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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 SEPTEMBER 27, 2003
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 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 25, 2003 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 Instructions
H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with
a reduced disclosure format.
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SEARS ROEBUCK ACCEPTANCE CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 WEEKS AND 39 WEEKS ENDED SEPTEMBER 27, 2003
PART I. FINANCIAL INFORMATION: PAGE NO.
Item 1. Financial Statements
Statements of Financial Position
September 27, 2003 (unaudited) and September 28, 2002 (unaudited)
and December 28, 2002 1
Statements of Income and Comprehensive Income (unaudited)
13 Weeks and 39 Weeks ended September 27, 2003
and September 28, 2002 2
Statements of Cash Flows (unaudited)
39 Weeks ended September 27, 2003
and September 28, 2002 3
Notes to Financial Statements (unaudited) 4-6
Independent Accountants' Report 7
Item 2. Management's Discussion and Analysis of Operations 8
Item 4. Controls and Procedures 8
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K 9
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEARS ROEBUCK ACCEPTANCE CORP.
STATEMENTS OF FINANCIAL POSITION
(unaudited)
-----------------
(millions, except share data) Sept.27, Sept.28, Dec. 28,
2003 2002 2002
Assets ------- ------ --------
Cash and cash equivalents $ 1,126 $ 377 $ 1,563
Notes of Sears 17,227 17,883 15,352
Other assets 149 142 139
------- -------- --------
Total assets $ 18,502 $ 18,402 $ 17,054
======== ======== ========
Liabilities
Commercial paper (net of
unamortized discount of
$3, $6 and $5) $ 3,312 $ 4,008 $ 2,869
Medium-term notes (net of
unamortized discount of
$3, $5 and $5) 4,248 2,336 2,118
Discrete underwritten debt (net
of unamortized discount of
$55, $59 and $58) 7,295 8,541 8,542
Accrued interest and
other liabilities 179 184 160
------- ------- --------
Total liabilities 15,034 15,069 13,689
------- ------- --------
Commitments and contingent liabilities
Shareholder's Equity
Common share, 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 1,150 1,150
Accumulated other
comprehensive loss (3) (3) (3)
Retained income 2,286 2,151 2,183
------- ------- --------
Total shareholder's equity 3,468 3,333 3,365
------- ------- --------
Total liabilities and
shareholder's equity $ 18,502 $ 18,402 $ 17,054
======== ======== ========
See notes to financial statements.
1
SEARS ROEBUCK ACCEPTANCE CORP.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
(millions, except ratios) 13 Weeks Ended 39 Weeks Ended
Sept.27, Sept.28, Sept.27, Sept.28,
2003 2002 2003 2002
------ ------ ------ -------
Revenues
Earnings on notes of Sears $ 257 $ 255 $ 756 $ 729
Earnings on cash equivalents 5 2 21 10
----- ----- ---- ----
Total revenues 262 257 777 739
----- ----- ---- ----
Expenses
Interest expense and amortization
of debt discount/premium 201 205 611 588
Loss on debt extinguishment 7 - 7 -
Operating expenses - - 1 1
----- ----- ---- ----
Total expenses 208 205 619 589
----- ----- ---- ----
Income before income taxes 54 52 158 150
Income taxes 19 18 55 52
----- ----- ---- ----
Net income $ 35 $ 34 $ 103 $ 98
----- ----- ----- -----
Total other comprehensive income(loss)
Losses on cash flow hedge,
net of tax - - - (3)
----- ----- ---- ----
Total comprehensive income $ 35 $ 34 $ 103 $ 95
===== ===== ===== =====
Ratios of earnings
to fixed charges 1.26 1.25 1.26 1.26
See notes to financial statements.
2
SEARS ROEBUCK ACCEPTANCE CORP.
