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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 JULY 3, 1999
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: 302/434-3100
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 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 26 WEEKS ENDED JULY 3, 1999
PART I. FINANCIAL INFORMATION: Page No.
Item 1. Financial Statements
Statements of Financial Position
July 3, 1999 and July 4, 1998 (unaudited)
and January 2, 1999 (audited) 1
Statements of Income (unaudited)
13 Weeks and 26 Weeks ended July 3, 1999
and July 4, 1998 2
Statements of Cash Flows (unaudited)
26 Weeks ended July 3, 1999
and July 4, 1998 3
Notes to Financial Statements (unaudited) 4,5
Independent Accountants' Report 6
Item 2. Analysis of Results of Operations 7,8
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 9
SEARS ROEBUCK ACCEPTANCE CORP.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENTS OF FINANCIAL POSITION
(unaudited)
(millions, except share data) July 3, July 4, Jan. 2,
1999 1998 1999
Assets
Cash and cash equivalents $ 68 $ 145 $ 94
Notes of Sears 17,560 16,576 17,990
Receivable balances
purchased from Sears 81 90 90
Other assets 76 70 73
Total assets $ 17,785 $ 16,881 $ 18,247
Liabilities
Commercial paper (net of
unamortized discount of
$11, $14 and $25) $ 3,501 $ 3,304 $ 4,243
Medium-term notes 5,444 6,436 5,976
Discrete underwritten debt (net
of unamortized discount of
$24, $8 and $16) 5,826 4,542 5,084
Accrued interest and
other liabilities 160 156 169
Total liabilities $ 14,931 $ 14,438 $ 15,472
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 1,150 900 1,150
Retained income 1,669 1,508 1,590
Total stockholder's equity 2,854 2,443 2,775
Total liabilities and
stockholder's equity $ 17,785 $ 16,881 $ 18,247
See notes to financial statements.
1
SEARS ROEBUCK ACCEPTANCE CORP.
STATEMENTS OF INCOME
(unaudited)
(millions) 13 Weeks Ended 26 Weeks Ended
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
Revenues
Earnings on notes of Sears $ 293 $ 303 $ 598 $ 603
Earnings on receivable
balances purchased from Sears 1 2 3 4
Earnings on cash equivalents 1 1 2 3
Total revenues 295 306 603 610
Expenses
Interest expense and amortization
of debt discount/premium 235 243 480 484
Operating expenses 1 1 2 2
Total expenses 236 244 482 486
Income before income taxes 59 62 121 124
Income taxes 20 21 42 43
Net income $ 39 $ 41 $ 79 $ 81
Ratio of earnings
to fixed charges 1.25 1.26 1.25 1.26
See notes to financial statements.
2
SEARS ROEBUCK ACCEPTANCE CORP.
STATEMENTS OF CASH FLOWS
(unaudited)
(millions) 26 Weeks Ended
July 3, July 4,
1999 1998
Cash flows from operating activities:
Net income $ 79 $ 81
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, amortization and other
noncash items 5 5
Increase in other assets (3) -
(Decrease)increase in other liabilities (9) 33
Net cash provided by operating activities 72 119
Cash flows from investing activities:
Decrease(increase)in notes of Sears 430 (15)
Decrease(increase)in receivable balances
purchased from Sears 9 (1)
Net cash provided by(used in)
investing activities 439 (16)
Cash flows from financing activities:
Decrease in commercial paper,
primarily 90 days or less (742) (1,945)
Proceeds from issuance of long-term debt 767 1,882
Payments for redemption of long-term debt (562) (100)
Proceeds from capital infusion - 200
Net cash (used in)provided by
financing activities (537) 37
Net (decrease)increase in cash and
cash equivalents (26) 140
Cash and cash equivalents at beginning
of period 94 5
Cash and cash equivalents at end of period $ 68 $ 145
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 52 weeks ended January 2, 1999, 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 $8 million to a high of $502 million in the second quarter
of 1999. Credit facilities as of July 3, 1999 were as follows:
Expiration Date (millions)
- ------------------------------------------------------------
April 2003 $4,185
April 2002 875
November 1999 500
November 1999 40
- ------------------------------------------------------------
$5,600
============================================================
4
3. Medium-term Notes and Discrete Underwritten Debt
Medium-term notes and discrete underwritten debt are issued with
either a floating rate indexed to LIBOR or a fixed rate.
