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 JUNE 28, 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
(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 July 26, 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.
SEARS ROEBUCK ACCEPTANCE CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 WEEKS AND 26 WEEKS ENDED JUNE 28, 2003
PART I. FINANCIAL INFORMATION: PAGE NO.
Item 1. Financial Statements
Statements of Financial Position
June 28, 2003 (unaudited) and June 29, 2002 (unaudited)
and December 28, 2002 1
Statements of Income and Comprehensive Income (unaudited)
13 Weeks and 26 Weeks ended June 28, 2003
and June 29, 2002 2
Statements of Cash Flows (unaudited)
26 Weeks ended June 28, 2003
and June 29, 2002 3
Notes to Financial Statements (unaudited) 4, 5
Independent Accountants' Report 6
Item 2. Management's Discussion and Analysis of Operations 7
Item 4. Disclosure Controls and Procedures 7
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 8
Item 6. Exhibits and Reports on Form 8-K 8
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEARS ROEBUCK ACCEPTANCE CORP.
STATEMENTS OF FINANCIAL POSITION
(unaudited)
-------------------
(millions, except share data) June 28, June 29, Dec. 28,
2003 2002 2002
-------- -------- --------
Assets
Cash and cash equivalents $ 2,449 $ 579 $ 1,563
Notes of Sears 16,252 17,746 15,352
Other assets 167 61 139
-------- -------- --------
Total assets $ 18,868 $ 18,386 $ 17,054
Liabilities
Commercial paper (net of
unamortized discount of
$4, $10 and $5) $ 3,208 $ 3,880 $ 2,869
Medium-term notes (net of
unamortized discount of
$4, $5 and $5) 4,242 2,500 2,118
Discrete underwritten debt (net
of unamortized discount of
$56, $60 and $58) 7,794 8,540 8,542
Accrued interest and
other liabilities 191 167 160
-------- -------- --------
Total liabilities 15,435 15,087 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 2,251 2,117 2,183
-------- -------- --------
Total shareholder's equity 3,433 3,299 3,365
-------- -------- --------
Total liabilities and
shareholder's equity $ 18,868 $ 18,386 $ 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 26 Weeks Ended
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
------- ------- ------- -------
Revenues
Earnings on notes of Sears $ 248 $ 240 $ 499 $ 474
Earnings on cash equivalents 9 5 16 8
---- ---- ---- ----
Total revenues 257 245 515 482
---- ---- ---- ----
Expenses
Interest expense and amortization
of debt discount/premium 204 195 410 383
Operating expenses 1 1 1 1
---- ---- ---- ----
Total expenses 205 196 411 384
---- ---- ---- ----
Income before income taxes 52 49 104 98
Income taxes 18 17 36 34
---- ---- ---- ----
Net income $ 34 $ 32 $ 68 $ 64
==== ==== ==== ====
Total other comprehensive income(loss)
Losses on cash flow hedge,
net of tax - (3) - (3)
---- ---- ---- ----
Total comprehensive income $ 34 $ 29 $ 68 $ 61
==== ==== ==== ====
Ratios of earnings
to fixed charges 1.25 1.25 1.25 1.26
See notes to financial statements.
2
SEARS ROEBUCK ACCEPTANCE CORP.
STATEMENTS OF CASH FLOWS
(unaudited)
(millions) 26 Weeks Ended
June 28, June 29,
2003 2002
------ -------
Cash flows from operating activities:
Net income $ 68 $ 64
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, amortization and other
noncash items 11 7
(Increase)decrease in other assets (15) 80
Increase(decrease)in other liabilities 31 (25)
------ ------
Net cash provided by operating activities 95 126
------ ------
Cash flows from investing activities:
Increase in notes of Sears (900) (1,732)
------ ------
Net cash used in
investing activities (900) (1,732)
------ ------
Cash flows from financing activities:
Increase in commercial paper,
primarily 90 days or less 339 655
Proceeds from issuance of long-term debt 3,060 1,832
Payments for redemption of long-term debt (1,687) (877)
Issue costs paid to issue debt (21) (24)
------ ------
Net cash provided by
financing activities 1,691 1,586
------ ------
Net increase (decrease) in cash and
cash equivalents 886 (20)
Cash and cash equivalents at beginning
of period 1,563 599
------ ------
Cash and cash equivalents at end of period $ 2,449 $ 579
====== ======
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 $1.7 billion to a high of $3.5 billion in the second quarter of
2003. On June 28, 2003, SRAC's committed credit facilities consisted of a
$3.5 billion 364-day revolving credit facility expiring February 23, 2004
which includes an option to extend the repayment of borrowings, if any,
through February 2005.
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, 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. The plaintiffs purport to represent a class of
noteholders who purchased certain notes issued by SRAC between June 21, 2002
and October 17, 2002. 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 and reserves, 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 Event
On August 1, 2003, SRAC announced that it has elected to call for redemption
the entire outstanding principal amount of its $250 million 7% notes due
March 1, 2038. The redemption date is September 1, 2003.
4
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 $1,280 3.57% 2.4 $ - % -
Discrete debt $ - -% - $1,250 7.19% 32.0
26 Weeks Ended:
Medium-term notes $2,810 4.64% 3.0 $ 15 4.50% 2.6
Discrete debt $ 250 7.40% 40.0 $1,850 7.03% 24.9
GROSS OUTSTANDING
6/28/03 6/29/02
--------------------- ---------------------
Avg. Avg.
