UNITED STATESSECURITIES 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
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2000
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: 302/434-3100
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, 2001, 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
None
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. 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, 2001, 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.
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, 2001, Sears owned all outstanding shares of SDC's common stock. During 2000 and 1999 there were no dividends declared or paid to Sears by SDC.Item 6. Selected Financial Data.Not applicable.
SEARS DC CORP.
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (thousands).
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 $213,025 in outstanding medium-term notes as of December 30, 2000 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, primarily in the event of a significant decline in 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.
The ratings of Sears debt securities as of December 30, 2000 appear in the table below:
| Moody's | | |
| Investors | | |
| Services, | Standard | |
| Inc. | & Poor's | Fitch, Inc. |
Unsecured long-term debt | A3 | A- | A- |
On June 1, 2000, Duff & Phelps Credit Rating Co. merged with Fitch IBCA, Inc. to form Fitch, Inc. and the Sears ratings were harmonized to the single set of ratings shown above.
Results of Operations
Medium-term notes outstanding were $213,025 as of December 30, 2000 and January 1, 2000. Average medium-term notes outstanding were $213,025, $266,276 and $469,557 in 2000, 1999 and 1998, respectively. Revenues decreased 12.8% to $19,252 in 2000 from $22,076 in 1999. Revenues decreased 31.6% to $22,076 in 1999 from $32,290 in 1998. The decrease in the average amount of medium-term notes outstanding led to interest and related expenses decreasing 12.7% to $19,122 in 2000 from $21,916 in 1999. In 1999 interest and related expenses decreased 31.6% to $21,916 from $32,035 in 1998 due to a decrease in the average amount of medium-term notes outstanding. Earnings covered fixed charges 1.005 times in 2000, 1999 and 1998.Cautionary Statement Regarding Forward Looking Information:
Certain statements made in this Annual Report on Form 10-K 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 the ability of Sears to perform under the agreements described herein and general economic conditions (such as interest rates). 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 (thousands)SDC's outstanding debt securities are subject to interest rate risk. All debt securities are considered non-trading. At year-end 2000 and 1999, 100% of SDC's portfolio was fixed rate. At year-end 2000 and 1999, the carrying value of SDC's debt was $213,025. The fair value of SDC's debt was $224,863 and $220,482 at year-end 2000 and 1999, respectively.As of year-end 2000, average interest rate by year of maturity was:
| | | 2001 | | | | 8.97 | % | | | |
| | | 2002 | | | | 8.69 | % | | | |
| | | 2003 | | | | 8.58 | % | | | |
| | | 2004 | | | | - | | | | |
| | | 2005 | | | | - | | | | |
| | | Thereafter | | | | 9.15 | % | | | |
| | | | | | | | | | | |
Item 8. Financial Statement and Supplementary Data
SEARS DC CORP. |
STATEMENTS OF INCOME |
| | | | | | | | | | | |
(thousands, except ratios) | | | | | | | | | |
| | | | | | | | | | | |
| | | | | 2000 | | | 1999 | | | 1998 |
Revenues | | | | | | | | | | | |
Earnings on notes of Sears | | $ | 19,252 | | $ | 22,076 | | $ | 32,290 |
| | | | | | | | | | | |
Expenses | | | | | | | | | | | |
Interest and related expenses | | | 19,122 | | | 21,916 | | | 32,035 |
Operating expenses | | | | 35 | | | 51 | | | 95 |
| | | | | | | | | | | |
Total expenses | | | | 19,157 | | | 21,967 | | | 32,130 |
| | | | | | | | | | | |
Income before income taxes | | | 95 | | | 109 | | | 160 |
| | | | | | | | | | | |
Income taxes | | | | 33 | | | 38 | | | 56 |
| | | | | | | | | | | |
Net income | | | $ | 62
| | $ | 71
| | $ | 104
|
| | | | | | | | | | | |
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, except share data) |
| | | | | | | | | |
| | | | | | 2000 | | | 1999 |
Assets | | | | | | | | | |
Cash and cash equivalents | | | $ | - | | $ | - |
Notes of Sears | | | | | 224,166 | | | 223,993 |
Interest receivable and other assets | | | 299 | | | 420 |
| | | | | | | | | |
Total assets | | | | $ | 224,465
| | $ | 224,413
|
| | | | | | | | | |
Liabilities | | | | | | | | | |
Medium-term notes | | | | $ | 213,025 | | $ | 213,025 |
| | | | | | | | | |
Interest payable and other liabilities | | | 6,052 | | | 6,062 |
| | | | | | | | | |
Total liabilities | | | | | 219,077 | | | 219,087 |
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 | | | | | 5,380 | | | 5,318 |
| | | | | | | | | |
Total stockholder's equity | | | | 5,388 | | | 5,326 |
| | | | | | | | | |
Total liabilities and stockholder's equity | | $ | 224,465
| | $ | 224,413
|
| | | | | | | | | |
See notes to financial statements | | | | | | | |
SEARS DC CORP. | |
STATEMENTS OF STOCKHOLDER'S EQUITY | |
(thousands) | | | | | | | | | | | |
| | | | | 2000 | | | 1999 | | | 1998 | |
| | | | | | | | | | | | |
Capital stock | | | | $ | 1 | | $ | 1 | | $ | 1 | |
| | | | | | | | | | | | |
Capital in excess of par value | | | 7 | | | 7 | | | 7 | |