(dollars in millions; terms in years)
ISSUANCE
Avg. Avg.
1999 Avg. Orig. 1998 Avg. Orig.
Volume Coupon Term Volume Coupon Term
------ ------ ---- ------ ------ ----
13 Weeks Ended:
Medium-term notes $ 5 6.00% 10.0 $ 200 6.01% 4.3
Discrete debt $ 750 6.25% 10.0 $ - -% -
26 Weeks Ended:
Medium-term notes $ 30 5.92% 10.0 $ 453 5.99% 4.5
Discrete debt $ 750 6.25% 10.0 $1,450 6.40% 14.5
GROSS OUTSTANDING
Avg. Avg.
07/03/99 Avg. Remain. 07/04/98 Avg. Remain.
Balance Coupon Term Balance Coupon Term
-------- ------ ------ ------- ------ -------
Medium-term notes $5,444 6.51% 2.7 $6,436 6.49% 3.1
Discrete debt $5,850 6.61% 12.2 $4,550 6.69% 10.9
MATURITIES
Medium-term Discrete
Year notes debt
- ---------------------------------
1999 $ 48 $ -
2000 1,231 250
2001 2,018 -
2002 813 600
2003 900 1,250
Thereafter 434 3,750
- ---------------------------------
Total $5,444 $5,850
=================================
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 July 3, 1999 and
July 4, 1998, and the related statements of income for the
13 week and 26 week periods then ended and cash flows for the
26 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 2, 1999 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 22, 1999, 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 2, 1999 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
July 14, 1999
6
SEARS ROEBUCK ACCEPTANCE CORP.
ITEM 2. ANALYSIS OF RESULTS OF OPERATIONS
During the second quarter of 1999, Sears Roebuck Acceptance
Corp.'s ("SRAC") revenues decreased 4% to $295 million from
$306 million in the comparable 1998 period. For the first six
months of 1999, revenues declined 1% to $603 million from
$610 million for the comparable 1998 period. SRAC's income is
derived primarily from the earnings on its investment in the notes
and receivable balances of Sears, Roebuck and Co. ("Sears") and
invested cash. The decrease in revenue is attributable to lower
interest rates on SRAC's average earning assets that more than
offset the impact of increases in these assets.
SRAC's interest and related expenses decreased 3% to
$235 million from $243 million and 1% to $480 million from
$484 million for the second quarter and first half of 1999,
respectively, as compared to the comparable 1998 periods.
Interest and related expenses decreased due to decreases in
average short-term borrowings and cost of short-term funds.
SRAC's cost of short-term funds averaged 4.97% in the second
quarter and 5.03% in the first six months of 1999 compared to
5.56% and 5.60% for the same periods in 1998. SRAC's short-term
borrowings averaged $3.7 billion and $4.2 billion for the second
quarter and first half of 1999, compared to $3.9 billion and
$4.5 billion for the respective 1998 periods. Second quarter
decreases in interest expense from short-term borrowings were
offset by interest expense related to increased long-term debt
levels. SRAC's average long-term debt of $11.1 billion in the
second quarter of 1999 and $11.0 billion in the first six months
of 1999 reflect increases of 2% and 7%, respectively, compared
with $10.9 billion and $10.3 billion for the same periods in 1998.
SRAC's net income of $39 million and $79 million for the
second quarter and first half of 1999, respectively, reflects
decreases from the comparable 1998 period amounts of $41 million
and $81 million. SRAC's ratio of earnings to fixed charges for
both the second quarter and first half of 1999 was 1.25 compared
to 1.26 for the comparable 1998 periods.
7
YEAR 2000
This description updates the full description of SRAC's
Year 2000 project included beginning on page 5 of SRAC's
filing on Form 10-K for the fiscal year ended January 2, 1999
(the "10-K").
SRAC is implementing its Year 2000 plan in coordination with
Sears for information systems, equipment and third party
relationships that are specific to SRAC and not otherwise used
corporate-wide at Sears. Pursuant to an agreement between SRAC
and Sears, SRAC is relying on Sears implementation of Sears Year
2000 effort as to information systems, equipment and third party
relationships that SRAC uses in conjunction with Sears. For a
detailed description of Sears Year 2000 plan see "Year 2000"
beginning on page 16 of Sears filing on Form 10-Q for the
fiscal quarter ending July 3, 1999.
