UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 1998
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 registrantas 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.
As of February 27, 1998, the Registrant had 1,000 shares of capital stock
outstanding, all of which was 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 of Form 10-K
None
<PAGE>
SEARS DC CORP.
PART I
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. Commercial paper was sold by Sears Roebuck Acceptance
Corp., an affiliate of SDC, with expenses being paid by SDC.
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, 1998, 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.
<PAGE>
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, 1998, Sears owned all outstanding
shares of SDC's common stock. During 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 of at least 1.005
times, and in highly liquid short-term investments.
The $443.8 million in outstanding medium-term notes as of January 3,
1998 are not redeemable 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, Discover & Co., now known as Morgan Stanley
Dean Witter, Discover & Company.
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
Interest and related expenses decreased 43.5% to $47.7 million in
1997 from $84.4 million in 1996 due to a decrease in the balance of
medium-term notes outstanding. In 1996 interest and related expenses
decreased 27.3% to $84.4 million from $116.1 million in 1995 due to a
decrease in the balance of medium-term notes outstanding. Earnings
covered fixed charges 1.005 times in 1997, 1996, and 1995.
<PAGE>
SEARS DC CORP.
Item 8. Financial Statement and Supplementary Data.
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
(thousands, except ratios)
1997 1996 1995
<S> <C> <C> <C>
Revenues
Earnings on notes of Sears $ 48,043 $ 84,958 $ 116,802
Expenses
Interest and related expense 47,721 84,453 116,152
Operating expenses 84 83 69
Total expenses 47,805 84,536 116,221
Income before income taxes 238 422 581
Income taxes 83 148 203
Net income $ 155 $ 274 $ 378
Ratio of earnings to fixed charges 1.005 1.005 1.005
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE>
SEARS DC CORP.
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(thousands) 1997 1996
<S> <C> <C>
Assets
Cash and cash equivalents $ 54 $ 55
Notes of Sears 459,455 799,221
Accrued interest and other assets 853 1,290
Total assets $ 460,362 $ 800,566
Liabilities
Medium-term notes $ 443,780 $ 778,880
Accrued interest and other liabilities 11,431 16,690
Total liabilities 455,211 795,570
Stockholder's Equity
Capital 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 5,143 4,988
Total stockholder's equity 5,151 4,996
Total liabilities and stockholder's equity $ 460,362 $ 800,566
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE>
SEARS DC CORP.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
(thousands) 1997 1996 1995
<S> <S> <S> <S>
Capital stock $ 1 $ 1 $ 1
Capital in excess of par value 7 7 7
Retained income
Beginning of year 4,988 4,714 4,336
Net income 155 274 378
End of year 5,143 4,988 4,714
Total stockholder's equity $ 5,151 $ 4,996 $ 4,722
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE>
SEARS DC CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(thousands) 1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 155 $ 274 $ 37
Adjustments to reconcile net income to
net cash used in operating activities:
Net change in accrued interest income
and other assets and accrued interest
expense and other liabilities (4,821) (9,394) (2,140)
Net cash used in operating activities (4,666) (9,120) (1,762)
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in notes of Sears 339,765 458,945 294,465
Net cash provided by investing activities 339,765 458,945 294,465
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of medium-term notes (335,100) (449,825) (292,703)
Net cash used in financing activities (335,100) (449,825) (292,703)
Net increase (decrease) in cash and
cash equivalents (1) -- --
Balance at beginning of year 55 55 55
Balance at end of year $ 54 $ 55 $ 55
Supplemental Disclosure of Cash Flow
Information
Cash paid during the year
Interest $ 52,708 $ 94,079 $117,600
Income taxes 148 195 233
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE>
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 calender years.
Fiscal year Ended Weeks
1997 January 3, 1998 53
1996 December 28, 1996 52
1995 December 30, 1995 52
Cash and cash equivalents includes all highly liquid investments with
maturities of three months or less at 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 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 $475.2
million and $814.0 million at January 3, 1998 and December 28, 1996
respectively, based on discounted cash flows using interest rates of
comparable borrowings. Selected details of SDC's borrowings are shown below.
(millions)
1997 1996
7.67% to 9.26% medium-term notes due through 2012 $ 443.8 $ 778.9
At January 3, 1998, medium-term note maturities for the next five years
were as follows:
1998 $ 111.3
1999 119.5
2000 0.0
2001 135.5
2002 24.7
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
<PAGE>
SEARS DC CORP.
PART III
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 4th Quarter of 1997.
