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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 1999
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 36-3533346
(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: 302/888-3114
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock par
value $1.00 per share
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 .
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.x
As of February 28, 1999, the 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 (I)(1)(a)
and (b) of Form 10-K and is therefore filing this report with a reduced
disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of this Form 10-K incorporates by reference certain information from
the Sears, Roebuck and Co. 1998 Annual Report to Shareholders.
SEARS DC CORP.
PART 1
Item 1. Business
Sears DC Corp. ("SDC"), a wholly-owned subsidiary of Sears, Roebuck and Co.
("Sears") organized under the laws of Delaware in January 1987, was formed to
borrow in domestic and foreign debt markets and lend the proceeds of such
borrowings to Sears and certain direct and indirect subsidiaries of Sears in
exchange for their unsecured notes. SDC raised funds through the sale of its
medium-term notes and direct placement of commercial paper with corporate and
institutional investors. The only outstanding debt of SDC is two series of
medium-term notes. SDC does not plan to issue additional debt.
Under an agreement between SDC and Sears, the interest rate paid by Sears on
its unsecured notes is designed to produce earnings sufficient to cover SDC's
fixed charges at least 1.005 times. Required payments of principal and
interest to SDC under the Sears borrowing agreement are intended to be
sufficient to allow SDC to make timely payments of principal and interest to
the holders of its securities.
A Net Worth Maintenance Agreement exists between Sears and SDC which requires
Sears to maintain ownership of and positive stockholder's equity in SDC.
At February 28, 1999, SDC had no employees on its payroll and its officers
and directors consisted of employees of affiliated companies. Its offices
are located at 3711 Kennett Pike, Greenville, Delaware 19807.
Item 2. Properties.
None.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
SEARS DC CORP.
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.
There is no established public trading market for SDC's common stock. As of
February 28, 1999, Sears owned all outstanding shares of SDC's common stock.
During 1998 and 1997 there were no dividends declared or paid to Sears by
SDC.
Item 6. Selected Financial Data.
Not applicable.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Financial Condition
SDC has invested funds in the unsecured notes of Sears, which pay interest
sufficient to cover SDC's fixed charges at least 1.005 times, and in highly
liquid short-term investments.
The $332.5 million in outstanding medium-term notes as of January 2, 1999 are
not redeemable by SDC prior to their stated maturity except for notes having
a stated maturity at the time of issue of more than seven years which may be
redeemed under certain circumstances in the event of declining Discover Card
receivables of Sears former subsidiary, Dean Witter, which is now a part of
Morgan Stanley Dean Witter & Co.
The financial information appearing in this Annual Report on Form 10-K is
presented in historical dollars which do not reflect the decline in
purchasing power that results from inflation. As is the case for most
financial companies, substantially all of SDC's assets and liabilities are
monetary in nature. Interest rates on SDC's investment in Sears notes are
set to provide for a ratio of earnings to fixed charges of at least 1.005
times. This maintenance mechanism insulates SDC from bearing the effects of
inflation-based interest rate increases.
Results of Operations
Medium-term notes outstanding decreased 25.1% to $332.5 million as of January
2, 1999 from $443.8 million as of January 3, 1998. The decrease in the notes
was a result of payment on certain notes that reached their maturity date.
Revenues decreased 32.7% to $32.3 million in 1998 from $48.0 million in 1997,
primarily as a result of the decrease in the average amount of Sears notes
outstanding during 1998 compared to 1997. Revenues decreased 43.5% to $48.0
million in 1997 from $85.0 million in 1996, primarily as a result of the
decrease in the average amount of Sears notes outstanding during 1997
compared to 1996. The decrease in the average amount of medium-term notes
outstanding led to interest and related expenses decreasing 32.9% to $32.0
million in 1998 from $47.7 million in 1997. In 1997 interest and related
expenses decreased 43.5% to $47.7 million from $84.5 million in 1996 due to
a decrease in the average amount of medium-term notes outstanding. Earnings
covered fixed charges 1.005 times in 1998, 1997, and 1996.
Year 2000:
Year 2000 compliance is the ability of information systems to properly
recognize and process dates and date-sensitive information including the year
2000 and beyond (commonly referred to as Year 2000 or Y2K). As a
wholly-owned subsidiary of Sears, SDC uses Sears and Sears subsidiaries
information systems and service providers to support its operations.