STATE OF READINESS
SRAC completed the inventorying, assessment, remediation and
initial testing of information systems that are specific to SRAC
in the second quarter of 1999. SRAC expects to complete final
certification of its mission critical information systems during the
third quarter of 1999.
CONTINGENCY PLANS
SRAC has for many years had in place a continuity plan to address
business interruptions. SRAC, with assistance from Sears, is
modifying its continuity plan to address the particular challenges
that would arise if critical systems, equipment or third parties
were not Year 2000 compliant. SRAC expects to finalize these
modifications by September 1999.
CAUTIONARY STATEMENT
The foregoing statements relating to SRAC's expectations as to its
Year 2000 efforts include forward looking statements and are made
in reliance on the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. They are based on SRAC's best
estimates and 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 estimates and 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.
8
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:
Registrant filed current reports on
Forms 8-K dated April 23, 1999 and
May 6, 1999 [Items 5 and 7].
9
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)
August 9, 1999
10
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
December 16, 1998.*
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 August 6, 1999 concerning unaudited financial
information.*
27 Financial Data Schedule.*
99 Pages 16 and 17 of the Sears, Roebuck and Co. Quarterly
Report on Form 10-Q for the quarter ended July 3, 1999.*
* Filed herewith.
1
Exhibit 12
SEARS ROEBUCK ACCEPTANCE CORP.
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
13 Weeks Ended 26 Weeks Ended
July 3, July 4, July 3, July 4,
(millions) 1999 1998 1999 1998
INCOME BEFORE INCOME TAXES $ 59 $ 62 $ 121 $ 124
PLUS FIXED CHARGES:
Interest 233 241 475 479
Amortization of debt
discount/premium 2 2 5 5
Total fixed charges 235 243 480 484
EARNINGS BEFORE INCOME TAXES
AND FIXED CHARGES $ 294 $ 305 $ 601 $ 608
RATIO OF EARNINGS TO FIXED
CHARGES 1.25 1.26 1.25 1.26
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 July 3, 1999 and
July 4, 1998, as indicated in our report dated July 14, 1999;
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 July 3, 1999, is incorporated by reference in Registration
Statement Nos.333-30879 and 333-62847 on Forms 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
August 6, 1999
By-Laws
of
SEARS ROEBUCK ACCEPTANCE CORP.
as amended to
December 16, 1998
ARTICLE I
OFFICES
Section 1. The corporation may have offices at such places within the State
of Delaware as the Board of Directors may from time to time determine or
the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders shall be held at the office
of the corporation in Wilmington, Delaware, or at such other place within
or without the State of Delaware and the United States of America as shall
be designated in the notice of the meeting or in a duly executed waiver of
notice thereof.
Section 2. Annual Meetings of Stockholders for the election of Directors
and for transaction of such other business as may properly be brought
before the meeting shall be held on the second Tuesday of December in
each year if not a legal holiday, and if a legal holiday, then on the
next secular day following at 10:00 A.M., or at such time and on such
other date as the Board of Directors shall each year fix.
Section 3. Special Meetings of the Stockholders, for any purpose or
purposes, may be called to be held at any time by a majority of the
members of the Board of Directors then in office, or at the
request in writing, addressed to the President or the Secretary, of
stockholders owning a majority in amount of the entire capital stock
14
of the corporation issued and outstanding and entitled to vote. Such
request shall state the purpose or purposes of the proposed meeting.
Section 4. Written notice of the time and place of each Annual Meeting of
Stockholders, and of the time, place and purpose or purposes of each
Special Meeting of Stockholders, shall be given by the Secretary, either
personally or by mail, to each stockholder entitled to vote at such meeting,
not less than ten nor more than sixty days before the date of such meeting,
except when otherwise required by law. If mailed, the notice shall be
addressed to each stockholder entitled to vote at such meeting at his
address.
Section 5. Business transacted at all Special Meetings shall be confined to
the objects stated in the call.
Section 6. The holders of a majority of the total number of outstanding
shares of the stock of the corporation entitled to vote, present in person
or represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. If, however, such quorum
shall not be present or represented at any meeting of the stockholders,
the stockholders entitled to vote, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be
present or represented. At any adjourned meeting at which a quorum is
present or represented, any business may be transacted that might have been
transacted at the meeting as originally convened.
