UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
 

FORM 10-Q

XQUARTERLY      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE      SECURITIES EXCHANGE ACT OF 1934 FOR THE      QUARTERLY PERIOD ENDED SEPTEMBER 27, 2003 
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        (State of Incorporation)
36-3533346        ( I.R.S. Employer Identification No.)    
3711 Kennett Pike,        Greenville, Delaware        (Address of Principal Executive Offices)
19807        (Zip Code)   
Registrant's telephone        number, including area code: (302) 434-3100
 
 Indicate      by check make whether the 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 [ ]

 Indicate by check mark whether      Registrant is an accelerated filer (as defined in Exchange Act Rule      12b-2). Yes [ ] No [ X ]

As of October 31, 2003, 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 the reduced disclosure format.

None
 

SEARS DC CORP.Index To Quarterly Report on Form 10-Q13 and 39 Weeks Ended September 27, 2003

 

Part I - Financial Information          
Page     
Item 1.
Financial Statements      Condensed Statements of Income        (unaudited) - 13 and 39 Weeks Ended        September 27, 2003 and September 28, 20021  Condensed Statements of        Financial Position - September 27, 2003 (unaudited), September 28, 2002        (unaudited) and December 28, 2002 2
Condensed Statements of Cash Flows (unaudited)        - 13 and 39 Weeks Ended September 27, 2003 and September 28, 2002
3      
Notes to Condensed Financial Statements        (unaudited)
4
  Item        2.Management's Discussion and        Analysis of Financial Condition and        Results of Operations
5

Item 3.
Quantitative and Qualitative Disclosures        about Market Risk
5 
Item 4.
Disclosure Controls and Procedures
6    
Part II - Other Information     
Item 1.
Legal Proceedings       
None.  
Item 6.
Exhibits and Reports on Form 8-K
7        
 

 

SEARS DC CORP.  Condensed Statements of Income  (Unaudited)

 

PART I. FINANCIAL INFORMATION*Item I. Financial Statements*
13        Weeks Ended

39        Weeks Ended
*thousands
Sept.        27,         2003

Sept.        28,         2002

Sept.        27,         2003

Sept.        28,         2002

Revenues
       Earnings        on notes of Sears
$
1,089
$
1,210
$
3,444
$
4,307

Expenses

   Interest        and related expenses
1,074
1,194
3,399
4,256
   Operating        expenses
10

10

28

29

   Total        expenses
1,084
1,204
3,427
4,285
Income        before income taxes
5
6
17
22
Income        taxes
2
2
6
8
Net        income
$
3

$
4

$
11

$
14

See accompanying notes.

1

 

SEARS DC CORP.Condensed Statements of Financial Position

(Unaudited)*thousands, except share data
Sept. 27,
Sept. 28,
Dec. 28,
2003
2002
2002
Assets
     Notes of        Sears
$
51,205
$
60,520
$
59,344
     Deferred        debt issuance costs
145
166
160
          Total        assets
$
51,350
$
60,686
$
59,504
Liabilities
     Medium-term        notes
$
43,800
$
52,800
$
52,800
     Interest        payable and other liabilities
2,079
2,430
1,244
           Total        liabilities
45,879
55,230
54,044
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
5,463
5,448
5,452
          Total        stockholder's equity
5,471
5,456
5,460
     Total        liabilities and stockholder's equity
$
51,350
$
60,686
$
59,504
See accompanying notes.
2

 

 

SEARS DC CORP.Condensed Statements of Cash Flows(Unaudited)

39 Weeks Ended*thousands
Sept. 27,      2003
Sept. 28,      2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$
11
$
14
Adjustments to reconcile net income to net      cash provided by         operating activities:
Net change in interest receivable and        other assets and interest payable and other liabilities
      850
      599
Net cash used in operating activities
861
613
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in notes of Sears
8,139
24,112
Net cash provided by investing          activities
8,139
24,112
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Medium-term notes
(9,000)
(24,725)
Net cash used in financing activities
(9,000)
(24,725)
Net increase in cash and cashequivalents
--
--
Cash and cash equivalents at beginning of      period
--
--
Cash and cash equivalents at end of period
$
--
$
--
See accompanying notes.** **
3
** 

