Notes to Consolidated Financial Statements


On November 18, 1998, the Company entered into an agreement to exchange its interest in the HomeLife furniture business for $100 million in cash, a $10 million note receivable and a 19% equity ownership in the new HomeLife business. The Company recorded a pretax charge of $33 million ($21 million after-tax) in the fourth quarter of 1998 to adjust the carrying value of HomeLife's assets to their estimated fair market value, less cost to sell. The sale was completed on January 30, 1999.

On November 2, 1998, the Company completed an Agreement and Plan of Merger of Western Auto, a wholly-owned subsidiary, and Advance Auto Parts, whereby Sears exchanged its interest in Western Auto for $175 million in cash and approximately 40% equity ownership in the resulting combined company. Based on the terms of the sale, the Company recorded a pretax charge of $296 million ($225 million after-tax) in the third quarter of 1998 to adjust the carrying value of Western Auto's assets to their estimated fair market value, less cost to sell. In the fourth quarter of 1998, this loss was revised to reflect an additional after-tax charge of $18 million based on the final terms of the transaction.


During 1996, the Company acquired all the outstanding stock of Orchard Supply Hardware Stores Corporation ("Orchard") for $309 million. At the date of acquisition, Orchard was engaged in the operation of more than 60 hardware stores in California. The acquisition was recorded using the purchase method of accounting and resulted in goodwill of approximately $220 million, which is included in other assets. Orchard's results of operations are not material to the Company's consolidated results of operations.

Income before income taxes, minority interest and extraordinary loss is as follows:

A reconciliation of the statutory federal income tax rate to the effective rate is as follows:

Deferred taxes based upon differences between the financial statement and tax bases of assets and liabilities and available tax carryforwards consists of:

Management believes that the realization of the deferred tax assets is more likely than not, based on the expectation that the Company will generate the necessary taxable income in future periods.

U.S. income and foreign withholding taxes were not provided on certain unremitted earnings of international affiliates that the Company considers to be permanent investments. The cumulative amount of unremitted income for which income taxes have not been provided totaled $426 million at January 2, 1999. If these earnings were to be remitted, taxes of $104 million would be due.

Income taxes of $366, $886 and $386 million were paid in 1998, 1997 and 1996, respectively.


Expenses for retirement and savings-related benefit plans were as follows:

Sears 401(k) Profit Sharing Plan
Most domestic employees are eligible to become members of the Sears 401(k) Profit Sharing Plan ("the Plan"). Under the terms of the Plan, the Company matches a portion of the employee contributions. The Company matching contribution is based on 6% of consolidated income, as defined, for the participating companies and is limited to 70% of eligible employee contributions. The Company's matching contributions were $75, $71 and $64 million in 1998, 1997 and 1996, respectively.

The Plan includes an Employee Stock Ownership Plan ("the ESOP") to prefund a portion of the Company's anticipated contribution. The Company provided the ESOP with a loan that was used to purchase Sears common shares in 1989. In June 1998, the ESOP refinanced the loan and extended its maturity to 2024. The purchased shares represent deferred compensation expense, which is presented as a reduction of shareholders' equity and recognized as expense when the shares are allocated to employees to fund the Company contribution. The per share cost of Sears common shares purchased by the ESOP in 1989 was $15.27.

The Company uses the ESOP shares to fund the Company contribution, which thereby reduces expense. The ESOP loan bears interest at 6.1% (9.2% prior to refinancing) and is repaid from dividends on the ESOP shares and additional cash payments provided by the Company. The Company has contributed cash to the ESOP annually in the amount equal to the ESOP's required interest and principal payments on the loan, less dividends received on the ESOP shares. The cash payments amounted to $24, $23 and $29 million in 1998, 1997 and 1996, respectively. The balance of the ESOP loan was $267 and $290 million at January 2, 1999 and January 3, 1998, respectively.

The reported expense is determined as follows:

At December 31, 1998, total committed to be released, allocated and remaining unallocated ESOP shares were 1.9, 12.5 and 11.5 million, respectively. All ESOP shares are considered outstanding in the calculation of earnings per share.

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