were as follows:
27
The decrease in total domestic debt is primarily due to the sale of the
domestic Credit and Financial Products business to Citicorp. Citicorp assumed
$10 billion of the Companys securitized debt as part of the sale. In
addition, on November 17, 2003, the Company and its wholly-owned subsidiaries,
SRAC and Sears DC Corp., concluded cash tender offers to purchase unsecured
term debt securities maturing after 2003, resulting in the retirement of $6.4
billion of outstanding unsecured term debt. Finally, concurrent with the sale
of the domestic Credit and Financial Products business, short-term borrowings
were reduced from $4.5 billion at the end of 2002 to $1.0 billion at the end of
2003, as the Company repaid amounts outstanding associated with, and in some
cases terminated, its short-term borrowings programs.
As a result of the early retirement of debt, the Company recorded a pretax
charge of $791 million, representing premiums paid on early retirement of debt,
gains on the termination of associated derivative instruments to hedge interest
rate risk, the write-off of unamortized debt discount and debt issuances costs
and the loss on a previously terminated derivative contract.
The Company continues to use interest rate derivatives to synthetically convert
fixed rate debt to variable rate debt. The interest rate derivatives qualify as
fair value hedges in accordance with SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities, and as such are recorded on the balance
sheet at market value with an offsetting entry to the underlying hedged item,
which is debt.
Liquidity
Historically, the Company has been an active borrower in various capital
markets due to the funding needs of its domestic credit card receivables
portfolio. As a result of the sale of its domestic Credit and Financial
Products business, the Companys need to access capital markets for borrowings
has been greatly reduced. The Companys primary need for liquidity will be to
fund capital expenditures and the seasonal working capital requirements of its
retail business. These needs will primarily be funded through the Companys
liquid investment portfolio and operating cash flows.
In order to ensure liquidity and provide additional capacity, the Company
intends to maintain access to capital markets. Effective November 3, 2003, the
Company, through its domestic wholly-owned financial subsidiary, SRAC, amended
its $3.5 billion unsecured, 364-day revolving credit facility by extending the
termination date to May 2004 for consenting lenders and modifying the option to
extend the repayment of any borrowings to November 2004. The amendment also
provided for the commitment amount under this facility to be reduced to $2.5
billion as of December 3, 2003. This facility provides support for the
Companys domestic direct-issue commercial paper program. No borrowings were
outstanding under this committed credit facility in 2003. The Company is
beginning the renewal process of its domestic credit facility and is targeting
a new facility in the range of $1.0 billion to $2.0 billion. In addition,
Sears Canada has a $0.5 billion committed credit facility.
The ratings of the Companys domestic debt securities as of January 3, 2004,
appear in the table below:
28
RESULTS OF OPERATIONS
Table of Contents
Table of Contents
Credit and Financial Products
millions
2003
2002
2001
$
4,429
$
5,392
$
4,941
645
955
794
1,695
2,203
1,810
14
18
18
813
1,014
1,272
791
3,958
4,190
3,894
$
471
$
1,202
$
1,047
2003
2002
2001
42.2%
44.0%
47.0%
$
1,194
$
1,196
$
1,142
$
1,718
$
1,562
$
1,112
$
1,384
$
1,321
$
1,136
18.56%
19.48%
19.56%
15.04%
15.53%
15.16%
17.04%
18.29%
19.14%
Credit share is the percentage of retail sales, excluding Direct to Customer,
Orchard Supply Hardware and NTB, paid for with a Sears credit product (Sears Card or MasterCard).
Table of Contents
millions
% of
% of
% of
2003
Total
2002
Total
2001
Total
$
16,750
56.9%
$
19,836
69.9%
$
23,819
90.5%
12,689
43.1%
8,536
30.1%
2,499
9.5%
$
29,439
100.0%
$
28,372
100.0%
$
26,318
100.0%
$
$
18,391
59.8%
$
22,321
80.9%
12,375
40.2%
5,278
19.1%
$
$
30,766
100.0%
$
27,599
100.0%
2003
2002
2001
10.34%
8.91%
3.76%
1.97%
7.69%
7.58%
$
922
$
900
$
805
6.20%
6.29%
5.71%
6.39%
3.40%
1.64%
6.28%
5.42%
5.32%
Table of Contents
Corporate and Other
millions
2003
2002
2001
$
372
$
326
$
378
149
121
159
425
442
473
43
55
58
18
58
635
618
748
$
(263
)
$
(292
)
$
(370
)
Table of Contents
Sears Canada
millions, except foreign exchange rate
2003
2002
2001
$
4,158
$
3,913
$
4,031
323
276
294
4,481
4,189
4,325
2,918
2,782
2,994
1,127
1,036
997
52
58
56
112
92
83
110
94
111
111
4,319
4,173
4,241
$
162
$
16
$
84
-4.6%
-4.3%
-0.4%
0.7122
0.6359
0.6451
Table of Contents
Table of Contents
millions
2003
2002
2001
$
653
$
636
$
530
29
113
318
111
169
191
132
117
87
$
925
$
1,035
$
1,126
January 3, 2004
December 28, 2002
millions
Domestic
Sears Canada
Domestic
Sears Canada
$
719
$
314
$
4,397
$
128
5,336
1,245
23,883
1,162
355
142
331
127
90
609
$
6,500
$
1,701
$
29,220
$
1,417
Table of Contents
Moody's
Standard &
Investors
Fitch
Poor's Ratings
Service
Ratings
Services
Baa1
BBB+
BBB
P-2
F2
A-2
Table of Contents
Contractual Obligations and Off-Balance Sheet Arrangements
To facilitate an understanding of the Companys contractual obligations and
off-balance sheet arrangements, the following data is provided:
millions
Payments Due by Period
Within
After
Total
1 Year
2-3 Years
4-5 Years
5 Years
$
6,592
$
2,921
$
1,305
$
662
$
1,704
1,033
1,033
497
29
56
49
363
2,152
322
526
362
942
$
10,274
$
4,305
$
1,887
$
1,073
$
3,009
(1) Excludes $11 million of premium/discount on long-term debt. |
The Company has no material unconditional purchase obligations as defined by SFAS No. 47, Disclosure of Long-Term Purchase Obligations.
Defined benefit retirement plans
As is indicated in Note 9 of the Notes to Consolidated Financial Statements,
the projected benefit obligation of the defined benefit plans exceeded plan
assets by $0.7 billion at the end of 2003 as compared to $1.0 billion at the
end of 2002. This decrease in net obligation was attributable to the fact that
plan assets increased in value, primarily due to the increased level of
contributions in 2003 which more than offset the growth in plan obligations
resulting from lower discount rate and benefits accrued during the period. The
Company does not expect to contribute to the domestic pension plan in 2004.
The Critical Accounting Estimates section and Note 9 of the Notes to
Consolidated Financial Statements provide a more complete description of the
status of the Companys defined benefit plans.
Amount of Expiration Per Period
millions
Total
Amounts
Within
After
Committed
1 Year
2-3 Years
4-5 Years
5 Years
$
155
$
155
$
$
$
93
12
21
16
44
89
57
2
30
72
18
37
17
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements requires the Company to estimate the effect of various matters that are inherently uncertain as of the date of the financial statements. Each of these required estimates varies in regard to the level of judgment involved and its potential impact on the Companys reported financial results. Estimates are deemed critical when a different estimate could have reasonably been used or where changes in the estimate are reasonably likely to occur from period to period, and would materially impact the Companys financial condition, changes in financial condition or results of operations. The Companys significant accounting policies are discussed in Note 1 of the Notes to Consolidated Financial Statements; critical estimates inherent in these accounting policies are discussed in the following paragraphs.
29
Inventory valuation
Approximately 88% of merchandise inventories are valued at the lower of cost or market, with cost determined using the retail inventory method (RIM) under the last-in, first-out (LIFO) cost flow assumption. Inherent in the RIM calculation are certain significant management judgments and estimates including, among others, merchandise markon, markups, markdowns, shrinkage and vendor allowances, which significantly impact the ending inventory valuation at cost as well as resulting gross margins. The methodologies used to value merchandise inventories include the development of the cost-to-retail ratios, the groupings of homogenous classes of merchandise, the development of shrinkage reserves, the accounting for price changes and the computations inherent in the LIFO adjustment.
Self-insurance reserves
The Company uses a combination of third-party insurance and/or self-insurance for a number of risks including workers compensation, automobile, product and general liability claims. The Companys liability reflected on the consolidated balance sheet represents an estimate of the ultimate cost of uninsured claims incurred as of the balance sheet date. In estimating this liability, the Company utilizes loss development factors prepared by independent third-party actuaries. These development factors utilize historical data to project the future development of incurred losses. Loss estimates are adjusted based upon actual claims settlements and reported claims. Although the Company does not expect the amounts ultimately paid to differ significantly from its estimates, self-insurance reserves could be affected if future claim experience differs significantly from the historical trends and the actuarial assumptions.
Defined benefit retirement plans
The fundamental components of accounting for defined benefit retirement plans consist of the compensation cost of the benefits earned, the interest cost from deferring payment of those benefits into the future and the results of investing any assets set aside to fund the obligation. Such retirement benefits are earned by associates ratably over their service careers; therefore the amounts reported in the income statement for these retirement plans have historically followed the same pattern. Accordingly, changes in the obligations or the value of assets to fund it have been recognized systematically and gradually over the associates estimated period of service. This systematic and gradual recognition of changes has been accomplished by amortizing experience gains/losses in excess of the 10% corridor into expense over the associate service period and by recognizing the difference between actual and expected asset returns over a five-year period.
As discussed in Note 9 of the Notes to Consolidated Financial Statements, the Company will change its method of accounting for its domestic defined benefit plans to immediately recognize any experience gains or loss in excess of the 10% corridor and to value plan assets at fair value. The Company believes that the new method is preferable in light of changes made to its domestic benefit plans to discontinue providing pension and retiree medical benefits to associates under the age of 40 as the new policy accelerates recognition of events which have already occurred. As a result of this accounting method change, the Company expects to record an after-tax charge of $840 million in the first quarter of 2004 for the cumulative effect of the change in accounting principle.
Under its new accounting method, the Companys pension expense in future periods may be more volatile as this method accelerates recognition of actual experience. Furthermore, because the domestic pension plans unrecognized loss will be at the 10% corridor limit at the beginning of 2004, additional pension expense will be recognized in 2004 for the full amount of any experience losses realized in 2004. The largest drivers of experience losses in recent years have been the discount rate used to determine the present value of the obligation and the actual return on pension assets.
The discount rate used to determine the present value of the obligation is adjusted annually based on prevailing interest rates as of the measurement date, which is October 31. In 2003, the Company lowered the discount rate used to determine the pension obligation from 7.00% to 6.00% based on the lower interest rate environment. A further 25 basis point decline in the discount rate would generate an experience loss of approximately $100 million.
30
Future pension expense may also be affected by the actual return on plan assets achieved. The current assumption is that pension assets will earn an average annual 8% return. Every one percentage point variance from the actual return to the assumed rate of 8% will generate an experience gain or loss of $25 million.
Allowance for uncollectible accounts
The Company records an allowance for uncollectible accounts to reflect managements best estimate of losses inherent in its portfolio of credit card receivables as of the balance sheet date. This allowance is established through a charge to the provision for uncollectible accounts and represents amounts of current and past due credit card receivable balances (principal, finance charge and credit card fee balances) which management estimates will not be collected. The Company calculates the allowance for uncollectible accounts using a model that considers the current condition of the portfolio and factors such as bankruptcy filings, historical charge-off patterns and other portfolio data. The Companys calculation is then reviewed by management to assess whether, based on economic events, additional analyses are required to appropriately estimate losses inherent in the portfolio. Management believes that the allowance for uncollectible accounts is adequate to cover anticipated losses in the reported credit card receivable portfolio under current conditions; however, significant deterioration in any of the above-noted factors, or in the overall health of the economy, could materially change these expectations.
Valuation of long-lived assets
The Company evaluates the carrying value of long-lived assets whenever events or changes in circumstances indicate that a potential impairment has occurred. A potential impairment has occurred if the projected future undiscounted cash flows are less than the carrying value of the assets. The estimate of cash flows includes managements assumptions of cash inflows and outflows directly resulting from the use of that asset in operations. When a potential impairment has occurred, an impairment write-down is recorded if the carrying value of the long lived asset exceeds its fair value. Fair value is measured based on a projected discounted cash flow model using a discount rate the Company feels is commensurate with the risk inherent in the Companys business. The Companys impairment analyses contain estimates due to the inherently judgmental nature of forecasting long-term estimated cash flows and determining the ultimate useful lives of assets. Actual results will differ, which could materially impact the Companys impairment assessment.
Income taxes
The Company provides deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities based on currently enacted tax laws. The tax balances and income tax expense recognized by the Company are based on managements interpretation of the tax laws of multiple jurisdictions. Income tax expense also reflects the Companys best estimates and assumptions regarding, among other things, the level of future taxable income, interpretation of the tax laws, and tax planning. Future changes in tax laws, changes in projected levels of taxable income, and tax planning could affect the effective tax rate and tax balances recorded by the Company.
Managements estimates as of the date of the financial statements reflect its best judgment giving consideration to all currently available facts and circumstances. As such, these estimates may require adjustment in the future, as additional facts become known or as circumstances change.
The Companys management has discussed the development and selection of these critical accounting policies with the Audit Committee of the Companys Board of Directors and the Audit Committee has reviewed the Companys disclosures in this Managements Discussion and Analysis.
31
Adoption of New Accounting Standards
In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The recognition and measurement provisions of FIN 45 were applicable to guarantees issued or modified after December 31, 2002. The disclosure requirements were effective for financial statements ending after December 15, 2002. The Company has adopted FIN 45 and provided disclosures regarding its guarantees in Note 5 of the Notes to Consolidated Financial Statements.
In January 2003, the Emerging Issues Task Force (EITF) issued EITF 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, which states that cash consideration received from a vendor is presumed to be a reduction of the prices of the vendors products or services and should, therefore, be characterized as a reduction of Cost of Merchandise Sold when recognized in the Consolidated Statements of Earnings. That presumption is overcome when the consideration is either a reimbursement of specific, incremental and identifiable costs incurred to sell the vendors products, or a payment for assets or services delivered to the vendor. The Company receives allowances from its vendors through a variety of programs and arrangements, including co-operative advertising and markdown reimbursement programs. Given the promotional nature of the Companys business, the allowances are generally intended to offset the Companys cost of promoting, advertising and selling expense when the purpose for which the vendor funds were intended to be used has been fulfilled. Co-operative advertising allowances are reported as a reduction of advertising expense in the period in which the advertising occurs. Markdown reimbursements are credited to cost of sales, buying and occupancy during the period in which the related promotional markdown is taken. EITF 02-16 was effective for contracts entered into after December 31, 2002. The adoption of EITF 02-16 did not have a material impact on the Companys financial position or results of operations in 2003.
In December 2003, the FASB revised SFAS No. 132, Employers Disclosures about Pensions and Other Postretirement benefits - an amendment of FASB Statements No. 87, 88 and 106. The Company has adopted the disclosure only provisions of the revised statement for fiscal year 2004.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. The statement was effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the Companys financial position or results of operations in 2003.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards that require companies to classify certain financial instruments as liabilities that were previously classified as equity. The Company did not reclassify any financial instruments as a result of adopting SFAS No. 150.
OUTLOOK
The Companys preliminary outlook for fiscal year 2004 is for earnings per share before the cumulative effect of a change in accounting principle, as discussed in the Critical Accounting Policies section of this Managements Discussion and Analysis, to range from $3.60 to $3.80. This includes the negative carrying cost of approximately $0.20 to $0.25 per share on the Companys remaining credit legacy debt related to its Credit and Financial Products business. The preliminary outlook encompasses several important factors, including: a 52-week fiscal year in 2004, versus the 53-week fiscal year in 2003; pension costs reflected under the new accounting method; the
32
amount of outstanding debt; and the number of shares outstanding due to the ongoing share repurchase program. The Company expects domestic comparable store sales to grow in the low-single digit range for the year.
With the sale of the domestic Credit and Financial Products business, the Company will be more focused as a retailer, and thus the Companys reporting segments will be changed to reflect two operating segments - a domestic segment and an international segment. The Domestic segment will comprise the former Retail and Related Services segment, including the revenues earned from the Citicorp relationship, and the former Corporate and Other segment. The International segment will continue to represent the results of operations of Sears Canada.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements made in this Annual Report on Form 10-K and in other public announcements by the Company, including in the Chairmans letter accompanying the report, are forward-looking statements that are subject to risks and uncertainties that may cause the Companys actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include information concerning the Companys future financial performance, business strategy, plans, goals and objectives. Statements preceded by, followed by or that otherwise include the words believes, expects, anticipates, intends, estimates, plans, forecasts, is likely to, projected and similar expressions or future or conditional verbs such as will, should, would, may and could are generally forward-looking in nature and not historical facts.
Following are some of the risks and uncertainties that could affect our financial condition or results of operations, and could cause actual results, performance or achievements to differ from the future results, performance or achievements expressed or implied by these forward-looking statements: competitive conditions in the retail and related services industries; changes in consumer confidence and spending; the success of the Full-line Store strategy and other strategies; the possibility that the Company will identify new business and strategic options for one or more of its business segments, potentially including selective acquisitions, dispositions, restructurings, joint ventures and partnerships; the Companys ability to integrate and operate Lands End successfully; the successful integration of Sears retail business with Citicorps operation of the Credit and Financial Products business, which involves significant training and the integration of complex system and processes; the outcome of pending legal proceedings; anticipated cash flow; social and political conditions such as war, political unrest and terrorism or natural disasters; the possibility of negative investment returns in the Companys pension plans; changes in interest rates; the volatility in financial markets; changes in the Companys debt ratings, credit spreads and cost of funds; the possibility of interruptions in systematically accessing the public debt markets; general economic conditions and normal business uncertainty. In addition, Sears typically earns a disproportionate share of its operating income in the fourth quarter due to seasonal buying patterns, which are difficult to forecast with certainty. Additional discussion of these and other risks and uncertainties is contained elsewhere under Managements Discussion and Analysis and Quantitative and Qualitative Disclosures About Market Risk.
While the Company believes that its forecasts and assumptions are reasonable, it cautions that actual results may differ materially. The Company intends the forward-looking statements to speak only as of the time first made and does not undertake to update or revise them as more information becomes available.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The primary market risk exposure faced by the Company is interest rate risk, which arises from the Companys debt obligations and derivative financial instruments. The Companys policy is to manage interest rate risk through the use of fixed and variable rate debt and interest rate derivatives. All debt securities and derivative instruments are considered non-trading. The overall reduction in debt significantly reduced the Companys exposure to market risk.
At year-end 2003 and 2002, 53% and 80%, respectively, of the Companys funding portfolio was variable rate
33
(including fixed rate debt synthetically converted to variable rate through the use of derivative financial instruments). Based on the size of the Companys variable rate funding portfolio at year-end 2003 and 2002, which totaled $4.3 billion and $24.2 billion, respectively, an immediate 100 basis point change in interest rates would have affected pretax funding costs by approximately $43 million and $242 million, respectively. These estimates do not take into account the effect on revenue resulting from invested cash or the returns on assets being funded. These estimates also assume that the variable rate funding portfolio remains constant for an annual period and that the interest rate change occurs at the beginning of the period. As a result of the sale of the Companys Credit and Financial Products business to Citicorp on November 3, 2003, the Companys domestic funding requirements have declined such that it is unlikely that current maturities of domestic term debt will be refinanced and therefore are not considered variable rate in the calculation above. Prior to the sale, it was assumed that these current maturities of fixed rate term debt would be refinanced and were considered variable rate due to the interest rate risk upon refinancing. Under the methodology used prior to the sale, at year-end 2002, approximately 83% of the Companys funding portfolio was variable rate debt.
The Company actively manages the risk of nonpayment by its derivative
counterparties by limiting its exposure to individual counterparties based on
credit ratings, value at risk and maturities. The counterparties to these
instruments are major financial institutions with credit ratings of single-A
or better. In certain cases, counterparty risk is also managed through the
use of collateral in the form of cash or U.S. government securities. The
following table summarizes notional amounts, fair values and weighted-average
remaining life of the Companys domestic derivative instruments:
Weighted-Average
Notional Amount
Fair Value
Remaining Life
(millions)
(millions)
(years)
$112
3.5
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company, including the notes to all such statements, and other information are included in this report beginning on page F-1.
Item 9. Changes in and Disagreements with Independent Auditors on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
The Companys management, including Alan J. Lacy, Chairman of the Board of Directors, President and Chief Executive Officer (principal executive officer) and Glenn R. Richter, Senior Vice President and Chief Financial Officer (principal financial officer), have evaluated the effectiveness of the Companys disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the Exchange Act). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Companys disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the SEC) (1) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and (2) is accumulated and communicated to the Companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Companys internal control over financial reporting occurred during the fiscal year ended January 3, 2004 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
34
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors and executive officers of Sears is incorporated herein by reference to the descriptions under Item 1: Election of Directors and Section 16(a) Beneficial Ownership Reporting Compliance of the 2004 Proxy Statement and to Item 1A of this Report under the caption Executive Officers of the Registrant.
