UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 3, 1998
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-17955
SEARS DC CORP.
(Exact name of registrant as specified in its charter)
Delaware 36-3533346
(State of Incorporation) (I.R.S. Employer Identification No.)
3711 Kennett Pike
Greenville, Delaware 19807
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 302/888-3114
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___
As of October 31, 1998, the Registrant had 1,000 shares of common stock
outstanding, all of which were held by Sears, Roebuck and Co.
Registrant meets the conditions set forth in General Instruction H(1) (a)
and (b) of Form 10-Q and is therefore filing this Form with a reduced
disclosure format.
<PAGE>
SEARS DC CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 AND 39 WEEKS ENDED OCTOBER 3, 1998
Page
Part I - Financial Information.
Item 1. Financial Statements
Statements of Income (unaudited) -
13 and 39 Weeks Ended October 3, 1998
and September 27, 1997 1
Statements of Financial Position -
October 3, 1998 (unaudited),
September 27, 1997 (unaudited),
and January 3, 1998 2
Statements of Cash Flows (unaudited) -
39 Weeks Ended October 3, 1998 and
September 27, 1997 3
Notes to Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 5
Part II - Other Information.
Item 6. Exhibits and Reports on Form 8-K 7
<PAGE>
- -1-
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
SEARS DC CORP.
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
3 Weeks Ended 39 Weeks Ended
Oct. 3, Sept. 27, Oct. 3, Sept.27,
(thousands, except ratios) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues
Earnings on notes of Sears $7,551 $9,937 $24,931 $37,379
Expenses
Interest and related expenses 7,499 9,866 24,727 37,130
Operating expenses 15 21 81 63
Total expenses 7,514 9,887 24,808 37,193
Income before income taxes 37 50 123 186
Income taxes 12 17 43 64
Net income $ 25 $ 33 $ 80 $ 122
Ratio of earnings to fixed charges 1.005 1.005 1.005 1.005
2
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE>
- -2-
<TABLE>
SEARS DC CORP.
STATEMENTS OF FINANCIAL POSITION
<CAPTION>
(Unaudited)
Oct. 3, Sept. 27, Jan. 3,
(thousands, except share data) 1998 1997 1998
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 58 $ 55 $ 54
Notes of Sears 340,884 469,371 459,455
Interest receivable and
other assets 645 942 853
Total assets $341,587 $470,368 $460,362
Liabilities
Medium-term notes $334,780 $444,780 $443,780
Interest payable and
other liabilities 1,576 20,470 11,431
Total liabilities 336,356 465,250 455,211
Stockholder's Equity
Common stock, par value
$1.00 per share,1,000 shares
authorized and outstanding 1 1 1
Capital in excess of par 7 7 7
Retained income 5,223 5,110 5,143
Total stockholder's equity 5,231 5,118 5,151
Total liabilities and
stockholder's equity $341,587 $470,368 $460,362
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE>
-3-
<TABLE>
SEARS DC CORP.
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
39 Weeks Ended
Oct. 3, Sept. 27,
(thousands) 1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 80 $ 122
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Net change in interest receivable
and other assets and interest
payable and other liabilities (9,647) 4,129
Net cash provided by (used in) 8
operating activities (9,567) 4,251
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in notes of Sears 118,571 329,849
Net cash provided by investing
activities 118,571 329,849
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of medium-term notes (109,000) (334,100)
Net cash used in financing
activities (109,000) (334,100)
Net increase in cash and cash equivalents 4 -
Cash and cash equivalents at beginning
of period 54 55
Cash and cash equivalents at end
of period $ 58 $ 55
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE>
-4-
SEARS DC CORP.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Financial Statements
Sears DC Corp. ("SDC"), a wholly-owned subsidiary of Sears, Roebuck and Co.
("Sears"), is principally engaged in borrowing in domestic and foreign debt
markets and lending the proceeds of such borrowings to Sears and certain
direct and indirect subsidiaries of Sears in exchange for their unsecured
notes.
