UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Thirteen and Twenty-Five Weeks Ended July 26, 1997
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 No. 1-4844
ECKERD CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 51-0378122
(State of incorporation) (I.R.S. Employer Identification No.)
8333 Bryan Dairy Road
Largo, Florida 33777
(Address and zip code of principal executive offices)
(813) 399-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the 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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of August 30, 1997 the registrant had 100 shares of common stock
outstanding.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED
DISCLOSURE FORMAT PROVIDED FOR IN GENERAL INSTRUCTION H TO FORM 10-Q.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
ECKERD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS Unaudited Audited
Current assets: 7/26/97 2/1/97
--------- ---------
<S> <C> <C>
Cash (including short-term investments of $62,000 and $57,000) $ 98,332 71,874
Receivables 116,684 102,393
Merchandise inventories 1,016,939 973,265
Prepaid expenses and other current assets 10,302 3,909
--------- ---------
Total current assets 1,242,257 1,151,441
--------- ---------
Property and equipment, at cost 841,834 775,690
Less accumulated depreciation 357,876 329,490
--------- ---------
Net property and equipment 483,958 446,200
--------- ---------
Excess of cost over net assets acquired, less
accumulated amortization 122,586 85,656
Favorable lease interests, less accumulated amortization 96,326 108,125
Deferred income taxes 64,343 64,343
Due from affiliates 135,457 -
Other assets 33,637 36,187
--------- ---------
$2,178,564 1,891,952
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Bank debit balances $ 67,286 54,252
Current installments of long-term debt 782 768
Accounts payable 384,225 404,945
Accrued expenses 391,936 323,717
--------- ---------
Total current liabilities 844,229 783,682
--------- ---------
Other noncurrent liabilities 165,578 168,240
Long-term debt, excluding current installments 925,776 779,951
Stockholders' equity:
Voting common stock of $.01 par value.
Authorized 1,000 shares; issued 100 - -
Capital in excess of par value 321,254 321,254
Retained deficit (78,273) (161,175)
--------- ---------
Total stockholder's equity 242,981 160,079
--------- ---------
$2,178,564 1,891,952
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<TABLE>
<CAPTION>
ECKERD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS)
Twenty-Five Twenty-Six
Thirteen Weeks Ended Weeks Ended Weeks Ended
------------------------- ----------- -----------
7/26/97 8/3/96 7/26/97 8/3/96
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Sales and other operating revenue $1,427,782 1,252,428 2,809,420 2,607,047
--------- --------- --------- ---------
Costs and expenses:
Cost of sales, including store
occupancy, warehousing and
delivery expense 1,111,794 979,784 2,181,902 2,031,207
Operating and administrative expenses 250,100 236,208 480,199 473,741
--------- --------- --------- ---------
Earnings before interest expense 65,888 36,436 147,319 102,099
Interest expense:
Interest expense, net 16,258 15,121 28,034 30,007
Amortization of original issue discount
and deferred debt expenses 134 251 269 504
--------- --------- --------- ---------
Total interest expense 16,392 15,372 28,303 30,511
--------- --------- --------- ---------
Earnings before income taxes 49,496 21,064 119,016 71,588
Income tax expense 14,849 4,608 36,116 15,722
--------- --------- --------- ---------
Net earnings $ 34,647 16,456 82,900 55,866
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<TABLE>
<CAPTION>
ECKERD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Twenty-Five Weeks Twenty-Six Weeks
Ended 7/26/97 Ended 8/3/96
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 82,900 55,866
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 48,905 45,389
Amortization of original issue discount
and deferred debt expenses 269 504
Increase in receivables, merchandise
inventories and prepaid expenses (36,930) (26,001)
Increase (decrease) in accounts payable and
accrued expenses 41,572 (9,610)
Increase in due from affiliates (135,457) -
--------- ---------
Net cash provided by operating activities 1,259 66,148
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (66,503) (59,334)
Sale of property, plant and equipment 2,712 1,690
Acquisition of certain drugstore assets (78,050) (13,334)
Other 8,165 (1,983)
--------- ---------
Net cash used in investing activities (133,676) (72,961)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in bank debit balances 13,034 (43,395)
Additions to long-term debt 22 -
Reductions of long-term debt (32,854) (519)
Net additions under intercompany note to J. C. Penney Company, Inc. 180,000 -
Net additions under credit agreements - 50,000
Redemption of 9.25% Senior Subordinated Notes (1,327) -
Other - 925
--------- ---------
Net cash provided by financing activities 158,875 7,011
--------- ---------
Net increase in cash and short-term investments 26,458 198
Cash and short-term investments at beginning of period 71,874 7,922
--------- ---------
Cash and short-term investments at end of period $ 98,332 8,120
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
ECKERD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
Note 1.