Item 11. Executive Compensation
Information regarding executive compensation is incorporated by reference to the material under the captions Item 1: Election of Directors, Directors Compensation and Benefits, Executive Compensation, Stock Options, Long-Term Performance Incentive Program, Pension Plan, Officers Agreements and Compensation Committee Interlocks and Insider Participation of the 2004 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference to the material under the heading Beneficial Ownership of the 2004 Proxy Statement.
See also Part II, Item 5 for a discussion of securities authorized for issuance under equity compensation plans.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is incorporated herein by reference to the material under the heading Certain Transactions of the 2004 Proxy Statement.
Item 14. Principal Accounting Fees and Services
Information regarding principal accounting fees and services is incorporated herein by reference to the material under the heading Principal Accounting Fees and Services of the 2004 Proxy Statement.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)1 and 2 - An Index to Financial Statements and Financial Statement Schedules has been filed as a part of this Report beginning on page F-1 hereof.
(a)3 - Exhibits:
An Exhibit Index has been filed as a part of this Report beginning on page E-1 hereof and is incorporated herein by reference. |
(b) - Reports on Form 8-K:
A Current Report on Form 8-K dated October 16, 2003 was filed with the Securities and Exchange Commission on October 16, 2003 to report, the release of third quarter earnings of the Registrant. | ||||
A Current Report on Form 8-K dated November 3, 2003 as filed with the Securities and Exchange Commission on December 19, 2003 to provide pro forma financial information relating to the sale of the Companys Credit and Financial Products business. |
35
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, as amended (the Exchange Act) the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
SEARS, ROEBUCK AND CO.
(Registrant) |
|||
|
||||
|
||||
|
*Michael J. Graham
|
|||
|
By: | Michael J. Graham | ||
|
Vice President and Controller | |||
|
||||
|
March 10, 2004 |
Pursuant to the requirements of the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature
Title
Date
Alan J. Lacy
Chairman of the Board of
Directors,
President
and Chief Executive Officer
)
)
)
Glenn R. Richter
Senior Vice President and
Chief
Financial Officer
(Principal Financial
Officer)
)
)
)
)
Michael J. Graham
Vice President and
Controller (Principal
Accounting Officer)
)
)
)
)
March 10, 2004
Hall Adams, Jr.
Director
)
)
)
)
Brenda C. Barnes
Director
)
)
)
)
William L Bax
Director
)
)
)
)
36
Signature
Title
Date
James R. Cantalupo
Director
)
)
)
)
Donald J. Carty
Director
)
)
)
)
March 10, 2004
W. James Farrell
Director
)
)
)
)
Michael A. Miles
Director
)
)
)
)
Hugh B. Price
Director
)
)
)
)
Dorothy A. Terrell
Director
)
)
)
)
Raul H. Yzaguirre
Director
)
)
)
)
*By:
|
/s/Michael J. Graham
|
Individually and as Attorney-in-fact | ||
|
Michael J. Graham |
37
SEARS, ROEBUCK AND CO.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Year Ended January 3, 2004
Page | ||||
|
||||
Managements Report
|
F-2 | |||
|
||||
Independent Auditors Report
|
F-3 | |||
|
||||
Consolidated Statements of Income
|
F-4 | |||
|
||||
Consolidated Balance Sheets
|
F-5 | |||
|
||||
Consolidated Statements of Cash Flows
|
F-6 | |||
|
||||
Consolidated Statements of Shareholders Equity
|
F-7 | |||
|
||||
Notes to Consolidated Financial Statements
|
F-8 | |||
|
||||
Schedule II Valuation and Qualifying Accounts
|
F-40 |
F - 1
Managements Report
The financial statements, financial analyses and all other information were prepared by management, which is responsible for their integrity and objectivity. Management believes the financial statements, which require the use of certain estimates and judgments, fairly and accurately reflect the financial position and operating results of Sears, Roebuck and Co. (the Company) in accordance with accounting principles generally accepted in the United States of America. All financial information is consistent with the financial statements.
Management maintains a system of internal controls that it believes provides reasonable assurance that, in all material respects, assets are maintained and accounted for in accordance with managements authorizations, transactions are recorded accurately in the books and records, and are appropriately reported and disclosed in the Companys financial statements. 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 Companys 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 Companys 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 on the following page. Their audit also includes gaining an understanding of the Companys control environment, accounting systems and control procedures to the extent necessary to plan and execute the audit. The independent accountants and internal auditors advise management of the results of their audits, and make recommendations to improve the system of internal controls. Management evaluates the audit recommendations and takes appropriate action.
The Audit Committee of the Board of Directors is comprised entirely of
directors who are not employees of the Company. The committee reviews audit
plans, internal control reports, financial reports and related matters and
meets regularly with the Companys management, internal auditors and
independent accountants, and performs other duties as outlined in the Audit
Committee Charter. The independent accountants and the internal auditors
advise the committee of any significant matters resulting from their audits and
have free access to the committee without management being present.
/s/ Alan J. Lacy
Alan J. Lacy
Chairman of the Board of Directors, President and
Chief Executive Officer
/s/ Glenn R. Richter
Glenn R. Richter
Senior Vice President and Chief Financial Officer
/s/ Michael J. Graham
Michael J. Graham
Vice President and Controller
F - 2
Independent Auditors Report
To the Board of Directors and Shareholders of
Sears, Roebuck and Co.
We have audited the accompanying Consolidated Balance Sheets of Sears, Roebuck and Co. as of January 3, 2004 and December 28, 2002, and the related Consolidated Statements of Income, Shareholders Equity, and Cash Flows for each of the three years in the period ended January 3, 2004. Our audits also included the financial statement schedule of Sears, Roebuck and Co., listed on page F-1. These financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sears, Roebuck and Co. as of January 3, 2004 and December 28, 2002, and the results of its operations and its cash flows for each of the three years in the period ended January 3, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Notes 1, 5 and 16 to the consolidated financial statements, the Company changed its method of accounting for goodwill in 2002 and its methods of accounting for credit card securitizations, derivative instruments and hedging activities in 2001, as required by new accounting standards.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chicago, Illinois
March 9, 2004
F - 3
SEARS, ROEBUCK AND CO.
Consolidated Statements of Income
millions, except per common share data | 2003 | 2002 | 2001 | |||||||||
|
||||||||||||
REVENUES
|
||||||||||||
Merchandise sales and services
|
$ | 36,372 | $ | 35,698 | $ | 35,755 | ||||||
Credit and financial products revenues
|
4,752 | 5,668 | 5,235 | |||||||||
|
||||||||||||
Total revenues
|
41,124 | 41,366 | 40,990 | |||||||||
|
||||||||||||
|
||||||||||||
COSTS AND EXPENSES
|
||||||||||||
Cost of sales, buying and occupancy
|
26,231 | 25,646 | 26,234 | |||||||||
Selling and administrative
|
9,111 | 9,249 | 8,892 | |||||||||
Provision for uncollectible accounts
|
1,747 | 2,261 | 1,866 | |||||||||
Depreciation and amortization
|
909 | 875 | 863 | |||||||||
Interest, net
|
1,025 | 1,143 | 1,415 | |||||||||
Loss on early retirement of debt, net
|
791 | | | |||||||||
Special charges and impairments
|
112 | 111 | 542 | |||||||||
|
||||||||||||
Total costs and expenses
|
39,926 | 39,285 | 39,812 | |||||||||
|
||||||||||||
Operating income
|
1,198 | 2,081 | 1,178 | |||||||||
Gain on sale of businesses
|
4,224 | | | |||||||||
Other income, net
|
27 | 372 | 45 | |||||||||
|
||||||||||||
|
||||||||||||
Income before income taxes, minority interest and cumulative
effect of change in accounting principle
|
5,449 | 2,453 | 1,223 | |||||||||
Income taxes
|
2,007 | 858 | 467 | |||||||||
Minority interest
|
45 | 11 | 21 | |||||||||
|
||||||||||||
Income before cumulative effect of change in accounting principle
|
3,397 | 1,584 | 735 | |||||||||
Cumulative effect of change in accounting for goodwill
|
| (208 | ) | | ||||||||
|
||||||||||||
NET INCOME
|
$ | 3,397 | $ | 1,376 | $ | 735 | ||||||
|
||||||||||||
|
||||||||||||
EARNINGS PER COMMON SHARE:
|
||||||||||||
BASIC
|
||||||||||||
Earnings per share before cumulative effect of change in
accounting principle
|
$ | 11.95 | $ | 4.99 | $ | 2.25 | ||||||
Cumulative effect of change in accounting principle
|
| (0.65 | ) | | ||||||||
|
||||||||||||
Earnings per share
|
$ | 11.95 | $ | 4.34 | $ | 2.25 | ||||||
|
||||||||||||
DILUTED
|
||||||||||||
Earnings per share before cumulative effect of change in
accounting principle
|
$ | 11.86 | $ | 4.94 | $ | 2.24 | ||||||
Cumulative effect of change in accounting principle
|
| (0.65 | ) | | ||||||||
|
||||||||||||
Earnings per share
|
$ | 11.86 | $ | 4.29 | $ | 2.24 | ||||||
|
See accompanying notes.
F - 4
SEARS, ROEBUCK AND CO.
Consolidated Balance Sheets
millions, except per share data | 2003 | 2002 | ||||||
ASSETS
|
||||||||
Current assets
|
||||||||
Cash and cash equivalents
|
$ | 9,057 | $ | 1,962 | ||||
Credit card receivables
|
1,998 | 32,563 | ||||||
Less allowance for uncollectible accounts
|
42 | 1,832 | ||||||
|
||||||||
Net credit card receivables
|
1,956 | 30,731 | ||||||
Other receivables
|
733 | 891 | ||||||
Merchandise inventories, net
|
5,335 | 5,115 | ||||||
Prepaid expenses and deferred charges
|
407 | 535 | ||||||
Deferred income taxes
|
708 | 749 | ||||||
|
||||||||
Total current assets
|
18,196 | 39,983 | ||||||
|
||||||||
Property and equipment
|
||||||||
Land
|
392 | 442 | ||||||
Buildings and improvements
|
7,151 | 6,930 | ||||||
Furniture, fixtures and equipment
|
4,972 | 5,050 | ||||||
Capitalized leases
|
609 | 557 | ||||||
|
||||||||
Gross property and equipment
|
13,124 | 12,979 | ||||||
Less accumulated depreciation
|
6,336 | 6,069 | ||||||
|
||||||||
Total property and equipment, net
|
6,788 | 6,910 | ||||||
|
||||||||
Deferred income taxes
|
378 | 734 | ||||||
Goodwill
|
943 | 944 | ||||||
Tradenames and other intangible assets
|
710 | 704 | ||||||
Other assets
|
708 | 1,134 | ||||||
|
||||||||
TOTAL ASSETS
|
$ | 27,723 | $ | 50,409 | ||||
|
||||||||
|
||||||||
LIABILITIES
|
||||||||
Current liabilities
|
||||||||
Short-term borrowings
|
$ | 1,033 | $ | 4,525 | ||||
Current portion of long-term debt and capitalized lease obligations
|
2,950 | 4,808 | ||||||
Merchandise payables
|
3,106 | 2,945 | ||||||
Income taxes payable
|
1,867 | 787 | ||||||
Other liabilities
|
2,950 | 3,753 | ||||||
Unearned revenues
|
1,244 | 1,199 | ||||||
Other taxes
|
609 | 580 | ||||||
|
||||||||
Total current liabilities
|
13,759 | 18,597 | ||||||
|
||||||||
Long-term debt and capitalized lease obligations
|
4,218 | 21,304 | ||||||
Pension and postretirement benefits
|
1,956 | 2,491 | ||||||
Minority interest and other liabilities
|
1,389 | 1,264 | ||||||
|
||||||||
Total Liabilities
|
21,322 | 43,656 | ||||||
|
||||||||
COMMITMENTS AND CONTINGENT LIABILITIES
|
||||||||
SHAREHOLDERS EQUITY
|
||||||||
Common shares issued ($.75 par value per share, 1,000 shares authorized,
230.4 and 316.7 shares outstanding, respectively)
|
323 | 323 | ||||||
Capital in excess of par value
|
3,519 | 3,505 | ||||||
Retained earnings
|
11,636 | 8,497 | ||||||
Treasury
stock - at cost
|
(7,945 | ) | (4,474 | ) | ||||
Deferred ESOP expense
|
(26 | ) | (42 | ) | ||||
Accumulated other comprehensive loss
|
(1,106 | ) | (1,056 | ) | ||||
|
||||||||
Total Shareholders Equity
|
6,401 | 6,753 | ||||||
|
||||||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
$ | 27,723 | $ | 50,409 | ||||
|
See accompanying notes.
F - 5
SEARS, ROEBUCK AND CO.
Consolidated Statements of Cash Flows
millions | 2003 | 2002 | 2001 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
Net income
|
$ | 3,397 | $ | 1,376 | $ | 735 | ||||||
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Depreciation and amortization |
909 | 875 | 863 | |||||||||
Loss on early retirement of debt
|
791 | | | |||||||||
Cumulative effect of a change in accounting for goodwill
|
| 208 | | |||||||||
Provision for uncollectible accounts
|
1,747 | 2,261 | 1,866 | |||||||||
Special charges and impairments
|
112 | 111 | 542 | |||||||||
Gain on sale of businesses
|
(4,224 | ) | | | ||||||||
Gain on sales of property and investments
|
(12 | ) | (347 | ) | (21 | ) | ||||||
Income tax benefit on nonqualified stock options
|
25 | 24 | 14 | |||||||||
Change in (net of dispositions and acquisitions):
|
||||||||||||
Deferred income taxes
|
648 | (203 | ) | (190 | ) | |||||||
Retained interest in transferred credit card receivables
|
| | (759 | ) | ||||||||
Credit card receivables
|
524 | (4,833 | ) | (810 | ) | |||||||
Merchandise inventories
|
(158 | ) | 45 | 610 | ||||||||
Other operating assets
|
(496 | ) | (56 | ) | 61 | |||||||
Other operating liabilities
|
(739 | ) | 34 | (596 | ) | |||||||
|
||||||||||||
Net cash provided by (used in) operating activities
|
2,524 | (505 | ) | 2,315 | ||||||||
|
||||||||||||
|
||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
Acquisition of businesses, net of cash acquired
|
| (1,840 | ) | | ||||||||
Proceeds from sale of businesses
|
21,651 | | | |||||||||
Proceeds from sales of property and investments
|
53 | 568 | 59 | |||||||||
Purchases of property and equipment
|
(925 | ) | (1,035 | ) | (1,126 | ) | ||||||
Purchases of long-term investments
|
(21 | ) | (15 | ) | (21 | ) | ||||||
|
||||||||||||
Net provided by cash (used in) investing activities
|
20,758 | (2,322 | ) | (1,088 | ) | |||||||
|
||||||||||||
|
||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
Proceeds from long-term debt
|
3,757 | 6,565 | 4,051 | |||||||||
Repayments of long-term debt
|
(12,643 | ) | (3,256 | ) | (3,532 | ) | ||||||
(Decrease) increase in short-term borrowings, primarily 90 days
or less
|
(3,519 | ) | 964 | (708 | ) | |||||||
Repayments of ESOP note receivable
|
2 | 11 | 33 | |||||||||
Common shares repurchased
|
(3,673 | ) | (427 | ) | (625 | ) | ||||||
Common shares issued for employee stock plans
|
191 | 157 | 75 | |||||||||
Dividends paid to shareholders
|
(327 | ) | (293 | ) | (302 | ) | ||||||
|
||||||||||||
Net cash (used in) provided by financing activities
|
(16,212 | ) | 3,721 | (1,008 | ) | |||||||
|
||||||||||||
Effect of exchange rate changes on cash and cash equivalents
|
25 | 4 | 3 | |||||||||
|
||||||||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
7,095 | 898 | 222 | |||||||||
|
||||||||||||
BALANCE AT BEGINNING OF YEAR
|
1,962 | 1,064 | 842 | |||||||||
|
||||||||||||
|
||||||||||||
BALANCE AT END OF YEAR
|
$ | 9,057 | $ | 1,962 | $ | 1,064 | ||||||
|
See accompanying notes.
F - 6
SEARS, ROEBUCK AND CO.
Consolidated Statements of Shareholders Equity
dollars in millions | ||||||||||||||||||||||||||||||||
shares in thousands | Accumulated | Total | ||||||||||||||||||||||||||||||
Common | Common | Capital in | Deferred | Other | Share- | |||||||||||||||||||||||||||
Shares | Shares | Excess of | Retained | Treasury | ESOP | Comprehen- | holders' | |||||||||||||||||||||||||
Outstanding | Issued | Par Value | Earnings | Stock | Expense | sive Loss | Equity | |||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Balance, beginning of year 2001
|
333,203 | $ | 323 | $ | 3,538 | $ | 6,979 | $ | (3,726 | ) | $ | (96 | ) | $ | (249 | ) | $ | 6,769 | ||||||||||||||
|
||||||||||||||||||||||||||||||||
Net income
|
735 | 735 | ||||||||||||||||||||||||||||||
Total other comprehensive income
|
(582 | ) | (582 | ) | ||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total comprehensive income
|
153 | |||||||||||||||||||||||||||||||
Dividends declared to shareholders
($0.92 per share)
|
(301 | ) | (301 | ) | ||||||||||||||||||||||||||||
Stock options exercised and other
changes
|
3,349 | (38 | ) | 128 | 90 | |||||||||||||||||||||||||||
Shares repurchased
|
(16,106 | ) | (625 | ) | (625 | ) | ||||||||||||||||||||||||||
ESOP expense recognized
|
33 | 33 | ||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Balance, end of year 2001
|
320,446 | 323 | 3,500 | 7,413 | (4,223 | ) | (63 | ) | (831 | ) | 6,119 | |||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Net income
|
1,376 | 1,376 | ||||||||||||||||||||||||||||||
Total other comprehensive income
|
(225 | ) | (225 | ) | ||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total comprehensive income
|
1,151 | |||||||||||||||||||||||||||||||
Dividends declared to shareholders
($0.92 per share)
|
(292 | ) | (292 | ) | ||||||||||||||||||||||||||||
Stock options exercised and other
changes
|
4,517 | 5 | 176 | 181 | ||||||||||||||||||||||||||||
Shares repurchased
|
(8,229 | ) | (427 | ) | (427 | ) | ||||||||||||||||||||||||||
ESOP expense recognized
|
21 | 21 | ||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Balance, end of year 2002
|
316,734 | $ | 323 | $ | 3,505 | $ | 8,497 | $ | (4,474 | ) | $ | (42 | ) | $ | (1,056 | ) | $ | 6,753 | ||||||||||||||
|
||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Net income
|
3,397 | 3,397 | ||||||||||||||||||||||||||||||
Total other comprehensive loss
|
(50 | ) | (50 | ) | ||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total comprehensive income
|
3,347 | |||||||||||||||||||||||||||||||
Dividends declared to shareholders
($0.92 per share)
|
(258 | ) | (258 | ) | ||||||||||||||||||||||||||||
Stock options exercised and other
changes
|
5,295 | 14 | 202 | 216 | ||||||||||||||||||||||||||||
Shares repurchased
|
(91,653 | ) | (3,673 | ) | (3,673 | ) | ||||||||||||||||||||||||||
ESOP expense recognized
|
16 | 16 | ||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Balance, end of year 2003
|
230,376 | $ | 323 | $ | 3,519 | $ | 11,636 | $ | (7,945 | ) | $ | (26 | ) | $ | (1,106 | ) | $ | 6,401 | ||||||||||||||
|
See accompanying notes.
F - 7
SEARS, ROEBUCK AND CO.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Sears, Roebuck and Co. (together with its consolidated subsidiaries, the Company) is a multi-line retailer that offers a wide array of merchandise and related services. The Company operates principally in the United States, Puerto Rico and Canada.
On November 3, 2003, the Company sold substantially all the assets and liabilities of its domestic Credit and Financial Products business, including its clubs and services business. The Companys results of operations include the results of the domestic Credit and Financial Products business through November 2, 2003. In addition, the Company sold its National Tire & Battery (NTB) business on November 29, 2003. The Companys results of operations included the results of its NTB business through the date of the sale.
Basis of Consolidation
The consolidated financial statements include the accounts of Sears, Roebuck
and Co. and all majority-owned subsidiaries, including Sears Canada.
Investments in companies in which the Company exercises significant influence,
but not control, are accounted for using the equity method of accounting.
Investments in companies in which the Company has less than a 20% ownership
interest, and does not exercise significant influence, are accounted for at
cost. All intercompany accounts and transactions have been eliminated during
consolidation.
