Annual Report (Form 10-K), fiscal year 1994

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 direct and indirect subsidiaries of Sears ("SDC borrowers") in exchange for 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, as agent, with expenses, but no fees, being paid by SDC.
Historically, the proceeds of SDC's borrowings were loaned to Sears Consumer Financial Corporation of Delaware ("SCFCD"), a wholly-owned subsidiary of Dean Witter, Discover & Co. ("DWDC"), to finance the accounts receivable generated by the Discover Card and consumer installment notes receivable. However, as a result of the strategic repositioning of Sears in 1993, the business of SDC changed significantly. In the last quarter of 1992, SDC stopped selling medium-term notes. On March 1, 1993, DWDC, until then a wholly-owned subsidiary of Sears, completed the sale of 19.9% of its outstanding capital stock through a primary initial public offering. Also in March 1993, SDC discontinued issuing commercial paper, and was repaid by SCFCD the amounts outstanding and owing to SDC. In June of 1993, Sears spun-off its 80.1% ownership interest in DWDC to Sears shareholders.
On March 9, 1993, SDC entered into a loan agreement with Sears for the investment of funds received upon the prepayment of the notes of SCFCD. The interest rate paid to SDC by Sears under this agreement is designed to produce earnings sufficient to cover SDC's fixed charges (principally interest on SDC's indebtedness) at least 1.005 times (reduced from the previous amount of 1.25 times in March 1994, since SDC is no longer actively involved in new financing). Required payments of principal and interest to SDC under the Sears borrowing agreement will be sufficient to allow SDC to make timely payments of principal and interest to the holders of its securities.
The Net Worth Maintenance Agreement between Sears and SDC is still in effect for the benefit of holders of debt securities issued by SDC. This agreement provides for Sears to maintain ownership of and positive stockholder's equity in SDC.
At February 28, 1995, 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.
PART II
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, 1995, Sears owned all outstanding shares of SDC's common stock. The Board of Directors of SDC declared a $167.4 million dividend on December 20, 1993 to Sears, payable on December 30, 1993. The Board also approved payment to Sears on December 30, 1993 of $319.1 million out of Capital in Excess of Par Value; such payment is characterized as a dividend under the Delaware General Corporation Law. Payment was effected by reducing SDC's investment in the notes of Sears by $486.5 million.
Item 6.

Item 6. Selected Financial Data.
Not applicable.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Financial Condition
On March 15, 1993, SDC received funds from DWDC's initial public offering, and a concurrent debt issuance, through SCFCD in amounts sufficient to repay the balances on the notes of SCFCD. SDC used these funds to repay short-term borrowings and current maturities of medium-term notes. SDC invested the remainder of these funds in the promissory notes of Sears, which pay interest sufficient to cover SDC's fixed charges 1.005 times, and in highly liquid short-term investments. As of December 31, 1994, the remaining proceeds of $1.6 billion were fully invested in the notes of Sears. SDC intends to use these funds to repay the maturities of its medium-term notes.
In March 1993, SDC discontinued issuing commercial paper. The last of SDC's commercial paper matured in October 1993. SDC had discontinued the sale of medium-term notes in the last quarter of 1992. The $1.5 billion in outstanding medium-term notes as of December 31, 1994 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.
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. This maintenance mechanism insulates SDC from bearing the effects of inflation-based interest rate increases.
Results of Operations
Due to the significant reduction in SDC's outstanding debt, interest and related expenses decreased 28.0% to $137.3 million in 1994 from $190.6 million in 1993. The Company's net income decreased significantly in 1994 from 1993 due to the reduction in the interest rate on Sears notes to produce earnings sufficient to cover SDC's fixed charges (principally interest on SDC's indebtedness) to at least 1.005 times from the 1993 amount of 1.25 times. Earnings covered fixed charges 1.005 times in 1994 and 1.32 times in 1993.
Item 8.


Item 8. Financial Statements and Supplementary Data.
SEARS DC CORP.
STATEMENTS OF INCOME Year Ended December 31, millions 1994 1993 1992 ------- ------- ------- Revenues Earnings on notes of Sears $138.3 $196.9 $ - Earnings on notes of SCFCD - 52.6 289.4 Earnings on invested cash - 2.7 8.8 ------- ------- ------- Total revenues 138.3 252.2 298.2
Expenses Interest and related expense 137.3 190.6 236.6 Operating expenses 0.3 1.5 1.9 ------- ------- ------- Total expenses 137.6 192.1 238.5 ------- ------- ------- Income before income taxes 0.7 60.1 59.7 Income taxes 0.2 21.0 20.3 ------- ------- ------- Net Income $ 0.5 $39.1 $39.4 ======= ======= =======
Ratio of earnings to fixed charges 1.005 1.32 1.25
See notes to financial statements.
SEARS DC CORP.