STATEMENTS OF CASH FLOWS
(unaudited)
(millions) 39 Weeks Ended
Sept.27, Sept.28,
2003 2002
-------- -------
Cash flows from operating activities:
Net income $ 103 $ 98
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, amortization and other
noncash items 16 10
Loss on debt extinguishment 7 -
Increase in other assets (8) (2)
Increase(decrease)in other liabilities 19 (8)
----- -----
Net cash provided by operating activities 138 98
----- -----
Cash flows from investing activities:
Increase in notes of Sears (1,875) (1,869)
----- -----
Net cash used in
investing activities (1,875) (1,869)
----- -----
Cash flows from financing activities:
Increase in commercial paper,
primarily 90 days or less 443 783
Proceeds from issuance of long-term debt 3,195 1,832
Payments for redemption of long-term debt (2,316) (1,042)
Issue costs paid to issue debt (21) (24)
----- -----
Net cash provided by
financing activities 1,301 1,549
----- -----
Net decrease in cash and
cash equivalents (437) (222)
Cash and cash equivalents at beginning
of period 1,563 599
----- -----
Cash and cash equivalents at end of period $ 1,126 $ 377
====== ======
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 accounting principles generally accepted
in the United States of America 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 December 28, 2002, 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 outstanding commercial paper
through its investment portfolio and committed credit facilities. SRAC's
investment portfolio,which consists of cash and cash equivalents, fluctuated
from a low of $1.1 billion to a high of $2.4 billion in the third quarter of
2003. On September 27, 2003, SRAC's committed credit facilities consisted
of a $3.5 billion unsecured 364-day revolving credit facility expiring
February 23, 2004 which includes an option to extend the repayment of
borrowings, if any, through February 2005. Effective November 3, 2003,
SRAC amended the facility extending the termination date to May 2004
for consenting lenders and modifying the option to extend the repayment
of any borrowings to November 2004. The amendment also provides for
the commitment amount under this facility to be reduced to $2.5 billion
30 days following the sale of Sears' Credit and Financial Products
business.
As of September 27, 2003, there have been no outstanding borrowings
related to this credit facility.
3. Legal Proceedings
On June 16, 2003, a lawsuit was filed in the United States District Court
for the Northern District of Illinois against Sears, certain of its officers,
and SRAC, alleging that certain public announcements and SEC filings by
Sears and SRAC concerning Sears credit card business violated Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated
thereunder, and Section 11 of the Securities Act of 1933, and seeking damages.
An amended complaint was filed on October 16, 2003, naming additional
individuals and certain investment banks as defendants. The plaintiffs
purport to represent a class of noteholders who purchased certain notes
issued by SRAC between October 24, 2001 and October 17, 2002, whether
by prospectus or otherwise. SRAC believes that these claims lack merit
and is defending against them vigorously.
4
The consequences of this matter are not presently determinable but,
in the opinion of management of SRAC after consulting with legal counsel
and taking into account insurance, the ultimate liability is not expected
to have a material effect on annual results of operations, financial position,
liquidity or capital resources of SRAC.
4. Subsequent Events
On October 17, 2003, SRAC commenced cash tender offers to purchase any
and all of its unsecured public term debt securities maturing after 2003,
which includes 174 series of securities with an aggregate principal
amount of approximately $10.7 billion. The offers are expected to expire
on November 14, 2003, unless previously terminated or extended. If all
of the $10.7 billion of debt is retired through the cash tender offers,
the Company expects to realize a $695 million after-tax loss on the
extinguishment of that debt in the fourth quarter of 2003. This loss
will consist of the expected premium paid to retire the debt and the
writeoff of unamortized debt issuance costs.
On November 3, 2003, Sears completed the sale of its domestic Credit
and Financial Products business to Citicorp. The sale generated total
proceeds of $32 billion, consisting of the assumption of $10 billion
of securitized debt by Citicorp and cash proceeds received by Sears
of $22 billion. Proceeds from Sears' sale of the Credit and Financial
Products business are intended to be earmarked primarily to retire debt
that supported the domestic credit card receivables, return cash to Sears
shareholders; and for general corporate purposes. Sears may use acquired
funds from the sale of its Credit business to redeem a portion of its
Sears Note to fund the repayment of SRAC's tendered debt.
As a result of Sears' sale of its Credit and Financial Products
business, on November 3, 2003, Sears executed guarantees pursuant to
which it has agreed to guarantee (1) SRAC's debt securities issued or
to be issued under the indenture dated as of May 15, 1995 between SRAC
and JPMorgan Chase Bank, as trustee, and the indenture dated as of
October 1, 2002 between SRAC and BNY Midwest Trust Company, as trustee;
and (2) SRAC's commercial paper notes issued or to be issued under
its commercial paper program.
5. 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; term in years)
ISSUANCE
2003 2002
--------------------- ---------------------
Avg. Avg.
Avg. Orig. Avg. Orig.
Volume Coupon Term Volume Coupon Term
--------------------- ---------------------
13 Weeks Ended:
Medium-term notes $ 135 1.89% 5.0 $ - -% -
Discrete debt $ - -% - $ - -% -
39 Weeks Ended:
Medium-term notes $2,945 4.51% 3.1 $ 15 4.50% 2.6
Discrete debt $ 250 7.40% 40.0 $1,850 7.03% 24.9
5
GROSS OUTSTANDING
9/27/03 9/28/02
--------------------- ---------------------
Avg. Avg.
Avg. Remain. Avg. Remain.
