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 JULY 4, 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 July 31, 1998, the Registrant had 1,000 shares of capital 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 26 Weeks Ended July 4, 1998
Page
Part I - Financial Information.
Item 1. Financial Statements.
Statements of Income (unaudited) -
13 and 26 Weeks Ended July 4, 1998 and June 28, 1997. 1
Statements of Financial Position -
July 4, 1998 (unaudited), June 28, 1997 (unaudited),
and January 3, 1998. 2
Statements of Cash Flows (unaudited) -
26 Weeks Ended July 4, 1998 and June 28, 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. 6
<PAGE>
-1-
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
SEARS DC CORP.
STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
13 Weeks Ended 26 Weeks Ended
<S> July 4, June 28, July 4, June 28,
(thousands, except ratios) 1998 1997 1998 1997
<C> <C> <C> <C>
Revenues
Earnings on notes of Sears $ 7,625 $11,406 $17,380 $27,442
Expenses
Interest and related expenses 7,555 11,329 17,228 27,264
Operating expenses 33 20 66 42
Total expenses 7,588 11,349 17,294 27,306
Income before income taxes 37 57 86 136
Income taxes 14 20 31 47
Net income $ 23 $ 37 $ 55 $ 89
Ratio of earnings to fixed charges 1.005 1.005 1.005 1.005
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
-2-
SEARS DC CORP.
STATEMENTS OF FINANCIAL POSITION
<CAPTION>
(Unaudited)
July 4, June 28, Jan. 3,
(thousands, except share data) 1998 1997 1998
<S> <C> <C> <C>
Assets
Cash and invested cash $ 59 $ 55 $ 54
Notes of Sears 357,313 462,520 459,455
Accrued interest and other assets 707 1,027 853
Total assets $ 358,079 $ 463,602 $ 460,362
Liabilities
Medium-term notes $ 343,780 $ 447,780 $ 443,780
Accrued interest and
other liabilities 9,093 10,737 11,431
Total liabilities 352,873 458,517 455,211
Stockholder's Equity
Capital 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 5,198 5,077 5,143
Total stockholder's equity 5,206 5,085 5,151
Total liabilities and
stockholder's equity $ 358,079 $ 463,602 $ 460,362
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE>
-3-
<TABLE>
SEARS DC CORP.
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
26 Weeks Ended
July 4, June 28,
(thousands) 1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 55 $ 89
Adjustments to reconcile net income to net cash
used in operating activities:
Net change in accrued interest
income and other assets
and accrued interest expense
and other liabilities (2,192) ( 5,689)
Net cash used in operating activities (2,137) ( 5,600)
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in notes of Sears 102,142 336,700
Net cash provided by investing activities 102,142 336,700
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of medium-term notes (100,000) (331,100)
Net cash used in financing activities (100,000) (331,100)
Net increase in cash and cash equivalents 5 -
Cash and cash equivalents at beginning of period 54 55
Cash and cash equivalents at end of period $59 $ 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"), was 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) July 4, June 28,
<S> 1998 1997
<C> <C>
7.67% to 9.26% medium-term notes due through 2012 $ 343.8 $ 447.8
At July 4, 1998, medium-term note maturities for the next five
years were as follows:
<C> <C>
Remaining 1998 $ 11.3
1999 119.5
2000 0.0
2001 135.5
2002 24.7
</TABLE>
<PAGE>
-5-
ITEM 2. SEARS DC CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
13 and 26 WEEKS ENDED JULY 4, 1998 AND JUNE 28, 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 $344 million in outstanding medium-term notes as of July 4,
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, Morgan Stanley Dean
Witter Company.
Results of Operations:
Interest and related expenses decreased 33.3% to $7.6 million
and 36.8% to 17.3 million for the 13 and 26 weeks ended July 4,
1998, respectively, from the comparable 1997 periods, primarily
as a result of the decrease in medium term notes outstanding
since the prior year. Earnings covered fixed charges 1.005
times for the 13 weeks and 26 weeks ended July 4, 1998 and June
28, 1997, respectively.
<PAGE>
-6-
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>
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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)
August 17, 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 26 WEEKS ENDED JULY 4, 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) on 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) on 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.
_____________________
* Sec File No. 0-17955
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS 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> 6-MOS
<FISCAL-YEAR-END> JAN-2-1999
<PERIOD-END> JUL-04-1998
<CASH> 59
<SECURITIES> 0<F1>
<RECEIVABLES> 357,313
<ALLOWANCES> 0<F1>
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 0<F1>
<PP&E> 0<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 358,079
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 343,780
0<F1>
0<F1>
<COMMON> 1<F1>
<OTHER-SE> 5,205
<TOTAL-LIABILITY-AND-EQUITY> 358,079
<SALES> 0<F1>
<TOTAL-REVENUES> 17,380
<CGS> 0<F1>
<TOTAL-COSTS> 0<F1>
<OTHER-EXPENSES> 66
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 17,228
<INCOME-PRETAX> 86
<INCOME-TAX> 31
<INCOME-CONTINUING> 55
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> 55
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
(1) Not applicable
</FN>