Section 7. If a quorum is present at any meeting of stockholders, the vote
of the holders of a majority of the stock then outstanding and entitled to
vote present in person or represented by proxy shall be sufficient for the
transaction of any business, unless otherwise provided by law.
Section 8. At each meeting of the stockholders, each stockholder having the
right to vote shall be entitled to vote in person, or by proxy appointed
by an instrument in writing subscribed by such stockholder and bearing a
date not more than three years prior to said meeting, unless said instrument
provides for a longer period. At all elections of directors of the
corporation, each stockholder shall be entitled to as many votes as shall
equal the number of votes which (except for such provision as to cumulative
voting) he would be entitled to cast for the election of directors with
respect to his shares of stock multiplied by the number of directors to be
elected, and he may cast all of such votes for a single director or may
distribute them among the number to be voted for, or for any two or more of
them as he may see fit.
Section 9. Whenever the vote of stockholders at a meeting thereof is
required or permitted to be taken in connection with any corporate action
by any provisions of the statutes or of the certificate of incorporation
or of these By-Laws, the meeting and vote of stockholders may be dispensed
with, if all the stockholders who would have been entitled to vote upon the
action if such meeting were held, shall consent in writing to such
corporate action being taken.
15
ARTICLE III
DIRECTORS
Section 1. The business, property and officers of the Company shall be
managed and controlled by a Board of Directors. The number of directors of
the Company shall be fixed and may from time to time be increased or
decreased by the Board of Directors or the stockholders but in no event shall
the number of directors be less than five or more than twelve. The directors
shall be elected at the Annual Meeting of the Stockholders, except as
provided in Section 2 of this Article, and each director elected
shall hold office until his successor shall be elected and shall qualify.
Directors may be removed at anytime by the vote of the holders of a majority
of the stock then outstanding and entitled to vote. Directors need not be
stockholders.
Section 2. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority
of the directors then in office, though less than a quorum, or by the
stockholders, and the directors so chosen shall hold office until the next
annual election and until their successors are duly elected and shall
qualify, unless sooner displaced.
Section 3. Any director may resign at any time by giving written notice to
the President or to the Secretary of the Company. Such resignation shall
take effect at the date of receipt of such notice or at any later time
specified therein; and, unless otherwise specified therein, the acceptance
of such resignation by the Board of Directors shall not be necessary to make
it effective.
MEETINGS OF THE BOARD
Section 4. The Board of Directors may hold its meetings, both regular and
special, either within or without the State of Delaware, as the Board of
Directors may from time to time determine.
Section 5. A meeting of the Board of Directors to be known as the annual
meeting of the Board of Directors shall be held following the meeting of the
stockholder at which such Board of Directors is elected, at the same place
as the annual meeting of the stockholder is held or as shall otherwise be
fixed by the Board of Directors, for the purpose of electing the officers
of the Corporation and the standing committees of the Board of Directors,
and of transacting such other business as may properly come before the
meeting. It shall not be necessary to give notice of this meeting.
16
Section 6. Regular meetings of the Board of Directors may be held without
notice at such time and place as shall from time to time be determined by
the board.
Section 7. Special meetings of the Board of Directors may be called by the
President or Secretary on the written request of two directors. Written
notice of special meetings of the Board of Directors shall be given to each
director at least two days before the date of the meeting.
Section 8. At all meetings of the Board of Directors, the presence of a
majority of all directors in office at the time shall constitute a quorum
for the transaction of business and the action of a majority of
the directors present at any meeting at which a quorum is present shall be
the act of the Board of Directors. If a quorum is not present at any
meeting of the Board of Directors, a majority of the directors present may
adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 9. Any action that may be taken at a meeting of the Board of
Directors or of any committee thereof, may be taken as follows: (i) without
a meeting if all members of the Board or of a committee of the Board, as
the case may be, consent thereto in writing; or (ii) by means of a telephone
conference or similar communications equipment by which all persons
participating in the meeting can hear each other -- provided a majority of
such members consent in writing to the recording of such communications in
the corporate records -- in which case such participation shall constitute
presence at a meeting.
