|10. LEGAL PROCEEDINGS
The Company has been subject to a federal civil and criminal investigation in connection with activities relating to certain debt reaffirmation agreements with current and former credit card holders of the Company who had declared personal bankruptcy. Under the reaffirmation provisions of the United States Bankruptcy Code, a debtor seeking Chapter 7 protection may agree to repay his or her debts to creditors. This reaffirmation agreement must be filed with the bankruptcy court to be valid. On February 19, 1999, Sears Bankruptcy Recovery Management Services, Inc., a subsidiary of the Company, pleaded guilty in federal district court to one count of bankruptcy fraud and was fined $60 million. The fine will have no effect on the Company's earnings because the Company recorded a pretax charge of $475 million against earnings for the settlement of lawsuits, fines and related matters stemming from the improper handling of certain debt reaffirmation agreements and other related matters in the second quarter of 1997. The plea agreement does not require any change in the day-to-day operations of Sears or the subsidiary.
In a separate civil action related to the reaffirmation matter dating from April 17, 1997, Sears reached a settlement agreement with the U.S. Attorney for the District of Massachusetts, which was approved by the federal district court on February 23, 1999. Under the terms of that agreement, the Company will continue to file all reaffirmation agreements obtained in Chapter 7 bankruptcies as required by the United States Bankruptcy Code.
On March 9, 1999, the Company reached an agreement to settle a class action lawsuit stemming from an increase in the annual percentage rate assessed on certain balances of some Sears credit customers. This settlement, which is subject to final approval by the United States District Court, Northern District of Illinois, is also expected to resolve related lawsuits in Illinois and Washington. The lawsuit was brought on behalf of a nationwide class of Sears credit customers who had outstanding balances when their accounts were transferred to Sears National Bank, a wholly-owned subsidiary of Sears, during a period from 1994 through 1996, and who had not fully paid off those balances as of the effective dates of an April 1997 Notice of Change in Credit Terms. Under the terms of the settlement, the Company will provide to the class members cash and coupons with a face value totaling approximately $156 million. The Company previously reserved for the estimated cost of the settlement; therefore, the settlement will not have a material effect on the Company's annual results of operations, financial position, liquidity or capital resources. The settlement does not require any change in the Company's credit practices.
On January 13, 1999, ten "Doe" plaintiffs filed a putative class action in the United States District Court for the Central District of California against eighteen domestic clothing retailers, including the Company, and eleven foreign clothing suppliers (the "Federal Action"). The Doe plaintiffs allege that they have worked in garment factories on the island of Saipan in the Commonwealth of the Northern Mariana Islands, and they purport to represent a class of other current and former workers. The plaintiffs allege that class members were forced to work under illegal labor conditions in the Saipan factories used by suppliers, and they assert against the Company claimed violations of the Racketeering Influenced Corrupt Organizations Act, the Anti-Peonage Act, the Thirteenth Amendment to the U.S. Constitution, and the Law of Nations. The central allegation of the Federal Action is that the Company and the other retail defendants who purchased garments manufactured in the Saipan factories used by suppliers are liable to the plaintiff class for any alleged unlawful working conditions imposed upon them by their employers. The case seeks injunctive and declaratory relief, unspecified treble damages, interest and attorneys' fees and expenses. On January 13, 1999, a related case was also filed against seventeen named domestic clothing retailers, including the Company, and additional unnamed retailers, in San Francisco County Superior Court (the "State Action"), alleging violations of the California Business and Professional Code. The named plaintiffs in the State Action are the Union of Needletrades Industrial and Textile Employees, AFL-CIO, Global Exchange, Sweatshop Watch and the Asian Law Caucus, who purport to bring the action on behalf of the general public of the State of California. The central allegation in the State Action is that the Company and the other defendants engaged in unlawful and unfair business practices in the selling and advertising in California of garments that had been manufactured under allegedly illegal labor conditions on Saipan. The case seeks injunctive relief, restitution and disgorgement of profits, interest and attorney's fees and costs. The Company intends to vigorously defend these cases. The consequences of these actions are not presently determinable, but in the opinion of the management of the Company, the ultimate liability is not expected to have a material effect on the results of operations, financial position, liquidity or capital resources of the Company.
The Company is subject to various other legal and governmental proceedings pending against the Company, many involving routine litigation incidental to the businesses. Other matters contain allegations that are nonroutine and involve compensatory, punitive or antitrust treble damage claims in very large amounts, as well as other types of relief. The consequences of these matters are not presently determinable but, in the opinion of management of the Company after consulting with legal counsel, the ultimate liability in excess of reserves currently recorded is not expected to have a material effect on annual results of operations, financial position, liquidity or capital resources of the Company.
11. OTHER INCOME
In 1997, the Company sold its 30% equity interest in Advantis, a joint venture between IBM and the Company, to IBM. This transaction resulted in a pretax gain of $150 million and is recorded in other income.
Also in 1997, the Company completed the sale of 60% of the outstanding shares of Sears, Roebuck de Mexico, S.A. de C.V. to Grupo Carso S.A. de C.V. The sale resulted in a pretax loss of $21 million and is reflected in other income.
12. EARNINGS PER SHARE
In each period, certain options were excluded from the computation of diluted earnings per share because they would have been antidilutive. At January 2, 1999, January 3, 1998 and December 28, 1996, options to purchase 5.2, 4.7 and 0.7 million shares of stock at prices ranging from $52 to $64, $47 to $64 and $48 to $52 per share were excluded from the 1998, 1997 and 1996 calculations, respectively.
13. SHAREHOLDERS' EQUITY
Share Repurchase Program
Annual Report Contents | Previous | Next