STATEMENTS OF FINANCIAL POSITION
December 31, millions 1994 1993 ------- ------- Assets Notes of Sears $1,552.6 $2,194.4 Cash and invested cash 0.1 0.1 Accrued interest and other assets 3.6 5.6 -------- -------- Total assets $1,556.3 $2,200.1 ======== ========
Liabilities Medium-term notes $1,521.4 $2,147.8 Accrued interest and other liabilities 30.6 48.5 -------- -------- Total liabilities 1,552.0 2,196.3 -------- -------- Stockholder's Equity Capital stock, par value $1.00 per share 1,000 shares authorized,issued and outstanding - - Retained income 4.3 3.8 -------- -------- Total stockholder's equity 4.3 3.8 -------- -------- Total liabilities and stockholder's equity $1,556.3 $2,200.1 ======== ========
See notes to financial statements.
SEARS DC CORP.
STATEMENTS OF SHAREHOLDER'S EQUITY Year Ended December 31, millions 1994 1993 1992 -------- -------- -------- Capital stock $ - $ - $ - -------- -------- --------
Capital in excess of par value Beginning of year - 319.1 319.1 Return of capital paid to Sears - (319.1) - -------- -------- -------- End of year - - 319.1 -------- -------- --------
Retained income Beginning of year 3.8 132.1 92.7 Net income 0.5 39.1 39.4 Dividend paid to Sears - (167.4) - -------- -------- -------- End of year 4.3 3.8 132.1 -------- -------- --------
Total shareholder's equity $ 4.3 $ 3.8 $451.2 ======== ======== ========
See notes to financial statements.
STATEMENTS OF CASH FLOWS Year Ended December 31, millions 1994 1993 1992 ------- ------- ------- Cash Flows From Operating Activities Net income $ 0.5 $ 39.1 $ 39.4 Adjustments to reconcile net income to net cash provided by (used in) operating activities Net change in accrued interest and other assets and accrued interest and other liabilities (15.9) 31.7 (0.7) ------- ------- ------- Net cash provided by (used in) operating activities (15.4) 70.8 38.7
Cash Flows From Investing Activities Decrease(increase) in notes of SCFCD - 4,622.4 (914.9) Decrease(increase) in notes of Sears 641.8 (2,680.9) - -------- -------- --------- Net cash provided by (used in) investing activities 641.8 1,941.5 (914.9)
Cash Flows From Financing Activities Decrease in commercial paper, primarily 90 days or less - (1,840.0) (225.5) Proceeds from medium-term notes - - 1,501.0 Repayments of medium-term notes (626.4) (257.6) (405.4) --------- --------- -------- Net cash provided by (used in) financing activities (626.4) (2,097.6) 870.1 --------- --------- --------
Net decrease in cash and invested cash - (85.3) (6.1) Cash and invested cash, beginning of year 0.1 85.4 91.5 --------- --------- --------- Cash and invested cash, end of year $ 0.1 $ 0.1 $ 85.4 --------- --------- ---------
Supplemental Disclosure of Cash Flow Information Cash paid during the year Interest $141.9 $181.7 $230.5 Income taxes 11.8 32.1 13.1
See notes to financial statements.
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 the borrowing in domestic and foreign debt markets and lending the proceeds of such borrowings to certain direct and indirect subsidiaries of Sears in exchange for their unsecured notes. Effective May 26, 1993, the company's name was changed to Sears DC Corp. from Discover Credit Corp.
Historically, the proceeds of SDC's borrowings were loaned to Sears Consumer Financial Corporation of Delaware ("SCFCD"), a wholly-owned subsidiary of Dean Witter, Discover & Co. ("DWDC"), to finance the accounts receivable generated by the Discover Card and consumer installment notes receivable. However, as a result of the strategic repositioning of Sears, the business of SDC changed significantly. In the last quarter of 1992, SDC stopped selling medium-term notes. On March 1, 1993, DWDC, until then a wholly-owned subsidiary of Sears, completed the sale of 19.9% of its outstanding capital stock through a primary initial public offering. Sears spun-off its 80.1% ownership interest in DWDC to Sears shareholders in June 1993. Also in March 1993, SDC discontinued issuing commercial paper, and was repaid by SCFCD the amounts outstanding and owing to SDC.
On March 9, 1993, SDC entered into a loan agreement with Sears for the investment of funds received upon the prepayment of the notes of SCFCD. The interest rate paid to SDC by Sears under this agreement was designed to produce earnings sufficient to cover SDC's fixed charges (principally interest on SDC's indebtedness) at least 1.25 times. On March 22, 1994, the agreement was amended to reduce the fixed charge coverage to 1.005. Required payments of principal and interest to SDC under the Sears borrowing agreement will be sufficient to allow SDC to make timely payments of principal and interest to the holders of its securities.
