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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 1-4040
SEARS ROEBUCK ACCEPTANCE CORP.
(Exact name of registrant as specified in its charter)
Delaware 51-0080535
(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: 302/888-3100
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, 1998, the Registrant had 350,000 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.
SEARS ROEBUCK ACCEPTANCE CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 WEEKS AND 39 WEEKS ENDED OCTOBER 3, 1998
Page No.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statements of Financial Position
October 3, 1998 and September 27, 1997 (unaudited)
and January 3, 1998 (audited) 1
Statements of Income (unaudited)
13 Weeks and 39 Weeks Ended October 3, 1998
and September 27, 1997 2
Statements of Cash Flows (unaudited)
39 Weeks Ended October 3, 1998
and September 27, 1997 3
Notes to Financial Statements (unaudited) 4,5
Independent Accountants' Report 6
Item 2. Analysis of Results of Operations 7-9
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 10
SEARS ROEBUCK ACCEPTANCE CORP.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENTS OF FINANCIAL POSITION
(unaudited)
(millions, except share data) Oct. 3, Sept. 27, Jan. 3,
1998 1997 1998
Assets
Cash and cash equivalents $ 3 $ 15 $ 5
Notes of Sears 18,592 14,162 16,561
Receivable balances
purchased from Sears 94 85 89
Other assets 67 122 61
Total assets $ 18,756 $ 14,384 $ 16,716
Liabilities
Commercial paper (net of
unamortized discount of
$20, $22 and $25) $ 5,129 $ 4,031 $ 5,249
Intermediate-term loans - 300 50
Medium-term notes 6,385 5,358 6,033
Discrete underwritten debt(net
of unamortized discount
of $8,$- and $1) 4,542 2,550 3,099
Accrued interest and
other liabilities 217 171 123
Total liabilities 16,273 12,410 14,554
Stockholder's Equity
Capital stock, par value $100 per share:
500,000 shares authorized
350,000 shares issued and
outstanding 35 35 35
Capital in excess of par value 900 550 700
Retained income 1,548 1,389 1,427
Total stockholder's equity 2,483 1,974 2,162
Total liabilities and
stockholder's equity $ 18,756 $ 14,384 $ 16,716
See notes to financial statements.
1
SEARS ROEBUCK ACCEPTANCE CORP.
STATEMENTS OF INCOME
(unaudited)
(millions) 13 Weeks Ended 39 Weeks Ended
Oct. 3, Sept. 27, Oct. 3, Sept. 27,
1998 1997 1998 1997
Revenues
Earnings on notes of Sears $ 302 $ 232 $ 905 $ 659
Earnings on receivable
balances purchased
from Sears 1 1 5 5
Earnings on cash equivalents 1 1 4 3
Total revenues 304 234 914 667
Expenses
Interest expense and
amortization of debt
discount/premium 241 187 725 532
Operating expenses 1 - 3 1
Total expenses 242 187 728 533
Income before income taxes 62 47 186 134
Income taxes 22 16 65 47
Net Income $ 40 $ 31 $ 121 $ 87
Ratio of earnings
to fixed charges 1.26 1.25 1.26 1.25
See notes to financial statements.
2
SEARS ROEBUCK ACCEPTANCE CORP.
STATEMENTS OF CASH FLOWS
(unaudited)
(millions) 39 Weeks Ended
Oct. 3, Sept. 27,
1998 1997
Cash flows from operating activities:
Net income $ 121 $ 87
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, amortization and other
noncash items 8 5
Decrease(increase) in other assets 2 (19)
Increase in other liabilities 94 107
Net cash provided by operating activities 225 180
Cash flows from investing activities:
Increase in notes of Sears (2,031) (2,553)
Increase in receivable balances
purchased from Sears (5) (9)
Net cash used in
investing activities (2,036) (2,562)
Cash flows from financing activities:
(Decrease)increase in commercial paper,
primarily 90 days or less (120) 707
Decrease in agreements with
bank trust departments - (82)
Proceeds from issuance of long-term debt 1,924 2,111
Payments for redemption of long-term debt (195) (767)
Proceeds from capital infusion 200 200
Net cash provided by financing activities 1,809 2,169
Decrease in cash and
cash equivalents (2) (213)
Cash and cash equivalents at beginning
of period 5 228
Cash and cash equivalents at end of period $ 3 $ 15
See notes to financial statements.