Therefore, SDC does not have a Y2K compliance plan in place; it is relying on
the company-wide Year 2000 effort being coordinated by Sears. If Sears is
not successful in completing the implementation of its Year 2000 plan, SDC's
operations could be materially impacted. Furthermore, because SDC lends the
proceeds of its borrowings to Sears and certain subsidiaries of Sears, any
material adverse Year 2000 effect on Sears or its subsidiaries ability to
make timely payments to SDC could materially impact SDC's ability to make
timely payments of principal and interest to the holders of its securities.
SDC has not and will not bear any expenses in connection with the Sears
company-wide Year 2000 effort.
A complete description of the Sears Y2K initiative can be found on pages 29
and 31 of the Sears, Roebuck and Co. 1998 Annual Report under the heading
"Year 2000", which description is incorporated by reference herein and filed
as Exhibit 99 hereto.
Cautionary Statement Regarding Forward Looking Information:
Certain statements made in this Annual Report on Form 10-K (including the
description of the Sears Year 2000 compliance effort) are forward-looking and
are made in reliance on the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. As such they involve risks and uncertainties
that could cause actual results to differ materially. These statements are
based on a number of assumptions about a variety of factors, including
general economic conditions (such as interest rates) and, with respect to the
discussion of Year 2000 matters, the technical skills of Sears employees and
independent contractors, the representations and preparedness of third
parties, vendors' delivery of merchandise and performance of services
required by Sears and the collateral effects of Year 2000 compliance issues
on Sears business partners and customers. While SDC believes that these
assumptions are reasonable, SDC cautions that it is impossible to predict the
impact of certain facts that could cause actual results to differ from
expected results.
Item 7(a). Quantitative and Qualitative Disclosures about Market Risk
The following tables provide information about SDC's financial instruments
that are sensitive to changes in interest rates. The fair value of SDC's
long-term, fixed-rate debt was estimated by discounting estimated cash flows
based on Sears current borrowing rates for debt with similar maturities. All
items described in the tables below are non-trading.
1998
(millions, except percent)1999 2000 2001 2002 2003 Thereafter Total Fair
Value
Long-term debt including
current portion
Fixed rate amount $119.5 - $135.5 $24.7 $9.0 $43.8 $332.5 $360.7
Average interest rate 8.34% - 8.97% 8.69% 8.58% 9.15%
1997
(millions, except percent)1998 1999 2000 2001 2002 Thereafter Total Fair
Value
Long-term debt including
current portion
Fixed rate amount $111.3 $119.5 - $135.5 $24.7 $52.8 $443.8 $475.5
Average interest rate 8.98% 8.34% - 8.97% 8.69% 9.05%
Item 8. Financial Statement and Supplementary Data
SEARS DC CORP.
STATEMENTS OF INCOME
(thousands, except ratios)
1998 1997 1996
Revenues
Earnings on notes of Sears $32,290 $48,043 $84,958
Expenses
Interest and related expenses 32,035 47,721 84,453
Operating expenses 95 84 83
Total expenses 32,130 47,805 84,536
Income before income taxes 160 238 422
Income taxes 56 83 148
Net income $104 $155 $274
Ratio of earnings to
fixed charges 1.005 1.005 1.005
See notes to financial statements
SEARS DC CORP.
STATEMENTS OF FINANCIAL POSITION
(thousands)
1998 1997
Assets
Cash and cash equivalents $ 58 $ 54
Notes of Sears 345,958 459,455
Interest receivable
and other assets 586 853
Total assets $ 346,602 $ 460,362
Liabilities
Medium-term notes $ 332,505 $ 443,780
Interest payable and
other liabilities 8,842 11,431
Total liabilities 341,347 455,211
Stockholder's Equity
Common stock, par value
$1.00 per share, 1,000
shares authorized and outstanding 1 1
Capital in excess of par value 7 7
Retained income 5,247 5,143
Total stockholder's equity 5,255 5,151
Total liabilities and
stockholder's equity $ 346,602 $ 460,362
See notes to financial statements
SEARS DC CORP.