- -------
On November 2, 1996, Eckerd Corporation ("Old Eckerd") entered into a definitive
agreement to be acquired by Omega Acquisition Corporation ("Omega"), a
wholly-owned subsidiary of J. C. Penney Company, Inc. ("JCPenney"). The
aggregate transaction value, including the assumption of Old Eckerd debt and the
cash out of certain outstanding Old Eckerd employee stock options, was
approximately $3.3 billion. The transaction was effected through a two-step
process consisting of (i) a cash tender offer at $35.00 per share for 50.1% of
the outstanding common stock of Old Eckerd, which was completed in December
1996, and (ii) the February 27, 1997 exchange in which Old Eckerd stockholders
received 0.6604 of a share of JCPenney common stock for each share of Old Eckerd
common stock. After completing the acquisition of Old Eckerd on February 27,
1997, Omega changed its name to Eckerd Corporation (the "Company").
Note 2.
- -------
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries, and were prepared from the books and records of
the Company without audit or verification and in the opinion of management
include all adjustments (none of which were other than normal recurring
accruals) necessary to present a fair statement of results for such periods. A
management fee and certain business integration expenses totaling $38,459 has
been charged to affiliates. The condensed consolidated financial statements
should be read in conjunction with the financial statements and notes filed as
part of the Company's Annual Report on Form 10-K405 for the fiscal year ended
February 1, 1997. The results of operations of the periods indicated should not
be considered as necessarily indicative of operations for the full year. Prior
to the acquisition, Old Eckerd's fiscal year ended the Saturday closest to
January 31st each year. In order to make its fiscal year end conform to that of
JCPenney, the Company changed its fiscal year end to the last Saturday in
January of each year. Accordingly, to conform to the JCPenney fiscal calendar,
the first quarter of fiscal year 1997 consisted of twelve weeks ended April 26,
1997 and the second quarter consisted of thirteen weeks ended July 26, 1997,
with a year-to-date total of twenty-five weeks ended July 26, 1997.
Certain amounts in the February 1, 1997 condensed consolidated balance sheet
have been reclassified to conform to the July 26, 1997 presentation.
Note 3.
- -------
Substantially all inventories are determined on a last-in, first-out (LIFO) cost
basis. At July 26, 1997 and February 1, 1997, inventories would have been
greater by approximately $119,400 and $109,900, respectively, if inventories
were valued on a first-in, first-out (FIFO) cost basis. Since LIFO inventory
costs can only be determined at the end of each fiscal year when inflation rates
and inventory levels are finalized, estimates of LIFO inventory costs are used
for interim financial statements. The cost of merchandise sold is calculated on
an estimated basis and adjusted based on inventories taken during the fiscal
year.