Fiscal Year
The Companys fiscal year ends on the Saturday nearest December 31. Unless
otherwise stated, references to years in this report relate to fiscal years
rather than to calendar years.
Fiscal year
Ended
Weeks
January 3, 2004
53
December 28, 2002
52
December 29, 2001
52
Reclassifications
Certain reclassifications have been made to prior year financial statements and the notes to conform with the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Significant estimates are required as part of inventory valuation; determining the allowance for uncollectible accounts; depreciation; amortization and recoverability of long-lived assets; establishing restructuring, warranty, and other reserves; and calculating retirement benefits. Actual results may differ from these estimates.
Cash and Cash Equivalents
Cash equivalents include all highly liquid investments with original maturities of three months or less at the date of purchase. Such investments may include, but are not limited to, commercial paper, United States federal, state and
F - 8
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements
municipal government securities, floating rate notes, repurchase agreements using the previously mentioned securities as collateral, and money market funds.
Credit Card Receivables
Credit card receivables arise under revolving credit accounts used primarily to finance purchases. Sears Card products are typically available only on purchases of merchandise and services offered by the Company, whereas MasterCard is widely accepted by merchants outside the Company. Additional MasterCard product receivables are generated from balance transfers and cash advances. These accounts have various billing and payment structures, including varying minimum payment levels and finance charge rates and fees. Based on historical payment patterns, the full receivable balance will not be repaid within one year. With the sale of the Companys domestic Credit and Financial Products business, all credit card receivables as of January 3, 2004 originated from the Companys Sears Canada subsidiary.
Credit card receivables are shown net of an allowance for uncollectible accounts. The allowance is an estimate of losses inherent in the portfolio (including current accounts, finance charges and credit card fee balances) as of the balance sheet date. The Company calculates the allowance using a model that analyzes factors such as bankruptcy filings, delinquency rates, historical charge-off patterns, recovery rates and other portfolio data. The Companys calculation is then reviewed by management to assess whether, based on economic events, additional analyses are required to appropriately estimate losses inherent in the portfolio.
Accounting for Credit Card Securitizations
Credit card securitizations are utilized as part of the Companys overall funding strategy. Sears sells certain of its credit card receivable balances to various subsidiaries that in turn transfer those balances to master trusts (trusts). The trusts then securitize the receivable balances by issuing certificates representing undivided interests in the trusts receivables to both outside investors and to the Company (as a retained interest). These certificates entitle the holder to a series of scheduled cash flows under preset terms and conditions, the receipt of which is dependent upon cash flows generated by the related trusts assets. In each securitization transaction, a Sears subsidiary has retained certain subordinated interests which serve as a credit enhancement to the certificates held by the outside investors. As a result, the credit quality of certificates held by outside investors is enhanced. However, the investors and the trusts have no recourse against the Company beyond the trust assets.
On March 31, 2001, the Company adopted the requirements of Statement of Financial Accounting Standards (SFAS) No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which superceded SFAS No. 125. Under SFAS No. 125, the Companys securitization transactions were accounted for as sales of receivables. SFAS No. 140 established new conditions for a securitization to be accounted for as a sale of receivables. Accordingly, the Company recorded on the balance sheet approximately $8.1 billion of previously unconsolidated securitized credit card receivables and related securitization borrowings in the second quarter of 2001. In addition, approximately $3.9 billion of assets were reclassified to credit card receivables from retained interest in transferred credit card receivables. In connection with the consolidation of the securitization structure, the Company recognized a non-cash, pretax charge of $522 million in 2001 to establish an allowance for uncollectible accounts related to the receivables which were previously considered as sold or accounted for as retained interests in transferred credit card receivables.
In 2003, the Company either repaid or transferred to Citicorp all of its domestic debt securitized by credit card receivables.
Merchandise Inventories
Approximately 88% of merchandise inventories are valued at the lower of cost or market, with cost determined using the retail inventory method (RIM) under the last-in, first-out (LIFO) cost flow assumption. To estimate
F - 9
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements
the effects of inflation on inventories, the Company utilizes internally developed price indices.
The LIFO adjustment to cost of sales was a credit of $22 million in 2003, a charge of $11 million in 2002 and a charge of $25 million in 2001. If the first-in, first-out (FIFO) method of inventory valuation had been used instead of the LIFO method, merchandise inventories would have been $580 and $602 million higher at January 3, 2004 and December 28, 2002, respectively.
Inherent in the RIM calculation are certain significant management judgments and estimates including, among others, merchandise markons, markups, markdowns and shrinkage, which significantly impact the ending inventory valuation at cost as well as resulting gross margins. The methodologies utilized by the Company in its application of the RIM are consistent for all periods presented. Such methodologies include the development of the cost-to-retail ratios, the groupings of homogenous classes of merchandise, the development of shrinkage reserves, the accounting for price changes and the computations inherent in the LIFO adjustment. Management believes that the Companys RIM and application of LIFO provides an inventory valuation which reasonably approximates cost using a last-in, first-out assumption and results in carrying inventory at the lower of cost or market.
Vendor Allowances
The Company receives allowances from its vendors through a variety of programs and arrangements, including co-operative advertising and markdown reimbursement programs. Given the promotional nature of the Companys business, the allowances are generally intended to offset the Companys costs of promoting, advertising and selling the vendors products in its stores. Vendor allowances are recognized as a reduction of cost of goods sold or related selling expense when the purpose for which the vendor funds were intended to be used has been fulfilled. Co-operative advertising allowances are reported as a reduction of advertising expense in the period in which the advertising expenditures are incurred. Markdown reimbursements are credited to cost of goods sold during the period in which the related promotional markdown was taken. Accordingly, a reduction or increase in vendor allowances has an inverse impact on cost of sales and/or selling and administrative expenses.
Deferred Policy Acquisition Costs
For certain insurance products, policy acquisition costs were amortized for 5 to 15 years in proportion to income produced. The consolidated balance sheets include deferred policy acquisition costs of $219 million at December 28, 2002. The current portion is included in prepaid expenses and deferred charges, while the long-term portion is included in other assets. In connection with the sale of the domestic Credit and Financial Products business, all outstanding insurance products were transferred to the buyer and deferred policy acquisition costs were written-off in 2003.
Tradenames and Other Identifiable Intangible Assets
The identifiable intangible assets of the Company are primarily indefinite-lived tradenames acquired in business combinations. Identifiable intangibles with finite lives are amortized and those with indefinite lives are not amortized. The estimated useful life of an identifiable intangible asset to the Company is based upon a number of factors including the effects of demand, competition and the level of maintenance expenditures required to obtain future cash flows.
The Company tests identifiable intangible assets with an indefinite life for impairment, at a minimum on an annual basis, relying on a number of factors including operating results, business plans and projected future cash flows. The impairment test for identifiable intangible assets not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying amount. Identifiable intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used to evaluate other long-lived assets. An impairment loss is recognized for the amount by which the carrying value exceeds the fair value of the asset.
F - 10
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements
Goodwill
Under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is no longer amortized. Prior to the start of 2002, the Company followed the provisions of Accounting Principles Board Opinion (APB) No. 17, which required that goodwill be amortized by systematic charges to income over the period expected to be benefited. That period ranged from 5 to 40 years.
The Companys policy is to test the realizability of goodwill as of the end of the fiscal year. The Company tested the realizability of the $943 million of goodwill as of January 3, 2004 resulting in no impairment being recorded.
The changes in the carrying amount of goodwill as of January 3, 2004 are as
follows:
Retail and
Credit and
Corporate
millions
Related
Financial
and
Sears
Services
Products
Other
Canada
Total
$
291
$
2
$
61
$
(60
)
$
294
(261
)
(261
)
77
77
834
834
$
864
$
2
$
61
$
17
$
944
1
1
(2
)
(2
)
$
865
$
$
61
$
17
$
943
Long-Lived Asset Recoverability
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, the carrying value of long-lived assets, primarily property and equipment, is evaluated whenever events or changes in circumstances indicate that a potential impairment has occurred. A potential impairment has occurred if projected undiscounted cash flows are less than the carrying value of the assets. The estimated cash flows include managements assumptions of cash inflows and outflows directly resulting from the use of that asset in operations. The SFAS No. 144 impairment test is a two-step process. If the carrying value of the asset exceeds the expected future cash flows from the asset, impairment is indicated. The impairment loss recognized is the excess of the carrying value of the asset over its fair value.
Revenue Recognition
In-store revenues from merchandise sales and services, including delivery fees, are reported net of estimated returns and allowances and customer rebates, and are recognized when the related goods are shipped and all significant obligations of the Company have been satisfied. The reserve for returns and allowances is calculated as a percentage of sales based on historical return percentages. Commissions earned on sales made by licensed businesses are also included as a component of merchandise sales and services. Beginning November 3, 2003, revenues earned under the long-term alliance entered into with Citibank N.A. are included as a component of merchandise sales and services. Incentive payments are earned for the generation of new accounts, new financial products sales and credit card sales.
Revenues from product installation and repair services are recognized as the services are provided. Additionally, the Company sells extended service contracts with terms of coverage between 12 and 60 months. Revenues from the sale of these contracts are deferred and amortized over the lives of the contracts while the service costs are expensed as incurred. Incremental costs directly related to the acquisition of such contracts are deferred and
F- 11
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements
charged to expense in proportion to the revenue recognized.
The Company directly markets merchandise through catalogs and online via websites. Revenue is recognized for these items when the merchandise is delivered to a customer unless the terms of the sale are FOB shipping point, in which case the revenue is recognized upon shipment.
The Company is responsible for providing warranty coverage on certain products.
Based on historical warranty claims, the Company accrues the estimated costs
of the warranty coverage at the time of sale. A rollforward of the warranty
reserve is as follows:
millions
2003
2002
$
131
$
114
204
233
(204
)
(216
)
$
131
$
131
The Company recognizes finance charges and fee income on credit card receivables according to the contractual provisions of the credit agreements, and such charges and income are recorded until an account is charged off, at which time uncollected finance charge and fee revenue are recorded as a reduction of credit revenues. The Company provides an allowance for estimated uncollectible finance charge and fee revenues in the provision for uncollectible accounts.
Cost of Sales, Buying and Occupancy Expenses
Cost of sales, buying and occupancy includes the cost of merchandise, buying, warehousing, distribution and delivery and store occupancy costs related to the Companys retail store operations, service and installation costs associated with product repair services businesses, and all shipping, handling and delivery costs associated with our online and direct-to-customer businesses.
Selling and Administrative Expenses
Selling and administrative expenses primarily include payroll and related benefits, advertising and data processing expenses.
Advertising and Direct Response Marketing
Costs for newspaper, television, radio and other media advertising are expensed the first time the advertising occurs. The total cost of advertising charged to selling, general and administrative expense was $1.8 billion, $1.8 billion and $1.6 billion in 2003, 2002 and 2001, respectively.
Certain direct response advertising and solicitation costs are capitalized. Membership acquisition and renewal costs, which primarily relate to membership solicitations, are capitalized since such direct response advertising costs result in future economic benefits. Generally, such costs are amortized over the shorter of the programs life or five years, primarily in proportion to when revenues are recognized. For specialty catalogs, costs are amortized over the life of the catalog, not to exceed one year. When the carrying amount of such deferred direct advertising costs exceed the estimated future net revenues realized from such advertising, any excess is recorded as advertising expense of the current period. The consolidated balance sheets include deferred direct response advertising costs of $24 million and $58 million at January 3, 2004 and December 28, 2002, respectively. The current portion is included in prepaid expenses and deferred charges, while the long-term portion is included in other assets.
F- 12
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements
Income Taxes
The Company provides deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities based on currently enacted tax laws. The tax balances and income tax expense recognized by the Company are based on managements interpretation of the tax laws of multiple jurisdictions. Income tax expense also reflects the Companys best estimates and assumptions regarding, among other things, the level of future taxable income, interpretation of the tax laws, and tax planning. Future changes in tax laws, changes in projected levels of taxable income, and tax planning could affect the effective tax rate and tax balances recorded by the Company.
Defined Benefit Plans
For defined benefit plans, the Company recognizes changes in plan obligations and assets systematically over time. This systematic recognition of changes is accomplished by amortizing experience gains/losses in excess of the 10% corridor into expense over the estimated associate service period and by recognizing the difference between actual and expected asset returns over a five-year period. See Note 9 for a discussion of the fiscal year 2004 accounting change.
Depreciation and Amortization
Depreciation and amortization is provided principally by the straight-line method over the estimated useful lives of the related assets, generally 2 to 10 years for furniture, fixtures and equipment, 15 to 50 years for buildings and building improvements and 3 to 5 years for identifiable intangible assets with a definitive estimated useful life.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the periods presented. Diluted earnings per common share also includes the dilutive effect of potential common shares (primarily dilutive stock options) outstanding during the period for the periods presented.
Stock-Based Compensation
At January 3, 2004, the Company had various stock-based employee compensation plans which are described more fully in Note 10. The Company accounts for those plans in accordance with APB No. 25, Accounting For Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost was reflected in net income, as no options granted under those plans had an exercise price less than the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation.
F- 13
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements
millions, except earnings per share
2003
2002
2001
$
3,397
$
1,376
$
735
(44
)
(49
)
(51
)
$
3,353
$
1,327
$
684
$
11.95
$
4.34
$
2.25
11.79
4.18
2.10
$
11.86
$
4.29
$
2.24
11.71
4.14
2.08
Financial Instruments
The Company uses financial instruments primarily to manage its exposures to movements in interest rates. The use of interest rate derivatives lessens the exposure to this risk with the intent to reduce the risk or cost to the Company. The Company does not use derivatives for trading purposes.
The Company formally documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. The Company also formally assesses, both at inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the fair value of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, the Company discontinues hedge accounting.
The Companys interest rate derivatives are designated as fair value hedges of fixed rate borrowings on the date the derivative is entered. A fair value hedge is a hedge of a recognized asset or liability or an unrecognized firm commitment. For fair value hedges, both the effective and ineffective portions of the changes in the fair value of the derivative, along with the offsetting gain or loss on the hedged item that is attributable to the hedged risk, are recorded in earnings and reported in the consolidated statements of income in the same account as the hedged item.
Fair Value of Financial Instruments
Due to their short-term nature, the carrying value of the Companys cash and cash equivalents, investments, credit card and other receivables and short-term borrowings approximate fair value. The fair value of long-term debt is disclosed in Note 4. The Companys derivative financial instruments are recorded on the balance sheet within other assets and other long-term liabilities at fair value. Fair value estimates for the Companys derivative and debt instruments are based on market prices when available or are derived from financial valuation methodologies such as discounted cash flow analyses.
Effect of Accounting Standards Not Yet Adopted
In January 2004, the Financial Accounting Standards Board (FASB) staff issued FASB Staff Position (FSP) 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act was signed into law in December 2003. In accordance with this FSP, any measures of the accumulated projected benefit obligation or net periodic postretirement benefit cost in the financial statements or accompanying notes do not reflect the effects of the Act on the plan. While the impact of the Medicare legislation will not be known until detailed regulations are developed, the Company does not expect the impact to be material to the Companys consolidated financial statements.
F- 14
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements
NOTE 2 - ACQUISITIONS/DISPOSITIONS
On November 3, 2003, the Company completed the sale of its domestic Credit and Financial Products business, including its clubs and services business, to Citicorp. The sale generated total proceeds of $32 billion, consisting of the assumption of $10 billion of securitized debt by Citicorp and cash proceeds received by the Company of $22 billion. The Company recorded a pretax gain of $4.1 billion as a result of the sale. The results of operations for this sold business are reflected in the Credit and Financial Products segment as further illustrated in Note 15.
Additionally, the Company and Citibank (USA) N.A. entered into a long-term marketing and servicing alliance with an initial term of 10 years, with an option to renew. Under the long-term marketing and servicing alliance, Citibank (USA) N.A. will provide credit and customer service benefits to the Companys proprietary and Gold MasterCard holders. In addition, Citibank (USA) N.A. will support the Companys current zero-percent financing program.
On November 29, 2003, the Company sold NTB to TBC Corporation (TBC). The sale generated total cash proceeds of $264 million. The Company recognized a pretax gain of $81 million as a result of the sale. Revenues for NTB were $400 million, $465 million and $494 million in 2003, 2002 and 2001, respectively.
The gain on sale for each transaction are as follows:
Credit and
millions
Financial
Products
NTB
$
31,621
$
264
27,353
163
4,268
101
125
20
$
4,143
$
81
On June 17, 2002, the Company acquired 100 percent of the outstanding common
shares of Lands End, Inc. (Lands End) for $1.8 billion in cash. The
allocation of the purchase price assigned $834 million to goodwill and $704
million to intangible assets. The results of Lands Ends operations have been
included in the consolidated financial statements since that date. Lands End
is a leading direct merchant of traditionally styled,
casual clothing, accessories and footwear for men, women and children, as well
as home products and soft luggage.
NOTE 3 - CREDIT CARD RECEIVABLES
A summary of the Companys credit card receivables at year-end is as follows:
millions
2003
2002
$
$
30,766
1,998
1,797
1,998
32,563
(42
)
(1,832
)
$
1,956
$
30,731
(1) | At January 3, 2004 and December 28, 2002, $1.1 billion and $23.8 billion, respectively, of credit card receivables were segregated in securitization trusts. |
F - 15
SEARS, ROEBUCK AND CO.
A summary of the activity in the allowance for uncollectible accounts is as follows:
Notes to Consolidated Financial Statements
millions
2003
2002
$
1,832
$
1,158
1,747
2,261
(1,634
)
(1,587
)
(1,903
)
$
42
$
1,832
(1) | In the second quarter of 2002, the Company refined its method of determining the uncollectible portion of current accounts and credit card fee balances, resulting in an increase to the allowance for uncollectible accounts in the amount of $300 million. In accordance with APB No. 20, Accounting Changes, the effect of this change in accounting was recorded as a change in accounting estimate in the second quarter of 2002. | |
(2) | In connection with the sale of the domestic Credit and Financial Products business, the domestic allowance for uncollectible accounts of $1.9 billion was written-off. |
NOTE 4 - BORROWINGS
Total borrowings outstanding as of January 3, 2004 and December 28, 2002 were $8.1 billion and $30.0 billion, respectively.
Short-term borrowings consist of:
millions | ||||||||
2003 | 2002 | |||||||
Unsecured commercial paper
|
$ | 1,033 | $ | 2,950 | ||||
Asset-backed commercial paper
|
| 1,500 | ||||||
Bank loans
|
| 75 | ||||||
|
||||||||
Total short-term borrowings
|
$ | 1,033 | $ | 4,525 | ||||
|
||||||||
Weighted-average annual interest rate on short-term debt
|
2.2% | 2.8% |
The Company maintains committed credit facilities to support its unsecured commercial paper borrowings. In February 2003, the Companys domestic wholly-owned financing subsidiary, Sears Roebuck Acceptance Corp. (SRAC), through a syndicate of banks, obtained an unsecured, 364-day revolving credit facility in the amount of $3.5 billion. Effective November 3, 2003, SRAC amended the facility extending the termination date to May 2004 for consenting lenders and modifying the option to extend the repayment of any borrowings to November 2004. The amendment also provided for the commitment amount under this facility to be reduced to $2.5 billion as of December 3, 2003. As of January 3, 2004, there were no outstanding borrowings related to this credit facility.
The Company maintained asset-backed commercial paper programs. The programs were terminated and amounts outstanding were repaid concurrent with the sale of the Credit and Financial Products business on November 3, 2003.
In March 2003, the Company negotiated a $2.0 billion private asset-backed facility. Borrowings under the facility were scheduled to enter an amortization period in January 2004 and bore interest at a variable rate based on LIBOR. On November 3, 2003, this facility was terminated and amounts outstanding were repaid concurrent with the sale of the Credit and Financial Products business.
The Company had interest rate swap agreements that established floating rates on $2.0 billion and $10.7 billion of
F - 16
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements
long-term fixed rate debt at January 3, 2004 and December 28, 2002, respectively. The weighted-average maturity of these agreements was approximately 3.5 years as of both January 3, 2004 and December 28, 2002. The weighted-average interest rate received by the Company related to the agreements was 4.9% and 4.5% at January 3, 2004 and December 28, 2002, respectively.
Long-term debt is as follows:
ISSUE
2003
2002
millions
$
236
$
300
251
300
367
610
1,838
8,542
1,267
1,678
1,346
440
3,671
8,280
23
53
481
398
756
757
497
458
16
16
7,078
25,503
90
609
(2,950
)
(4,808
)
$
4,218
$
21,304
4.2%
4.4%
The fair value of long-term debt was $7.3 billion and $25.1 billion at January 3, 2004 and December 28, 2002, respectively.
Included in current maturities of long-term debt are securities with provisions that permit optional early redemptions in 2004. On February 2, 2004, Sears, Roebuck and Co. redeemed its outstanding term debt of $618 million. Through the end of February 2004, an additional $48 million of SRAC debt has been called.
