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 2, 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 Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 302/434-3100
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 October 31, 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
October 2, 1999.
SEARS DC CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 AND 39 WEEKS ENDED OCTOBER 2, 1999
<TABLE>
<CAPTION>
Part I - Financial Information
<S> <C>
Page
Item 1.Financial Statements
Statements of Income (unaudited) -
13 and 39 Weeks Ended October 2, 1999 and October 3, 1998 1
Statements of Financial Position -
October 2, 1999 (unaudited), October 3, 1998 (unaudited),
and January 2, 1999 2
Statements of Cash Flows (unaudited) -
39 Weeks Ended October 2, 1999 and October 3, 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)
</TABLE>
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
October 2, October 3, October 2, October 3,
(thousands, except ratios) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues
Earnings on notes of
Sears $4,799 $7,551 $17,264 $24,931
Expenses
Interest and related
expenses 4,762 7,499 17,140 24,727
Operating expenses 13 15 38 81
Total expenses 4,775 7,514 17,178 24,808
Income before income taxes 24 37 86 123
Income taxes 8 12 30 43
Net income $ 16 $ 25 $ 56 $ 80
Ratio of earnings to fixed
charges 1.005 1.005 1.005 1.005
</TABLE>
See notes to financial statements.
-2-
SEARS DC CORP.
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(Unaudited)
October 2, October 3, January 2,
(thousands, except share data) 1999 1998 1999
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 56 $ 58 $ 58
Notes of Sears 219,181 340,884 345,958
Interest receivable and other assets 453 645 586
Total assets $219,690 $341,587 $346,602
Liabilities
Medium-term notes $213,025 $334,780 $332,505
Interest payable and other
liabilities 1,354 1,576 8,842
Total liabilities 214,379 336,356 341,347
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 5,303 5,223 5,247
Total stockholder's equity 5,311 5,231 5,255
Total liabilities and stockholder's
equity $219,690 $341,587 $346,602
</TABLE>
See notes to financial statements.
-3-
SEARS DC CORP.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
39 Weeks Ended
October 2, October 3,
(thousands) 1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 56 $ 80
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 (7,355) (9,647)
Net cash used in operating activities (7,299) (9,567)
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in notes of Sears 126,777 118,571
Net cash provided by investing activities 126,777 118,571
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of medium-term notes (119,480) (109,000)
Net cash used in financing activities (119,480) (109,000)
Net increase (decrease) in cash and cash
equivalents (2) 4
Cash and cash equivalents at beginning of period 58 54
Cash and cash equivalents at end of period $ 56 $ 58
</TABLE>
See notes to financial statements.
-4-
SEARS DC CORP.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Notes to 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 current
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 of Sears former subsidiary, Dean Witter, which is now a part of
Morgan Stanley Dean Witter & Co. Selected details of SDC's borrowings are
shown below.
<TABLE>
<CAPTION>
(millions) October 2, October 3,
1999 1998
<S> <C> <C>
8.52% to 9.26% medium-term notes due through 2012 $ 213.0 $ 334.8
At October 2, 1999, medium-term note maturities for the remainder of 1999, the
next four years, and thereafter are as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
1999 $ -
2000 -
2001 135.5
2002 24.7
2003 9.0
Thereafter 43.8
$213.0
</TABLE>
-5-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEARS DC CORP.
13 AND 39 WEEKS ENDED OCTOBER 2, 1999 AND OCTOBER 3, 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 $213.0 million in outstanding medium-term notes as of October 2, 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 36.4% to $213.0 million as of October
2, 1999 from $334.8 million as of October 3, 1998. The decrease in the notes
resulted from the payment on certain notes that reached their maturity date.
The corresponding decrease in the notes of Sears is due to the need to fund
the payments on the medium-term notes outstanding.
