UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 2, 2004
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 30, 2004 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 39 WEEKS ENDED OCTOBER 2, 2004
PART I. FINANCIAL INFORMATION:
PAGE NO.
Item 1. Financial Statements
Condensed Statements of Financial Position
October 2, 2004 (unaudited) and
September 27, 2003 (unaudited) and January 3, 2004 1
Condensed Statements of Income and Comprehensive
Income (unaudited) 13 Weeks and 39 Weeks ended
October 2, 2004 and September 27, 2003 2
Condensed Statements of Cash Flows (unaudited)
39 Weeks ended October 2, 2004 and September 27, 2003 3
Notes to Condensed Financial Statements (unaudited) 4, 5
Report of Independent Registered Public Accounting Firm 6
Item 2. Management's Discussion and Analysis of
Results of Operations 7
Item 4. Controls and Procedures 8
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 9
Item 5. Other Information 9
Item 6. Exhibits 9
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEARS ROEBUCK ACCEPTANCE CORP.
CONDENSED STATEMENTS OF FINANCIAL POSITION
(unaudited)
(millions, except share data) Oct. 2, Sept. 27, Jan. 3,
2004 2003 2004
------- ------- -------
Assets
Cash and cash equivalents $ 339 $ 1,126 $ 1,286
Notes of Sears 7,173 17,227 7,743
Other assets 22 149 28
------- ------- -------
Total assets $ 7,534 $ 18,502 $ 9,057
======= ======= =======
Liabilities
Commercial paper (net of
unamortized discount of
$1, $3 and $1) $ 816 $ 3,312 $ 774
Medium-term notes (net of
unamortized discount of
$2, $3 and $3) 1,180 4,248 2,701
Discrete underwritten debt (net
of unamortized discount of
$8, $55 and $8) 1,838 7,295 1,838
Accrued interest and
other liabilities 54 179 128
------- ------- -------
Total liabilities 3,888 15,034 5,441
------- ------- -------
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) -
Retained earnings 2,461 2,286 2,431
------- ------- -------
Total shareholder's equity 3,646 3,468 3,616
------- ------- -------
Total liabilities and
shareholder's equity $ 7,534 $ 18,502 $ 9,057
======= ======= =======
See notes to condensed financial statements.
1
SEARS ROEBUCK ACCEPTANCE CORP.
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
(millions, except ratios) 13 Weeks Ended 39 Weeks Ended
Oct. 2, Sept.27, Oct. 2, Sept.27,
2004 2003 2004 2003
------ ------ ------ ------
Revenues
Earnings on notes of Sears $ 64 $ 257 $ 211 $ 756
Earnings on cash equivalents 3 5 9 21
------ ------ ------ ------
Total revenues 67 262 220 777
------ ------ ------ ------
Expenses
Interest expense and amortization
of debt discount/premium 53 201 172 611
Loss on early retirement of debt - 7 1 7
Operating expenses - - 1 1
------ ------ ------ ------
Total expenses 53 208 174 619
------ ------ ------ ------
Income before income taxes 14 54 46 158
Income taxes 5 19 16 55
------ ------ ------ ------
Net income $ 9 $ 35 $ 30 $ 103
====== ====== ====== ======
Total comprehensive income $ 9 $ 35 $ 30 $ 103
====== ====== ====== ======
Ratios of earnings
to fixed charges 1.26 1.26 1.26 1.26
See notes to condensed financial statements.
2
SEARS ROEBUCK ACCEPTANCE CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(millions) 39 Weeks Ended
Oct. 2, Sept.27,
2004 2003
------- -------
Cash flows from operating activities:
Net income $ 30 $ 103
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Depreciation, amortization and other
noncash items 7 16
Increase in other assets - (8)
(Decrease) increase in other liabilities (74) 19
Loss on early retirement of debt 1 7
------- -------
Net cash (used in) provided by
operating activities (36) 137
------- -------
Cash flows from investing activities:
Decrease (increase) in notes of Sears 570 (1,875)
------- -------
Net cash provided by (used in)
investing activities 570 (1,875)
------- -------
Cash flows from financing activities:
Increase in commercial paper,
primarily 90 days or less 42 443
Proceeds from issuance of long-term debt 90 3,195
Payments for redemption of long-term debt (1,613) (2,316)
Issue costs paid to issue debt - (21)
------- -------
Net cash (used in) provided by
financing activities (1,481) 1,301
------- -------
Net decrease in cash and
cash equivalents (947) (437)
Cash and cash equivalents at beginning
of period 1,286 1,563
------- -------
Cash and cash equivalents at end of period $ 339 $ 1,126
======= =======
See notes to condensed financial statements.