On September 1, 2003, SRAC redeemed the entire outstanding principal amount of its $250 million 7% notes due March 1, 2038. On October 23, 2003, SRAC also redeemed the entire principal amount of its $250 million 6.95% notes due October 23, 2038.
On November 17, 2003, the Company and its wholly-owned subsidiaries, SRAC and Sears DC Corp., completed cash tender offers to purchase their respective unsecured public term debt securities maturing after 2003, which included 214 series of securities with an aggregate principal amount of approximately $11.8 billion. Approximately $6.4 billion of debt was tendered.
A loss on early retirement of debt of $791 million was recorded during the fourth quarter of 2003 related to the significant amount of debt retirement activities that occurred following the sale of the domestic Credit and Financial Products business. This loss consisted of a $752 million loss representing premium costs, the write-off
F - 17
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements
of unamortized issuance costs, the write-off of unamortized discounts and fees associated with the retirement of debt, and a $316 million loss related to the write-off of the unamortized loss on a previously terminated interest rate swap, partially offset by a $277 million gain related to the unwind of interest rate swaps designated as fair value hedges of the debt which was retired. Of the total debt retirement loss of $791 million, $420 million was non-cash.
As of January 3, 2004, long-term debt maturities for the next five years and
thereafter are as follows:
millions
$
2,950
470
891
458
2,309
$
7,078
The Company paid interest of $0.7 billion, $1.1 billion and $1.3 billion in 2003, 2002 and 2001, respectively. Interest capitalized was $2 million, $4 million and $11 million in 2003, 2002 and 2001, respectively.
NOTE 5 - DERIVATIVE FINANCIAL INSTRUMENTS AND FINANCIAL GUARANTEES
Effective in the first quarter of 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. The adoption of SFAS No. 133 did not affect net income. In 2001, the cumulative effect of the change in accounting principle reduced other comprehensive income (OCI) by $262 million, including the reclassification to OCI of a $228 million ($389 million pretax) deferred loss on an interest rate swap that was terminated in 1997 and the recognition in OCI of $34 million ($56 million pretax) related to a cash flow hedge. The Company terminated the cash flow hedge during the second quarter of 2001. The termination had no impact on earnings. The deferred swap loss was being amortized into earnings at the rate of approximately $17 million ($26 million pretax) a year over the original life of the interest rate swap. As a result of the sale of the Credit and Financial Products business and the resulting retirement of borrowings to which the interest rate swap was designated, the Company recognized a non-cash pretax loss of $316 million. The pretax loss is presented as a component of the loss on early retirement of debt.
Also, during the fourth quarter of 2003, the Company terminated a number of outstanding interest rate swaps as a result of the Companys retirement of the underlying related debt. The Company recognized a pretax gain of $277 million related to the termination of these interest rate swaps, which is presented as a component of the loss on early retirement of debt.
The Company utilizes derivative financial instruments as part of an overall risk management program designed to address certain financial exposures faced by the Company. The only significant derivative instruments the Company currently holds are interest rate swaps. As of January 3, 2004, the Company had interest rate swaps with an aggregate fair value of $112 million that have been used to synthetically convert certain of the Companys domestic fixed rate debt to variable rate.
The Companys remaining interest rate swaps have been recorded on the balance sheet at fair value, classified as $22 million of other receivables and $90 million of other assets. For accounting purposes, the swaps are designated and qualify as fair value hedges of certain of the Companys fixed rate debt instruments. As the critical terms of the swaps are designed to match those of the underlying hedged debt, the change in fair value of the swaps
F - 18
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements
is largely offset by changes in fair value recorded on the hedged debt. Consequently, the amount of hedge ineffectiveness recorded during 2003 in connection with these hedges was not material and is reflected as a component of interest expense.
The following sets forth the notional amounts and fair values of interest rate
swaps outstanding at the end of 2003 and 2002:
2003
2002
Contract or
Contract or
millions
Notional
Notional
Amount
Fair Value
Amount
Fair Value
$
1,970
$
112
$
10,742
$
690
The Company paid a weighted-average rate of 1.3% and received a
weighted-average rate of 4.6% in 2003. The fair values of interest rate swaps
are based on prices quoted from derivative dealers. If a counterparty fails to
meet the terms of a swap agreement, the Companys exposure is limited to the
net amount that would have been received, if any, over the agreements
remaining life, net of any collateral posted.
Financial Guarantees
The Company issues various types of guarantees in the normal course of
business. As of January 3, 2004, the Company had the following guarantees
outstanding:
millions
$
5,181
155
93
89
72
The debt obligations of SRAC are reflected in the Companys consolidated balance sheets. As a result of the Companys sale of its domestic Credit and Financial Products Business, Sears was required to issue a guarantee of SRACs outstanding public debt in order to maintain SRACs exemption from being deemed an investment company under the Investment Company Act of 1940, as amended. This guarantee would require the Company to repay such debt should SRAC default.
The secondary lease obligations relate to certain store leases of Homelife and NTB assigned to Homelife and an affiliate of TBC, respectively. The Company remains secondarily liable if the primary obligor defaults. As of January 3, 2004, the Company had a $21 million liability recorded in other liabilities which represents the Companys current estimate of potential exposure related to these guarantees.
The performance guarantee relates to certain municipal bonds issued in connection with the Companys headquarters building. Payments under this guarantee were $10 million and $6 million for 2003 and 2002, respectively, and have been recorded as long-term receivables since they are expected to be recovered from future cash flows generated by the property. This guarantee expires in 2012.
On November 24, 2003, approximately $500 million of certain real estate assets were transferred to a wholly-owned consolidated subsidiary of Sears, Roebuck and Co. and segregated into a trust owned by the consolidated subsidiary. These assets are related to an inter-company loan arrangement.
F - 19
SEARS, ROEBUCK AND CO.
NOTE 6 - SPECIAL CHARGES AND IMPAIRMENTS
Special charges and impairments included the following:
Notes to Consolidated Financial Statements
millions
2003
2002
2001
$
112
$
$
111
123
151
185
63
20
$
112
$
111
$
542
The Great Indoors Strategic Review
On August 28, 2003, the Company announced a refinement of the business strategy for TGI which included its decision to close three TGI stores and cease development of four future locations. In addition, the carrying value of the long-lived assets for the remaining eighteen TGI stores were reviewed for recoverability. As a result, the Company recorded a pretax charge of $141 million. The $141 million pretax charge consisted of $99 million related to asset impairments, $29 million related to inventory clearance costs, $11 million related to other contractual obligations and $2 million related to employee terminations costs. Of the $141 million charge, $112 million was recorded in special charges and impairments and $29 million was recorded in cost of sales, buying and occupancy both within the Retail and Related Services segment.
The asset impairment charge of $99 million includes $60 million related to the write-down of property and equipment to be held and used, and $39 million related to the write-down of property and equipment to fair value (less costs to sell and net of estimated salvage value) for three stores which were closed and four locations for which development ceased. The review process which led to the Companys conclusion to close three under-performing stores also included revising the cash flow projections for all stores. For certain TGI stores, the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets did not exceed the carrying amount of their assets. Consequently, the Company obtained external assessments of fair market value for those stores. The impairment charge of $60 million represents the excess carrying value of the long-lived assets over the estimated fair value of the related properties.
The pretax charge also provided a reserve of $11 million for incremental costs and contractual obligations for items such as reimbursement to licensed businesses for facility closures, lease termination costs and other exit costs incurred as a direct result of the store closures. As a result of the store closures, along with the decision to modify the TGI merchandise assortment, certain inventory was written down to its net realizable value. This resulted in a charge to cost of sales, buying and occupancy of $29 million. As of January 3, 2004, the three stores have been closed and all related employees terminated.
Sears Canada - Eatons Conversion
In February 2002, Sears Canada announced its intention to convert the remaining seven Eatons stores to the Sears Canada banner. The conversion of the stores was completed at the end of July 2002. This decision enabled the Company to better leverage its buying and advertising efforts, and take better advantage of the Sears brands equity. The Company recorded a one-time, pretax charge of $111 million in 2002 related to the conversions. Of the $111 million charge, $92 million was to record asset impairments on fixtures and equipment in such facilities. The remaining $19 million was comprised of $16 million for contractual obligations and holding costs and $3
F - 20
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements
million for employee termination costs. All actions identified under this plan had been executed by December 28, 2002.
Productivity Initiatives
During the fourth quarter of 2001, the Company announced a series of strategic initiatives designed to revitalize its Full-line Stores and reduce operating expenses. In connection therewith, the Company recorded a pretax charge of $123 million related to employee termination, facility closing and other exit costs. Of the $123 million charge, $102 million is for employee termination costs associated with the planned elimination of approximately 5,950 associate positions. The positions eliminated include store support positions within the Companys headquarters as well as positions within store and field operations. The remaining $21 million of productivity-related charges was comprised of $13 million for contractual obligations and holding costs associated with certain support facilities to be vacated as a result of the plan, and $8 million to record asset impairments on fixtures and equipment in such facilities. All actions identified under this plan had been executed by December 28, 2002.
Product Category Exits
During 2001, the Company announced its decision to exit certain product categories within its Full-line Stores, including its skin care and color cosmetics, installed floor covering and custom window treatments businesses. In connection with these exits, the Company recorded pretax charges totaling $151 million during 2001. Of the $151 million charge, $106 million was recorded for the cost of settling contractual obligations to certain vendors and contractors and for other exit costs associated with the Companys plan to discontinue these businesses, including incremental customer warranty claims liability to be incurred by the Company in the absence of ongoing relationships with certain product manufacturers. Also included within the $151 million charge were asset impairment charges of $38 million, primarily reflecting the write-down of store fixtures within the exited businesses to their estimated fair value. The remaining $7 million of product category exit charges was for employee termination costs associated with managements decision to eliminate 1,980 associate positions connected to the exited businesses, primarily store sales positions. All positions had been eliminated as of December 28, 2002.
Homelife Closure
The Company sold its Homelife furniture division to Citicorp Venture Capital, Ltd. in early 1999. As part of the sale, Sears received a 19% equity interest in the new Homelife Corporation. Additionally, the Company assigned certain store leases to Homelife in connection with the sale. Subsequently, the Company guaranteed certain indebtedness related to the new Homelife Corporation, and also obtained secured interests in certain Homelife assets. Homelife ceased operations and subsequently filed for Chapter 11 bankruptcy protection on July 16, 2001. The Company recorded a pretax charge of $185 million in the second quarter of 2001 to reflect the Companys estimated obligations and asset impairments relative to Homelife. The pretax charge included an accrual for net future lease obligations of $150 million reduced by estimated sublease income, early terminations and lease mitigation costs of $50 million; indebtedness guarantees, obligations to Homelife customers related to unshipped product billed on the Sears card, and other costs of $69 million; and write-offs of $16 million for logistics services previously provided to Homelife. As of January 3, 2004, the Company has paid approximately $119 million relative to its Homelife obligations. While the timing of any additional cash outlays related to these charges is uncertain, management does not expect that such payments will have a material impact on the liquidity or financial condition of the Company.
Exide Battery Litigation Settlement
The Company reached a civil settlement agreement in December 2001 with the U.S. Attorney for the Southern District of Illinois concluding an investigation into the advertising of certain Company automotive batteries in 1994 and 1995 that were manufactured by Exide Technologies. A pretax charge of $63 million was recorded to reflect
F - 21
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements
the Companys payment obligation to the government under the terms of the settlement agreement.
Other
During 1999 and 2000, the Company made investments totaling $20 million in a privately-held retail company specializing in home decorating products and services. In 2001, the Company recorded a pretax charge of $20 million to write-off its investment in this entity as it had ceased operations.
Following is a summary of the 2003 activity in the reserves established in
connection with the Companys restructuring initiatives:
Balance,
millions
beginning
2003
Asset
Cash
Balance,
of year
Additions
Write-Down
Payments
end of year
$
23
$
28
(1)
$
$
(42
)
$
9
2
2
99
(99
)
11
11
112
(99
)
13
$
23
$
140
$
(99
)
$
(42
)
$
22
(1) | In the second quarter of 2003, the Company recorded a pretax charge of $28 million for the estimated cost of severance for approximately 650 associates. Of the $28 million pretax charge, $16 million was recorded as selling and administrative expense in the Retail and Related Services segment and $12 million was recorded in the Corporate and Other segment. |
NOTE 7 - LEASES
The Company leases certain stores, office facilities, warehouses, computers and transportation equipment.
Operating and capital lease obligations are based upon contractual minimum rates and, for certain stores, amounts in excess of these minimum rates are payable based upon specified percentages of sales. Contingent rent is accrued over the lease term, provided that the achievement of the specified sales level that triggers the contingent rental is probable. Certain leases include renewal or purchase options. Operating lease rentals were $499 million, $474 million and $483 million, including contingent rentals of $44 million, $56 million and $59 million in 2003, 2002 and 2001, respectively.
Minimum lease obligations, excluding taxes, insurance and other expenses payable directly by the Company, for leases in effect as of January 3, 2004, are as follows:
F - 22
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements
millions
Capital
Operating
Leases
Leases
$
80
$
325
80
286
78
243
70
198
67
165
665
942
1,040
$
2,159
543
497
29
$
468
(1) | Sears Canada: Total operating minimum lease payments of $590 million; capital lease present value of minimum lease payments of $133 million |
NOTE 8 - SHAREHOLDERS EQUITY
Dividend Payments
Under an agreement pursuant to which Sears has provided a credit facility in support of certain tax increment revenue bonds issued by the Village of Hoffman Estates, Illinois, in connection with the construction of its headquarters facility, the Company cannot take specified actions, including the declaration of cash dividends, that would cause its unencumbered assets, as defined, to fall below 150% of its liabilities, as defined. At January 3, 2004, approximately $3.8 billion could be paid in dividends to shareholders under the most restrictive indentures.
Share Repurchase Program
The Company repurchased 91.7 million, 8.2 million and 16.1 million common shares in 2003, 2002 and 2001, respectively, under share repurchase programs approved by the Board of Directors. As of January 3, 2004, the Company had remaining authorization to repurchase $1.6 billion of shares by December 31, 2006 under a $3.0 billion share repurchase plan approved by the Board of Directors on October 8, 2003.
F - 23
SEARS, ROEBUCK AND CO.
Comprehensive Income and Accumulated Other Comprehensive Loss
The following table shows the computation of comprehensive income:
Notes to Consolidated Financial Statements
millions
January 3,
December 28,
December 29,
2004
2002
2001
$
3,397
$
1,376
$
735
(367
)
(246
)
(333
)
(262
)
182
14
16
17
(4
)
(6
)
34
(1
)
125
11
(37
)
(50
)
(225
)
(582
)
$
3,347
$
1,151
$
153
(1)
|
Net of tax of $211 million, $153 million and $184 million for 2003, 2002 and 2001, respectively. | |||
(2)
|
Net of tax of $8 million, $10 million and $9 million for 2003 2002 and 2001, respectively. | |||
(3)
|
Net of tax of $3 million, $2 million and $22 million for 2003, 2002 and 2001, respectively. | |||
The following table displays the components of accumulated other comprehensive loss:
NOTE 9 BENEFIT PLANS
Expenses for retirement and savings-related benefit plans were as follows:
2003
2002
2001
$
(9
)
$
(201
)
$
(211
)
(19
)
(144
)
(155
)
(1,078
)
(711
)
(465
)
$
(1,106
)
$
(1,056
)
$
(831
)
2003
2002
2001
$
45
$
26
$
23
148
70
68
(65
)
(60
)
(65
)
$
128
$
36
$
26
Sears 401(k) Savings Plan
Most domestic employees are eligible to become members of the Sears 401(k) Savings Plan (the Plan). Under the terms of the Plan, the Company matches a portion of employee contributions with Sears common shares. Per the Plan, the Company match is 70% of eligible employee contributions. The Companys matching contributions
F - 24
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements
were $65 million, $72 million and $76 million in 2003, 2002 and 2001, respectively. Matching contributions were made at the end of each calendar quarter, based on the quarter-end stock price.
The Plan includes an Employee Stock Ownership Plan (the ESOP) to prefund a portion of the Companys anticipated contribution. The Company provided the ESOP with a loan that was used to purchase Sears common shares in 1989. The purchased shares represent deferred compensation expense, which is presented as a reduction of shareholders equity and recognized as expense when the shares are allocated to employees to fund the Company contribution. The per share cost of Sears common shares purchased by the ESOP in 1989 was $15.27. To the extent the Company uses the ESOP shares to fund the Company contribution, the expense recognized by the Company is reduced. The Company contribution funded with ESOP shares was $33 million, $56 million and $76 million in 2003, 2002 and 2001, respectively, and the Company contribution funded with cash was $32 million and $16 million in 2003 and 2002, respectively.
The ESOP loan bears interest at 6.1% and is repaid from dividends on the ESOP shares and additional cash payments provided by the Company. The Company has contributed cash to the ESOP annually in the amount equal to the ESOPs required interest and principal payments on the loan, less dividends received on the ESOP shares. The cash payments amounted to $2, $11 and $33 million in 2003, 2002 and 2001, respectively. The balance of the ESOP loan was $7 and $16 million at January 3, 2004 and December 28, 2002, respectively. Cash on hand in the ESOP at January 3, 2004 was $2 million.
In 2003, the ESOP allocated 1.0 million shares to employees. At January 3, 2004, 24.2 million ESOP shares had been allocated and 1.7 million are available for future allocation. All ESOP shares are considered outstanding in the calculation of earnings per share.
Retirement Benefit Plans
Certain domestic full-time and part-time employees are eligible to participate in noncontributory defined benefit plans after meeting age and service requirements. Substantially all Canadian employees are eligible to participate in contributory defined benefit plans. Pension benefits are based on length of service, compensation and, in certain plans, social security or other benefits. Funding for the various plans is determined using various actuarial cost methods.
In addition to providing pension benefits, the Company provides certain medical and life insurance benefits for retired employees. Employees may become eligible for medical benefits if they retire in accordance with the Companys established retirement policy and are continuously insured under the Companys group medical 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. Generally, the Companys share of these benefit costs will be capped at the Company contribution calculated during the year of retirement. The Companys postretirement benefit plans are not funded. The Company has the right to modify or terminate these plans.
F - 25
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements
The Company uses October 31 as the measurement date for determining pension plan assets and obligations. The change in benefit obligation, change in plan assets, funded status and reconciliation to amounts recognized in the consolidated balance sheets are as follows:
(1)
|
The minimum pension liability, net of tax, was $1,078 million and $711 million as of January 3, 2004 and December 28, 2002, respectively. | |||
The Company has appointed a non-affiliated third party professional investment advisor to manage the domestic pension plan assets. The plans overall investment objective is to provide a long-term return that, along with Company contributions, is expected to meet future benefit payment requirements. A long-term horizon has been adopted in establishing investment policy such that the likelihood and duration of investment losses are carefully weighed against the long-term potential for appreciation of assets. The plans investment policy requires investments to be diversified across individual securities, industries, market capitalization and valuation characteristics. In addition, various techniques are utilized to monitor, measure and manage risk.
F - 26
SEARS, ROEBUCK AND CO.
Plan assets were invested in the following classes of securities (none of which
were securities of the Company):
Notes to Consolidated Financial Statements
Plan Assets as of October 31
2003
2002
68
%
62
%
25
%
27
%
5
%
5
%
2
%
6
%
100
%
100
%
The plans target allocation is determined taking into consideration the amounts and timing of projected liabilities, the Companys funding policies and expected returns on various asset classes. At October 31, 2003 and October 31, 2002, the plans target asset allocation was 75% equity (which included investments classified as real estate and other in the table above) and 25% fixed income.
To develop the expected long-term rate of return on assets assumption, the
Company considered the historical returns and the future expectations for
returns for each asset class, as well as the target asset allocation of the
pension portfolio. This resulted in the selection of the 9.0% long-term rate
of return on assets assumption used in 2002 and 2001. However, subsequent to
the measurement date of October 31, 2003, the Company contributed an additional
$634 million to the pension plan, which significantly increased the plan
assets. As a result of the significant change in the funded status of the
plan, the Company is currently reviewing the plans asset allocation and may
increase the relative fixed-income allocation in the future. As such, the
long-term return rate has been adjusted from 9.0% to 8.0% for purpose of
determining future expense. The Company does not expect to contribute to the
domestic pension plan in 2004.
Postretirement Benefits
Domestic
Sears Canada
Total
2003
2002
2003
2002
2003
2002
$
802
$
814
$
102
$
91
$
904
$
905
3
4
3
3
6
7
39
45
8
12
47
57
18
47
33
2
51
49
(108
)
(139
)
(10
)
(8
)
(118
)
(147
)
19
2
19
2
31
31
$
754
$
802
$
155
$
102
$
909
$
904
$
$
$
$
$
$
108
139
10
8
118
147
(108
)
(139
)
(10
)
(8
)
(118
)
(147
)
$
$
$
$
$
$
$
(754
)
$
(802
)
$
(155
)
$
(102
)
$
(909
)
$
(904
)
(283
)
(322
)
69
34
(214
)
(288
)
(237
)
(334
)
(237
)
(334
)
$
(1,274
)
$
(1,458
)
$
(86
)
$
(68
)
$
(1,360
)
$
(1,526
)
$
(1,274
)
$
(1,458
)
$
(86
)
$
(68
)
$
(1,360
)
$
(1,526
)
F - 27
SEARS, ROEBUCK AND CO.
