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 April 3, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to
__________
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 (Zip Code)
Executive Offices)
Registrant's telephone number, including area code:
302/888-3100
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 April 30, 1999, 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.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of this Form 10-Q incorporates by reference
certain information from the Sears, Roebuck and Co.
Quarterly Report on Form 10-Q for the quarter ended
April 3, 1999.
SEARS DC CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 WEEKS ENDED APRIL 3, 1999
Page
Part I - Financial Information.
Item 1. Financial Statements
Statements of Income (unaudited) -
13 Weeks Ended April 3, 1999 and
April 4, 1998 1
Statements of Financial Position -
April 3, 1999 (unaudited), April 4,
1998 (unaudited), and January 2,1999 2
Statements of Cash Flows (unaudited) -
13 Weeks Ended April 3, 1999 and
April 4, 1998 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
-1-
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
SEARS DC CORP.
STATEMENTS OF INCOME
(Unaudited)
[S] 13 Weeks Ended
[C] [C]
April 3, April 4,
1999 1998
(thousands, except
ratios)
Revenues
Earnings on notes of
Sears $7,106 $9,755
Expenses
Interest and related
expenses 7,058 9,673
Operating expenses 13 33
Total expenses 7,071 9,706
Income before income
taxes 35 49
Income taxes 12 17
Net income $ 23 $ 32
Ratio of earnings to
fixed charges 1.005 1.005
See notes to financial statements.
-2-
SEARS DC CORP.
STATEMENTS OF FINANCIAL POSITION
<TABLE>
(Unaudited)
<S> <C> <C> <C>
April 3, April 4, January 2,
(thousands, 1999 1998 1999
except share
data)
Assets
Cash and cash
equivalents $ 58 $ 59 $ 58
Notes of Sears 304,290 349,688 345,958
Interest receiv-
able and other
assets 528 772 586
Total assets $304,876 $350,519 $346,602
Liabilities
Medium-term
notes $298,175 $343,780 $332,505
Interest payable
and other
liabilities 1,423 1,556 8,842
Total liabilities 299,598 345,336 341,347
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 value 7 7 7
Retained income 5,270 5,175 5,247
Total stockholder's
equity 5,278 5,183 5,255
Total liabilities
and stockholder's
equity $304,876 $350,519 $346,602
See notes to financial statements.
</TABLE>
-3-
SEARS DC CORP.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<S> <C> <C>
13 Weeks Ended
April 3, April 4,
(thousands) 1999 1998
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income
$ 23 $ 32
Adjustments to
reconcile net income
to net cash used in
operating activities:
Net change in interest
receivable and other
assets and interest
payable and other
liabilities (7,361) (9,794)
Net cash used in
operating activities (7,338) (9,762)
CASH FLOWS FROM
INVESTING ACTIVITIES:
Decrease in notes of
Sears 41,668 109,767
Net cash provided
by investing
activities 41,668 109,767
CASH FLOWS FROM
FINANCING ACTIVITIES:
Repayments of medium-
term notes (34,330) (100,000)
Net cash used in
financing activities (34,330) (100,000)
Net increase in cash
and cash equivalents - 5
Cash and cash equiva-
lents at beginning of
period 58 54
Cash and cash equiva-
lents at end of period $ 58 $ 59
See notes to financial
statements.
</TABLE>
-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 formed to borrow in domestic
and foreign debt markets and lend the proceeds of such borrowings to
Sears and certain direct and indirect subsidiaries of Sears in exchange
for their unsecured notes. SDC raised funds through the sale of its
medium-term notes and direct placement of commercial paper with corporate and
institutional investors. The only outstanding debt of SDC is two
series of medium-term notes. SDC does not plan to issue additional
debt.
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 2, 1999, 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.
(millions) April 3, April 4,
1999 1998
8.12% to 9.26% medium-
term notes due through
2012 $298.2 $343.8
At April 3, 1999, medium-term note maturities for the
next five years and thereafter are as follows:
1999 $ 85.2
2000 -
2001 135.5
2002 24.7
2003 9.0
Thereafter 43.8
$ 298.2
-5-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEARS DC CORP.