 **
SEARS DC CORP.Notes To Condensed FinancialStatements(Unaudited)

 

Notes to Condensed Financial Statements*****(thousands)*
Sears DC Corp. ("SDC" or the"Company"), a wholly-owned subsidiary of Sears, Roebuck and Co.("Sears"), was formed to borrow in domestic and foreign debt marketsand lend the proceeds of such borrowings to Sears and certain direct andindirect subsidiaries of Sears in exchange for their unsecured notes. The onlyoutstanding debt of SDC is two series of medium-term notes. SDC does not plan toissue additional debt.

Under an agreement between SDC and Sears, theinterest rate paid by Sears on its unsecured notes is designed to produceearnings sufficient to cover SDC's fixed charges at least 1.005 times. Requiredpayments of principal and interest to SDC under the Sears borrowing agreementare intended to be sufficient to allow SDC to make timely payments of principaland interest to the holders of its securities.

Certain information and footnote disclosuresnormally included in financial statements prepared in conformity with accountingprinciples generally accepted in the United States of America have beencondensed or omitted. The significant accounting policies used in thepresentation of these financial statements are consistent with the summary ofsignificant accounting policies set forth in SDC's Annual Report on Form 10-Kfor the fiscal year ended December 28, 2002, and these financial statementsshould be read in conjunction with the financial statements and notes foundtherein. The interim financial statements reflect all adjustments (consistingonly 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 consideredindicative of the results to be expected for the full year.

The medium-term notes are not redeemable by SDCexcept in the event of a significant decline in Discover Card receivables ofSears former subsidiary, Dean Witter, which is now a part of Morgan Stanley.SDC's borrowings include the following:

Sept. 27,      2003

Sept. 28,      2002

9.07% to 9.26% Medium-Term      Notes due in 2012
$           43,800
$           52,800
 

At September 27, 2003, medium-term notematurities for the next five years and thereafter are as follows:

2003 . . . . . . . . . . .
$
--
2004 . . . . . . . . . . .
--
2005 . . . . . . . . . . .
--
2006 . . . . . . . . . . .
--
2007 . . . . . . . . . . .
--
Thereafter . . . . . . . .
43,800
$
43,800
Subsequent Event

On October 17, 2003, Sears DC Corp. commencedcash tender offers to purchase any and all of its respective unsecured publicterm debt securities maturing after 2003, which includes securities with anaggregate principal amount of approximately $43.8 million. The offers areexpected to expire on November 14, 2003, unless previously terminated orextended. If all 9 series of SDC securities with an aggregate amount of $43.8million of debt are retired through the cash tender offers, the Company expectsto realize a $8.2 million after-tax loss on the extinguishment of that debt inthe fourth quarter of 2003. This loss will consist of the anticipated premiumpaid to retire the debt and the recognition of unamortized debt issuance costs.

4

SEARS DC CORP.13 and 39 Weeks Ended September27, 2003 And September 28, 2002
** ***Item 2. Management's Discussion and Analysis ofFinancial Condition and Results of Operations(amounts in millions)***FINANCIAL CONDITION**
SDC invests funds in promissory notes of Sears,which pay interest sufficient to cover SDC's fixed charges at least 1.005 times.