Weighted-average assumptions used to determine plan obligations are as follows:
Notes to Consolidated Financial Statements
Pension Benefits
Postretirement Benefits
2003
2002
2001
2003
2002
2001
6.00%
7.00%
7.25%
6.00%
7.00%
7.25%
4.25%
4.25%
4.00%
NA
NA
NA
Weighted-average assumptions used to determine net cost for years ended are as
follows:
Pension Benefits
Postretirement Benefits
2003
2002
2001
2003
2002
2001
7.00%
7.25%
8.25%
7.00%
7.25%
8.25%
9.00%
9.00%
9.50%
NA
NA
NA
4.25%
4.00%
4.00%
NA
NA
NA
The components of net periodic benefit cost are as follows:
Pension Benefits
Postretirement Benefits
millions
2003
2002
2001
2003
2002
2001
$
90
$
89
$
68
$
6
$
7
$
4
195
196
211
47
57
68
(213
)
(236
)
(221
)
(3
)
(4
)
(4
)
(97
)
(97
)
(102
)
84
29
18
(21
)
(27
)
(35
)
(5
)
(4
)
(4
)
$
148
$
70
$
68
$
(65
)
$
(60
)
$
(65
)
For 2004 and beyond, the weighted-average health care cost trend rates used in
measuring the postretirement benefit expense are a 8.0% trend rate in 2004 to
an ultimate trend rate of 5.0% in 2009 for pre-65 retirees, and a 11.5% trend
rate in 2004 to an ultimate trend rate of 6.5% in 2009 for post-65 retirees. A
100 basis point change in the assumed health care cost trend rate would have
the following effects on the postretirement liability:
100 Basis
100 Basis
millions
Point Increase
Point Decrease
$
3
$
(2
)
$
30
$
(28
)
Subsequent Event
Subsequent to the sale of its domestic Credit and Financial Products business, the Company initiated a project to review its domestic employee retirement benefits cost structure and programs. The Company assessed its retirement benefits programs in the context of comparable programs in the retail industry. As a result of this review, the Company concluded that its current retirement benefit package is not comparable with its retail peers nor is it consistent with the needs of the typical associate. As such, in January 2004, the Company announced a series of benefit plan changes which included the enhancement of the Companys 401(k) defined contribution plan and the phasing out of participation in its domestic pension plan. Associates hired in 2004 and those under the age of 40 as of December 31, 2004, will receive an increased Company-matching contribution to the 401(k) plan of 110%, but will no longer earn additional pension benefits effective January 1, 2005. Pension benefits continue to accrue for associates age 40 and older as of December 31, 2004, unless they elect to participate in the enhanced
F - 28
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements
401(k) defined contribution plan. In addition, the Company eliminated its retiree medical insurance contribution for associates hired in 2004 and those under the age of 40 as of December 31, 2004, and capped the contribution at the 2004 level for associates age 40 and older.
In connection with the domestic pension and postretirement plan changes discussed above, the Company believes that it would be preferable to change its accounting methods which under SFAS Nos. 87 and 106 delay recognition of past events. Therefore, in the first quarter of 2004 the Company changed its method for determining the market-related value of plan assets used in determining the expected return-on-assets component of annual net pension costs and its method for recognizing gains and losses for both its domestic pension and postretirement benefit plans. Under the previous accounting method, the market-related value of the domestic pension plan assets was determined by averaging the value of equity assets over a five-year period. The new method recognizes equity assets at fair value. Further, under its previous accounting method, all unrecognized gains and losses in excess of the 10 percent corridor were amortized over the expected working lifetime of active employees (approximately 10 years). Under the new methodology, the portion of the total gain or loss outside the 10 percent corridor will be immediately recognized. As a result of this accounting change, the Company will record an after-tax charge of approximately $840 million in the first quarter of 2004 for the cumulative effect of the change in accounting. The charge represents the recognition of unamortized experience losses at the beginning of 2004 in accordance with the new methods.
NOTE 10 STOCK-BASED COMPENSATION
Stock Option Plans
Options to purchase common shares of the Company have been granted to employees under various plans at prices not less than the fair market value of the shares on the dates the options were granted. Generally, options vest over a three- or four-year period and become exercisable either in equal, annual installments over the vesting period, or at the end of the vesting period. Options generally expire in 10 years.
In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the assumptions listed below:
2003
2002
2001
4.01%
1.92%
1.60%
42%
41%
31%
3.90%
4.75%
4.86%
8 years
8 years
8 years
The Company had 0.9 million performance-based options outstanding at the end of both 2002 and 2001. These options contained vesting provisions that required the Companys share price to reach specified targets at specified intervals. These options were cancelled in March 2003 as the vesting provisions were not met. The Company did not recognize compensation expense in 2003, 2002 or 2001 related to these options because the exercise price exceeded the Company share price at each year-end.
F - 29
SEARS, ROEBUCK AND CO.
Changes in stock options are as follows (shares in thousands):
Notes to Consolidated Financial Statements
2003
2002
2001
Weighted-
Weighted-
Weighted-
Average
Average
Average
Exercise
Exercise
Exercise
Shares
Price
Shares
Price
Shares
Price
26,878
$
40.32
32,578
$
39.04
21,950
$
38.42
8,945
22.31
1,081
51.41
14,942
38.27
(4,451
)
32.52
(3,414
)
32.96
(2,052
)
22.74
(4,104
)
39.68
(3,367
)
38.97
(2,262
)
42.32
27,268
$
35.81
26,878
$
40.32
32,578
$
39.04
12,319
17,381
15,755
9,343
$
43.75
9,855
$
43.33
9,399
$
41.90
$
7.56
$
23.05
$
14.47
The following table summarizes information about stock options outstanding at
January 3, 2004 (shares in thousands):
Options Outstanding
Options Outstanding
Weighted-
Average
Weighted-
Weighted-
Range of
Number
Remaining
Average
Number
Average
Exercise
Outstanding
Contractual
Exercise
Exercisable
Exercise
Prices
at 01/03/04
Life in Years
Price
at 01/03/04
Price
8,586
8.7
$
21.94
669
$
24.54
12,134
7.8
37.01
3,111
34.22
3,298
5.6
43.59
3,119
43.55
3,250
5.7
60.02
2,444
61.42
27,268
7.6
$
35.81
9,343
$
43.75
Associate Stock Purchase Plan
The Companys Associate Stock Purchase Plan (ASPP) allows eligible employees the right to elect to use up to 15% of their eligible compensation to purchase the Companys common shares on a quarterly basis at the lower of 85% of the fair market value at the beginning or end of each calendar quarter. The maximum number of shares available under the ASPP is 10 million. As of January 3, 2004, 4.4 million shares had been issued under the ASPP and 5.6 million shares remain available.
Performance Share Plan
In 2001, the Companys Board of Directors approved the initiation of a performance share plan for a limited number of key executives. The level of awards to be earned under the plan is contingent upon the attainment of specific performance targets over a three-year period. Subject to the satisfaction of the performance-based features, the awards vest 50% in 2004 and 50% in 2005. Performance award expense of approximately $10 million and $5 million was recorded in 2003 and 2002, respectively.
F - 30
SEARS, ROEBUCK AND CO.
NOTE 11 - OTHER INCOME
Other income consists of:
Notes to Consolidated Financial Statements
2003
2002
2001
$
12
$
347
$
21
8
20
12
7
5
12
$
27
$
372
$
45
The gain on sales of property and investments for 2002 includes a gain of $336
million related to the sale of the Companys holdings of common stock in
Advance Auto Parts, Inc.
NOTE 12 - INCOME TAXES
Income before income taxes, minority interests and cumulative effect of change
in accounting principle was as follows:
millions
2003
2002
2001
$
5,279
$
2,424
$
1,125
170
29
98
$
5,449
$
2,453
$
1,223
Federal, state and foreign taxes are as follows:
millions
2003
2002
2001
$
1,270
$
988
$
300
92
2
(4
)
28
39
25
1,390
1,029
321
544
(167
)
88
29
32
32
44
(36
)
26
617
(171
)
146
$
2,007
$
858
$
467
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
2003
2002
2001
35.0
%
35.0
%
35.0
%
1.5
0.9
1.5
0.1
(0.8
)
1.9
0.2
(0.1
)
(0.2
)
36.8
%
35.0
%
38.2
%
F - 31
SEARS, ROEBUCK AND CO.
Deferred taxes based upon differences between the financial statement and tax
bases of assets and liabilities and available tax carryforwards consist of:
Notes to Consolidated Financial Statements
millions
2003
2002
$
316
$
414
7
646
88
61
519
599
625
417
39
93
129
90
532
544
2,255
2,864
(374
)
(293
)
(495
)
(172
)
(82
)
(67
)
(236
)
(356
)
(218
)
(257
)
(1,169
)
(1,381
)
$
1,086
$
1,483
Management believes that the realization of the deferred tax assets is more likely than not, based on the expectation that the Company will generate the necessary taxable income in future periods and, accordingly, no valuation reserve has been provided. Tax benefits from loss carryforwards will expire by year-end 2009.
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 $482 million at January 3, 2004. If these earnings were to be remitted, taxes of $64 million would be due.
Income taxes of $348 million, $918 million and $341 million were paid in 2003,
2002 and 2001, respectively.
NOTE 13 - EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings
per share:
millions, except per share data
2003
2002
2001
$
3,397
$
1,376
$
735
284.3
317.4
326.4
2.0
3.3
2.1
286.3
320.7
328.5
$
11.95
$
4.34
$
2.25
$
11.86
$
4.29
$
2.24
(1)
|
Net income is the same for purposes of calculating basic and diluted earnings per share. | |||
F - 32
SEARS, ROEBUCK AND CO.
The following table sets forth the computations of basic and diluted earnings
per share before cumulative effect of change in accounting principle:
Notes to Consolidated Financial Statements
millions, except per share data
2003
2002
2002
$
3,397
$
1,584
$
735
284.3
317.4
326.4
2.0
3.3
2.1
286.3
320.7
328.5
$
11.95
$
4.99
$
2.25
$
11.86
$
4.94
$
2.24
(1)
|
Income before cumulative effect of change in accounting principle is the same for purposes of calculating basic and diluted earnings per share. | |||
In each period, certain options were excluded from the computation of diluted earnings per share because they would have been anti-dilutive. At January 3, 2004, December 28, 2002 and December 29, 2001, options to purchase 16.4 million, 5.8 million and 6.5 million common shares at prices ranging from $37 to $64, $45 to $64 and $40 to $64 per share were excluded from the 2003, 2002 and 2001 calculations, respectively.
NOTE 14 - LEGAL PROCEEDINGS
Pending against the Company and certain of its officers and directors are a number of lawsuits, described below, that relate to the credit card business and public statements about it. The Company believes that all of these claims lack merit and is defending against them vigorously.
§ | On and after October 18, 2002, several actions were filed in the United States District Court for the Northern District of Illinois against the Company and certain current and former officers alleging that certain public announcements by the Company concerning its credit card business violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Court has consolidated the actions and appointed the Department of the Treasury of the State of New Jersey and its Division of Investments as lead plaintiff. The Court has more recently denied defendants motions to dismiss the complaint and certified the consolidated action as a class action on behalf of a class of all persons who purchased securities of the Company between October 24, 2001 and October 17, 2002, inclusive. The Court has scheduled trial to begin on April 4, 2005. A similar case filed in the United States District Court for the Northern District of California was transferred to the Northern District of Illinois and subsequently voluntarily dismissed by the plaintiffs in that action. | |
§ | On and after November 15, 2002, several actions were filed in the United States District Court for the Northern District of Illinois against the Company, certain officers and directors, and alleged fiduciaries of Sears 401(k) Savings Plan (the Plan), seeking damages and equitable relief under the Employee Retirement Income Security Act of 1974 (ERISA). The plaintiffs purport to represent participants in the Plan, and allege breaches of fiduciary duties under ERISA in connection with the Plans investment in the Companys common shares and alleged communications made to Plan participants regarding the Companys financial condition. These actions have been consolidated into a single action. A motion to dismiss the consolidated complaint is pending. A motion for certification of the action as a class action was ordered withdrawn pending the courts decision on the motion to dismiss. |
F - 33
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements
§ | On October 23, 2002, a purported derivative action was filed in the Supreme Court of the State of New York against the Company (as a nominal defendant) and certain current and former directors seeking damages on behalf of the Company. The complaint purports to allege a breach of fiduciary duty by the directors with respect to the Companys management of the credit card business. A motion to dismiss is pending. Two similar actions were subsequently filed in the Circuit Court of Cook County, Illinois, and a third was filed in the United States District Court for the Northern District of Illinois. These actions have been stayed pending disposition of the action in New York. The plaintiffs in the Northern District of Illinois action have appealed the stay order to the United States Court of Appeals for the Seventh Circuit. | |||
§ | On June 17, 2003, an action was filed in the Northern District of Illinois against the Company and certain officers, purportedly on behalf of a class of all persons who, between June 21, 2002 and October 17, 2002, purchased the 7% notes that SRAC issued on June 21, 2002. An amended complaint has been filed, naming as additional defendants certain former officers, SRAC and several investment banking firms who acted as underwriters for SRACs March 18, May 21 and June 21, 2002 notes offerings. The amended complaint alleges that the defendants made misrepresentations or omissions concerning its credit business during the class period and in the registration statements and prospectuses relating to the offerings. The amended complaint alleges that these misrepresentations and omissions violated Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder, and Sections 11, 12 and 15 of the Securities Act of 1933 and purports to be brought on behalf of a class of all persons who purchased any security of SRAC between October 24, 2001 and October 17, 2002, inclusive. Motions to dismiss the amended complaint are pending. |
The Company is subject to various other legal and governmental proceedings, many involving litigation incidental to the businesses. Some matters contain class action allegations, environmental and asbestos exposure allegations and other consumer-based claims that involve compensatory, punitive or treble damage claims in very large amounts as well as other types of relief. The consequences of these matters are not presently determinable but, in the opinion of management of the Company after consulting with legal counsel, and taking into account insurance and reserves, the ultimate liability is not expected to have a material adverse effect on annual results of operations, financial position, liquidity or capital resources of the Company.
NOTE 15 SUMMARY OF SEGMENT DATA
For each of the three fiscal years presented, the Company organized its business into three domestic segments: Retail and Related Services, Credit and Financial Products and Corporate and Other; and one international segment: Sears Canada.
The Retail and Related Services segment consists of merchandise sales and related services, including service contracts, delivery and product installation and repair services. It includes all Sears selling channels, including Specialty and Full-line Stores as well as Direct to Customer operations which includes online, catalogs, and Lands End online and catalog business. Beginning November 3, 2003, this segment also includes the revenues earned under the long-term marketing and servicing alliance with Citibank (USA) N.A.
The Credit and Financial Products segment managed the Companys domestic portfolio of Sears Card and MasterCard receivables. Sears Card receivables arise primarily from purchases of merchandise and services from domestic operations, whereas MasterCard is widely accepted by merchants outside the Company. This segment also included related financial products, such as credit protection and insurance products. The domestic Credit and Financial products business was sold on November 3, 2003, and thus the segment results include the results of operations through November 2, 2003.
F - 34
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements
The Corporate and Other segment includes activities that are of an overall holding company nature primarily consisting of administrative activities. This segment also includes Home Improvement Services such as siding and windows.
The Sears Canada segment includes similar retail, credit and corporate operations conducted by Sears Canada, a 54.4% owned subsidiary.
These businesses have been aggregated into their respective reportable segments based on the management reporting structure and their similar economic characteristics, customers and distribution channels. No single product or service accounts for a significant percentage of the Companys consolidated revenue.
External revenues and expenses are allocated between the applicable segments. For zero-percent financing promotions in which customers receive free financing, Retail and Related Services reimbursed Credit and Financial Products over the life of the financing period at a 10% annual rate. The cost was reported as selling expense by Retail and Related Services and an offsetting benefit was recognized by Credit and Financial Products. With the sale of the domestic Credit and Financial Products business, the allocation of these costs are included in the results of operation through November 2, 2003. Under the terms of the long-term marketing and servicing alliance with Citibank (USA) N.A., Citibank will support the Companys historical level zero-percent receivable balances at no cost to the Company.
The domestic segments participate in a centralized funding program. Interest expense was allocated to the Credit and Financial Products segment based on its funding requirements. Funding included unsecured debt reflected on the balance sheet and investor certificates related to credit card receivables transferred to trusts through securitizations. The remainder of net domestic interest expense was reported in the Retail and Related Services segment through November 3, 2003. Subsequent to the sale of the Credit and Financial Products business, the allocation of interest expense was changed such that net interest expense associated with approximately $3.8 billion of outstanding domestic term debt remaining from the Credit and Financial Products segment (credit legacy debt) is allocated to the Corporate and Other Segment. The Company expects to retire $2.6 billion of the domestic term debt in 2004, which will reduce the amount of credit legacy debt.
The Companys segments are evaluated on a pretax basis, and a stand-alone income tax provision is not calculated for the individual segments. The Company includes its deferred income taxes within the Corporate and Other segment. The other accounting policies of the segments are substantially the same as those described in the Companys summary of significant accounting policies footnote.
With the sale of the domestic Credit and Financial Products business, the Companys financial reporting segments for fiscal 2004 will be changed to reflect two operating segments - a Domestic segment and an International segment. The Domestic segment will comprise the former Retail and Related Services segment, including the revenues earned from the Citibank relationship, and the former Corporate and Other segment. The International segment will continue to represent the results of operations of Sears Canada.
F - 35
SEARS, ROEBUCK AND CO.
2003
Notes to Consolidated Financial Statements
Retail and
Credit and
Corporate
Related
Financial
and
Sears
Consolidated
Services
Products
Other
Canada
GAAP
$
31,842
$
$
372
$
4,158
$
36,372
4,429
323
4,752
31,842
4,429
372
4,481
41,124
23,164
149
2,918
26,231
6,914
645
425
1,127
9,111
1,695
52
1,747
740
14
43
112
909
84
813
18
110
1,025
791
791
112
112
31,014
3,958
635
4,319
39,926
$
828
$
471
$
(263
)
$
162
$
1,198
$
20,138
$
218
$
3,164
$
4,203
$
27,723
$
750
$
3
$
40
$
132
$
925
2002
Retail and
Credit and
Corporate
Related
Financial
and
Sears
Consolidated
Services
Products
Other
Canada
GAAP
$
31,459
$
$
326
$
3,913
$
35,698
5,392
276
5,668
31,459
5,392
326
4,189
41,366
22,743
121
2,782
25,646
6,816
955
442
1,036
9,249
2,203
58
2,261
710
18
55
92
875
35
1,014
94
1,143
111
111
30,304
4,190
618
4,173
39,285
$
1,155
$
1,202
$
(292
)
$
16
$
2,081
$
12,469
$
32,207
$
2,252
$
3,481
$
50,409
$
894
$
6
$
18
$
117
$
1,035
F - 36
SEARS, ROEBUCK AND CO.
2001
Notes to Consolidated Financial Statements
Retail and
Credit and
Corporate
Related
Financial
and
Sears
Consolidated
Services
Products
Other
Canada
GAAP
$
31,346
$
$
378
$
4,031
$
35,755
4,941
294
5,235
31,346
4,941
378
4,325
40,990
23,081
159
2,994
26,234
6,628
794
473
997
8,892
1,810
56
1,866
704
18
58
83
863
32
1,272
111
1,415
484
58
542
30,929
3,894
748
4,241
39,812
$
417
$
1,047
$
(370
)
$
84
$
1,178
$
10,674
$
27,900
$
2,264
$
3,479
$
44,317
$
829
$
25
$
185
$
87
$
1,126
NOTE 16 IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The recognition and measurement provisions of FIN 45 were applicable to guarantees issued or modified after December 31, 2002. The disclosure requirements were effective for financial statements ending after December 15, 2002. The Company has adopted FIN 45 and provided disclosures regarding its guarantees in Note 5.
In January 2003, the Emerging Issues Task Force (EITF) issued EITF 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, which states that cash consideration received from a vendor is presumed to be a reduction of the prices of the vendors products or services and should, therefore, be characterized as a reduction of Cost of Merchandise Sold when recognized in the Consolidated Statements of Earnings. That presumption is overcome when the consideration is either a reimbursement of specific, incremental and identifiable costs incurred to sell the vendors products, or a payment for assets or services delivered to the vendor. The Company receives allowances from its vendors through a variety of programs and arrangements, including co-operative advertising and markdown reimbursement programs. Given the promotional nature of the Companys business, the allowances are generally intended to offset the Companys cost of promoting, advertising and selling expense when the purpose for which the vendor funds were intended to be used has been fulfilled. Co-operative advertising allowances are reported as a reduction of advertising expense in the period in which the advertising occurs. Markdown reimbursements are credited to cost of sales, buying and occupancy during the period in which the related promotional markdown is taken. EITF 02-16 was effective for contracts entered into after December 31, 2002. The adoption of EITF 02-16 did not have a material impact on the Companys financial position or results of operations in 2003.