3
SEARS ROEBUCK ACCEPTANCE CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Significant Accounting Policies
The unaudited interim financial statements of Sears Roebuck
Acceptance Corp. (the "Company" or "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 53 weeks
ended January 3, 2004, 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 $138 million
to a high of $822 million in the third quarter of 2004. SRAC has
an unsecured, three-year revolving credit facility in the
amount of $2.0 billion. No borrowings were outstanding under
this committed credit facility at the end of the third quarter
of 2004. This facility and other debt agreements require SRAC
to maintain specified fixed charge coverage ratios, and the credit
facility requires Sears' domestic segment to maintain a minimum
level of tangible net worth and a minimum interest coverage ratio.
SRAC and Sears were in compliance with these covenants at
October 2, 2004. This credit facility does not contain provisions
that would restrict borrowings based on material adverse changes
or credit ratings.
Sears has issued guarantees in support of SRAC's outstanding
public debt in order to maintain SRAC's exemption from being
deemed an "investment company" under the Investment Company Act
of 1940, as amended. These guarantees are continuous, have no
recourse provisions and require Sears to repay all SRAC's
outstanding debt including interest and principal and any
borrowings under the credit facility, in the event SRAC defaults
on its payment obligations.
3. Legal Proceedings
On June 17, 2003, an action was filed in the Northern District
of Illinois against Sears and certain of its officers, purportedly
on behalf of a class of all persons who, between June 21, 2002 and
October 17, 2002, purchased the 7% notes that SRAC issued on
June 21, 2002.
An amended complaint has been filed, naming as additional defendants
certain former officers, SRAC and several investment banking firms
who acted as underwriters for SRAC's March 18, May 21 and June 21, 2002
notes offerings. The amended complaint alleges that the defendants made
misrepresentations or omissions concerning its credit business during
the class period and in the registration statements and prospectuses
relating to the offerings. The amended complaint alleges that
these misrepresentations and omissions violated Sections 10(b)
and 20(a) of the Securities Exchange Act and Rule 10b-5 promulgated
thereunder, and Sections 11, 12 and 15 of the Securities Act of 1933
and purports to be brought on behalf of a class of all persons who
purchased any security of SRAC between October 24, 2001 and
October 17, 2002, inclusive. The defendants filed motions to dismiss
the action. On September 24, 2004, the court granted these motions
in part, and denied them in part. The court dismissed the claims related
to the March 18 and May 21, 2002 note offerings because the plaintiff
did not purchase notes in those offerings. The court dismissed
the Section 10(b) and Rule 10b-5 claims against several of the individual
defendants because the plaintiff failed to adequately plead such claims.
The court sustained the remaining claims. By invitation of the court,
on October 1, 2004, defendants moved to dismiss the Section 10(b),
Rule 10b-5 and Section 20(a) claims not dismissed in the court's
ruling. On October 5, 2004, the court granted the plaintiff
leave to file a second amended complaint.
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 applicable third party
insurance coverage, the ultimate liability is not expected
to have a material adverse effect on annual results of
operations, financial position, liquidity or capital
resources of SRAC. No amounts have been accrued for
this matter in the financial statements.
4. 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
2004 2003
--------------------- ---------------------
Avg. Avg.
Avg. Orig. Avg. Orig.
Volume Coupon Term Volume Coupon Term
--------------------- ---------------------
13 Weeks Ended:
Medium-term notes $ 61 2.91% 5.0 $ 135 1.89% 5.0
39 Weeks Ended:
Medium-term notes $ 90 2.54% 5.0 $2,945 4.51% 3.1
Discrete debt $ - -% - $ 250 7.40% 40.0
GROSS OUTSTANDING
10/2/04 9/27/03
--------------------- ---------------------
Avg. Avg.
Avg. Remain. Avg. Remain.
Balance Coupon Term Balance Coupon Term
--------------------- ---------------------
Medium-term notes $1,182 5.26% 2.6 $4,251 4.80% 2.8
Discrete debt $1,846 6.80% 11.2 $7,350 6.81% 13.3
MATURITIES
Medium-term Discrete
Year notes debt Total
--------------------------------------------------------
2004 $ 150 $ - $ 150
2005 185 112 297
2006 265 190 455
2007 67 269 336
2008 317 - 317
Thereafter 198 1,275 1,473
--------------------------------------------------------
Total $1,182 $1,846 $ 3,028
========================================================
Maturity schedule assumes debt that is callable within
one year of this Quarterly report will be retired.