Under an agreement between SDC and Sears, the interest rate paid by Sears
on its unsecured notes is designed to produce earnings sufficient to cover
SDC's fixed charges at least 1.005 times. Required payments of principal
and interest to SDC under the Sears borrowing agreement are intended to be
sufficient to allow SDC to make timely payments of principal and interest
to the holders of its securities.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The significant accounting
policies used in the presentation of these financial statements are
consistent with the summary of significant accounting policies set forth
in SDC's Annual Report on Form 10-K for the fiscal year ended January 3,
1998, and these financial statements should be read in conjunction with the
financial statements and notes found therein. The interim financial
statements reflect all adjustments (consisting only of normal recurring
accruals) which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. The results of
operations for the interim periods should not be considered indicative of
the results to be expected for the full year.
The medium-term notes are not redeemable except for notes having a stated
maturity at the time of issue of more than seven years which may be redeemed
under certain circumstances in the event of declining Discover Card
receivables. Selected details of SDC's borrowings are shown below.
<TABLE>
<CAPTION>
(millions)
Oct. 3, Sept. 27,
1998 1997
<S> <C> <C>
7.81% to 9.26% medium-term notes due through 2012 $334.8 $444.8
At October 3, 1998, medium-term note maturities for the next five years and
thereafter are as follows:
Remaining 1998 $ 2.3
1999 119.5
2000 0.0
2001 135.5
2002 24.7
Thereafter 52.8
Total 334.8
</TABLE>
<PAGE>
-5-
ITEM 2. SEARS DC CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
13 AND 39 WEEKS ENDED OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
Financial Condition:
SDC has invested funds in the promissory notes of Sears, which pay interest
sufficient to cover SDC's fixed charges at least 1.005 times, and in highly
liquid short-term investments.
The $335 million in outstanding medium-term notes as of October 3, 1998 are
not redeemable prior to their stated maturity except for notes having a
stated maturity at the time of issue of more than seven years which may be
redeemed under certain circumstances in the event of declining Discover Card
receivables of Sears' former subsidiary, Dean Witter, which is now a part of
Morgan Stanley Dean Witter & Co.
Results of Operations:
Revenues decreased 24.0% to $7.6 million and 33.3% to $24.9 million for the
13 and 39 weeks ended October 3, 1998, respectively, from the comparable 1997
periods, primarily as a result of the decrease in the average amount of
medium term notes outstanding during 1998 compared to 1997. The decrease in
the average amount of medium term notes outstanding led to interest and
related expenses decreasing 24.0% to $7.5 million and 33.4% to $24.7 million
for the 13 and 39 weeks ended October 3, 1998, respectively, from the
comparable 1997 periods. Earnings covered fixed charges 1.005 times for the
13 weeks and 39 Weeks ended October 3, 1998 and September 27, 1997,
respectively.
<PAGE>
- -6-
Year 2000:
As a wholly-owned subsidiary of Sears, SDC uses Sears information systems
and equipment to support its operations. Sears has implemented a
comprehensive risk-based plan designed to make its corporate-wide operations
Year 2000 compliant. Sears has established a corporate project office, which
reports to an executive management team, to oversee, monitor and coordinate
the corporate-wide 2000 effort. The Sears plan focuses on three areas: (i)
information systems, (ii) business management and (iii) vendor relations. Of
these three areas, only information systems and business management are
applicable to SDC. The Sears plan generally covers four stages: (i)
inventory,(ii) assessment, (iii) remediation and (iv) testing and
certification. Sears is utilizing both internal and external resources to
complete its Year 2000 initiatives.
The information systems area includes Sears proprietary and third party
computer systems and related hardware, software and data and telephone
networks. Approximately 50% of Sears information systems are presently
Year 2000 compliant. Remediation of the majority of Sears remaining systems
is in process, with substantial completion anticipated by mid-1999. The
testing and certification stage for these areas is targeted to be largely
completed by mid-1999.
The business management area includes equipment and systems that contain
embedded computer technology such as elevators and security systems. Sears
assessment of these systems is nearing completion. Based on assurances from
third parties, these systems present little Year 2000 exposure or risk.