STATEMENTS OF STOCKHOLDER'S EQUITY
(thousands)
1998 1997 1996
Capital stock $ 1 $ 1 $ 1
Capital in excess
of par value 7 7 7
Retained income
Beginning of year 5,143 4,988 4,714
Net income 104 155 274
End of year 5,247 5,143 4,988
Total stockholder's
equity $ 5,255 $ 5,151 $ 4,996
See notes to financial statements
SEARS DC CORP.
STATEMENTS OF CASH FLOWS
(thousands)
1998 1997 1996
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 104 $ 155 $ 274
Adjustment to reconcile
net income to net cash used
in operating activities
Net change in interest
receivable and other assets
and interest payable and
other liabilities (2,322) (4,821) (9,394)
Net cash used in operating
activities (2,218) (4,666) (9,120)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Decrease in notes of Sears 113,497 339,765 458,945
Net cash provided by investing
activities 113,497 339,765 458,945
CASH FLOWS FROM FINANCING
ACTIVITIES:
Repayments of medium-term
notes (111,275) (335,100) (449,825)
Net cash used in financing
activities (111,275) (335,100) (449,825)
Net increase (decrease) in
cash and cash equivalents 4 (1) -
Balance at beginning of year 54 55 55
Balance at end of year $ 58 $ 54 $ 55
Supplemental Disclosure of Cash Flow
Information
Cash paid during the year
Interest $ 34,512 $ 52,708 $ 94,079
Incomes taxes 83 148 195
See notes to financial statements
SEARS DC CORP.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Sears DC Corp. ("SDC"), a wholly-owned subsidiary of Sears, Roebuck and Co.
("Sears"), was principally engaged in borrowing in domestic and foreign debt
markets and lending the proceeds of such borrowings to Sears and certain
direct and indirect subsidiaries of Sears in exchange for their unsecured
notes.
Under an agreement between SDC and Sears, the interest rate paid by Sears is
designed to produce earnings sufficient to cover SDC's fixed charges at least
1.005 times. Required payments of principal and interest to SDC under the
Sears borrowing agreement are intended to be sufficient to allow SDC to make
timely payments of principal and interest to the holders of its securities.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
SDC's fiscal year ends on the Saturday nearest December 31. Unless otherwise
stated, references to years in this report relate to fiscal years rather than
to calendar years.
Fiscal year Ended Weeks
1998 January 2, 1999 52
1997 January 3, 1998 53
1996 December 28, 1996 52
Cash and cash equivalents includes all highly liquid investments with
maturities of three months or less at the date of purchase.
The results of operations of SDC are included in the consolidated federal
income tax return of Sears. Tax liabilities and benefits are allocated as
generated by SDC, whether or not such benefits would be currently available
on a separate return basis. Taxes are provided based on the statutory
federal income tax rate.
2. BORROWINGS
The medium-term notes are not redeemable by SDC except for notes having a
stated maturity at the time of issue of more than seven years which may be
redeemed under certain circumstances in the event of declining Discover Card
receivables. The fair market value of medium-term notes approximated $360.7
million and $475.5 million at January 2, 1999 and January 3, 1998,
respectively, based on discounted cash flows using interest rates currently
available to Sears. Selected details of SDC's borrowings are shown below.
(millions) 1998 1997
7.81% to 9.26% medium-term
notes due through 2012 $332.5 $443.8
At January 2, 1999 medium-term note maturities for the next five years and
thereafter were as follows:
1999 $119.5
2000 -
2001 135.5
2002 24.7
2003 9.0
Thereafter 43.8
$332.5
SEARS DC CORP.
PART III
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 10. Directors and Executive Officers of the Registrant.
Not applicable.
Item 11. Executive Compensation.
Not applicable.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Not applicable.
Item 13. Certain Relationships and Related Transactions.
Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
1. An "Index to Financial Statements" has been filed as a part of this report
on page S-1 hereof.
2. No financial statement schedules are included herein because they are not
required or because the information is contained in the financial statements
and notes thereto, as noted in the "Index to Financial Statements" filed as
part of this report.
3. An "Exhibit Index" has been filed as part of this report beginning on page
E-1 hereof.
(b) Reports on Form 8-K:
There was no report on Form 8-K filed by the Registrant during the fourth
quarter of 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 DC CORP.