--------------------------------------------------------
5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of
Sears Roebuck Acceptance Corp.:
We have reviewed the accompanying condensed statements of
financial position of Sears Roebuck Acceptance Corp.
(a wholly-owned subsidiary of Sears, Roebuck and Co.) as
of October 2, 2004 and September 27, 2003, and the related
condensed statements of income and comprehensive income for
the 13 week and 39 week periods then ended and condensed
cash flows for the 39 week period then ended. These
condensed interim financial statements are the responsibility
of the Sears Roebuck Acceptance Corp.'s management.
We conducted our reviews in accordance with standards of
the Public Company Accounting Oversight Board (United States).
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 standards of the Public Company Accounting Oversight
Board (United States), 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 condensed 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 standards of
the Public Company Accounting Oversight Board (United States),
the statement of financial position of Sears Roebuck Acceptance
Corp. as of January 3, 2004, 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 March 9, 2004, we expressed an
unqualified opinion on those financial statements.
In our opinion, the information set forth in the accompanying
condensed statement of financial position as of January 3, 2004
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 8, 2004
6
SEARS ROEBUCK ACCEPTANCE CORP.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Overview
Sears Roebuck Acceptance Corp.'s ("SRAC") investment in the Notes
of Sears, Roebuck and Co.("Sears") decreased in the 13- and
39-week periods ended October 2, 2004 as Sears continued to
utilize the cash proceeds from the sale in November 2003 of
its Credit and Financial Products business to pay down its debt.
SRAC retired a portion of its debt with the funds received from
Sears as payment on the Notes, resulting in reduced levels of both
assets and debt during the quarter. Lower average asset and debt
levels coupled with a reduction in average interest rates
drove both earnings and interest expense down in the 13- and 39-week
periods ended October 2, 2004. SRAC expects the Sears Note and debt
levels to decline further as proceeds are passed to SRAC for debt
retirement, resulting in reduced earnings and expenses.
Results of Operations
SRAC revenues decreased $195 million and $557 million in the
13-and 39 week periods ended October 2, 2004, respectively,
versus the comparable 2003 periods. SRAC's revenues are derived
primarily from the earnings on its investment in the notes of Sears
and invested cash. The decreases in revenue resulted primarily
from $11.3 billion and $10.4 billion decreases in average earning
asset levels and 204 and 196 basis point reductions in average rates
on these assets in the third quarter and 39-weeks ended October 2, 2004,
respectively, versus the 2003 periods.
SRAC's interest and related expenses, including loss on early retirement
of debt, decreased 75% to $53 million from $208 million and 72% to
$173 million from $618 million for the third quarter and first nine
months of 2004, respectively, as compared to the comparable 2003 periods.
Interest and related expenses decreased during the third quarter and first
nine months of 2004 primarily as a result of significantly lower debt levels.
SRAC's average total debt levels decreased 75% to $3.8 billion and 72% to
$4.2 billion in the third quarter and first nine months of 2004, respectively,
compared with $15.3 billion and $14.8 billion for the same periods in 2003.
Debt levels in 2004 declined from the comparable 2003 periods as a result
of the November 2003 cash tender offer in which SRAC retired $6.2 billion
of its outstanding term debt, coupled with a term debt retirement of
approximately $23 million and $1.6 billion during the 13- and 39- week
periods ended October 2, 2004. SRAC expects to retire an additional
$150 million of term debt by year-end 2004. SRAC's cost of funds on all
debt averaged 5.22% in the 13-week period and 4.89% in the 39-week
period ended October 2, 2004 compared to 5.08% and 4.98% for the same
periods in 2003.
The ratings on SRAC's debt appear in the table below:
Moody's Standard &
Investors Fitch Poor's Ratings
Service Ratings Services
--------------------------------------------------------------------
Unsecured term debt Baa1 BBB- BBB
Unsecured commercial paper P-2 F3 A-2
On October 25, 2004, Fitch Ratings lowered SRAC's long-term debt from BBB
and its short-term debt rating from F2, with a negative rating outlook.