In December 2003, the FASB revised SFAS No. 132, Employers Disclosures about Pensions and Other Postretirement benefits an amendment of FASB Statements No. 87, 88 and 106. The Company has adopted the
F - 37
SEARS, ROEBUCK AND CO.
Notes to Consolidated Financial Statements
disclosure only provisions of the revised statement for fiscal year 2003.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracted and for hedging activities under SFAS No. 133. The statement was effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the Companys financial position or results of operations in 2003.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards that require companies to classify certain financial instruments as liabilities that were previously classified as equity. The Company did not reclassify any financial instruments as a result of adopting SFAS No. 150.
Effective at the beginning of 2002, the Company adopted SFAS No. 142. Upon adoption of SFAS No. 142, goodwill amortization ceased. The Company completed the required transitional goodwill impairment test in the first quarter of 2002 and determined that $261 million of goodwill recorded within the Companys Retail and Related Services segment, primarily related to NTB and Orchard Supply Hardware, was impaired under the fair value impairment test approach required by SFAS No. 142.
The fair value of these reporting units was estimated using the expected present value of associated future cash flows and market values of comparable businesses where available. Upon adoption of the SFAS No. 142, a $208 million charge, net of tax and minority interest, was recognized in the first quarter of 2002 to record this impairment as well as the recognition of negative goodwill and was classified as a cumulative effect of a change in accounting principle.
The following table presents the pro forma effect of the adoption of SFAS No.
142 on periods prior to adoption as if the change was applied at the beginning
of the respective fiscal year:
2001
$
735
(14
)
20
$
741
$
2.25
0.02
$
2.27
$
2.24
0.02
$
2.26
326.4
328.5
F - 38
SEARS, ROEBUCK AND CO.
NOTE 17 QUARTERLY RESULTS (Unaudited)
millions, except per common share data
Notes to Consolidated Financial Statements
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year
2003
2002
2003
2002
2003
2002
2003
2002
2003
2002
$
8,880
$
9,037
$
10,196
$
10,142
$
9,794
$
9,669
$
12,254
$
12,518
$
41,124
$
41,366
309
356
489
366
242
275
158
1,084
1,198
2,081
192
318
309
229
147
189
2,749
848
3,397
1,584
192
110
309
229
147
189
2,749
848
3,397
1,376
0.60
0.98
1.04
0.71
0.52
0.59
10.84
2.67
11.86
4.94
$
0.60
$
0.34
$
1.04
$
0.71
$
0.52
$
0.59
$
10.84
$
2.67
$
11.86
$
4.29
The first quarter 2002 results included a pretax charge of $111 million, or $0.13 per share, related to the conversion of Eatons stores to Sears Canada, a pretax gain of $71 million, or $0.18 per share, related to the sale of a portion of the Companys investment in Advance Auto Parts, Inc, and an after-tax charge of $208 million, or $0.64 per share, related to the adoption of SFAS No. 142.
The second quarter 2002 results included a pretax charge of $300 million, or $0.60 per share, which reflected a change in estimate related to the Companys decision to refine its methodology for determining its domestic allowance for uncollectible accounts.
The fourth quarter 2002 results included a pretax gain of $265 million, or $0.56 per share, related to the sale of the Companys remaining investment in the common stock of Advance Auto Parts, Inc.
The third quarter 2003 results included a pretax charge of $141 million, or $0.32 per share, related to the Companys refinement of its business strategy for TGI.
The fourth quarter 2003 results included three significant items: a pretax gain of $4.1 billion, or $10.38 per share, related to the sale of the Companys domestic Credit and Financial Products business, a pretax gain of $81 million, or $0.20 per share, related to the sale of NTB and a pretax charge of $791 million, or $1.98 per share, related to the Companys domestic debt retirement activities. In addition, pretax LIFO credits of $52 and $19 million were recorded in the fourth quarter of 2003 and 2002, respectively, compared with charges of $12 million, $12 million and $6 million for the first, second and third quarters of fiscal 2003 and 2002, respectively.
The sum of quarterly earnings per common share may not equal the annual amount as net income per common share is independently calculated for each quarter.
F - 39
SEARS, ROEBUCK AND CO.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at
Charged to
Balance at
beginning
and costs
end of
of period
expenses
Deductions
Other
(1)
period
$
1,832
$
1,747
$
(1,634
)
$
(1,903
)
$
42
$
1,158
$
2,261
$
(1,587
)
$
$
1,832
$
686
$
1,866
$
(1,394
)
$
$
1,158
(1)
|
On November 3, 2003, the Company sold its domestic Credit and Financial Products business. As a result, the domestic allowance for uncollectible accounts of approximately $1.9 billion was written-off. | ||
F - 40
EXHIBIT INDEX
Sears, Roebuck and Co. Form 10-K
For the Year Ended January 3, 2004
E - 1
EXHIBIT INDEX
Sears, Roebuck and Co. Form 10-K
For the Year Ended January 3, 2004
Registrants Annual Incentive Compensation Plan, amended and
restated as of January 1, 1994 (incorporated by reference to
Appendix B to Registrants Proxy Statement dated March 23,
1994).** ****
Registrants Conformed Amended and Restated Long-Term
Performance Incentive Program (LTPIP), as conformed and
restated through August 14, 2002 and Conforming Amendment to
Registrants 2000 Employee Stock Plan for purposes of the LTPIP
(incorporated by reference to Exhibit 10(a) to Registrants
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 28, 2002).** ****
Description of Registrants Supplemental Life Insurance Plan,
amended as of December 31, 1986 (incorporated by reference to
the second and third full paragraphs on page 10 of Registrants
Proxy Statement dated March 26, 1987).** ****
Registrants Supplemental Retirement Income Plan, as amended and
restated effective March 25, 1997 (incorporated by reference to
Exhibit 10.(ii)(11) to Registrants Annual Report on Form 10-K
for the fiscal year ended January 1, 2000).** ****
Registrants Supplemental Long-Term Disability Plan
(incorporated by reference to Exhibit 10(d) to Registrants
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1995).** ****
Registrants Deferred Compensation Plan, as
amended and restated to December 13, 2000
(incorporated by reference to Exhibit 10.
(ii)(15) to Registrants Annual Report on
Form 10-K for the fiscal year ended December
30, 2000). ** ****
Registrants Supplemental 401(k) Savings
Plan, as amended and restated as of January
1, 2001 (incorporated by reference to
Exhibit 10.21 to the Registrants Annual
Report on Form 10-K for the fiscal year
ended December 28, 2002).****
Registrants Transferred Executives Pension
Supplement (incorporated by reference to
Exhibit 10.(iii)(16) to Registrants Annual
Report on Form 10-K for the fiscal year
ended December 31, 1988).** ****
Amendment to Registrants Transferred
Executives Pension Supplement adopted on
March 13, 1996 (incorporated by reference to
Exhibit 10.(iii)(14) to Registrants Annual
Report on Form 10-K for the fiscal year
ended December 30, 1995).** ****
Amendment to Registrants Executive
Retirement Plan Arrangements, effective as
of March 24, 1997 (incorporated by reference
to Exhibit 10.2 to Registrants Quarterly
Report on Form 10-Q for the fiscal quarter
ended June 28, 1997).** ****
Registrants Non-Employee Directors
Retirement Plan, as amended and restated to
March 13, 1996 (incorporated by reference to
Exhibit 10.(iii)(8) to Registrants Annual
Report on Form 10-K for the fiscal year
ended December 30, 1995).** ****
Description of Registrants Non-Employee
Director Life Insurance Plan (incorporated
by reference to the first paragraph on page
10 of Registrants Proxy Statement dated
March 26, 1998).** ****
Registrants Non-Employee Director Stock
Plan (incorporated by reference to Appendix
B of Registrants Proxy Statement dated
March 20, 1996).** ****
Registrants 2002 Non-Employee Director
Stock Plan (incorporated by reference to
Appendix B to Registrants Proxy Statement
dated March 27, 2002).** ****
Term Sheet from Registrant to Greg A. Lee dated December 8, 2000
relating to employment (incorporated by reference to Exhibit 10
to Registrants Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2001).** ****
E - 2
EXHIBIT INDEX
Sears, Roebuck and Co. Form 10-K
For the Year Ended January 3, 2004
Letter from Registrant to Gerald F. Kelly relating to
employment dated September 27, 2002 (incorporated by reference
to Exhibit 10.35 to the Registrants Annual Report on Form 10-K
for the fiscal year ended December 28, 2002).****
Letter from Registrant to Janine M. Bousquette relating to
employment dated October 4, 2002 (incorporated by reference to
Exhibit 10.36 to the Registrants Annual Report on Form 10-K
for the fiscal year ended December 28, 2002).****
Letter from Registrant to Mark S. Cosby relating to employment
dated November 13, 2002 (incorporated by reference to Exhibit
10.37 to the Registrants Annual Report on Form 10-K for the
fiscal year ended December 28, 2002).****
Memorandum from Greg A. Lee to William G. Pagonis relating to
employment dated April 9, 2002 (incorporated by reference to
Exhibit 10.38 to the Registrants Annual Report on Form 10-K
for the fiscal year ended December 28, 2002).****
Letter from Registrant to Robert J. OLeary relating to
employment dated as of June 2, 2003 (incorporated by reference
to Exhibit 10(b) to the Registrants Quarterly Report on Form
10-Q for the fiscal quarter ended June 28, 2003).
Amendment, dated as of November 6, 2003, to Executive Severance
Non-Compete Agreement between Lyle Heidemann and Sears, Roebuck
and Co. dated November 13, 2001.
Form of Non-Compete/Change of Control Agreement for Executive
Officers of Registrant (incorporated by reference to Exhibit 10
to Registrants Quarterly Report on Form 10-Q for the fiscal
quarter ended July 3, 1999).** ****
Form of Executive Non-Disclosure and Non-Solicitation of
Employees Agreement and form of Executive Severance/Non-Compete
Agreement for Executive Officers of Registrant (incorporated by
reference to Exhibit 10.(ii)(26) to Registrants Annual Report
on Form 10-K for the fiscal year ended December 29, 2001).**
****
$3,500,000,000 364-day Credit Agreement dated as of February
24, 2003 among Sears Roebuck Acceptance Corp. (SRAC), the
banks, financial institutions and other institutional lenders
listed on the signature pages thereof, Bank One, NA, as
syndication agent, Barclays Bank PLC and Bank of America, N.A.,
as documentation agents, Salomon Smith Barney Inc. and Banc One
Capital Markets, Inc. as joint lead arrangers and joint
bookrunners, and Citibank, N.A., as agent for the Lenders
(incorporated by reference to Exhibit 10(a) to SRACs Current
Report on Form 8-K dated February 24, 2003).
Credit Agreement Support Letter dated as of February 24, 2003
between Registrant and Sears Roebuck Acceptance Corp.
(incorporated by reference to Exhibit 10(b) to SRACs Current
Report on Form 8-K dated February 24, 2003).
Acknowledgement and Extension Agreement, dated as of August 19,
2003, among Sears Roebuck Acceptance Corp. (SRAC),
Registrant, and Certain Lenders that are parties to the 364-day
Credit Agreement dated as of February 24, 2003 (which is set
forth as Exhibit 10(c) to SRACs Current Report on Form 8-K
dated February 24, 2003) (incorporated by reference to Exhibit
10(c) to the Registrants Quarterly Report on Form 10-Q for the
fiscal quarter ended September 27, 2003).
Guarantee executed by the Registrant under the Indenture, dated
as of May 15, 1995, between Sears Roebuck Acceptance Corp. and
JP Morgan Chase Bank (successor to The Chase Manhattan Bank,
N.A.), as supplemented by the First Supplemental Indenture,
dated as of November 3, 2003. (incorporated by reference to
Exhibit 4(g) to SRACs Quarterly Report on Form 10-Q for the
fiscal quarter ended September 27, 2003).
E - 3
EXHIBIT INDEX
Sears, Roebuck and Co. Form 10-K
For the Year Ended January 3, 2004
Guarantee executed by the Registrant under the Indenture, dated as of October 1, 2002,
between Sears Roebuck Acceptance Corp. and BNY Midwest Trust Company, as supplemented by the
First Supplemental Indenture, dated as of November 3, 2003 (incorporated by reference to
Exhibit 4(h) to SRACs Quarterly Report on Form 10-Q for the fiscal quarter ended September
27, 2003).
Guarantee dated as of November 3, 2003 of the commercial paper master notes, executed
between the Registrant and Sears Roebuck Acceptance Corp.
Purchase, Sale and Servicing Transfer Agreement, dated as of July 15, 2003, by an among
Registrant, certain subsidiaries of Registrant and Citicorp (incorporated by reference to
Exhibit 10.1 to SRACs Current Report on Form 8-K dated July 15, 2003).
Amendment No. 1, dated as of November 3, 2003, to the Purchase, Sale and Servicing Transfer
Agreement, by and among Registrant, certain subsidiaries of Registrant and Citicorp
(incorporated by reference to Exhibit 2(b) to the Registrants Quarterly Report on Form 10-Q
for the fiscal quarter ended September 27, 2003).
Amended and Restated Program Agreement, dated as of July 15, 2003, amended and restated as
of November 3, 2003, by and between Registrant, Sears Intellectual Property Management
Company, and Citibank (USA) N.A. (incorporated by reference to Exhibit 10(a) to the
Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 2003).
Amendment, as of August 13, 2003, to Registrants 2002 Non-employee Director Stock Plan (as
set forth in Appendix B of Registrants Proxy Statement dated March 27, 2003) (incorporated
by reference to Exhibit 10(a) to the Registrants Quarterly Report on Form 10-Q for the
fiscal quarter ended September 27, 2003).
Computation of ratio of income to fixed charges for Registrant and consolidated subsidiaries.
Subsidiaries of Registrant.
Consent of Deloitte & Touche LLP.
Power of Attorney of certain officers and directors of Registrant.
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* | Filed herewith | |
** | SEC File No. 1-416 | |
*** | SEC File No. 1-11840 | |
**** | A management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 15(c) of Form 10-K |
E - 4
Exhibit 3.2
Sears, Roebuck and Co.
By-Laws
As Amended to
October 8, 2003
Incorporated
New York
1906
Contents
By-Laws
Article I
|
||||
MEETINGS OF SHAREHOLDERS
|
||||
Section 1.
Place of Meetings
|
1 | |||
Section 2.
Annual Meetings
|
1 | |||
Section 3.
Special Meetings
|
2 | |||
Section 4.
Notice of Meetings
|
2 | |||
Section 5.
Quorum
|
3 | |||
Section 6.
Organization and Adjournment
|
3 | |||
Section 7.
Voting
|
3 | |||
Section 8.
Inspectors of Election
|
3 | |||
Article II
|
||||
BOARD OF DIRECTORS
|
||||
Section 1.
Number, Qualification and Term of Office
|
3 | |||
Section 2.
Vacancies
|
3 | |||
Section 3.
Resignations
|
3 | |||
Section 4.
Place of Meetings
|
4 | |||
Section 5.
Annual Meetings
|
4 | |||
Section 6.
Other Meetings
|
4 | |||
Section 7.
Notice of Meetings
|
4 | |||
Section 8.
Organization, Quorum, Written Consents and Meetings by Telephone or Similar Equipment
|
4 | |||
Section 9.
Compensation
|
4 | |||
Article III
|
||||
COMMITTEES
|
||||
Section 1.
Creation and Organization
|
5 | |||
Section 2.
Executive Committee
|
5 | |||
Section 3.
Audit Committee
|
6 | |||
Section 4.
Compensation Committee
|
6 | |||
Section 5.
Nominating and Governance Committee
|
6 |
ii
Article IV
|
||||
OFFICERS
|
||||
Section 1.
Officers
|
6 | |||
Section 2.
Term of Office
|
6 | |||
Section 3.
Vacancies
|
7 | |||
Section 4.
The Chairman of the Board of Directors
|
7 | |||
Section 5.
The President
|
7 | |||
Section 6.
Vice Chairmen and Vice Presidents
|
7 | |||
Section 7.
Chief Financial Officer
|
7 | |||
Section 8.
Controller
|
7 | |||
Section 9.
Secretary
|
8 | |||
Section 10.
Compensation
|
8 | |||
Article V
|
||||
INDEMNIFICATION OF DIRECTORS AND OFFICERS
|
||||
Section 1.
Indemnification
|
8 | |||
Section 2.
Partial Indemnity
|
8 | |||
Section 3.
Advancement of Expenses
|
8 | |||
Section 4.
Corporate Action; Judicial Review
|
8 | |||
Section 5.
Contract Right
|
9 | |||
Section 6.
Change in Control
|
9 | |||
Section 7.
Period of Limitations
|
10 | |||
Section 8.
Non-exclusivity
|
10 | |||
Section 9.
Applicable Law
|
10 | |||
Article VI
|
||||
STOCK CERTIFICATES AND TRANSFER OF STOCK
|
||||
Section 1.
Certificates of Stock
|
10 | |||
Section 2.
Transfer of Certificated Stock
|
10 | |||
Section 3.
Transfer Agent and Registrar; Regulations
|
10 | |||
Section 4.
Record Date of Shareholders
|
11 | |||
Section 5.
Uncertificated Shares
|
11 | |||
Section 6.
Shareholder Records
|
11 | |||
Article VII
|
||||
FISCAL YEAR
|
11 |
iii
11
11
iv
By-Laws
Article I
Section 1. Place of Meetings. All meetings of the shareholders shall be held at such place within or without the State of New York as shall be fixed by the Board of Directors from time to time.
Section 2. Annual Meetings . The annual meeting of the shareholders for the election of directors and for the transaction of such other business as may properly be brought before the meeting shall be held at such time as is specified in the notice of the meeting on either the second Wednesday in May of each year or on such other date as may be fixed by the Board of Directors prior to the giving of the notice of such meeting. The Board of Directors acting by resolution may postpone and reschedule any previously scheduled annual meeting of shareholders.
Nominations of persons for election to the Board of Directors of the Company and the proposal of business to be considered by the shareholders may be made at an annual meeting of shareholders (a) pursuant to the Companys notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any shareholder of the Company who was a shareholder of record at the time of giving of notice provided for in this By-Law, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this By-Law.
For nominations or other business to be properly brought before an annual meeting by a shareholder pursuant to clause (c) of the foregoing paragraph of this By-Law, the shareholder must have given timely notice thereof in writing to the Secretary of the Company. To be timely, a shareholders notice shall be delivered to the Secretary at the principal executive offices of the Company not less than 45 days nor more than 75 days prior to the first anniversary of the date on which the Company first mailed its proxy materials for the preceding years annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from the anniversary date of the preceding years annual meeting, notice by the shareholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. Such shareholders notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the Exchange Act) (including such persons written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; (c) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such shareholder, as they appear on the Companys books, and of such beneficial owner and (ii) the class and number of shares of the Company which are owned beneficially and of record by such shareholder and such beneficial owner.
Notwithstanding anything in the second sentence of the preceding paragraph to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Company is increased and there is no public announcement naming all of the nominees for Director or specifying the size of the increased Board of
1
Directors made by the Company at least 70 days prior to the first anniversary of the preceding years annual meeting, a shareholders notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Company not later than the close of business on the 10th day following the day on which such public announcement is first made by the Company.
Only such persons who are nominated in accordance with the procedures set forth in these By-Laws shall be eligible to serve as directors and only such business shall be conducted at an annual meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this By-Law. The chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this By-Law and, if any proposed nomination or business is not in compliance with this By-Law, to declare that such defective proposal shall be disregarded.
For purposes of this By-Law, public announcement shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Company with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act.
Notwithstanding the foregoing provisions of this By-Law, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Nothing in this By-Law shall be deemed to affect any rights (i) of shareholders to request inclusion of proposals in the Companys proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of Preferred Stock to elect directors under specified circumstances.
Section 3. Special Meetings . Special meetings of the shareholders for any purpose or purposes shall be called to be held at any time upon the request of the Chairman of the Board of Directors, the President or a majority of the members of the Board of Directors or of the Executive Committee then in office. Business transacted at all special meetings shall be confined to the specific purpose or purposes of the persons authorized to request such special meeting as set forth in this Section 3 and only such purpose or purposes shall be set forth in the notice of such meeting. The Board of Directors acting by resolution may postpone and reschedule any previously scheduled special meeting of shareholders.