13 WEEKS ENDED APRIL 3, 1999 AND APRIL 4, 1998
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 $298.2 million in outstanding medium-term notes as of April 3, 1999
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.
Medium-term notes outstanding decreased 13.3% to $298.2 million as of
April 3, 1999 from $343.8 million as of April 4, 1998. The decrease in the
notes resulted from the payment on certain notes that reached their
maturity date. The decrease in notes of Sears is due to the need to fund
the payments on the medium-term notes outstanding.
Results of Operations:
Revenues decreased 27.2% to $7.1 million compared to $9.8 million for
the 13 weeks ended April 3, 1999 and April 4, 1998, respectively. The
decrease in revenues was primarily due to the decrease in the average
amount of notes of Sears held during 1999 compared to 1998. The
corresponding decrease in the average amount of medium-term notes
outstanding led to interest and related expenses decreasing 27.0% to
$7.1 million compared to $9.7 million from the comparable 1998 period.
Earnings covered fixed charges 1.005 times for the 13 weeks ended
April 3, 1999 and April 4, 1998 respectively.
Year 2000:
Year 2000 compliance is the ability of information systems to properly
recognize and process dates and date-sensitive information including the
year 2000 and beyond (commonly referred to as Year 2000 or Y2K). As
a wholly-owned subsidiary of Sears, SDC uses Sears and Sears subsidiaries'
information systems and service providers to support its operations.
Therefore, SDC does not have a Y2K compliance plan in place; it is relying on
the company-wide Year 2000 effort being coordinated by Sears. If Sears is
not successful in completing the implementation of its Year 2000 plan, SDC's
operations could be materially impacted. Furthermore, because SDC lends
the proceeds of its borrowings to Sears and certain subsidiaries of
Sears, any material adverse Year 2000 effect on Sears or its
subsidiaries' ability to make timely payments to SDC could materially impact
SDC's ability to make timely payments of principal and interest to the
holders of its securities.
SDC has not and will not bear any expenses in connection with the
Sears company-wide Year 2000 effort.
A complete description of the Sears Y2K initiative can be found on pages 29
and 31 of the Sears 1998 Annual Report under the heading "Year 2000," which
description was incorporated by reference into SDC's Annual Report on Form
10-K for the fiscal year ended January 2, 1999. An update to such
description can be found in the "Management's Discussion and Analysis of
Operations, Financial Condition and Liquidity" section of the Sears Quarterly
Report on Form 10-Q for the quarter ended April 3, 1999 under the heading
"Year 2000," which description is incorporated by reference herein and filed
as Exhibit 99 hereto.
Cautionary Statement Regarding Forward-Looking Information
Certain statements made in this report including the forgoing 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, the representations and preparedness of third
parties, vendors' delivery of merchandise and performance of services
required by Sears and the collateral effects of Year 2000 compliance issues
on Sears business partners and customers. 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.
-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
-7-
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)
May 11, 1999 By: ROBERT J.PHELAN
Robert J. Phelan
Vice President
and Controller
(Principal Accounting
Officer and Authorized
Officer of Registrant)
E-1
EXHIBIT INDEX
SEARS DC CORP.
13 WEEKS ENDED APRIL 3, 1999
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
Securities and Exchange 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**
99 Year 2000 disclosure contained in the
Sears, Roebuck and Co. Quarterly Report on
Form 10-Q for the quarter ended April 3,
1999.**
_____________________
*Sec File No. 0-17955
**Filed herewith
<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> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> APR-03-1999
<CASH> 58
<SECURITIES> 0<F1>
<RECEIVABLES> 304,290
<ALLOWANCES> 0<F1>
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 0<F1>
<PP&E> 0<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 304,876
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 298,175
0<F1>
0<F1>
<COMMON> 1<F1>
<OTHER-SE> 5,277
<TOTAL-LIABILITY-AND-EQUITY> 304,876
<SALES> 0<F1>
<TOTAL-REVENUES> 7,106
<CGS> 0<F1>
<TOTAL-COSTS> 0<F1>
<OTHER-EXPENSES> 13
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 7,058
<INCOME-PRETAX> 35
<INCOME-TAX> 12
<INCOME-CONTINUING> 0
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> 23
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Not applicable
</FN>
</TABLE>
Exhibit 99
Year 2000
Except for the risks below, this description
supplements the description of the Company's Year
2000 project on pages 29 and 31 of Sears 1998 Annual
Report to Shareholders.