Balance Coupon Term Balance Coupon Term
--------------------- ---------------------
Medium-term notes $4,251 4.80% 2.8 $2,341 5.88% 1.3
Discrete debt $7,350 6.81% 13.3 $8,600 6.97% 13.2
MATURITIES
Medium-term Discrete
Year notes debt Total
- ---------------------------------------------------
2003 $ 429 $ 250* $ 679
2004 1,702 - 1,702
2005 204 250 454
2006 507 550 1,057
2007 104 - 104
Thereafter 1,305 6,300 7,605
- ---------------------------------------------------
Total $4,251 $7,350 $11,601
===================================================
*On September 23, 2003, SRAC announced that it
elected to call for redemption the entire
$250 million outstanding principal amount of
its 6.95% notes due March 23, 2038. The redemption
date was October 23, 2003.
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On September 1, 2003, SRAC redeemed the entire $250 million
outstanding principal amount of its 7% notes due March 1, 2038,
which resulted in a loss on debt extinguishment of $7 million. On
October 23, 2003, SRAC also redeemed the entire $250 million
outstanding principal amount of its 6.95% notes due October 23, 2038,
which resulted in a loss on debt extinguishment of $7 million.
On October 17, 2003, SRAC commenced cash tender offers to purchase
any and all of its unsecured public term debt securities maturing
after 2003, which includes 174 series of securities with an
aggregate principal amount of approximately $10.7 billion.
The offers are expected to expire on November 14, 2003, unless
previously terminated or extended.(see Note 4)
6
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholder 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 September 27, 2003 and
September 28, 2002, and the related statements of income and
comprehensive income for the 13 week and 39 week periods
then ended and cash flows for the 39 week periods then
ended. These interim 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 and making inquiries of persons
responsible for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with auditing
standards generally accepted in the United States of America, 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 interim financial statements
for them to be in conformity with accounting principles generally
accepted in the United States of America.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the statement
of financial position of Sears Roebuck Acceptance Corp. as of
December 28, 2002 and the related statements of income and comprehensive
income, shareholder's equity and cash flows for the year then ended (not
presented herein); and in our report dated February 14, 2003, except for
Note 5, as to which the date is February 24, 2003, 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 December 28, 2002 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
November 4, 2003
7
SEARS ROEBUCK ACCEPTANCE CORP.
ITEM 2. ANALYSIS OF RESULTS OF OPERATIONS
During the third quarter of 2003, SRAC revenues increased to $262 million from
$257 million in the comparable 2002 period. For the 39 week period ended
September 27, 2003, SRAC's revenues increased to $777 million from $739 million
for the comparable 2002 period. The increase in revenues resulted from
increases in average earning asset levels of $300 million and $800 million
in the 13 and 39 week periods of 2003 versus the 2002 periods.
SRAC's interest and related expenses, including losses associated with
the early extinguishment of debt, increased 1% to $208 million from
$205 million and 5% to $618 million from $588 million for the 13 and 39 week
periods of 2003, respectively, as compared to the comparable 2002 periods.
Interest and related expenses increased during the 13 and 39 week period
of 2003 due to a loss on the early extinguishment of debt related to the
writeoff of unamortized issue expense of $7 million and increases in
average long-term debt levels. The loss on debt extinguishment related
to a $250 million 7% note due March 1, 2038 and redeemed September 1, 2003.
SRAC's average long-term debt increased to $11.9 billion and $11.6 billion
in the 13 and 39 weeks of 2003, compared with $11.0 billion and
$10.4 million for the same periods in 2002. Increases in interest and
related expenses attributed to long-term debt levels were partially
offset by reductions in average short-term debt levels and overall cost
of funds. SRAC's short-term borrowings averaged $3.4 billion in the
third quarter and $3.2 billion in the 39 week period of 2003, compared
to $4.1 billion and $3.8 billion for the respective 2002 periods.
SRAC's cost of short-term funds averaged 1.35% in the third quarter
and 1.57% in the first nine months of 2003 compared to 2.13% and 2.27%
for the same periods in 2002. SRAC's cost of long-term funds averaged 6.14%
and 6.36% in the 13 and 39 weeks of 2003 compared to 6.53% and 6.54% for
the comparable 2002 periods.
SRAC's net income of $35 million and $103 million for the 13 and 39 weeks
of 2003, respectively, increased from the comparable 2002 period amounts of
$34 million and $98 million.
SRAC's ratio of earnings to fixed charges for both the 13 and 39 weeks of
2003 was 1.26, compared to 1.25 and 1.26 for the comparable 2002 periods.