Nominations of persons for election to the Board of Directors may be made at a special meeting of shareholders at which directors are to be elected (a) pursuant to the Companys notice of meeting (b) by or at the direction of the Board of Directors or (c) by any shareholder of the Company who is a shareholder of record at the time of giving of notice provided for in this By-Law, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. Nominations by shareholders of persons for election to the Board of Directors may be made at such a special meeting of shareholders if the shareholders notice required by the third paragraph of Section 2 of Article I of these By-Laws shall be delivered to the Secretary at the principal executive offices of the Company not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting.
Only such persons who are nominated in accordance with the procedures set forth in these By-Laws shall be eligible to serve as directors and only such business shall be conducted at a special meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this By-Law. The chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this By-Law and, if any proposed nomination or business is not in compliance with this By-Law, to declare that such defective proposal shall be disregarded.
Notwithstanding the foregoing provisions of this By-Law, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law.
Section 4. Notice of Meetings . Written notice of the time, place, and purpose or purposes of each annual and special meeting of shareholders shall be signed by the Chairman of the Board of Directors, the President, the
2
Secretary, or a Vice President designated by the Chairman and served by mail upon each shareholder of record entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. Notice of an annual or special meeting of shareholders shall be deemed to be served when deposited in the United States mail, postage prepaid, addressed to each shareholder at his address as it appears on the stock records of the Company or at such other address as he may have filed with the Secretary of the Company for such purpose.
Section 5. Quorum . At any meeting of the shareholders, the holders of record of one-third of the total number of shares of the Company entitled to vote, present in person or represented by proxy, shall constitute a quorum for the purpose of transacting business.
Section 6. Organization and Adjournment . The Chairman of the Board of Directors or in the Chairmans absence, the President, or, if both of such officers are absent, an officer designated by the Executive Committee, shall act as chairman of the meeting. The Secretary, or in the Secretarys absence an Assistant Secretary, or if neither the Secretary nor any Assistant Secretary be present, any person designated by the chairman of the meeting, shall act as secretary of the meeting. Any annual or special meeting of shareholders may be adjourned by the chairman of the meeting or pursuant to resolution of the Board of Directors without notice other than by announcement at the meeting. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted at the meeting as originally convened.
Section 7. Voting . At each meeting of the shareholders, each holder of shares entitled to vote at such meeting shall be entitled to vote in person or by proxy appointed by such shareholder in accordance with applicable law, except as provided in the Certificate of Incorporation of the Company with respect to cumulative voting, shall have one vote for each share standing in the shareholders name on the books of the Company upon each matter submitted to a vote at the meeting. The vote upon the election of directors shall be by ballot. If a quorum is present at any meeting of shareholders, the vote of the holders of a majority of the shares cast by the holders of shares entitled to vote on the matter shall be sufficient for the transaction of any business, except that directors shall be elected by a plurality of shares cast by the holders of shares entitled to vote in the election, unless, in either case, otherwise provided by law or by the Certificate of Incorporation.
Section 8. Inspectors of Election . Prior to each meeting of shareholders, the Board of Directors shall appoint three Inspectors, who shall not be directors or officers of the Company or candidates for the office of director. Such Inspectors shall count and report to the meeting the votes cast on all matters submitted to a vote at such meeting. In the case of failure of the Board of Directors to make such appointments, or in the case of failure of any Inspector so appointed to act, the chairman of the meeting may, and at the request of a shareholder entitled to vote thereat, shall, make such appointments or fill such vacancies. Each Inspector shall be entitled to a reasonable compensation from the Company for his services. The Inspectors appointed to act at any meeting of the shareholders, before entering upon the discharge of their duties, shall be sworn faithfully to execute the duties of Inspectors at such meeting with strict impartiality and according to the best of their ability, and the oath so taken shall be subscribed by them.
Article II
BOARD OF DIRECTORS
Section 1. Number, Qualification and Term of Office . The business of the Company shall be managed under the direction of a Board of Directors, each of whom shall be at least 25 years of age. The number of directors of the Company shall be fixed and may from time to time be increased or decreased by the affirmative vote of a majority of the entire Board of Directors, but in no event shall the number of directors be less than 7 or more than 20.
Section 2. Vacancies . Any vacancies on the Board of Directors may be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.
Section 3. Resignations . Any director may resign at any time by giving written notice to the Chairman of the Board of Directors, or to the President, or to the Secretary of the Company. Such resignation shall take effect on the date of receipt of such notice unless a later effective date is specified therein. The acceptance of such resignation by the Board of Directors shall not be necessary to make it effective.
3
Section 4. Place of Meetings . The Board of Directors may hold its meetings at such place or places, within or without the State of New York, as the Board of Directors may from time to time determine or as may be specified in the notice of any meeting.
Section 5. Annual Meetings . A meeting of the Board of Directors to be known as the annual meeting of the Board of Directors shall be held following the meeting of the shareholders at which such Board of Directors is elected, at such place as shall be fixed by the Board of Directors, for the purpose of electing the officers of the Company and the committees of the Board of Directors, and of transacting such other business as may properly come before the meeting. It shall not be necessary to give notice of this meeting.
Section 6. Other Meetings . Meetings of the Board of Directors shall be held on such dates as from time to time may be determined by the Board of Directors or whenever called upon the direction of the Chairman of the Board of Directors or of the President or by the Secretary upon the written request of one-third of the directors in office, which request shall state the date, place and purpose of such meeting.
Section 7. Notice of Meetings . Written, telephonic, telegraphic or facsimile transmission notice of each meeting except the annual meeting shall be given by the Secretary to each director, by personal delivery, by telephone, or by regular or express mail, or telegram or facsimile transmission addressed to the director at his or her usual business address, or to the address where the director is known to be, at least three days (excluding Saturdays, Sundays, and holidays) prior to the meeting in case of notice by regular mail and at least three hours prior to the meeting in case of notice by personal delivery, express mail, telephone, telegram, or facsimile transmission. All notices which are given by regular mail shall be deemed to have been given when deposited in the United States mail, postage prepaid. Any director may waive notice of any meeting before or after the meeting, and the attendance of a director at any meeting, except for the sole purpose of protesting the lack of notice thereof, shall constitute a waiver of notice of such meeting. Any and all business may be transacted at any meeting which need not be restricted to the purpose thereof specified in the notice or waiver of notice of such meeting, if one is specified.
Section 8. Organization, Quorum, Written Consents and Meetings by Telephone or Similar Equipment . Unless the Board of Directors shall by resolution otherwise provide, the Chairman of the Board of Directors, or in the Chairmans absence, the President, or, if both of such officers are absent, a director chosen by a majority of the directors present, shall act as chairman at meetings of the Board of Directors; and the Secretary, or in the Secretarys absence an Assistant Secretary, or in the absence of an Assistant Secretary, such person as may be designated by the chairman of the meeting, shall act as secretary at such meetings.
A majority of the directors in office at the time (but not less than one-third of the entire Board of Directors) shall constitute a quorum necessary for the transaction of business, and, except as otherwise provided in these By-Laws, the action of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. If at any meeting of the Board of Directors a quorum is not present, a majority of the directors present may adjourn the meeting from time to time.
Any action required or permitted to be taken by the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board of Directors or the committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consent thereto by the members of the Board of Directors or committee shall be filed with the minutes of the proceedings of the Board of Directors or committee.
Any one or more members of the Board of Directors or any committee thereof may participate in a meeting of such Board of Directors or committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting.
Section 9. Compensation . Each director not an officer of the Company, or of any subsidiary or affiliated company, may receive such compensation for his or her services as a director and as a committee member as shall be fixed from time to time by resolution of the Board of Directors and shall be reimbursed for expenses of attendance at meetings of the Board of Directors and of any committee of which he or she is a member.
4
Article III
COMMITTEES
Section 1. Creation and Organization . The Board of Directors, at its annual meeting, or any adjournment thereof, shall, or at any other meeting may, elect from among its members, by the vote of a majority of the entire Board of Directors, an Audit Committee, a Compensation Committee, an Executive Committee, and a Nominating and Governance Committee, which shall be the standing committees of the Board of Directors, and such other committees as shall be determined by the Board of Directors.
The Secretary of the Company shall act as secretary of each committee meeting or any person as may be designated by the chairman of the committee shall act as secretary of the meeting and keep the minutes of such meeting.
The Board of Directors, by the vote of a majority of the entire Board of Directors, may remove the chairman or any member of any committee, and may fill from among the directors vacancies in any committee caused by the death, resignation, or removal of any person elected thereto.
The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee.
Each committee may determine its own rules of procedure, consistent with these By-Laws. Meetings of any committee may be called upon direction of the Chairman of the Board of Directors, the President, or the chairman of the committee. Notice of each meeting shall be given to each member of the committee, by personal delivery, telephone, telegram, facsimile transmission, or regular or express mail addressed to the member at his or her usual business address, or to the address where the member is known to be, at least three days (excluding Saturdays, Sundays, and holidays) prior to the meeting in case of notice by regular mail, and at least three hours prior to the meeting in case of notice by personal delivery, express mail, telephone, telegram, or facsimile transmission. All notices which are given by regular mail shall be deemed to have been given when deposited in the United States mail, postage prepaid. Notice of meetings of any committee may be waived by any member of the committee before or after the meeting. At meetings of each committee, the presence of a majority of such committee shall be necessary to constitute a quorum for the transaction of business, and, if a quorum is present at any meeting, the action taken by a majority of the members present shall be the act of the committee. Each committee shall keep a record of its acts and proceedings, and all action shall be reported to the Board of Directors at the next meeting of the Board of Directors following such action. Each committee shall annually consider whether amendments to the section of Article III of these By-Laws relating to the composition and function of such committee appear to be in the best interests of the Company. Each committee shall report on such recommendations to the Nominating and Governance Committee annually, no later than December. The Nominating and Governance Committee shall report on such recommendations to the Board of Directors at its first regular meeting each year.
Section 2. Executive Committee . The Executive Committee shall consist of the Chairmen of the Board of Directors, the chairman of the Audit, Compensation and Nominating and Governance Committees, and such number of other directors, a majority of whom shall not be officers or employees of the Company or its affiliates, not less than four, as shall from time to time be prescribed by the Board of Directors.
The Executive Committee, unless otherwise provided by resolution of the Board of Directors, shall between meetings of the Board of Directors have all the powers of the Board of Directors and may perform all of the duties thereof, except that the Executive Committee shall have no authority as to the following matters: (i) submission to shareholders of any action that requires shareholders authorization under the New York Business Corporation Law; (ii) compensation of directors; (iii) amendment or repeal of these By-Laws or the adoption of new By-Laws; (iv) amendment or repeal of any resolution of the Board of Directors that by its terms may not be so amended or repealed; (v) action in respect of dividends to shareholders; (vi) election of officers, directors or members of committees of the Board of Directors. Any action taken by the Executive Committee shall be subject to revision or alteration by the Board of Directors, provided that rights or acts of third parties vested or taken in reliance on such action prior to their receipt of written notice of any such revision or alteration shall not be adversely affected by such revision or alteration.
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Section 3. Audit Committee . The provisions regarding the composition of the Audit Committee and the duties and responsibilities of its members shall be as set forth in that certain Audit Committee Charter as adopted by the Board of Directors. The Audit Committee shall conduct its meetings and carry out its duties and responsibilities in accordance with the applicable provisions of these By-Laws.
Section 4. Compensation Committee . The Compensation Committee shall consist of such number of directors, who shall not be officers or employees of the Company or any of its affiliates, not less than three, as shall from time to time be prescribed by the Board of Directors. The Compensation Committee shall approve the salaries, bonuses, and other compensation to be paid to the officers of the Company, including the terms and conditions of their employment, shall approve the compensation of the Chief Executive Officer, and shall administer all stock option and other benefit plans (unless otherwise specified in or pursuant to plan documents or resolutions of the Board of Directors) affecting officers direct and indirect remuneration.
The Compensation Committee shall, on its own initiative or upon referral from the Board of Directors, investigate, analyze and consider the current and future financial practices of the employee benefit plans of the Company and its subsidiaries and shall report and make such recommendations to the Board of Directors as the Committee deems appropriate.
Section 5 . Nominating and Governance Committee . The provisions regarding the composition of the Nominating and Governance Committee and the duties and responsibilities of its members shall be set forth in that certain Nominating and Governance Committee Charter as adopted by the Board of Directors. The Nominating and Governance Committee shall conduct its meetings and carry out its duties and responsibilities in accordance with the applicable provisions of these By-Laws.
Article IV
OFFICERS
Section 1. Officers . The Board of Directors shall, at its annual meeting, and may at any other meeting, or any adjournment thereof, elect from among its members a Chairman of the Board of Directors and a President. The Board of Directors may also elect at such meeting one or more Vice Chairmen and one or more Vice Presidents, who may have special designations, and may elect at such meeting a Treasurer, a Controller and a Secretary, who also may have special designations.
The Board of Directors may elect or appoint such other officers and agents as it shall deem necessary, or as the business of the Company may require, each of whom shall hold office for such period, have such authority and perform such duties as the Board of Directors may prescribe from time to time.
Any two or more offices, except the offices of Chairman of the Board of Directors and Secretary, the offices of President and Secretary and the offices of Chief Financial Officer (regardless of title) and Controller, may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity.
Section 2. Term of Office . Each officer elected by the Board of Directors shall hold office until the annual meeting of the Board of Directors following the next annual meeting of shareholders and until his or her successor is elected, or until such earlier date as shall be prescribed by the Board of Directors at the time of his or her election. Any officer may be removed at any time, with or without cause, by the vote of a majority of the members of the Board of Directors.
Section 3. Vacancies . A vacancy in any office caused by the death, resignation, retirement, or removal of the person elected thereto, or by any other cause, may be filled for the unexpired portion of the term by election of the Board of Directors at any meeting. In case of the absence or disability, or refusal to act of any officer of the Company, or for any other reason that the Board of Directors shall deem sufficient, the Board of Directors may delegate, for the time being, the powers and duties, or any of them, of such officer to any other officer or to any director, consistent with the limitations in Section 1.
Section 4. The Chairman of the Board of Directors . The Chairman of the Board of Directors shall be the chief executive officer of the Company and shall have general direction over the affairs of the Company, subject to the control and direction of the Board of Directors. The Chairman shall, when present, preside as chairman at all meetings of the shareholders and of the Board of Directors. The Chairman may call meetings of the
6
shareholders and of the Board of Directors and of the committees whenever he or she deems it necessary. The Chairman shall, in the absence or incapacity of the President, perform all duties and functions and exercise all the powers of the President. The Chairman shall have such other powers and perform such other duties as from time to time may be prescribed by the Board of Directors.
Section 5. The President . The President shall have general direction over the day-to-day business of the Company, subject to the control and direction of the Chairman of the Board of Directors. The President shall keep the Chairman of the Board of Directors fully informed concerning the activities of the Company under his supervision. The President shall, in the absence or incapacity of the Chairman of the Board of Directors, perform all duties and functions and exercise all the powers of the Chairman of the Board of Directors. In the absence of the Chairman of the Board of Directors, the President shall preside at meetings of the shareholders and of the Board of Directors. The President shall have such other powers and perform such other duties as are incident to the office of President and as from time to time may be prescribed by the Board of Directors.
Section 6. Vice Chairmen and Vice Presidents . Each Vice Chairman and each Vice President shall have such powers and perform such duties as from time to time may be assigned to him or her by the Board of Directors or be delegated to him or her by the Chairman of the Board of Directors or by the President. The Board of Directors may assign to any Vice Chairman or Vice President general supervision and charge over any territorial or functional division of the business and affairs of the Company. In the absence or incapacity of the Chairman of the Board of Directors and the President, the powers, duties, and functions of the President shall be temporarily performed and exercised by such one of the Vice Chairmen or Vice Presidents as shall be designated by the Board of Directors or, if not designated by the Board of Directors, by the Executive Committee or, if not designated by the Executive Committee, by the President.
Section 7. Chief Financial Officer . The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the Company, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director.
The Chief Financial Officer shall deposit all money and other valuables in the name and to the credit of the Company with such depositaries as may be designated by the Board of Directors. He or she shall disburse the funds of the Company as may be ordered by the Board of Directors, shall render to the Board of Directors, the Chairman of the Board of Directors, or the President, whenever they request it, an account of all of his or her transactions as Chief Financial Officer and of the financial condition of the Company, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors, the Chairman of the Board of Directors, the President or these By-Laws.
Section 8. Controller . The Controller shall have general charge, control, and supervision over the accounting and auditing affairs of the Company. The Controller or such persons as the Controller shall designate shall have responsibility for the custody and safekeeping of all permanent records and papers of the Company. The Controller shall have responsibility for the preparation and maintenance of the books of account and of the accounting records and papers of the Company; shall supervise the preparation of all financial statements and reports on the operation and condition of the business; shall have responsibility for the establishment of financial procedures, records, and forms used by the Company; shall have responsibility for the filing of all financial reports and returns, except tax returns, required by law; shall render to the Chairman of the Board of Directors, the President, or the Board of Directors, whenever they may require, an account of the Controllers transactions; and in general shall have such other powers and perform such other duties as are incident to the office of Controller and as from time to time may be prescribed by the Board of Directors, the Chairman of the Board of Directors, or the President.
Section 9. Secretary . The Secretary shall attend and keep the minutes of meetings of the shareholders, of the Board of Directors, and of all committees of the Company in books of the Company provided for that purpose; may sign with the Chairman of the Board of Directors, the President, any Vice Chairman or any Vice President, or the Manager of any Department, in the name of the Company, contracts and other instruments authorized by the Board of Directors or by the Executive Committee, and in proper cases shall affix the corporate seal thereto; shall see that notices are given and corporate records and reports are properly kept and filed by the Company as required by these By-Laws or as required by law; and in general shall have such other
7
powers and perform such other duties as are incident to the office of Secretary and as from time to time may be prescribed by the Board of Directors, the Chairman of the Board of Directors, or the President.
Section 10. Compensation . The salaries and other compensation of all officers elected by the Board of Directors shall be fixed from time to time by or under the direction of the Board of Directors.
Article V
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. Indemnification . Any person (hereinafter called an Indemnitee) made, or threatened to be made, a party to, or who is otherwise involved in, any action, suit or proceeding whether civil, criminal, administrative or investigative, by reason of the fact that such Indemnitee, or his or her testator or intestate, is or was a director or officer of the Company, or, while a director or officer of the Company and at the request of the Company, is or was serving another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, shall be indemnified by the Company to the full extent permitted by applicable law, against judgments, fines, amounts paid in settlement and all expenses, including attorneys fees, actually incurred as a result of such action, suit or proceeding, or any appeal therein.
Without limitation of the foregoing, the Company shall be deemed to have requested an Indemnitee to serve an employee benefit plan where the performance by such person of his or her duties to the Company also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan. Excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall be considered fines.
Section 2. Partial Indemnity . If an Indemnitee is entitled under any provision of this Article V to indemnification by the Company for some or a portion of the amounts indemnified against, but not for the total amount thereof, the Company shall nevertheless indemnify such Indemnitee for the portion thereof to which such Indemnitee is entitled.
Section 3. Advancement of Expenses . Except as prohibited by applicable law, the Company shall, from time to time, reimburse or advance to any Indemnitee the funds necessary for payment of expenses incurred in connection with any action, suit or proceeding referred to in Section 1, upon receipt of a written undertaking by or on behalf of such Indemnitee to repay such amounts if and to the extent that such repayment is required pursuant to applicable law.
Section 4. Corporate Action; Judicial Review . Upon receipt of a request to be indemnified, or for the reimbursement or advancement of expenses, the Company shall promptly proceed in good faith to take all actions necessary to a determination of whether or not the Indemnitee is entitled to such payment pursuant to this Article V. If such a request is not paid in full by the Company within thirty days after receipt of a written claim therefor, the Indemnitee may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim and, if successful in whole or in part, the Indemnitee also shall be entitled to be reimbursed by the Company for the expenses actually incurred, including attorneys fees, of prosecuting such claim. Neither a determination that such payments are improper under the circumstances, nor the failure of the Company (including its Board of Directors, Independent Counsel (as hereinafter defined) or shareholders) to have made a determination, prior to the commencement of such action, that such payments are proper under the circumstances, shall be a defense to the action or shall create a presumption that the Indemnitee is not entitled to the payment requested. Notwithstanding any other provision of this Article V, in any action hereunder by the Indemnitee against the Company to secure indemnification or reimbursement or advancement of expenses, to the extent permitted by applicable law, the Company shall bear the burden of proof that the Indemnitee is not entitled to such payments.
Section 5. Contract Right . The right to indemnification and to the reimbursement or advancement of expenses pursuant to this Article V (a) is a contract right provided in consideration of services to the Company, with respect to which an Indemnitee may bring suit as if the provisions of this Article V were set forth in a separate written contract between the Company and such Indemnitee, (b) is intended to be retroactive and shall,
8
to the extent permitted by applicable law, be available with respect to events occurring prior to the adoption hereof, and (c) shall continue to exist after any future rescission or restrictive modification hereof with respect to any alleged cause of action that accrues, or any other incident or matter that occurs, prior to such rescission or modification. It is the intent of the Company to irrevocably establish hereby the right of Indemnitees to all indemnification that is not prohibited by applicable law.