3
SEARS ROEBUCK ACCEPTANCE CORP.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. Significant Accounting Policies
The unaudited interim financial statements of Sears Roebuck
Acceptance Corp. ("SRAC"), a wholly-owned subsidiary of Sears,
Roebuck and Co. ("Sears"), 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.
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 SRAC's Annual Report
on Form 10-K for the 53 weeks ended January 3, 1998, and these
financial statements should be read in conjunction with the
financial statements and notes found therein. The results of
operations for the interim periods should not be considered
indicative of the results to be expected for the full year.
2. Back-up Liquidity
SRAC continued to provide support for 100% of its commercial
paper outstanding through its investment portfolio and credit
facilities. SRAC's investment portfolio fluctuated from a low of
$1 million to a high of $282 million in the third quarter of
1998. Credit facilities as of October 3, 1998 were as follows:
Expiration Date millions
April 2003 $4,125
April 2002 875
November 1998 250
$5,250
4
3. Medium-term notes
Medium-term notes are issued with either a floating rate
indexed to LIBOR or a fixed rate.
(dollars in millions; term in years)
Avg. Avg.
1998 Avg. Orig. 1997 Avg. Orig.
Notes Issued Volume Coupon Term Volume Coupon Term
Third Quarter $ 45 6.27% 11.9 $213 6.66% 5.6
Year to Date $498 6.00% 5.1 $872 6.79% 5.7
Avg Avg.
10/03/98 Avg. Remain. 09/27/97 Avg. Remain.
Balance Coupon Term Balance Coupon Term
Notes Outstanding $6,385 6.47% 3.9 $5,358 6.53% 3.6
As of October 3, 1998, medium-term notes were scheduled to mature
as follows:
1998 $ 439
1999 610
2000 1,231
2001 2,018
2002 813
Thereafter 1,274
Total $6,385
4. Discrete underwritten debt
(dollars in millions; term in years)
Avg. Avg.
1998 Avg. Orig. 1997 Avg. Orig.
Notes Issued Volume Coupon Term Volume Coupon Term
Third Quarter $ - -% - $650 6.93% 10.0
Year to Date $1,450 6.40% 14.5 $1,250 6.86% 7.6
Avg Avg.
10/03/98 Avg. Remain. 09/27/97 Avg. Remain.
Balance Coupon Term Balance Coupon Term
Notes Outstanding $4,550 6.69% 10.7 $2,550 6.73% 7.1
As of October 3, 1998, discrete underwritten debt was scheduled
to mature as follows:
2000 $ 250
2002 600
Thereafter 3,700
Total $4,550
5
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholder of
Sears Roebuck Acceptance Corp.:
We have reviewed the accompanying statements of financial
position of Sears Roebuck Acceptance Corp. (a wholly-owned
subsidiary of Sears, Roebuck and Co.) as of October 3, 1998 and
September 27, 1997, and the related statements of income for the
13 week and 39 week periods then ended and cash flows for the
39 week periods then ended. These financial statements are the
responsibility of Sears Roebuck Acceptance Corp.'s management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and of making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to such financial statements
for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the statement of financial position of Sears
Roebuck Acceptance Corp. as of January 3, 1998 and the related
statements of income, stockholder's equity and cash flows for the
year then ended (not presented herein); and in our report dated
January 23, 1998, we expressed an unqualified opinion on those
financial statements. In our opinion, the information set forth
in the accompanying statement of financial position as of
January 3, 1998 is fairly stated, in all material respects, in
relation to the statement of financial position from which it has
been derived.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Philadelphia, Pennsylvania
October 14, 1998
6
SEARS ROEBUCK ACCEPTANCE CORP.
