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, 2002, 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.
Item 2. Properties.
None.
Item 3.
Item 3. Legal Proceedings.
None.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5.
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, 2002, Sears owned all outstanding shares of SDC's common stock. During 2001 and 2000 there were no dividends declared or paid to Sears by SDC.
Item 6.
Item 6. Selected Financial Data.
Not applicable.
PART II.
Item 7.
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.
The $77,525 in outstanding medium-term notes as of December 29, 2001 are not redeemable by SDC prior to their stated maturity except 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 29, 2001 appear in the table below:
Moody's
Investors
Services,
Inc.
Standard
&
Poor's
Fitch
Ratings
Unsecured long-term debt
A3
A-
A-
RESULTS OF OPERATIONS
Medium-term notes outstanding were $77,525 and $213,025 as of December 29, 2001 and December 30, 2000, respectively. Average medium-term notes outstanding were $183,602, $213,025 and $266,276 in 2001, 2000 and 1999, respectively. Revenues decreased 14.7% to $16,421in 2001 from $19,252 in 2000. Revenues decreased 12.8% to $19,252 in 2000 from $22,076 in 1999. The revenue decreases are due to lower levels of interest earning assets in each period. The decrease in the average amount of medium-term notes outstanding led to interest and related expenses decreasing 14.7% to $16,316 in 2001 from $19,122 in 2000. In 2000 interest and related expenses decreased 12.8% to $19,122 from $21,916 in 1999 due to a decrease in the average amount of medium-term notes outstanding. Earnings covered fixed charges 1.005 times in 2001, 2000 and 1999.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
Certain statements made in this Annual Report on Form 10-K are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. Such 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 7a.
Item 7a. 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 2001 and 2000, 100% of SDC's portfolio was fixed rate. At year-end 2001 and 2000, the carrying value of SDC's debt was $77,525 and $213,025, respectively. The fair value of SDC's debt was $85,756 and $224,863 at year-end 2001 and 2000, respectively.
As of year-end 2001, average interest rates by year of maturity were:
8.69%
8.58%
--
--
--
Thereafter
9.15%
SEARS DC CORP.
Statements of Income
See notes to financial statements.
SEARS DC CORP.
Statements of Financial Position
See notes to financial statements
SEARS DC CORP.
Statements of Stockholder's Equity
See notes to financial statements
SEARS DC CORP.
Statements of Cash Flows
See notes to financial statements
SEARS DC CORP.
Notes to Financial Statements
(thousands)
NOTE 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 Sears unsecured notes.
Under an agreement between SDC and Sears, the interest rate Sears pays on the unsecured notes to SDC 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 accounting principles generally accepted in the United States of America 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
December 29,
December 30,
January 1,
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.
Reclassifications
Certain reclassifications have been made to prior year financial statements and the notes to conform with the 2001presentation.
SEARS DC CORP.
Notes to Financial Statements
(thousands)
NOTE 2 - BORROWINGS
The medium-term notes are not redeemable by SDC except 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 $85,756 and $224,863 at December 29, 2001, and December 30, 2000, respectively, based on discounted cash flows using interest rates currently available to Sears. SDC's borrowings include the following:
At December 29, 2001 medium-term note maturities for the next five years and thereafter were as follows:
$
24,725
9,000
--
--
--
Thereafter
43,800
$
77,525
PART III
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Not applicable.
Item 11.
Item 11. Executive Compensation.
Not applicable.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Not applicable.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Not applicable.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
An "Index to Financial Statements" has been filed as a part of this report on page S-1 hereof.
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.
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)
/s/ William K. Phelan
By: William K. Phelan
Vice President and Controller
March 27, 2002
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
Larry R. Raymond
Director, President and Chief Executive Officer (Principal Executive Officer)
)
)
)
)
/s/ Keith E. Trost
Keith E. Trost
Director, Vice President and Treasurer (Principal Financial Officer)
)
)
)
)
March 27, 2002
/s/ William K. Phelan
William K. Phelan
Vice President and Controller (Principal Accounting Officer)
)
)
)
)
/s/ Paul J. Liska
Paul J. Liska
Director
)
)
)
)
SEARS DC CORP.
Years Ended December 29, 2001 and December 30, 2000
S-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Sears DC Corp.
Greenville, Delaware
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 29, 2001 and December 30, 2000, and the related statements of income, stockholder's equity and cash flows for each of the three years in the period ended December 29, 2001. 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 29, 2001 and December 30, 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2001, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Chicago, Illinois
March 22, 2002
-- page break --
EXHIBIT INDEX
Sears DC Corp. Form 10-K
For the Year Ended December 29, 2001
3(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*).
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)
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)*).
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.
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*).
Calculation of ratio of earnings to fixed charges**
Consent of Deloitte & Touche LLP**
______________________________
* SEC File No. 0-17955
** Filed herewith
E-1