Section 6. Change in Control . If there has been a Change in Control of the Company (as hereinafter defined) within five years prior to any request for indemnification or reimbursement or advancement of expenses pursuant to this Article V, then with respect to all matters thereafter arising concerning the rights of Indemnitees to payments pursuant to this Article V or under any other agreement not inconsistent with this Article V now or hereafter in effect, the Company shall seek legal advice as specified below only from Independent Counsel (as hereinafter defined) selected by the Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such Independent Counsel shall determine whether and to what extent the Indemnitee would be permitted to be indemnified under applicable law, which determination shall include an opinion as to whether any requisite standard of conduct under applicable law has been met, and shall render a written opinion to the Company and the Indemnitee to such effect. To the extent permitted by applicable law, the Company shall be required by this Section 6 to authorize indemnification to the extent such opinion of Independent Counsel indicates that indemnification is permitted under applicable law; provided, however, that nothing in this Section 6 shall be deemed to abrogate the duties of any director of the Company to participate in any determination required to be made under applicable law as to whether such payments shall be made. The Company agrees to pay the reasonable fees of such Independent Counsel and to indemnify such counsel fully against any and all expenses, claims, liabilities and damages arising out of or relating to this Article V or the engagement of such Independent Counsel pursuant hereto.
A Change in Control of the Company shall be deemed to have occurred if (a) any person (as such term is used in Section 13(d) of the Securities Exchange Act of 1934) is or becomes the beneficial owner (as defined in Rule 13d-3 under such Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Companys then outstanding voting shares, or (b) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof unless the election of each director who was not a director at the beginning of the period was approved by a vote of a least 75% of the directors then still in office who were directors at the beginning of the period.
Independent Counsel shall refer to an attorney-at-law who at the time of his or her selection shall not have otherwise performed services for the Company or the Indemnitee within the previous five years. Independent Counsel shall not be any person who, under the standards of professional conduct to which he or she is legally subject, would have a conflict of interest in representing either the Company or the Indemnitee in connection with the determination of the Indemnitees rights under this Article V; nor shall Independent Counsel be any person who has been sanctioned or censured for ethical violations of such standards of professional conduct.
Section 7. Period of Limitations . To the extent such limitation is permitted by applicable law, no legal action shall be brought and no cause of action shall be asserted by or in the right of the Company or any affiliate of the Company against an Indemnitee, Indemnitees spouse, heirs, testators, intestates, executors, administrators or personal or legal representatives after the expiration of three years from the date of accrual of such cause of action, and any claim or cause of action of the Company or any affiliate shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such three year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern.
Section 8. Non-exclusivity . The rights of Indemnitees under the foregoing provisions of this Article V shall be in addition to any other rights such persons may have under a resolution of the shareholders of the Company, a resolution of its directors, the Certificate of Incorporation of the Company as amended or restated from time to time, the New York Business Corporation Law, the common law, any insurance policy, any agreement or otherwise. In addition to the foregoing provisions of this Article V, indemnification and reimbursement and advancement of expenses may be authorized pursuant to this Article V by a resolution of the shareholders of the Company, a resolution of its directors or an agreement providing for such indemnification.
9
The Company shall not be liable under this Article V to make any payment to an Indemnitee to the extent that such person has otherwise actually received payment of the amounts otherwise indemnifiable hereunder.
Section 9. Applicable Law . Any Indemnitee entitled to indemnification or to the reimbursement or advancement of expenses as a matter of right pursuant to this Article V may elect, to the extent permitted by law, to have the right of indemnification (or reimbursement or advancement of expenses) interpreted on the basis of the applicable law in effect at the time of the occurrence of the event or events giving rise to the action, suit or proceeding, or on the basis of the applicable law in effect at the time indemnification (or reimbursement or advancement of expenses) is sought.
Article VI
STOCK CERTIFICATES AND TRANSFER OF STOCK
Section 1. Certificates of Stock . Certificates representing shares of the Company shall be in such form, consistent with law, as shall be approved by the Board of Directors. They shall be signed by the Chairman of the Board of Directors or President or a Vice Chairman or a Vice President, and by the Secretary or Treasurer or by an Assistant Secretary or Assistant Treasurer, and shall be sealed with the corporate seal of the Company. Such seal may be an engraved or printed facsimile, and the signature of such officers of the Company, or any of them, may be printed facsimiles if such certificates are countersigned by a Transfer Agent or registered by a Registrar other than the Company itself or an employee thereof. In case any officer who shall have signed any such certificate, or whose facsimile signature shall have been used thereon, shall cease to be such officer before such certificate shall have been issued by the Company, such certificate may be issued by the Company with the same effect as if such officer had not ceased to be such at the date of the issuance of such certificate. The signature of the Transfer Agent and Registrar on a certificate representing shares of the Company may also be a printed facsimile when the same entity acts in the dual capacity.
Section 2. Transfer of Certificated Stock . Certificated shares of the Company shall be transferred on the books of the Company only upon surrender of the certificate or certificates therefor to the Treasurer of the Company, or to any authorized Transfer Agent, properly endorsed or accompanied by proper assignments duly executed by the registered holder thereof in person or by his or her attorney duly authorized in writing; except that with respect to certificates alleged to have been lost, stolen, or destroyed, a new certificate may be issued without cancellation of the original certificate, but only upon production of such evidence of the loss, theft, or destruction of the original certificate, and upon delivery to the Company of a bond of indemnity in such amount and upon such terms as the Board of Directors, in its discretion, may require. Until so transferred on the books of the Company, the Company shall deem and treat the registered holder of each certificate for shares as the owner of such shares for all purposes.
Section 3. Transfer Agent and Registrar; Regulations . The Company shall maintain one or more transfer offices or agencies, each under control of a Transfer Agent, where the shares of the Company may be transferable, and also one or more registry offices or agencies, each under control of a Registrar, where such shares may be registered, and no certificate for shares of the Company shall be valid unless countersigned by such Transfer Agent and registered by such Registrar. The Board of Directors may make such additional rules and regulations as it may deem expedient concerning the issue, transfer, and registration of certificates for shares of the Company.
Section 4. Record Date of Shareholders . The Board of Directors may from time to time fix in advance a date, not more than sixty nor less than ten days preceding the date of any meeting of shareholders, and not more than sixty days prior to the date for the payment of any dividend, or the date for the allotment of any rights, or the date when any change or conversion or exchange of shares shall become effective, or the date for any other action by the shareholders, as a record for the determination of the shareholders entitled to notice of, and to vote at, any such meeting and any adjournment thereof, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion, or exchange of shares, or to take any other action, and only such shareholders as shall be shareholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting and any adjournment thereof, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, or to take such other action, as the case may be, notwithstanding any transfer of any shares on the books of the Company after any such record date so fixed.
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Section 5. Uncertificated Shares . The Board of Directors may in its discretion authorize the issuance of shares which are not represented by certificates and provide for the registration and transfer thereof on the books and records of the Company or any Transfer Agent or Registrar so designated.
Section 6. Shareholder Records . The names and addresses of the persons to whom shares are issued, and the number of shares and the dates of issue and any transfer thereof, whether in certificated or uncertificated form, shall be entered on records kept for that purpose. The stock transfer records and the blank stock certificates shall be kept by the Transfer Agent, or by the Treasurer, or such other officer as shall be designated by the Board of Directors for that purpose. Every certificate surrendered for transfer or exchange shall be cancelled.
Article VII
FISCAL YEAR
The fiscal year of the Company shall begin on January 1 in 1994, and thereafter shall begin on the day after the Saturday closest to December 31 in each year, and shall end on the Saturday closest to December 31 in 1994 and each year thereafter.
Article VIII
SEAL
The corporate seal of the Company shall be circular in form and shall contain the name of the Company and the words New York, 1906, and Seal. The Secretary shall have custody of the seal, and a duplicate of the seal may be kept and used by any Assistant Secretary.
Article IX
AMENDMENTS
These By-Laws may be amended or repealed by the vote of a majority of the directors present at any meeting of the Board of Directors at which a quorum is present or by the vote of the holders of the shares of the Company at the time entitled to vote in the election of directors at any meeting of the shareholders at which a quorum is present.
11
Exhibit 10.30
AMENDMENT TO EXECUTIVE SEVERANCE
NON-COMPETE AGREEMENT
BETWEEN
LYLE HEIDEMAN AND SEARS, ROEBUCK AND CO.
NOVEMBER 13, 2001
The undersigned parties hereby amend the EXECUTIVE SEVERANCE/NON-COMPETE AGREEMENT dated November 13, 2001 (the Agreement) in the following particulars:
1.) | By adding the following sentence to the beginning of Section 1(a): | |||
Executive agrees to discontinue his present job duties effective 11:59 PM CST on December 31, 2003. During the period of January 1, 2003 through March 31, 2004 Executive will be considered as actively employed and continue to be paid his base salary, earn target annual bonus, and be eligible for the 2004 annual stock option grant, less legal deductions as an active employee. In accordance with the terms of an involuntary termination for a reason other than Cause, death, total and permanent disability, or voluntary retirement, and other than a Change in Control Termination as described in this Section 1 of the Agreement, commencing as of April 1, 2004 Executive will be eligible for Severance Pay as provided under Section 1(a) of the Agreement and placed on a leave of absence as provide under Section 1(b) of the Agreement and agree to retire from Sears at the end of his leave of absence. | ||||
2.) | By adding the following subsection (g) to Section 1 of the Agreement: | |||
In the event Executive does not survive for the duration of the Agreement, all amounts due Executive under this Agreement shall be payable to Executives estate or beneficiaries, as if Executive survived until March 31, 2006. | ||||
3.) | By replacing the first sentence in Section 1(b) with: | |||
During the salary continuation period, Executive will be placed on a leave of absence status and be entitled to all benefits (other than as specified above) for which Executive was eligible to participate prior to the end of active employment, with the exception of Long-Term Disability and Flexible Spending Accounts. |
Except as explicitly set forth herein, the Agreement will remain in full force and effect.
IN WITNESS WHEREOF , the parties hereto have executed this Agreement.
SEARS, ROEBUCK AND CO. | |||||
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/s/ Lyle G. Heidemann | By: | /s/ G. A. Lee | |||
Lyle Heidemann | |||||
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Dated
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11/06/03 | Dated: | 11/06/03 | ||
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Exhibit 10.38
GUARANTEE
Sears Roebuck Acceptance Corp., a Delaware corporation (the Company ), has issued commercial paper notes pursuant to the Companys Section 3(a)(3) commercial paper program (the CP Program ) and (all such notes collectively referred to as the Notes ).
Sears, Roebuck and Co., a New York corporation ( Sears ), hereby irrevocably and unconditionally guarantees, to each holder of a Note outstanding on the date hereof or any Note thereafter issued by the Company under the CP Program, that (a) the principal of (and premium, if any) and interest on the Notes will be paid in full when due, and (b) in case of any extension of time in payment or renewal of any Notes or pursuant to any cure period provisions of the Notes or the CP Program, they will be paid in full when due in accordance with the terms of the extension, renewal or cure period (this Guarantee ). Failing payment when due of any amount so guaranteed, Sears will be obligated to pay the same. In the event of a default in the payment of principal, interest or premium (if any) any holder of Notes may seek to enforce the guarantee against Sears without first proceeding against the Company.
No stockholder, officer, director or incorporator, as such, past, present or future of Sears shall have any liability under this Guarantee by reason of his, her or its status as such stockholder, officer, director or incorporator.
This Guarantee shall be applicable to all Notes outstanding on the date hereof and any Note issued under the CP Program, after the date of this Guarantee, whether or not a notation of this Guarantee is endorsed on any Note. This is a continuing guarantee and shall remain in full force and effect and shall be binding upon Sears and its successors and assigns until full and final payment of all of principal, interest and premium (if any) under the Notes and shall inure to the benefit of the successors and assigns of the holders of the Notes and, in the event of any transfer or assignment of rights by any holder of a Note, the rights and privileges herein conferred upon that party shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. This is a guarantee of payment, not of collectibility.
Sears hereby confirms that it is its intention that this Guarantee not constitute a fraudulent transfer or conveyance for purposes of any Federal bankruptcy law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar Federal, state or foreign law to the extent applicable to this Guarantee (the Applicable Laws ). In the event that this Guarantee would constitute or result in a violation of any Applicable Law, the liability of Sears under this Guarantee shall be reduced to the maximum amount permissible under such Applicable Law.
IN WITNESS WHEREOF, Sears, Roebuck and Co. has caused this Guarantee to be executed by its duly authorized representative.
Dated:
November 3, 2003
SEARS, ROEBUCK AND CO. | ||||
By: | /s/Glenn R. Richter | |||
Name: | Glenn R. Richter | |||
Title: |
Senior Vice President and Chief Financial
Officer |
Exhibit 12
COMPUTATION OF RATIO OF INCOME TO COMBINED FIXED CHARGES
SEARS, ROEBUCK AND CO. AND CONSOLIDATED SUBSIDIARIES
(Unaudited)
For the Fiscal Year Ended
(millions, except ratios)
2003
2002
2001
2000
1999
$
1,816
$
1,143
$
1,415
$
1,248
$
1,268
167
157
161
136
133
1,983
1,300
1,576
1,384
1,401
1
4
11
4
5
$
1,984
$
1,303
$
1,587
$
1,388
$
1,406
$
5,449
$
2,453
$
1,223
$
2,223
$
2,419
8
20
12
17
(5
)
5,441
2,433
1,211
2,206
2,424
1,983
1,300
1,576
1,384
1,401
$
7,424
$
3,733
$
2,787
$
3,590
$
3,825
3.74
2.86
1.76
2.59
2.72
EXHIBIT 21
The Significant subsidiaries of Sears, Roebuck and Co., the names under which
such subsidiaries do business, and the states or countries in which each was
organized, were as follows as of January 3, 2004:
SUBSIDIARIES OF THE REGISTRANT
Place of Organization
Delaware
Delaware
Canada
Canada
Delaware
United States
Delaware
Delaware
Delaware
Delaware
Illinois
Pennsylvania
Various
The Company owns 20% to 50% of the outstanding voting securities of 37 companies, which are accounted for on the equity method.
The Company has investments in a number of other corporations representing substantial percentages (but not more than 20 percent) of their outstanding capital stock. The Company disclaims control of any such companies.
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Exhibit 23 |
INDEPENDENT AUDITORS CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
2-80037, 33-18081, 33-23793, 33-41485, 33-45479, 33-55825, 33-58851, 33-64345
and 333-08141 of Sears, Roebuck and Co.; Registration Statement No. 333-92082
of Sears, Roebuck and Co. and Sears Roebuck Acceptance Corp.; Registration
Statement Nos. 33-64775, 333-18591, and 333-43309 of Sears, Roebuck and Co. and
Sears, Roebuck and Co. Deferred Compensation Plan; Registration Statement No.
333-102114 of Sears, Roebuck and Co. and the Sears 401(K) Savings Plan
(formerly, The Savings and Profit Sharing Fund of Sears Employees and the Sears
401(K) Profit Sharing Plan) and Lands End, Inc. Retirement Plan; Registration
Statement No. 333-38131 of Sears, Roebuck and Co. and the Sears Associate Stock
Ownership Plan; Registration Statement No. 333-52056 of Sears, Roebuck and Co.
and the 2000 Employee Stock Plan; Registration Statement No. 333-72514 of
Sears, Roebuck and Co. and the 2001 Broad-Based Stock Option Plan; and
Registration Statement No. 333-87942 of Sears, Roebuck and Co. and the 2002
Non-Employee Director Stock Plan, of our report dated March 9, 2004 (which
report expresses an unqualified opinion and includes an explanatory paragraph
relating to changes in accounting principles for goodwill in 2002 and methods of accounting for credit card
securitizations, derivative instruments and hedging activities in 2001) appearing in the Annual Report on Form 10-K of Sears,
Roebuck and Co. for the year ended January 3, 2004.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Chicago, Illinois
March 9, 2004
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned being a
director or officer, or both, of SEARS, ROEBUCK AND CO., a New York corporation
(the Company), does hereby constitute and appoint ALAN J. LACY, GLENN R.
RICHTER, and MICHAEL J. GRAHAM with full power to each of them to act alone, as
the true and lawful attorneys and agents of the undersigned, with full power of
substitution and resubstitution to each of said attorneys, to execute, file and
deliver any and all instruments and to do any and all acts and things which
said attorneys and agents, or any of them, deem advisable to enable the Company
to comply with the Securities Exchange Act of 1934, as amended, and any
requirements of the Securities and Exchange Commission in respect thereto,
relating to the annual report on Form 10-K for the year ended January 3, 2004,
including specifically, but without limitation of the general authority hereby
granted, the power and authority to sign his or her name in the name and on
behalf of the Company or as a director or officer, or both, of the Company, as
indicated below opposite his or her signature, to the annual report on Form
10-K for the year ended January 3, 2004 or any amendment or papers supplemental
thereto; and each of the undersigned does hereby fully ratify and confirm all
that said attorneys and agents or any of them, or the substitute of any of
them, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has subscribed his or her
name, this 10th day of March, 2004.
TITLE
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
Senior Vice President and Chief
Financial Officer (Principal Financial
Officer)
Vice President and Controller
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Exhibit 31.1
CERTIFICATIONS
I, Alan J. Lacy, certify that:
Date: March 10, 2004
1.
I have reviewed this annual report on Form 10-K of Sears, Roebuck and Co.;
2.
Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4.
The registrants other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
(a)
Designed such disclosure
controls and procedures,
or caused such disclosure
controls and procedures
to be designed under our
supervision, to ensure
that material information
relating to the
registrant, including its
consolidated
subsidiaries, is made
known to us by others
within those entities,
particularly during the
period in which this
annual report is being
prepared;
(b)
Evaluated the
effectiveness of the
registrants disclosure
controls and procedures
and presented in this
annual report our
conclusions about the
effectiveness of the
disclosure controls and
procedures, as of the end
of the period covered by
this annual report based
on such evaluation; and
(c)
Disclosed in this annual
report any change in the
registrants internal
control over financial
reporting that occurred
during the registrants
most recent fiscal
quarter (the registrants
fourth fiscal quarter in
the case of an annual
report) that has
materially affected, or
is reasonably likely to
materially affect, the
registrants internal
control over financial
reporting; and
5.
The registrants other certifying officers and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions):
(a)
All significant
deficiencies and material
weaknesses in the design
or operation of internal
control over financial
reporting which are
reasonably likely to
adversely affect the
registrants ability to
record, process,
summarize and report
financial information;
and
(b)
Any fraud, whether or not
material, that involves
management or other
employees who have a
significant role in the
registrants internal
control over financial
reporting.
President and Chief Executive Officer
of Sears, Roebuck and Co.
Exhibit 31.2
CERTIFICATIONS
I, Glenn R. Richter, certify that:
Date: March 10, 2004
1.
I have reviewed this annual report on Form 10-K of Sears, Roebuck and Co.;
2.
Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4.
The registrants other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
(a)
Designed such disclosure
controls and procedures,
or caused such disclosure
controls and procedures
to be designed under our
supervision, to ensure
that material information
relating to the
registrant, including its
consolidated
subsidiaries, is made
known to us by others
within those entities,
particularly during the
period in which this
annual report is being
prepared;
(b)
Evaluated the
effectiveness of the
registrants disclosure
controls and procedures
and presented in this
annual report our
conclusions about the
effectiveness of the
disclosure controls and
procedures, as of the end
of the period covered by
this annual report based
on such evaluation; and
(c)
Disclosed in this annual
report any change in the
registrants internal
control over financial
reporting that occurred
during the registrants
most recent fiscal
quarter (the registrants
fourth fiscal quarter in
the case of an annual
report) that has
materially affected, or
is reasonably likely to
materially affect, the
registrants internal
control over financial
reporting; and
5.
The registrants other certifying officers and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions):
(a)
All significant
deficiencies and material
weaknesses in the design
or operation of internal
control over financial
reporting which are
reasonably likely to
adversely affect the
registrants ability to
record, process,
summarize and report
financial information;
and
(b)
Any fraud, whether or not
material, that involves
management or other
employees who have a
significant role in the
registrants internal
control over financial
reporting.
Chief Financial Officer of
Sears, Roebuck and Co.
Exhibit 32
CERTIFICATION
Each of the undersigned, Alan J. Lacy, Chairman of the Board of Directors,
President and Chief Executive Officer of Sears, Roebuck and Co. (the Company)
and Glenn R. Richter, Senior Vice President and Chief Financial Officer of the
Company, has executed this certification in connection with the filing with the
Securities and Exchange Commission of the Companys annual report on Form 10-K
for the fiscal year ended January 3, 2004 (the Report).
Each of the undersigned hereby certifies that:
March 10, 2004
Pursuant to 18 U.S.C. 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
1.
The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
President and Chief Executive Officer
and Chief Financial Officer