ITEM 2. ANALYSIS OF RESULTS OF OPERATIONS
During the third quarter of 1998, Sears Roebuck Acceptance
Corp.'s ("SRAC") revenues increased 30% to $304 million from
$234 million in the comparable 1997 period. For the 39 weeks
ended October 3, 1998, revenues were up 37% to $914 million from
$667 million for the comparable 1997 period. SRAC's income is
derived primarily from the earnings on its investment in the
notes of Sears, Roebuck and Co. ("Sears")and to a lessor extent,
receivable balances purchased from Sears and invested cash. The
increase in revenue is attributable to a $4.1 billion increase in
SRAC's average earning assets in the third quarter of 1998
compared to the third quarter of 1997 and a $4.5 billion increase
in the 39 weeks ended October 3, 1998 as compared to the
comparable 1997 period. Increases in average earning assets were
in response to Sears funding requirements.
SRAC's interest and related expenses increased 29% to
$241 million from $187 million and 36% to $725 million from
$532 million for the third quarter of 1998 and 39 weeks ended
October 3, 1998, respectively, as compared to the comparable 1997
periods. Interest and related expenses increased due to increases
in average outstanding long-term debt. SRAC's cost of short-term
funds averaged 5.59% in the third quarter of 1998 and 5.61% in
the 39 weeks ended October 3, 1998 compared to 5.65% and 5.53%
for the same periods in 1997. SRAC's short-term borrowings
averaged $4.0 billion and $4.3 billion for the third quarter and
39 weeks ended October 3, 1998, compared to the respective 1997
levels of $3.4 billion and $3.7 billion. SRAC's average
long-term debt of $11.0 billion in the third quarter of 1998 and
$10.5 billion in the 39 weeks ended October 3, 1998 reflect
increases of 33% and 38%, respectively, compared with
$8.3 billion and $7.6 billion for the same periods in 1997.
In the third quarter of 1998, SRAC entered into a
$250 million credit facility expiring in November 1998. In
October 1998, SRAC elected to increase the aggregate amount of
the commitments under the Amended and Restated Credit Agreement
dated as of April 28, 1997 by $60 million. Also in October
1998, SRAC issued a $250 million 40 year, discrete underwritten
debt offering with a 6.95% coupon, callable after five years.
SRAC's net income of $40 million and $121 million for the
third quarter and 39 weeks ended October 3, 1998, respectively,
reflects increases of 29% and 39% from the comparable 1997 period
amounts of $31 million and $87 million. SRAC's ratio of earnings
to fixed charges for both the third quarter and first nine months
of 1998 was 1.26 compared to 1.25 for the comparable 1997
periods.
7
On November 2, 1998, in anticipation of future borrowings,
SRAC received a capital infusion of $250 million from Sears. The
capital infusion provides additional strength to SRAC's balance
sheet.
YEAR 2000
SRAC, with the assistance of Sears, has implemented a
comprehensive risk-based plan designed to make its operations
Year 2000 compliant. The implementation of the SRAC plan, which
is modeled after a plan designed and being implemented by Sears
to make its operations Year 2000 compliant, is being coordinated
with the Sears corporate-wide effort. Sears has established a
corporate project office, which reports to an executive
management team, to oversee, monitor and coordinate the
corporate-wide Year 2000 effort. Both the Sears plan and the
SRAC plan focus on three areas: (i)informations systems,
(ii)business management and (iii)vendor relations and generally
cover four stages:(i)inventory, (ii)assessment, (iii)remediation
and (iv)testing and certification. The remediation and testing
and certification stages do not apply to the vendor relations
area.
The SRAC plan is composed primarily of two components. For
information systems, equipment and vendor relations that SRAC
shares with Sears, SRAC is relying on the implementation by Sears
of its Year 2000 effort. For information systems, equipment and
vendor relations that are specific to SRAC and not otherwise used
corporate-wide at Sears, SRAC is implementing its plan in
coordination with Sears.
As of the date hereof, SRAC has only utilized internal
resources in connection with its Year 2000 plan relating to the
information systems, equipment and vendor relations areas that
are specific to SRAC. The costs relating to such effort have not
been, and are not anticipated to be, material. SRAC has not
incurred, and does not anticipate incurring, expenses in
connection with the Sears corporate-wide effort to make Sears
Year 2000 compliant.
The information systems area includes proprietary and third
party computer systems and related hardware, software and data
and telephone networks. Approximately 50% of the Sears
corporate-wide 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. As of the date
hereof, the remediation, testing and certification of information
systems that are specific to SRAC are predominately done and are
expected to be completed by the end of the first quarter of 1999.