Sears is developing contingency plans, such as alternative sourcing and
identifying what actions would need to be taken if a critical system or
service provider were not Year 2000 compliant. Sears expects these plans
to be finalized by July 1999.
Despite Sears significant effort to make its systems and facilities
Year 2000 compliant, the ability of third party service providers, and
certain other third parties, including governmental entities and utility
companies, to be Year 2000 compliant is beyond the control of Sears.
Accordingly, neither Sears nor SDC can give any assurances that the systems
of other companies on which Sears systems rely will be timely converted
or compatible with Sears systems. The failure of these entities to comply
on a timely basis could have a material adverse effect on Sears and SDC.
At the present time, SDC does not expect Year 2000 issues to have a material
adverse effect on its financial performance. SDC has not and will not bear
any expenses in connection with the Year 2000 effort.
The foregoing statements relating to Sears and SDC's expectations as to their
Year 2000 efforts are forward looking and are made in reliance on the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
They are based on Sears and SDC's best estimates and may be updated as
additional information becomes available. These statements are also based on
assumptions about many important factors, including the technical skills of
employees and independent contractors and the representations and
preparedness of third parties. While SDC believes that these assumptions are
reasonable,SDC cautions that it is impossible to predict the impact of
certain facts that could cause actual results to differ from expected
results.
<PAGE>
-7-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
An Exhibit Index has been filed as part of this Report on
Page E-1.
(b) Reports on Form 8-K.
None
<PAGE>
- -8-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Sears DC Corp.
(Registrant)
November 9, 1998
/s/ William K. Phelan
William K. Phelan
Vice President and Controller
(Principal Accounting Officer
and Authorized Officer of Registrant)
<PAGE>
E-1
EXHIBIT INDEX
SEARS DC CORP.
13 AND 39 WEEKS ENDED OCTOBER 3, 1998
Exhibit No.
3.1 Certificate of Incorporation of Discover Credit Corp. dated January 9,
1987 [Incorporated by reference to Exhibit 3(a) to Form 10 of the
Registrant ("Form 10")*]
3.2 Amendment to Certificate of Incorporation of Discover Credit Corp.
dated April 9, 1987 [Incorporated by reference to Exhibit 3(b) to
Form 10*]
3.3 Certificate of Amendment of Certificate of Incorporation dated
May 21, 1993 to change the name of Discover Credit Corp. to Sears
DC Corp. [Incorporated by reference to exhibit 3 (c) to Form 10-K
of the Registrant for the fiscal year ended December 28, 1996*]
3.4 By-laws of Sears DC Corp., as amended to February 6, 1996
[Incorporated by reference to exhibit 3 (c) to Form 10-K of the
Registrant for the fiscal year ended December 30, 1995*]
4 Registrant hereby agrees to furnish the Commission, upon request,
with the instruments defining the rights of holders of long-term debt
of the Registrant with respect to which the total amount of securities
authorized does not exceed 10% of the total assets of the Registrant
27 Financial Data Schedule
[FN]
_____________________
*Sec File No. 0-17955
</FN>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAIN S SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF FINANCIAL POSITION, INCOME AND CASH FLOWS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-2-1999
<PERIOD-END> OCT-3-1998
<CASH> 58
<SECURITIES> 0<F1>
<RECEIVABLES> 340,884
<ALLOWANCES> 0<F1>
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 0<F1>
<PP&E> 0<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 341,587
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 334,780
0<F1>
0<F1>
<COMMON> 1
<OTHER-SE> 5,231
<TOTAL-LIABILITY-AND-EQUITY> 341,587
<SALES> 0<F1>
<TOTAL-REVENUES> 24,931
<CGS> 0<F1>
<TOTAL-COSTS> 0<F1>
<OTHER-EXPENSES> 81
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 24,727
<INCOME-PRETAX> 123
<INCOME-TAX> 43
<INCOME-CONTINUING> 80
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> 80
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Not Applicable
</FN>
</TABLE>