Item 4. CONTROLS AND PROCEDURES
The Company's management, including Keith E. Trost, President
(principal executive officer) and George F. Slook, Vice President, Finance
(principal financial officer), have evaluated the effectiveness of the
Company's "disclosure controls and procedures,"as such term is defined
in Rules 13a-15(e) promulgated under the Securities Exchange
Act of 1934, as amended, (the "Exchange Act"). Based upon their
evaluation, the principal executive officer and principal
financial officer concluded that, at the end of the period
covered by this report, the Company's disclosure controls and
procedures were effective for the purpose of ensuring that
the information required to be disclosed in the reports that
the Company files or submits under the Exchange Act with
the Securities and Exchange Commission (the "SEC") (1) is
recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms,
and (2) is accumulated and communicated to the Company's
management, including its principal executive and
principal financial officers, as appropriate to allow timely
decisions regarding required disclosure. In addition,
based on that evaluation, no change in the Company's
internal control over financial reporting occurred during the
quarter ended September 27, 2003 that has materially affected,
or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
8
SEARS ROEBUCK ACCEPTANCE CORP.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 16, 2003, a lawsuit was filed in the United
States District Court for the Northern District of
Illinois against Sears, Roebuck and Co. ("Sears"),
certain of its officers, and SRAC, alleging that
certain public announcements and SEC filings by
Sears and SRAC concerning Sears credit card business
violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, Rule 10b-5 promulgated thereunder,
and Section 11 of the Securities Act of 1933, and
seeking damages. An amended complaint was filed on
October 16, 2003, naming additional individuals and
certain investment banks as defendants. The plaintiffs
purport to represent a class of noteholders who purchased
certain notes issued by SRAC between October 24, 2001
and October 17, 2002, whether by prospectus or otherwise.
SRAC believes that these claims lack merit and is
defending against them vigorously.
The consequences of this matter are not presently
determinable but, in the opinion of management of
SRAC after consulting with legal counsel and taking
into account insurance, the ultimate liability is
not expected to have a material effect on annual
results of operations, financial position, liquidity
or capital resources of SRAC.
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 current reports on Form 8-K filed by SRAC
during the quarter for which this report is filed.
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)
November 5, 2003
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 October 20, 1999
[Incorporated by reference to Exhibit 3(b) to the
Registrant's Quarterly Report on Form 10-Q for the
Quarter ended October 2, 1999*].
4(a) 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.
4(b) Fixed Charge Coverage and Ownership Agreement dated
as of September 24, 2002 between Sears Roebuck
Acceptance Corp. and Sears, Roebuck and Co.
[Incorporated by reference to Exhibit 4(f)
of Registration Statement No. 333-92082].
4(c) Indenture dated as of October 1, 2002 between the Registrant
and BNY Midwest Trust Company.[Incorporated by reference to
Exhibit 4(b) to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 28, 2002*].
4(d) Form of Fixed-Rate InterNotes [Incorporated by reference to
Exhibit 4 to the Registrant's Current Report on Form 8-K
dated April 23, 2003*].
4(e) Supplemental Indenture dated as of November 3, 2003 among
the Registrant, Sears Roebuck and Co. and BNY Midwest
Trust Company.**
4(f) Supplemental Indenture dated as of November 3, 2003 among
the Registrant, Sears Roebuck and Co. and JPMorgan Chase Bank
(successor to The Chase Manhatten Bank, N.A.).**
4(g) Guarantee executed by Sears, Roebuck and Co. under the
Indenture, dated as of May 15, 1995, between Registrant and
JPMorgan Chase Bank (successor to The Chase Manhattan Bank,
N.A.), as supplemented by the First Supplemental
Indenture, dated as of November 3, 2003**
4(h) Guarantee executed by Sears, Roebuck and Co. under the Indenture,
dated as of October 1, 2002, between Registrant and BNY Midwest
Trust Company, as supplemented by the First Supplemental Indenture,
dated as of November 3, 2003**
10 Acknowledgement and Extension Agreement, dated as of
August 19, 2003, among Sears, Roebuck and Co. ("Sears"),
Registrant, and Certain Lenders that are parties to the
364-Day Credit Agreement dated as of February 24, 2003
[Incorporated by reference to Exhibit 10(c) to
Sears'Quarterly Report on Form 10-Q for the quarter ended
September 27, 2003 (SEC File No 1-416)].
12 Calculation of ratio of earnings to fixed charges.**
15 Acknowledgement of awareness from Deloitte & Touche LLP,
dated November 4, 2003, concerning unaudited financial
information.**
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**
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* SEC File No. 1-4040.
** Filed herewith.
11