ARTICLE IV
NOTICES
Section 1. Notices to directors and stockholders shall be
in writing and delivered personally or mailed to the directors or
stockholders at their addresses appearing on the books of the corporation.
Notice by mail shall be deemed to be given at the time when the same shall
be mailed. Notice to directors may also be given by telegram.
Section 2. Whenever any notice is required to be given under the provisions
of the statutes or of the certificate of incorporation, or of these By-Laws,
a waiver thereof in writing signed by the person or persons entitled to said
notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
17
ARTICLE V
OFFICERS
Section 1. Officers. The officers of the corporation shall be elected by
the Board of Directors at the annual meeting and shall consist of a
President, a Vice President, Finance, one or more additional Vice
Presidents, a Secretary, and one or more Assistant Secretaries. Any number
of offices may be held by the same person, unless the Certificate of
Incorporation or these By-Laws otherwise provide. The Board of Directors
may appoint such other officers or agents as it shall deem necessary, who
shall hold their offices for such terms and shall exercise such powers and
perform such duties as shall be determined from time to time by the Board.
Section 2. The Board of Directors, at its first meeting after each annual
meeting of stockholders,shall choose the officers of the Corporation.
Section 3. The Board of Directors may appoint such other officers and
agents as it shall deem necessary, who shall hold their offices for such
terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the board.
Section 4. The officers of the corporation shall hold office until their
successors are chosen and qualify in their stead. Any officer elected or
appointed by the Board of Directors may be removed at any time by the
affirmative vote of a majority of the whole Board of Directors. If the
office of any officer becomes vacant for any reason, the vacancy shall be
filled by the Board of Directors.
PRESIDENT
Section 5. The President shall be elected from among the directors and
shall be the chief executive officer of the corporation. He shall preside
at meetings of the Board of Directors. He shall have general and active
management of the business of the corporation, and shall see that all
orders and resolutions of the Board of Directors are carried into effect.
Section 6. The President shall execute bonds, mortgages and other contracts
requiring a seal, under the seal of the corporation, except where required
or permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board
of Directors to some other officer or agent of the corporation.
18
VICE PRESIDENTS
Section 7. The Vice Presidents shall perform such duties as the Board of
Directors shall prescribe.
THE SECRETARY AND ASSISTANT SECRETARIES
Section 8. The Secretary shall attend all sessions of the Board of Directors
and all meetings of the stockholders and record all votes and the minutes
of all proceedings in a book to be kept for that purpose and shall perform
like duties for the standing committees when required. The Secretary shall
give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the Board of Directors, and shall perform such other
duties as may be prescribed by the Board of Directors or President, under
whose supervision he or she shall be. The Secretary shall keep in safe
custody the seal of the corporation and, when authorized by the Board of
Directors, affix the same to any instrument requiring it and, when so
affixed, it shall be attested by his or her signature or by the signature
of an Assistant Secretary.
Section 9. The Assistant Secretaries in order of their seniority shall, in
the absence or disability of the Secretary, perform the duties and exercise
the powers of the Secretary and shall perform such other duties as the
Board of Directors shall prescribe.
THE VICE PRESIDENT, FINANCE
Section 10. The Vice President, Finance shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys and other valuable effects in the name and to the credit
of the corporation in such depositories as may be designated by the Board
of Directors.
Section 11. The Vice President, Finance shall disburse the funds of the
corporation as may be ordered by the Board of Directors, taking proper
vouchers for such disbursements, and shall render to the President and the
Board of Directors, at its regular meetings, or when the Board of Directors
so requires, an account of all his transactions as Vice President, Finance
and of the financial condition of the corporation.
Section 12. If required by the Board of Directors, the Vice President,
Finance shall give the corporation a bond (which shall be renewed every six
years) in such sum and with such surety or sureties as shall be satisfactory
to the Board of Directors for the faithful performance of the duties of his
office and for the restoration to the corporation, in case of his death,
resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession
or under his control belonging to the corporation.
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Section 13. The Vice President, Finance shall have general charge, control
and supervision over the accounting and auditing affairs of the corporation.
