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 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 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 July 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 July 3, 1999.
SEARS DC CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 AND 26 WEEKS ENDED JULY 3, 1999
Page
Part I - Financial Information
Item 1. Financial Statements
Statements of Income (unaudited) -
13 and 26 Weeks Ended July 3, 1999 and July 4, 1998 1
Statements of Financial Position -
July 3, 1999 (unaudited), July 4, 1998 (unaudited),
and January 2, 1999 2
Statements of Cash Flows (unaudited) -
26 Weeks Ended July 3, 1999 and July 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)
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
July 3, July 4, July 3, July 4,
(thousands, except ratios) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues
Earnings on notes of Sears $ 5,359 $ 7,625 $12,465 $17,380
Expenses
Interest and related expenses 5,320 7,555 12,378 17,228
Operating expenses 13 33 25 66
Total expenses 5,333 7,588 12,403 17,294
Income before income taxes 26 37 62 86
Income taxes 9 14 22 31
Net income $ 17 $ 23 $ 40 $ 55
Ratio of earnings to fixed
charges 1.005 1.005 1.005 1.005
See notes to financial statements.
</TABLE>
-2-
SEARS DC CORP.
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(Unaudited)
July 3, July 4, January 2,
(thousands, except share data) 1999 1998 1999
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 57 $ 59 $ 58
Notes of Sears 223,921 357,313 345,958
Interest receivable and
other assets 485 707 586
Total assets $ 224,463 $ 358,079 $ 346,602
Liabilities
Medium-term notes $ 213,025 $ 343,780 $ 332,505
Interest payable and
other liabilities 6,143 9,093 8,842
Total liabilities 219,168 352,873 341,347
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 5,287 5,198 5,247
Total stockholder's equity 5,295 5,206 5,255
Total liabilities and
stockholder's equity $ 224,463 $ 358,079 $ 346,602
See notes to financial statements.
</TABLE>
-3-
SEARS DC CORP.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
26 Weeks Ended
July 3, July 4,
(thousands) 1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 40 $ 55
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 (2,598) (2,192)
Net cash used in operating activities (2,558) (2,137)
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in notes of Sears 122,037 102,142
Net cash provided by investing activities 122,037 102,142
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of medium-term notes (119,480) (100,000)
Net cash used in financing activities (119,480) (100,000)
Net increase (decrease) in cash and cash equivalent (1) 5
Cash and cash equivalents at beginning of period 58 54
Cash and cash equivalents at end of period $ 57 $ 59
See notes to financial statements.
</TABLE>
-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.
(millions) July 3, July 4,
1999 1998
8.52% to 9.26% medium-term notes due through 2012 $ 213.0 $ 343.8
At July 3, 1999, medium-term note maturities for remainder of 1999,
the next four years, and thereafter are as follows:
1999 $ -
2000 -
2001 135.5
2002 24.7
2003 9.0
Thereafter 43.8
$ 213.0
-5-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEARS DC CORP.
13 and 26 WEEKS ENDED JULY 3, 1999 AND JULY 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 $213.0 million in outstanding medium-term notes as of July 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 38.1% to $213.0 million as
of July 3, 1999 from $343.8 million as of July 4, 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 29.0% from $7.6 million to $5.4 million and
28.2% from $17.4 million to $12.5 million for the 13 and 26 weeks
ended July 3, 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 30.3%
from $7.6 million to $5.3 million and 27.9% from $17.2 million to
$12.4 million for the 13 and 26 weeks ended July 3, 1999, respectively,
from the comparable 1998 periods. Earnings covered fixed charges
1.005 times for the 13 and 26 weeks ended July 3, 1999 and July 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 o 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 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 July 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 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)
August 9, 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 26 WEEKS ENDED JULY 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 July 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>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> JUL-03-1999
<CASH> 57
<SECURITIES> 0<F1>
<RECEIVABLES> 223,921
<ALLOWANCES> 0<F1>
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 0<F1>
<PP&E> 0<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 224,463
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 213,025
0<F1>
0<F1>
<COMMON> 1
<OTHER-SE> 5,294
<TOTAL-LIABILITY-AND-EQUITY> 224,463
<SALES> 0<F1>
<TOTAL-REVENUES> 12,465
<CGS> 0<F1>
<TOTAL-COSTS> 0<F1>
<OTHER-EXPENSES> 25
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 12,378
<INCOME-PRETAX> 62
<INCOME-TAX> 22
<INCOME-CONTINUING> 0<F1>
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> 40
<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 JULY 3, 1999.
Year 2000
This description updates 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 previously reported, the Company has completed an inventory and
assessment of its mission critical (vital to business operations)
information systems. As of July 9, 1999, approximately 97% of
the Company's mission critical systems have either been remediated
or assessed as not containing a Year 2000 compliance issue.
The Company expects to complete remediation and testing of the
mission critical systems by September 1999. The Company has
modified its certification program (final testing and validation)
to require certification of mission critical and retired systems
only. This certification process has begun, and the Company expects
to complete it by 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 had rated 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). The Company has performed site visits of all
of its first tier vendors (50% of merchandise sales), and has
performed follow-up site visits on certain first tier vendors that
had been rated yellow or red. In addition, the Company has performed
site visits on 32 second tier vendors (approximately 6% of merchandise
sales), including all those that had been rated red or that were among
the higher volume second tier vendors with yellow or green ratings.
The Company has completed telephone conferences with all second tier
vendors.
The Company now rates its vendors as either green or red. The green
category consists of vendors that have represented to the Company
that they were compliant, including the development of contingency
plans, subject to the possible failure of the vendor's third party
providers. The green category also includes vendors in the third
tier that reported that they would be compliant by August 1, 1999.
The Company recently requested from all such third tier vendors
confirmation that they met their projected compliance dates.
All other vendors are rated in the red category. As of August 2,
1999, three first tier vendors (approximately 5% of merchandise
sales), five second tier vendors (approximately 1% of merchandise
sales) and 197 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, reviewing vendors' filings with the
Securities and Exchange Commission (first and second tier only)
and conducting electronic data interchange testing. The Company
also plans additional site visits to selected vendors rated in
the red category.
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. These plans will be based on existing emergency
response plans, business continuity plans and the results of the
Year 2000 compliance project. 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 finalize its contingency plans
by October 1999. In addition, the Company anticipates completing
in the fourth quarter of 1999 the development and rehearsing of
its century rollover event management procedures.
Risks
The Company previously identified as a risk the failure to timely
implement its new payroll processing system. The Company has now
completed implementation of that system and no longer regards that
system as a risk factor.
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; 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 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 $67 million, of which the Company (including
Sears Canada) has incurred approximately $47 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
$72 million. The Company funds Year 2000 costs with cash flows from
operations.