5
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In Thousands)
Thirteen Weeks Ended Twenty-Six Weeks Ended
--------------------------- -----------------------------
7/26/97 8/3/96 7/26/97 8/3/96
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales and other operating revenue $ 1,427,782 1,252,428 2,917,086 2,607,047
Costs of sales 1,111,794 979,784 2,266,143 2,031,207
Operating and administrative expenses 250,100 236,208 498,546 473,741
---------- ---------- ---------- ----------
Operating earnings 65,888 36,436 152,397 102,099
Total interest expense 16,392 15,372 29,311 30,511
---------- ---------- ---------- ----------
Earnings before income taxes 49,496 21,064 123,086 71,588
Income tax expense 14,849 4,608 36,922 15,722
---------- ---------- ---------- ----------
Net earnings $ 34,647 16,456 86,164 55,866
========== ========== ========== ==========
</TABLE>
For comparative purposes only, the above Condensed Consolidated Statements of
Earnings and the following analysis of results of operations compares the
thirteen and twenty-six weeks ended July 26, 1997 to the thirteen and twenty-six
weeks ended August 3, 1996. As noted previously, as a result of the change by
the Company of its fiscal year, Item 1 Financial Information is presented for
the thirteen and twenty-five weeks ended July 26, 1997.
Sales and other operating revenue for the second quarter and twenty-six weeks
ended July 26, 1997 increased 14.0% and 11.9%, respectively, over the 1996
comparable periods to $1.4 billion and $2.9 billion, respectively. Sales
benefited from significant increases in drugstore prescription sales as well as
from increases in non-prescription (front end) sales and from acquired and new
stores as well as increased sales in relocated freestanding stores. Comparable
drugstore sales (stores open one year or more) increased 9.3% and 8.6% for the
thirteen and twenty-six week periods compared to a 7.8% and 8.8% increase in
1996. The increases in comparable drugstore sales were primarily attributable to
the increase in sales of prescription drugs as well as increased sales of
non-prescription items in the health and convenience categories.
Prescription sales as a percentage of drugstore sales were 57.8% and 57.6%
compared to 56.6% and 56.0% for the comparable second quarter and twenty-six
week 1996 periods. The growth in prescription sales was primarily the result of
increased managed care prescription sales. Managed care prescription sales
increased to 78.7% and 78.5% of prescription sales compared to 75.0% and 74.4%
in 1996. Prescription sales to managed care payors, in terms of both dollar
volume and as a percentage of total prescription sales, are expected to continue
to increase in the current year and for the foreseeable future. Managed care
payors typically negotiate lower prescription prices than those on non-managed
care prescriptions, resulting in decreasing gross profit margins on prescription
sales. However, contracts with managed care payors generally increase the volume
of prescription sales and gross profit dollars.
6
As a percentage of sales, cost of sales and related expenses were 77.9% and
77.7% for the second quarter and twenty-six weeks ended July 26, 1997 compared
to 78.2% and 77.9% for the 1996 comparable periods. The decreases in cost of
sales and related expenses is attributable to a slowing in the decline in
prescription gross profit margins as well as improvement in front end gross
profit margins and reduced inventory shrinkage as a percentage of sales. The
LIFO charge for the 1997 second quarter and twenty-six week periods was $4.9
million and $10.1 million, respectively, compared to $4.4 million and $8.6
million for the 1996 second quarter and twenty-six weeks.
Operating and administrative expenses, net of $20.5 million and $40.0 million of
management fees and business integration costs charged to affiliates, for the
second quarter and twenty-six weeks increased 5.9% and 5.2%, respectively, over
1996 to $250.1 million and $498.5 million, and decreased as a percentage of
sales to 17.5% and 17.1%, respectively, from 18.9% and 18.2% in 1996. The
decreases as a percentage of sales resulted primarily from increased operating
efficiencies, higher sales, and cost controls which helped produce lower costs
as a percentage of sales in such expense categories as payroll and insurance.
Total interest expense for the 1997 second quarter increased 6.6% over 1996 to
$16.4 million. The increase was due to higher average borrowings and higher
interest rates in the second quarter compared to 1996. For the twenty-six week
period, total interest expense decreased 3.9% to $29.3 million, primarily due to
lower average borrowings and lower interest rates in the first quarter on
borrowings compared to 1996.
Earnings before income taxes for the second quarter and twenty-six weeks
increased 135.0% and 71.9%, respectively, to $49.5 million and $123.1 million,
respectively. The increases were due primarily to the increase in gross profit
dollars as a result of higher sales and other operating revenue, and the
decrease in operating and administrative expenses as a percentage of sales due
to operating efficiencies and expense control.