Cash and invested cash is defined to include all highly liquid investments with maturities of three months or less. The return of capital and dividend totalling $486.5 million paid to Sears in 1993 were effected through a non-cash transaction as a reduction in SDC's investment in Sears Notes.
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 $1,533.8 million and $2,297.5 million at December 31, 1994 and 1993, respectively, based on discounted cash flows using interest rates of comparable borrowings. Selected details of SDC's borrowings are shown below. Weighted average interest rates are based on the actual number of days in the year and borrowings net of unamortized discount. December 31, millions 1994 1993 -------- -------- 3.24% to 9.26% medium-term notes due 1994-2012 $1,521.4 $2,147.8 ======== ========
-------------------- Maximum millions Average (month-end) -------------------- Commercial paper outstanding $ 546.8 $1,781.8
Average Year-end -------------------- Weighted Interest Rates 4.02% -
At December 31, 1994, medium-term note maturities for the next five years were as follows:
1995 $292.7 1996 449.8 1997 335.1 1998 111.3 1999 119.5
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
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:
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 were no reports on Form 8-K filed by the Registrant during the 4th Quarter of 1994.
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 Paul D. Melancon* Vice President and Controller
March 28, 1995
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
Alice M. Peterson* Director, President and ) Chief Executive Officer ) (Principal Executive ) Officer) ) ) ) Paul D. Melancon* Vice President and Controller )March 28, 1995 (Principal Accounting ) Officer) ) ) ) Larry R. Raymond* Vice President and Treasurer ) (Principal Financial Officer)) ) James A. Blanda* Director ) ) ) James D. Constantine* Director ) )
*By /s/ PAUL D. MELANCON Individually and as Attorney-in-Fact Paul D. Melancon
SEARS DC CORP.
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
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 8-9
REPORT OF INDEPENDENT CERTIFIED S-2 PUBLIC ACCOUNTANTS
S-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholder and Board of Directors Greenville, DE
We have audited the accompanying Statements of Financial Position of Sears DC Corp. (formerly Discover Credit Corp.) (a wholly-owned subsidiary of Sears, Roebuck and Co.) as of December 31, 1994 and 1993, and the related Statements of Income, Stockholder's Equity and Cash Flows for each of the three years in the period ended December 31, 1994. 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 December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
Deliotte & Touche LLP Chicago, Illinois February 24, 1995
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) By-laws of Discover Credit Corp., as amended to May 22, 1992 [Incorporated by reference to Exhibit 3(c) to Annual Report on Form 10-K of the Registrant for the year ended December 31, 1992*]
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) $1,850,000,000 Credit Agreement dated as of June 23, 1992, among Discover Credit Corp., the Banks Listed therein, The Lead Managers Referred to therein, The Co-Agents Referred to therein, and Chemical Bank, as Agent [Incorporated by reference to Exhibit 4(b) to Quarterly Report of the Registrant on Form 10-Q for the quarter ended June 30, 1992*]
4(c) 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(d) 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(e) 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(f) 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(g) 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(h) 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
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.**
12 Calculation of ratio of earnings to fixed charges**
23 Consent of Deloitte & Touche LLP**
24 Power of attorney**
28(a) Current Report on Form 8-K of Sears, Roebuck and Co., for January 17, 1995 [Incorporated by reference, File No. 1-416]
28(b) Current Report on Form 8-K of Sears, Roebuck and Co., for February 7, 1995 [Incorporated by reference, File No. 1-416]
28(c) Annual Report on Form 10-K of Sears, Roebuck and Co. for the year ended December 31, 1994 [Incorporated by reference, File No. 1-416]
______________________________ * SEC File No. 0-17955 ** Filed herewith
Exhibit 12
SEARS DC CORP. CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
millions
Year Ended December 31 1994 1993 1992 NET INCOME $ 0.5 $ 39.1 $ 39.4 INCOME TAXES 0.2 21.0 20.3
FIXED CHARGES, INTEREST AND RELATED CHARGES 137.3 190.6 236.6
(i) EARNINGS AVAILABLE FOR FIXED CHARGES 138.1 250.7 296.3 (ii) FIXED CHARGES 137.3 190.6 236.6
RATIO OF EARNINGS TO FIXED CHARGES (i/ii) 1.005 1.32 1.25
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. (formerly Discover Credit Corp.) of our report dated February 24, 1995 appearing in this Annual Report on Form 10-K of Sears DC Corp. for the year ended December 31, 1994.
Deloitte & Touche LLP Chicago, Illinois March 28, 1995
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, PAUL D. MELANCON, RICHARD F. KOTZ 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 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 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 28th day of March, 1995.
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/ PAUL D. MELANCON Vice President and Controller Paul D. Melancon (Principal Accounting Officer)
/S/ JAMES A. BLANDA Director James A. Blanda
/S/ JAMES D. CONSTANTINE Director James D. Constantine