The $43.8 in outstanding medium-term notes as ofSeptember 27, 2003 are generally not redeemable prior to their stated maturity.One exception is in the event of a significant decline in Discover Cardreceivables of Sears former subsidiary, Dean Witter, which is now a part ofMorgan Stanley. On October 17, 2003, Sears DC Corp. commenced cash tender offersto purchase any and all of its respective unsecured public term debt securitiesmaturing after 2003. See the subsequent event discussion in the notes to thecondensed financial statements for additional information.
**RESULTS OF OPERATIONS**
Medium-term notes outstanding were $43.8 and$52.8 as of September 27, 2003 and September 28, 2002, respectively. Revenuesdecreased 10.0% to $1.1 from $1.2 and decreased 20.0% to $3.4 from $4.3 for the13 and 39 weeks ended September 27, 2003 and September 28, 2002, respectively.The revenue decrease is due to lower levels of interest-earning assets in 2003.The decrease in the amount of medium-term notes outstanding led to interest andrelated expenses decreasing 10.1% to $1.1 from $1.2 and a decrease of 20.1% to$3.4 from $4.3 for the 13 and 39 weeks ended September 27, 2003 and September28, 2002, respectively. Earnings covered fixed charges 1.005 times for the 13and 39 weeks ended September 27, 2003 and September 28, 2002.
**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKINGINFORMATION**
Certain statements made in this Report on Form10-Q are "forward-looking statements" that are subject to risks anduncertainties that could cause results to be materially different from anyfuture results expressed or implied by these forward-looking statements. Thesestatements are based on a number of assumptions about a variety of factors,including the ability of Sears to perform under the agreements described hereinand general economic conditions (such as interest rates). While SDC believesthat these assumptions are reasonable, SDC cautions that it is impossible topredict the impact of certain facts that could cause actual results to differfrom expected results. SDC intends the forward-looking statements to speak onlyas of the time first made and does not undertake to update or revise them asmore information becomes available.

 

Item 3. Quantitative and Qualitative Disclosuresabout Market Risk*(amounts in millions)*
SDC's outstanding debt securities are subject tointerest rate risk. All debt securities are considered non-trading. At September27, 2003 and September 28, 2002, 100% of SDC's portfolio was fixed rate. For the13 and 39 weeks ended September 27, 2003 and September 28, 2002, the carryingvalue of SDC's debt was $43.8 and $52.8, respectively.

For the period ended September 27, 2003, averageinterest rates by year of maturity were:

2003
--
2004
--
2005
--
2006
--
2007
--
Thereafter
9.15%
5

 

SEARS DC CORP.13 and 39 Weeks Ended September27, 2003 And September 28, 2002

 
*Item 4. Controls and Procedures*
The Company's management, Larry R. Raymond,President and Chief Executive Officer (principal executive officer) and Keith E.Trost, Vice President and Treasurer (principal financial officer), haveevaluated the effectiveness of the Company's "disclosure controls andprocedures," as such term is defined in Rule 13a-15(e) promulgated underthe Securities Exchange Act of 1934, as amended, (the "Exchange Act").Based upon their evaluation, the principal executive officer and principalfinancial officer concluded that, as of the end of the period covered by thisreport, the Company's disclosure controls and procedures were effective forthe purpose of ensuring that the information required to be disclosed in thereports that the Company files or submits under the Exchange Act with theSecurities and Exchange Commission (the "SEC") (1) is recorded,processed, summarized and reported within the time periods specified in theSEC's rules and forms, and (2) is accumulated and communicated to the Company'smanagement, including its principal executive and principal financial officers,as appropriate to allow timely decisions regarding required disclosure. Inaddition, based on that evaluation, no change in the Company's internal controlover financial reporting occurred during the quarter ended September 27, 2003that has materially affected, or is reasonably likely to materially affect, theCompany's internal control over financial reporting.

6
** **
SEARS DC CORP.13 and 39 Weeks Ended September27, 2003 And September 28, 2002

 

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

 

SEARS DC CORP.13 and 39 Weeks Ended September27, 2003 And September 28, 2002

 

SIGNATURE

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signed onits behalf by the undersigned thereunto duly authorized.