(Registrant)
By: /s/ ROBERT J. PHELAN
Robert J. Phelan
Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
/s/JAMES D. CONSTANTINE Director, President and )
James D. Constantine Chief Executive Officer )
(Principal Executive Officer) )
)
)
)
/s/LARRY R. RAYMOND Director, Vice President ) March 24, 1999
Larry R. Raymond and Treasurer )
(Principal Financial Officer) )
)
)
/s/ROBERT J. PHELAN Vice President and Controller )
Robert J. Phelan (Principal Accounting Officer) )
)
)
/s/JEFFREY N. BOYER Director )
Jeffrey N. Boyer )
SEARS DC CORP.
INDEX TO FINANCIAL STATEMENTS
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998
PAGE
STATEMENTS OF INCOME 6
STATEMENTS OF FINANCIAL POSITION 7
STATEMENTS OF STOCKHOLDER'S EQUITY 8
STATEMENTS OF CASH FLOWS 9
NOTES TO FINANCIAL STATEMENTS 10
INDEPENDENT AUDITORS' REPORT S-2
S-1
INDEPENDENT AUDITORS' REPORT
To the Stockholder and Board of Directors
Sears DC Corp.
Greenville, DE
We have audited the accompanying Statements of Financial Position of Sears DC
Corp. (a wholly-owned subsidiary of Sears, Roebuck and Co.) as of January 2,
1999 and January 3, 1998, and the related Statements of Income, Stockholder's
Equity and Cash Flows for each of the three years in the period ended January
2, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Sears DC Corp. as of January 2, 1999 and
January 3, 1998, and the results of its operations and its cash flows for
each of the three years in the period ended January 2, 1999, in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Chicago, Illinois
March 16, 1999
S-2
EXHIBIT INDEX
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
(Form 10)*).
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*).
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) on Form 10-K of the Registrant for
the year ended December 30, 1995*).
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 year ended December 30, 1995*).
4(a) Net Worth Maintenance Agreement between Discover Credit Corp. and
Sears, Roebuck and Co., dated as of November 13, 1987 (Incorporated by
reference to Exhibit 4 to Form 10*).
4(b) Forms of fixed rate Medium-Term Note and floating rate Medium-Term
Note (Incorporated by reference to Exhibits 4.1 and 4.2 to Current Report on
Form 8-K of the Registrant dated February 9, 1990*).
4(c) Indenture, dated as of June 1, 1991 between Discover Credit Corp. and
Bank of Delaware as Trustee (Incorporated by reference to Exhibit 4 to
Registration Statement No. 33-40056*).
4(d) Forms of fixed rate Medium-Term Note Series II and floating rate
Medium-Term Note Series II (Incorporated by reference to Exhibits 4.2 and 4.3
to Current Report on Form 8-K of the Registrant dated June 20, 1991*).
4(e) Indenture, dated as of February 15, 1992, between Discover Credit
Corp. and Harris Trust Company of New York (Incorporated by reference to
Exhibit 4.1 to Current Report on Form 8-K of the Registrant dated February
28, 1992*).
4(f) Forms of fixed rate Medium-Term Note Series III and floating rate
Medium-Term Note Series III (Incorporated by reference to Exhibits 4.2 and
4.3 to Current Report on Form 8-K of the Registrant dated February 28,
1992*).
4(g) 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.
_________________________________________
* SEC File No. 0-17955
** Filed herewith
E-1
10(a) Letter Agreement dated March 9, 1993 between Sears, Roebuck and Co.
and Discover Credit Corp. (Incorporated by reference to Exhibit 10(g) to
Annual Report on Form 10-K of the Registrant for the year ended December 31,
1992*).
10(b) Amendment dated March 22, 1994 to Letter Agreement dated March 9,
1993 between Sears, Roebuck and Co. and Discover Credit Corp. (Incorporated
by reference to Exhibit 10(b) to Annual Report on Form 10-K of the Registrant
for the year ended December 31, 1994*).
12 Calculation of ratio of earnings to fixed charges**
23 Consent of Deloitte & Touche LLP**
27 Financial Data Schedule**
99 Pages 29 and 31 of the Sears, Roebuck and Co. Annual Report
(Incorporated by reference to Exhibit 13.(ii) of the Sears, Roebuck and Co.
Annual Report on Form 10-K for the fiscal year ended January 2, 1999 (File
no. 1-416)).
______________________________
* SEC File No. 0-17955
** Filed herewith
E-2