8
The business management area includes equipment and systems
that contain embedded computer technology such as elevators and
security systems. SRAC has completed its assessment of these
systems. Based on assurances from third parties, these systems
present little Year 2000 exposure or risk.
SRAC has identified those vendor relations, including
investment sources, banks, issuing agents and electronic transfer
agents, that are critical to its business. SRAC has either
obtained or is negotiating to obtain appropriate assurances from
these vendors as to their Year 2000 effort. SRAC anticipates
obtaining all such assurances by mid-1999.
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 significant efforts by Sears and SRAC to make their
systems and facilities Year 2000 compliant, the ability of third
party service providers, vendors and certain other third parties,
including governmental entities and utility companies, to be Year
2000 compliant is beyond the control of Sears and SRAC.
Accordingly, neither Sears nor SRAC can give any assurances that
the systems of other companies on which Sears or SRAC's systems
rely will be timely converted or compatible with Sears or SRAC's
systems. The failure of these entities to comply on a timely
basis could have a material adverse effect on Sears and SRAC. At
the present time, SRAC does not expect Year 2000 issues to have a
material adverse effect on its business, results of operations or
financial condition.
The foregoing statements relating to Sears and SRAC'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 SRAC'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
SRAC believes that these assumptions are reasonable, SRAC
cautions that it is impossible to predict the impact of certain
facts that could cause actual results to differ from expected
results.
9
SEARS ROEBUCK ACCEPTANCE CORP.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits listed in the "Exhibit
Index" are filed as part of this
report.
(b) Reports on Form 8-K:
There were no reports filed on
Form 8-K.
10
SEARS ROEBUCK ACCEPTANCE CORP.
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 ROEBUCK ACCEPTANCE CORP.
(Registrant)
By: /s/ George F. Slook
-------------------
George F. Slook
Vice President, Finance
and Assistant Secretary
(principal financial
officer and authorized
officer of Registrant)
November 9, 1998
11
EXHIBIT INDEX
3(a) Certificate of Incorporation of the Registrant, as in
effect at November 13, 1987 [Incorporated by reference to
Exhibit 28(c)to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1987*}.
3(b) By-laws of the Registrant, as in effect at
February 6, 1996 [Incorporated by reference to
Exhibit 3(b)to the Registrant's Annual Report on
Form 10-K for the year ended December 30, 1995*].
4 - The Registrant hereby agrees to furnish the Commission,
upon request, with each instrument 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.
12 - Calculation of ratio of earnings to fixed charges **
15 - Acknowledgment of awareness from Deloitte & Touche LLP,
dated October 14, 1998, concerning unaudited financial
information.**
27 - Financial Data Schedule**
*Sec File No. 1040
**Filed herein
1
Exhibit 12
SEARS ROEBUCK ACCEPTANCE CORP.
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
39 Weeks Ended
Oct. 3, Sept. 27,
(millions) 1998 1997
INCOME BEFORE INCOME TAXES $ 186 $ 134
PLUS FIXED CHARGES:
Interest 717 527
Amortization of debt
discount/premium 8 5
Total fixed charges 725 532
EARNINGS BEFORE INCOME TAXES
AND FIXED CHARGES $ 911 $ 666
RATIO OF EARNINGS TO FIXED
CHARGES 1.26 1.25
1
EXHIBIT 15
Sears Roebuck Acceptance Corp.
Greenville, Delaware
We have made a review, in accordance with standards established
by the American Institute of Certified Public Accountants, of the
unaudited interim financial information of Sears Roebuck
Acceptance Corp. for the periods ended October 3, 1998 and
September 27, 1997, as indicated in our report dated October 14,
1998; because we did not perform an audit, we expressed no
opinion on that information.
We are aware that our report referred to above, which is
included in your Quarterly Report on Form 10-Q for the quarter
ended October 3, 1998, is incorporated by reference in
Registration Statement No.333-62847 on Form S-3.
We are also aware that the aforementioned reports, pursuant to
Rule 436(c) under the Securities Act of 1933, is not considered
a part of the Registration Statement prepared or certified by an
accountant or a report prepared or certified by an accountant
within the meaning of Sections 7 and 11 of that Act.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
October 14, 1998
14