Avg. Remain. Avg. Remain.
Balance Coupon Term Balance Coupon Term
--------------------- ---------------------
Medium-term notes $4,246 2.65% 2.6 $2,505 5.91% 1.4
Discrete debt $7,850 6.82% 14.9 $8,600 6.97% 13.5
MATURITIES
Medium-term Discrete
Year notes debt Total
---------------------------------------------------
2003 $ 559 $ 250 $ 809
2004 1,702 - 1,702
2005 204 250 454
2006 503 550 1,053
2007 103 - 103
Thereafter 1,175 6,800* 7,975
---------------------------------------------------
Total $4,246 $7,850 $12,096
===================================================
*On August 1, 2003, SRAC announced that it has
elected to call for redemption the entire
outstanding principal amount of its $250 million 7%
notes due March 1, 2038. The redemption date is
September 1, 2003.
---------------------------------------------------
5
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 June 28, 2003 and
June 29, 2002, and the related statements of income and
comprehensive 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 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 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
August 6, 2003
6
SEARS ROEBUCK ACCEPTANCE CORP.
ITEM 2. ANALYSIS OF RESULTS OF OPERATIONS
During the second quarter of 2003, SRAC revenues increased to $257 million from
$245 million in the comparable 2002 period. For the first six months of 2003,
SRAC's revenues increased to $515 million from $482 million for the comparable
2002 period. The increase in revenue resulted from a $1 billion increase in
average earning asset levels in the second quarter and first half of 2003
versus the 2002 periods.
SRAC's interest and related expenses increased 5% to $204 million from $195
million and 7% to $410 million from $383 million for the second quarter and
first half of 2003, respectively, as compared to the comparable 2002 periods.
Interest and related expenses increased during the second quarter and first
half of 2003 due to increases in average long-term debt levels. SRAC's average
long-term debt increased to $11.6 billion and $11.4 billion in the second
quarter and first six months of 2003, respectively, compared with $10.4 billion
and $10.1 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 $3.2 billion for both the second quarter and
first half of 2003, compared to $3.7 billion and $3.6 billion for the
respective 2002 periods. SRAC's cost of short-term funds averaged 1.60% in the
second quarter and 1.68% in the first six months of 2003 compared to 2.18% and
2.34% for the same periods in 2002. SRAC's cost of long-term funds averaged
6.40% and 6.48% in the second quarter and first six months of 2003 compared to
6.54% for both periods in 2002.
SRAC's net income of $34 million and $68 million for the second quarter and
first half of 2003, respectively, increased from the comparable 2002 period
amounts of $32 million and $64 million.
SRAC's ratio of earnings to fixed charges for both the second quarter and first
half of 2003 was 1.25, compared to 1.25 and 1.26 for the comparable 2002
periods.
Item 4. DISCLOSURE 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-14
and 15d-14 promulgated under the Securities Exchange Act of 1934, as amended,
within 90 days of the filing date of this Quarterly Report on Form 10-Q. Based
upon their evaluation, the principal executive officer and principal financial
officer concluded that the Company's disclosure controls and procedures are
effective. There were no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls,
since the date the controls were evaluated.
7
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. The plaintiffs purport to represent a class
of noteholders who purchased certain notes issued by SRAC
between June 21, 2002 and October 17, 2002. 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 and reserves,
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:
Registrant filed Current Reports on
Form 8-K dated April 23, 2003 and
May 14, 2003 [Items 5 and 7].
8
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 6, 2003
9
SEARS ROEBUCK ACCEPTANCE CORP.
CERTIFICATIONS
I, Keith E. Trost, President of Sears Roebuck Acceptance Corp.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sears
Roebuck Acceptance Corp.
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
(a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date");
and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and;
6.The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: August 6, 2003
By: /s/ Keith E. Trost
--------------------
Keith E. Trost
President (principal executive officer)
10
SEARS ROEBUCK ACCEPTANCE CORP.
I, George F. Slook, Vice President, Finance of Sears Roebuck
Acceptance Corp., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sears
Roebuck Acceptance Corp.
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
(a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date");
and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and;
6.The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: August 6, 2003
By: /s/ George F. Slook
--------------------
George F. Slook
Vice President, Finance
(principal financial officer)
11
EXHIBIT INDEX
3(a) Certificate of Incorporation of the Registrant, as in
effect at November 13, 1987 [Incorporated by reference to
Exhibit 28(c) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1987*].
3(b) By-laws of the Registrant, as in effect at 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) Form of Fixed-Rate Medium-Term Notes Series VII
[Incorporated by reference to Exhibit 4(a) to the
Registrant's Current Report on Form 8-K dated
May 14, 2003*].
4(f) Form of Floating Rate Medium-Term Notes Series VII
[Incorporated by reference to Exhibit 4(b) to the
Registrant's Current Report on Form 8-K dated
May 14, 2003*].
12 Calculation of ratio of earnings to fixed charges.**
15 Acknowledgement of awareness from Deloitte & Touche LLP,
dated August 6, 2003, concerning unaudited financial
information.**
32(a) Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002(18 U.S.C.1350)**
32(b) Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002(18 U.S.C.1350)**
-----------------------
* SEC File No. 1-4040.
** Filed herewith.
12