 

  
Sears DC Corp.      (Registrant)

November 5, 2003
By:
/s/ William K. Phelan      William K. Phelan      Vice President and Controller      (Authorized Officer and Principal      Accounting      Officer of Registrant)
 

8

 
**EXHIBIT INDEX**
SEARS DC CORP.13 and 39 Weeks Ended September27, 2003 And September 28, 2002

 

Exhibit No. 
 3(a)
Certificate of Incorporation of Discover      Credit Corp. dated January 9, 1987 (Incorporated by reference to Exhibit      3(a) to Form 10 of the Registrant *).   
 3(b)
Amendment to Certificate of Incorporation      of Discover Credit Corp. dated April 9, 1987 (Incorporated by reference to      Exhibit 3(b) to Form 10 of the Registrant*).   
 3(c)
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(d)
By-laws of Sears DC Corp. as amended to      February 6, 1996 (Incorporated by reference to Exhibit 3(c) on 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.   
31(a)
Certification of Principal Executive      Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**   
31(b)
Certification of Principal Financial      Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**   
32
Certification of Chief Executive Officer      and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted      by Section 906 of the Sarbanes-Oxley Act of 2002.**
 

_____________________            * Sec File No. 0-17955            ** Filed herewith

E-1
** 

SEARS DC CORP.Exhibit 31(a)**
 
**CERTIFICATIONS**
I, Larry R. Raymond,certify that:

1. I have reviewed this quarterly report      on Form 10-Q of Sears DC Corp.; 
2. Based on my knowledge, this report        does not contain any untrue statement of a material fact or omit to        state a material fact necessary to make the statements made, in light of        the circumstances under which such statements were made, not misleading        with respect to the period covered by this report; 
3. Based on my knowledge, the financial        statements, and other financial information included in this report,        fairly present in all material respects the financial condition, results        of operations and cash flows of the registrant as of, and for, the        periods presented in this report; 
4. The registrant's other certifying        officer(s) and I are responsible for establishing and maintaining        disclosure controls and procedures (as defined in Exchange Act Rules        13a-15(e) and 15d-15(e)) for the registrant and have:  
(a)
Designed such disclosure controls and      procedures, or caused such disclosure controls and procedures to be      designed under our supervision, to ensure that material information      relating to the registrant, including its consolidated subsidiaries, is      made known to us by others within those entities, particularly during the      period in which this report is being prepared;  
(b)
Evaluated the effectiveness of the      registrant's disclosure controls and procedures and presented in this      report our conclusions about the effectiveness of the disclosure controls      and procedures, as of the end of the period covered by this report based      on such evaluation; and    
(c)
Disclosed in this report any change in the      registrant's internal control over financial reporting that occurred      during the registrant's most recent fiscal quarter (the registrant's      fourth fiscal quarter in the case of an annual report) that has materially      affected, or is reasonably likely to materially affect, the registrant's      internal control over financial reporting; and 
5. The registrant's other certifying        officer(s) and I have disclosed, based on our most recent evaluation of        internal control over financial reporting, to the registrant's auditors        and the audit committee of the registrant's board of directors (or        persons performing the equivalent functions):  
(a)
All significant deficiencies and material      weaknesses in the design or operation of internal control over financial      reporting which are reasonably likely to adversely affect the registrant's      ability to record, process, summarize and report financial information;      and  
(b)
Any fraud, whether or not material, that      involves management or other employees who have a significant role in the      registrant's internal control over financial reporting.
Date: November 5, 2003

 

/s/ Larry R. Raymond      Larry R. Raymond      President and Chief Executive Officer of      Sears DC Corp.
E-2
** 

SEARS DC CORP.Exhibit 31(b)**
 
**CERTIFICATIONS**
I, Keith E. Trost, certify that:

1. I have reviewed this quarterly report      on Form 10-Q of Sears DC Corp.; 
2. Based on my knowledge, this report        does not contain any untrue statement of a material fact or omit to        state a material fact necessary to make the statements made, in light of        the circumstances under which such statements were made, not misleading        with respect to the period covered by this report; 
3. Based on my knowledge, the financial        statements, and other financial information included in this report,        fairly present in all material respects the financial condition, results        of operations and cash flows of the registrant as of, and for, the        periods presented in this report; 
4. The registrant's other certifying        officer(s) and I are responsible for establishing and maintaining        disclosure controls and procedures (as defined in Exchange Act Rules        13a-15(e) and 15d-15(e)) for the registrant and have:  
(a)***