<PAGE>
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/ William K. Phelan
William K. 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/ALICE M. PETERSON* Director, President and )
Alice M. Peterson Chief Executive Officer )
(Principal Executive Officer) )
)
)
)
/s/WILLIAM K. PHELAN* Vice President and Controller ) March 23, 1998
William K. Phelan (Principal Accounting Officer) )
)
)
)
/s/LARRY R. RAYMOND* Vice President and Treasurer )
Larry R. Raymond (Principal Financial Officer) )
)
)
/s/JAMES A. BLANDA* Director )
James A. Blanda )
)
)
/s/JAMES D. CONSTANTINE* Director )
James D. Constantine )
*By: /s/ WILLIAM K. PHELAN Individually and as Attorney-in-Fact
William K. Phelan
<PAGE>
SEARS DC CORP.
INDEX TO FINANCIAL STATEMENTS
YEARS ENDED JANUARY 3, 1998 AND DECEMBER 28, 1996
PAGE
STATEMENTS OF INCOME 4
STATEMENTS OF FINANCIAL POSITION 5
STATEMENTS OF STOCKHOLDER'S EQUITY 6
STATEMENTS OF CASH FLOWS 7
NOTES TO FINANCIAL STATEMENTS 8
INDEPENDENT AUDITORS' REPORT S-2
S-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholder and Board of Directors
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 3,
1998 and December 28, 1996, and the related Statements of Income,
Stockholder's Equity and Cash Flows for each of the three years in the period
ended January 3, 1998. 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 3, 1998 and
December 28, 1996, and the results of its operations and its cash flows for
each of the three years in the period ended January 3, 1998, in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Chicago, Illinois
March 3, 1998
S-2
<PAGE>
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
<PAGE>
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**
24 Power of Attorney**
27 Financial Data Schedule**
* SEC File No. 0-17955
** Filed herewith
E-2
Exhibit 12
SEARS DC CORP.
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
thousands 1997 1996 1995
<S> <C> <C> <C>
Income before income taxes $ 238 $ 422 $ 581
Fixed Charges 47,721 84,453 116,152
(i)Earnings available for Fixed Charges 47,959 84,875 116,733
(ii) Fixed Charges 47,721 84,453 116,152
<FN>
Ratio of Earnings to Fixed Charges (i/ii) 1.005 1.005 1.005
</FN>
</TABLE>
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in Registration Statement No.
33-44671 of Sears DC Corp. of our report dated March 3, 1998 appearing in
this Annual Report on Form 10-K of Sears DC Corp. for the year ended January
3, 1998.
/S/Deloitte & Touche LLP
Chicago, Illinois
March 20, 1998
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a
director or officer, or both, of SEARS DC CORP., a Delaware corporation (the
"Corporation"), does hereby constitute and appoint JAMES A. BLANDA, ALICE M.
PETERSON, LARRY R. RAYMOND, WILLIAM K. PHELAN, NANCY K. BELLIS and KEITH E.
TROST, with full power to each of them to act alone, as the true and lawful
attorneys and agents of the undersigned, with full power of substitution and
resubstitution to each of said attorneys, to execute, file and deliver any
and all instruments and to do any and all acts and things which said
attorneys and agents, or any of them, deem advisable to enable the
Corporation to comply with the Securities Exchange Act of 1934, as amended,
and any requirements of the Securities and Exchange Commission in respect
thereto, relating to annual reports on Form 10-K, including specifically, but
without limitation of the general authority hereby granted, the power and
authority to sign his or her name in the name and on behalf of the
Corporation or as a director or officer, or both, of the Corporation, as
indicated below opposite his or her signature, to annual reports on Form 10-K
or any amendment or papers supplemental thereto; and each of the undersigned
does hereby fully ratify and confirm all that said attorneys and agents, or
any of them, or the substitute of any of them, shall do or cause to be done
by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has subscribed these presents,
as of this 24th day of March, 1998.
NAME TITLE
/s/ ALICE M. PETERSON Director, President and
Alice M. Peterson Chief Executive Officer
(Principal Executive Officer)
/s/ LARRY R. RAYMOND Vice President and Treasurer
Larry R. Raymond (Principal Financial Officer)
/s/ WILLIAM K. PHELAN Vice President and Controller
William K. Phelan (Principal Accounting Officer)
/s/ JAMES A. BLANDA Director
James A. Blanda
/s/ JAMES D. CONSTANTINE Director
James D. Constantine
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> JAN-03-1998
<CASH> 54
<SECURITIES> 0<F1>
<RECEIVABLES> 459,455
<ALLOWANCES> 0<F1>
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 0<F1>
<PP&E> 0<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 460,362
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 443,780
0<F1>
0<F1>
<COMMON> 1<F1>
<OTHER-SE> 5,150
<TOTAL-LIABILITY-AND-EQUITY> 460,362
<SALES> 0<F1>
<TOTAL-REVENUES> 48,043
<CGS> 0<F1>
<TOTAL-COSTS> 0<F1>
<OTHER-EXPENSES> 84
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 47,721
<INCOME-PRETAX> 238
<INCOME-TAX> 83
<INCOME-CONTINUING> 0
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> 155
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>NOT APPLICABLE
</FN>
</TABLE>