The Vice President, Finance shall have the responsibility for the
preparation and maintenance of the books of account (but shall not have
access to make direct entries to these books) and of the accounting records
and papers of the corporation; shall have responsibility for the custody
and safekeeping of all permanent records and papers of the corporation;
shall supervise the preparation of all financial statements and reports on
the operation and condition of the business; shall have responsibility for
the establishment of financial procedures, records, and forms used by the
corporation; shall have responsibility for the filing of all financial and
tax reports and returns required by law; shall render to the President,
Vice President, or the Board of Directors, whenever they may require, an
account of his transactions as Vice President, Finance; and in general
shall have such other powers and perform such other duties as are incident
to the office of a treasurer and a controller and as from time to time may
be prescribed by the Board of Directors or the President.
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. Every holder of stock in the corporation shall be entitled to
have a certificate, signed by, or in the name of the corporation by, the
President or a Vice President and the Secretary or an Assistant Secretary
of the Corporation, certifying the number of shares owned by him in the
corporation. If the corporation shall be authorized to issue more than one
class of stock, the designations, preferences and relative, participating,
optional or other special rights of each class and the qualifications,
limitations or restrictions of such preferences and/or rights shall be set
forth in full or summarized on the face or back of the certificate which
the corporation shall issue to represent such class of stock.
Section 2. Where a certificate is signed (1) by a transfer agent or an
assistant transfer agent or (2) by a transfer clerk acting on behalf of the
corporation and a registrar, the signature of any such President, Vice
President, Secretary or Assistant Secretary may be facsimile. In case any
officer or officers who have signed, or whose facsimile signature or
signatures have been used on any such certificate or certificates shall
cease to be such officer or officers of the corporation, whether because of
death, resignation or otherwise, before such certificate or certificates
have been delivered by the corporation, such certificate or certificates
may nevertheless be adopted by the corporation and be issued and delivered
as though the person or persons who signed such certificate or certificates
or whose facsimile signature or signatures have been used thereon had not
ceased to be such officer or officers of the corporation.
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TRANSFERS OF STOCK
Section 3. Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it
shall be the duty of the corporation to issue a new certificate to the
person entitled thereto, cancel the old certificate and record the
transaction upon its books.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation, subject to
the provisions of the certificate of incorporation, if any, may be declared
by the Board of Directors at any regular or special meeting, pursuant to
law. Dividends may be paid in cash, in property, or in shares of the
capital stock, subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out of any
funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as
a reserve or reserves to meet contingencies, or for equalizing dividends, or
for repairing or maintaining any property of the corporation, or for such
other purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
ANNUAL STATEMENT
Section 3. The Board of Directors shall present at each Annual Meeting and
when called for by vote of the stockholders at any Special Meeting of the
Stockholders, a full and clear statement of the business and condition of
the corporation.
CHECKS
Section 4. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons
as the Board of Directors may from time to time designate.
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FISCAL YEAR
Section 5. The fiscal year of the Company shall begin on January 1 in 1995,
and thereafter shall begin on the day after the Saturday closest to
December 31 in each year, and shall end on the Saturday closest to
December 31 in 1995 and each year thereafter.
ARTICLE VIII
AMENDMENTS
Section 1. These By-Laws may be altered or repealed at any regular meeting
of the stockholders or of the Board of Directors or at any Special Meeting
of the Stockholders or of the Board of Directors if notice of such
alteration or repeal be contained in the notice of such Special Meeting.
No change of the time or place of the meeting for the election of directors
shall be made within sixty days next before the day on which such meeting
is to be held, and in case of any change of such time or place, notice
thereof shall be given to each stockholder in person or by letter mailed to
his last known post office address at least twenty days before the meeting
is held.
ARTICLE IX
COMMITTEES
Section 1. The Board of Directors, at its annual meeting, shall, or any
adjournment thereof, shall elect from among its members, by the vote of a
majority of its members, an Executive Committee, a Compensation Committee
and an Audit Committee, which shall be the standing committees of the
corporation. The Board of Directors also shall designate the chairman of
each such committee.
The Board of Directors, by the vote of a majority of its members, may remove
the chairman or any member of any committee, and may fill from among the
directors vacancies in any committee caused by the death, resignation, or
removal of any person elected thereto.