On October 21, 2004, Standard & Poor's Ratings Services
("Standards & Poor's") placed both SRAC's short- and long-term debt
ratings on CreditWatch with negative implications, and Moody's Investors
Services ("Moodys") placed SRAC's unsecured long-term debt rating on
review for possible downgrade and affirmed its short-term rating at P-2.
SRAC expects the Standard & Poor's and Moody's ratings reviews to be
completed following the fourth quarter.
A downgrade of SRAC's short-term rating by Standard & Poor's would
reduce its flexibility to issue commercial paper, affecting the cost,
placement term and, potentially, the amount of short-term debt available.
However, SRAC has cash, investments and funding capability through
recourse to its investment in Sears Notes to refund all commercial
paper outstanding as well as to meet near term working capital needs.
Although Moody's affirmed SRAC's short-term debt rating, a downgrade
of that rating by Moody's would have a similar effect on SRAC's
short-term borrowing flexibility.
7
SRAC does not expect that a one notch downgrade of its long-term
debt by either Standard & Poor's or Moody's would substantially
affect its ability to access the term debt capital markets.
However, depending upon market conditions, the amount, timing,
and pricing of new borrowings could be adversely affected. If
two or more of SRAC's domestic long-term debt ratings are
downgraded to below BBB-/Baa3, SRAC's flexibility to access
the term debt capital markets would be reduced. In the event
of a downgrade of SRAC's long-term debt, the cost of borrowing
and fees payable under SRAC's credit facility could increase.
None of SRAC's borrowing arrangements have provisions that
would require repayment of principal prior to maturity due to
a ratings downgrade.
SRAC's net income of $9 million and $30 million for the
13-week and 39-week periods ended October 2, 2004, respectively,
decreased from the comparable 2003 period amounts of $35 million
and $103 million.
SRAC's ratio of earnings to fixed charges for both the
13-week and 39-week periods ended October 2, 2004, was
1.26, compared to 1.26 for both the comparable 2003 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 Rule 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, as of 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 October 2, 2004 that has
materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 17, 2003, an action was filed in the Northern District of
Illinois against Sears and certain of its officers, purportedly
on behalf of a class of all persons who, between June 21, 2002
and October 17, 2002, purchased the 7% notes that SRAC issued
on June 21, 2002.
An amended complaint has been filed, naming as additional
defendants certain former officers, SRAC and several investment
banking firms who acted as underwriters for SRAC's March 18,
May 21 and June 21, 2002 notes offerings. The amended complaint
alleges that the defendants made misrepresentations or omissions
concerning its credit business during the class period and in the
registration statements and prospectuses relating to the offerings.
The amended complaint alleges that these misrepresentations and
omissions violated Sections 10(b) and 20(a) of the Securities
Exchange Act and Rule 10b-5 promulgated thereunder, and Sections 11,
12 and 15 of the Securities Act of 1933 and purports to be brought
on behalf of a class of all persons who purchased any security of
SRAC between October 24, 2001 and October 17, 2002, inclusive.
The defendants filed motions to dismiss the action. On
September 24, 2004, the court granted these motions in part,
and denied them in part. The court dismissed the claims
related to the March 18 and May 21, 2002 note offerings
because the plaintiff did not purchase notes in those offerings.
The court dismissed the Section 10(b) and Rule 10b-5 claims
against several of the individual defendants because the
plaintiff failed to adequately plead such claims. The court
sustained the remaining claims. By invitation of the court,
on October 1, 2004, defendants moved to dismiss the Section 10(b),
Rule 10b-5 and Section 20(a) claims not dismissed in the court's
ruling. On October 5, 2004, the court granted the plaintiff
leave to file a second amended complaint.
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 applicable third party
insurance coverage, the ultimate liability is not expected
to have a material adverse effect on annual results of
operations, financial position, liquidity or capital
resources of SRAC. No amounts have been accrued for this
matter in the financial statements.
Item 5. Other Information
(a) Reports on Form 8-K:
There were no reports of Form 8-K filed by SRAC during
the quarter for which this report is
filed.
Item 6. Exhibits
(a) The exhibits listed in the "Exhibit Index" are
filed as part of this report.
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
(authorized officer of
Registrant)
November 8, 2004
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 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
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.
12 Calculation of ratio of earnings to fixed charges.**
15 Acknowledgement of awareness from Deloitte & Touche LLP,
dated November 8, 2004, 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**
* SEC File No. 1-4040.
** Filed herewith
11