State of Readiness
Information Systems. As of April 7, 1999, the
Company has completed an inventory and assessment of
its mission critical (vital to business operations)
information systems. The Company has remediated
approximately 90% of its mission critical systems and
has assessed or tested approximately 73% of them as
Year 2000 compliant, subject to certification (final
testing and validation). The Company expects to have
substantially completed remediation and testing by
July 1999. The Company has begun certification,
which it expects to complete by November 1999. The
Company has issued a moratorium on deploying any non-
Year 2000 changes into its systems production
environment from July 1, 1999 through April 1, 2000
(subject to business critical changes), which will
assist in completing certification.
Business Management. There have been no changes in
the Company's assessment of its equipment and systems
that contain embedded computer technology, its resale
merchandise, or its mission critical, non-information
systems service providers -- the Company believes
that these areas do not pose a substantial Year 2000
compliance risk to the Company.
Merchandise Vendors. The Company rates its vendors
on a scale of green (on target to be compliant by
July 1), yellow (on target to be compliant by July
1 but minor concerns about progress) and red (not on
target to be compliant by July 1). As of April 7,
1999, the Company has assigned a red rating to
one first tier vendor (less than 1% of merchandise
sales), 24 second tier vendors (approximately 3% of
merchandise sales) and 208 third tier vendors
(approximately 3% of merchandise sales). Vendor
ratings are subject to change based on the Company's
ongoing evaluation process.
The Company has performed site visits of all of its
first tier vendors (50% of merchandise sales), and is
performing follow-up site visits on certain first
tier vendors with a yellow or red rating. In
addition, the Company is performing site visits on
second tier vendors (29% of merchandise sales) with a
red rating and the nine largest second tier vendors
with a yellow or green rating. The Company
anticipates completing all site visits by June 30,
1999. The Company has completed telephone
conferences with second tier vendors with a red or
green rating and anticipates completing telephone
conferences with second tier vendors with a yellow
rating in May 1999. The Company continues to track
responses to its Year 2000 questionnaire distributed
to all mission critical vendors in January 1998,
review follow-up progress reports, review vendors'
filings with the Securities and Exchange Commission
(the "Commission") and conduct electronic data
interchange testing for all mission critical vendors.
Contingency Plans
Each of the Company's business units is developing
contingency plans that identify what actions need to
be taken if a critical system, merchandise vendor or
service provider is not Year 2000 compliant. The
business units are considering various contingencies,
such as alternative merchandise vendors and service
providers, operational alternatives due to a loss of
utilities or public services and manual transaction
process alternatives due to a loss of a mission
critical information system. The Company expects to
be ready to implement its contingency plans by
October 1999.
Risks
The Company believes that its most significant Year
2000 risk factors are:
Failure of either of its two mission critical
information systems service providers to make their
systems Year 2000 compliant;
Failure of the Company to timely complete
implementation of its new payroll processing system,
which it anticipates completing by July 1999; and,
Failure of a first tier mission critical
merchandise vendor, or multiple merchandise vendors
or service providers, to supply merchandise or
services for an extended period of time.
Although the occurrence of any one of these scenarios
could have a material adverse effect on the Company,
the Company does not believe that any of these
scenarios or any other Year 2000 compliance issues
that would materially effect the Company's operations
are reasonably likely to occur.
Costs
The Company estimates total costs (including external
costs and the costs of internal personnel) related to
its Year 2000 effort to be approximately $66 million,
of which the Company (including Sears Canada) has
incurred approximately $39 million. In addition, the
Company has accelerated the planned development of
new systems with improved business functionality to
replace systems that were not Year 2000 compliant,
including the Company's new payroll processing
system. The Company expects these systems will cost
approximately $81 million, of which the Company has
incurred approximately $63 million. The Company
funds Year 2000 costs with cash flows from
operations.