| | | | | | | | | | | | |
Retained income | | | | | | | | | | | |
| | | | | | | | | | | | |
Beginning of year | | | | 5,318 | | | 5,247 | | | 5,143 | |
| | | | | | | | | | | | |
Net income | | | | 62 | | | 71 | | | 104 | |
| | | | | | | | | | | | |
End of year | | | | 5,380 | | | 5,318 | | | 5,247 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total stockholder's equity | | $ | 5,388
| | $ | 5,326
| | $ | 5,255
| |
| | | | | | | | | | | | |
See notes to financial statements | | | | | | | | | | |
SEARS DC CORP. |
STATEMENTS OF CASH FLOWS |
| | | | | | | | | | | |
(thousands) | | | | 2000 | | | 1999 | | | 1998 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
| | | | | | | | | | | |
Net income | | | $ | 62 | | $ | 71 | | $ | 104 |
Adjustment to reconcile net income to net cash | | | | | | | | |
provided by (used in) operating activities: | | | | | | | | |
Net change in interest receivable and other assets | | | | | | | | |
and interest payable and other liabilities | | | | 111 | | | (2,614) | | | (2,322) |
Net cash provided by (used in) operating activities | | 173 | | | (2,543) | | | (2,218) |
| | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
| | | | | | | | | | |
(Increase) decrease in notes of Sears | | | (173) | | | 121,965 | | | 113,497 |
Net cash provided by (used in) investing activities | | (173) | | | 121,965 | | | 113,497 |
| | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| | | | | | | | |
Repayments of medium-term notes | | - - | | | (119,480) | | | (111,275) |
Net cash used in financing activities | | - - | | | (119,480) | | | (111,275) |
| | | | | | | | | | | |
Net cash increase (decrease) in cash and equivalents | | | | - | | | (58) | | | 4 |
| | | | | | | | |
Balance at beginning of year | | - - | | | 58 | | | 54 |
| | | | | | | | | |
Balance at end of year | $ | - -
| | $ | - -
| | $ | 58
|
| | | | | | | | |
Supplemental Disclosure of Cash Flow Information | | | | | | | | |
| | | | | | | | | | | |
Cash paid during the year | | | | | | | | | |
Interest | | $ | 19,078 | | $ | 24,561 | | $ | 34,512 |
Incomes taxes | | | | 38 | | | 56 | | | 83 |
| | | | | | | | | | | |
See notes to financial statements | | | | | | | | |
SEARS DC CORP.
NOTES TO FINANCIAL STATEMENTS
(thousands)
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
2000 December 30, 2000 52
1999 January 1, 2000 52
1998 January 2, 1999 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, primarily in the event of a significant decline in Discover Card receivables of Sears former subsidiary, Dean Witter, which is now part of Morgan Stanley Dean Witter & Co. The fair market value of medium-term notes approximated $224,863 and $220,482 at December 30, 2000, and January 1, 2000, respectively, based on discounted cash flows using interest rates currently available to Sears. Selected details of SDC's borrowings are shown below.
| | | | | | | 2000 | | | 1999 | |
| | | | | | | | | | | |
8.52% to 9.26% medium-term notes due through 2012 | | | $213,025
| | | $213,025
| |
| | | | | | | | | | | |
At December 30, 2000 medium-term note maturities for the next five years and thereafter were as follows: |
| | | | | | | | | | | |
| | | 2001 | | | $ | 135,500 | | | | |
| | | 2002 | | | | 24,725 | | | | |
| | | 2003 | | | | 9,000 | | | | |
| | | 2004 | | | | - | | | | |
| | | 2005 | | | | - | | | | |
| | | Thereafter | | | | 43,800 | | | | |
| | | | | | | | | | | |
| | | | | | $ | 213,025
| | | | |
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:
None.
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/ MICHAEL J. CLEARY
Michael J. Cleary
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/LARRY R. RAYMOND Director, President and )
Larry R. Raymond Chief Executive Officer )
(Principal Executive Officer) )
)
)
/s/KEITH E. TROST Vice President and Treasurer )
Keith E. Trost (Principal Financial Officer) )
)
)
)
/s/MICHAEL J. CLEARY Vice President and Controller ) March 22, 2001
Michael J. Cleary (Principal Accounting Officer) )
)
)
)
/s/JEFFERY N. BOYER Director )
Jeffery N. Boyer )
)
)
)
)
/s/GLENN RICHTER Director )
Glen Richter )
)
SEARS DC CORP.
INDEX TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 2000 AND JANUARY 1, 2000
PAGE
STATEMENTS OF INCOME ; 5
STATEMENTS OF FINANCIAL POSITION 6
STATEMENTS OF STOCKHOLDER'S EQUITY 7
STATEMENTS OF CASH FLOWS 8
NOTES TO FINANCIAL STATEMENTS 9
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 December 30, 2000 and January 1, 2000, and the related Statements of Income, Stockholder's Equity and Cash Flows for each of the three years in the period ended December 30, 2000. 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 auditing standards generally accepted in the United States of America. 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 December 30, 2000 and January 1, 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2000, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
March 15, 2001
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) 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(c) 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(d) 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(e) 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(f) 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 herewithE-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**
_____________________________* SEC File No. 0-17955** Filed herewith E-2