Results of Operations:
Revenues decreased 36.8% from $7.6 million to $4.8 million and 30.5% from
$24.9 million to $17.3 million for the 13 and 39 weeks ended October 2, 1999,
respectively, from the comparable 1998 periods. The decrease is a result of
the reduction in the average amount of notes of Sears outstanding during 1999
compared to 1998. The decrease in the average amount of medium-term notes
outstanding led to interest and related expenses decreasing 36.0% from $7.5
million to $4.8 million and 30.8% from $24.7 million to $17.1 million for the
13 and 39 weeks ended October 2, 1999, respectively, from the comparable 1998
periods. Earnings covered fixed charges 1.005 times for the 13 and 39 weeks
ended October 2, 1999 and October 3, 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 October 2, 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 but not limited to 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)
November 8, 1999 By: /s/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 AND 39 WEEKS ENDED OCTOBER 2, 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 October 2,
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> 9-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> OCT-02-1999
<CASH> 56
<SECURITIES> 0<F1>
<RECEIVABLES> 219,181
<ALLOWANCES> 0<F1>
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 0<F1>
<PP&E> 0<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 219,690
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 213,025
0<F1>
0<F1>
<COMMON> 1
<OTHER-SE> 5,310
<TOTAL-LIABILITY-AND-EQUITY> 219,690
<SALES> 0<F1>
<TOTAL-REVENUES> 17,264
<CGS> 0<F1>
<TOTAL-COSTS> 0<F1>
<OTHER-EXPENSES> 38
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 17,140
<INCOME-PRETAX> 86
<INCOME-TAX> 30
<INCOME-CONTINUING> 0<F1>
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> 56
<EPS-BASIC> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>NOT APPLICABLE
</FN>
</TABLE>
Exhibit 99
YEAR 2000 DISCLOSURE CONTAINED IN THE SEARS, ROEBUCK AND CO. QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED OCTOBER 2, 1999.
Year 2000
This description updates the description of the Company's Year 2000 project
contained in the Company's 1998 Annual Report to Shareholders and its Quarterly
Reports for the quarters ended April 3, 1999 and July 3, 1999 and should be
read in conjunction with such descriptions.
State of Readiness
Information Systems
The Company has completed the inventory and assessment of its mission
critical (vital to business operations) information systems. During the period
covered by this Report, the Company completed the remediation and testing of
those mission critical systems requiring remediation. As of October 20, 1999,
the Company has completed certification (final testing and validation) for
approximately 80% of its mission critical or retired mission critical systems,
and the Company expects to complete such certification by the end of November
1999. To assist in completing certification, the Company has issued a
moratorium on deploying any changes into its systems production environment
from July 1, 1999 through April 1, 2000 (subject to business critical
changes) that are not related to the Year 2000 compliance project. A formal
process has been developed for managing business critical changes
implemented during the moratorium, including a retesting and recertification
process where necessary.
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 currently rates its vendors as either green or red. The green
category consists of vendors that have represented to the Company that they are
compliant, including the development of contingency plans, subject to the
possible failure of the vendors' third party providers. The green category also
includes vendors in the third tier that previously reported that they would be
compliant by August 1, 1999. All other vendors are rated in the red category.
As of November 1, 1999, one first tier vendor (less than 1% of merchandise
sales), two second tier vendors (less than 1% of merchandise sales) and 162
third tier vendors (approximately 2% of merchandise sales) were rated in the
red category. The Company continues to monitor vendors rated in the red
category, including reviewing follow-up progress reports and conducting
electronic data interchange testing. For first and second tier vendors rated
in the red category, the Company also continues to engage in further
discussions with the vendors regarding their compliance and review available
information, such as the vendors' filings with the Securities and Exchange
Commission.
Contingency Plans
Each of the Company's business units has substantially completed the
development of contingency plans that identify what actions need to be taken if
a critical system, merchandise vendor or service is not available. These plans
are based on existing emergency response plans, business continuity plans and
the results of the Year 2000 compliance project. The business units have
considered various contingencies, such as alternative merchandise vendors and
service providers and operational alternatives (including manual processes) in
the event of a loss of utilities, public services or mission critical systems.
In addition, the Company is developing its century rollover event management
procedures. The procedures focus on assuring that key personnel - including
managerial, operational and technical support functions - will be available to
identify and seek to remedy as promptly as possible any disruption that may
occur during the century rollover. The Company expects to complete the
formulation of these century rollover event management plans in November 1999
and to test, rehearse and refine these plans throughout the remainder of 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, despite such providers'
own Year 2000 compliance efforts and their assurances to the Company that
their systems are Year 2000 compliant; 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 either 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 affect
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 $67
million, of which the Company (including Sears Canada) has incurred
approximately $55 million through September 30, 1999. 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 $82 million, of which the Company has incurred
approximately $78 million through September 30, 1999. The Company funds Year
2000 costs with cash flows from operations.