Each standing committee may determine its own rules of procedure, consistent
with these By-Laws. Meetings of any standing committee may be called upon
direction of the President, or the chairman of the committee. Written,
facsimile or electronic notice of each meeting, except meetings of
the Executive Committee, shall be given to each member of the committee, by
personal delivery, or by mail addressed to him at his usual business
address, or by facsimile or electronic means at any facsimile number or
electronic address provided by him to the corporation, at least three days
(excluding Saturdays, Sundays, and holidays) prior to the meeting in case
of notice by mail, and at least two days (excluding Saturdays, Sundays, and
holidays) prior to the meeting in case of notice by telegram or by personal
delivery. Notice of each meeting of the Executive Committee shall
be given to each member of that committee, by personal delivery, or by
telephone, or by mail addressed to him at his usual business address, or by
facsimile or electronic means at any facsimile number or electronic
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address provided by him to the corporation, at least twenty-four hours prior
to the meeting in the case of notice by telephone, telegram, or personal
delivery, and at least two days (excluding Saturdays,Sundays, and holidays)
prior to the meeting in case of notice by mail. All notices which are
mailed shall be deemed to have been given when deposited in the United States
mail, postage prepaid. Notice of meetings of any standing committee may be
waived by any member of the committee. At meetings of each standing
committee, the presence of a majority of the members of such committee shall
be necessary to constitute a quorum for the transaction of business, and, if
a quorum is present at any meeting, the action taken by a majority of the
members present shall be the act of the committee. Each standing committee
shall keep a record of its acts and proceedings - and all action shall be
reported to the Board of Directors at the next meeting of the Board of
Directors following such action.
EXECUTIVE COMMITTEE
Section 2. The Executive Committee shall consist of not less than three
members, including the President, as from time to time shall be prescribed
by the Board of Directors and shall hold office until their respective
successors are elected.
The Executive Committee, unless otherwise provided by resolution of the
Board of Directors,shall have and may exercise, during the time between
meetings of the Board of Directors, all the powers and perform all the
duties of the Board of Directors except that said Committee shall have no
authority as to the following matters: (i) the submission to shareholders
of any action that needs shareholders'authorization under the Delaware
General Business Corporation Act; (ii) the amendment or repeal of
these By-Laws or the adoption of new By-Laws; (iii) the amendment or
repeal of any resolution of the Board of Directors which by its terms shall
not be so amendable or repealable; (iv) action in respect of dividends to
shareholders; (v) election of officers or the designation of members of
committees of the Board of Directors or the filling of vacancies in the
Board of Directors or in any committee of the Board of Directors; and (vi)
any action which the President shall by written instrument filed with the
Secretary designate as a matter which should be considered by the Board of
Directors. Action taken by the Executive Committee shall be subject to
revision or alteration by the Board of Directors, provided that rights or
acts of third parties vested or taken in reliance on such action prior to
any such revision or alteration shall not be adversely affected by such
revision or alteration.
The secretary of the corporation or in his absence any person as may be
designated by the Chairman of the Executive Committee, shall act as secretary
of the Executive Committee and keep the minutes of all meetings.
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COMPENSATION COMMITTEE
Section 3. The Compensation Committee shall consist of such number of
directors, not less than two, as shall from time to time be prescribed by
the Board of Directors. As authorized by the Board of Directors, the
Compensation Committee shall make recommendations to the Board of Directors
with respect to the number of employees of the Company and the
administration of the salaries, bonuses, and other compensation to be paid
to the employees of the Company, including the terms and conditions of
their employment.
AUDIT COMMITTEE
Section 4. The Audit Committee shall consist of not less than two directors
who are not engaged in the day to day operations of the corporation, as
from time to time shall be prescribed by the Board of Directors, who shall
hold office until their respective successors are elected.
The Audit Committee shall report to the Board of Directors annually the
independent public accountants that it recommends the Board appoint to audit
the books, records, and accounts of the corporation and to perform such
other duties as the Board of Directors may from time to time prescribe.
The Committee shall review all recommendations made by the corporation's
independent public accountants to the Board of Directors with respect to the
accounting methods used, the system of internal control followed by the
corporation and in connection with non-audit services, and shall advise
the Board of Directors with respect thereto. The Committee shall also have
authority to examine into and make recommendations to the Board of Directors
with respect to the scope of the audit conducted by the corporation's
independent public accountants and with respect to non-audit services.
The Audit Committee shall review the audit plans and results of the
Corporation's internal audit function and shall report to the Board of
Directors with respect thereto.
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Exhibit 99
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.
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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.
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