Income tax expense for the 1997 second quarter and twenty-six weeks was $14.8
million (30%) and $36.9 million (30%), respectively, compared to $4.6 million
(22%) and $15.7 million (22%) in 1996. Income tax expense in both periods
represent federal and state income taxes. The income tax rate was lower in 1996
when compared to 1997 due to the use of net operating loss carryforwards in
1996. In connection with the proposed settlement of the Company's Internal
Revenue Service income tax return examinations for the January 31, 1987 and
January 30, 1988 tax years, the Company's net operating loss carryforwards were
adjusted to zero and deferred tax assets in the form of alternative minimum tax
credit carryforwards and deductions relating to changes in amortization methods
are effective for 1997.
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Company's independent public accountants have made a limited review of the
financial information furnished herein in accordance with standards established
by the American Institute of Certified Public Accountants. The Independent
Auditors' Review Report is presented on page 8 of this report.
7
Independent Auditors' Review Report
The Board of Directors
Eckerd Corporation:
We have reviewed the condensed consolidated balance sheet of Eckerd Corporation
and subsidiaries as of July 26, 1997, and the related condensed consolidated
statements of earnings and cash flows for the thirteen and twenty-five weeks
ended July 26, 1997 and the thirteen and twenty-six weeks ended August 3, 1996.
These condensed consolidated financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Eckerd Corporation as of February
1, 1997, and the related consolidated statements of earnings, stockholders'
equity, and cash flows for the year then ended (not presented herein); and in
our report dated April 15, 1997, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of February 1, 1997 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ KPMG PEAT MARWICK LLP
September 8, 1997
8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
15.1 Letter re unaudited interim financial information.
27 Financial Data Schedule.
(b) Reports on Form 8-K
On June 10, 1997, the Company filed a Current Report on Form 8-K. The Report
covered Item 8 - Change in Fiscal Year.
SIGNATURES
Pursuant to the requirements 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.
ECKERD CORPORATION
(Registrant)
September 8, 1997 /s/ Samuel G. Wright
----------------------
Samuel G. Wright
Executive Vice President/
Chief Financial Officer
(Principal Accounting Officer)
9
Exhibit Index
-------------
Eckerd Corporation
Form 10-Q
Exhibit No. Description of Exhibit
- ----------- ----------------------
15.1 Letter re unaudited interim financial information
27 Financial Data Schedule
10
EXHIBIT 15.1
Eckerd Corporation
Largo, Florida
Ladies and Gentleman:
RE: Registration Statement on Form S-3 (No. 33-50223)
With respect to the subject registration statement, we acknowledge our awareness
of the use therein of our report dated September 8, 1997 related to our review
of interim financial information, which report was included in the Form 10-Q of
Eckerd Corporation for the thirteen and twenty-five weeks ended July 26, 1997 .
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Act.
/s/ KPMG PEAT MARWICK LLP
Tampa, Florida
September 8, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000031364
<NAME> Eckerd Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Jan-31-1998
<PERIOD-START> Feb-02-1997
<PERIOD-END> Jul-26-1997
<CASH> 98,332
<SECURITIES> 0
<RECEIVABLES> 119,684
<ALLOWANCES> 3,000
<INVENTORY> 1,016,939
<CURRENT-ASSETS> 1,242,257
<PP&E> 841,834
<DEPRECIATION> 357,876
<TOTAL-ASSETS> 2,178,564
<CURRENT-LIABILITIES> 844,229
<BONDS> 925,776
<COMMON> 0
0
0
<OTHER-SE> 242,981
<TOTAL-LIABILITY-AND-EQUITY> 2,178,564
<SALES> 2,809,420
<TOTAL-REVENUES> 2,809,420
<CGS> 2,181,902
<TOTAL-COSTS> 2,181,902
<OTHER-EXPENSES> 478,462
<LOSS-PROVISION> 1,737
<INTEREST-EXPENSE> 28,303
<INCOME-PRETAX> 119,016
<INCOME-TAX> 36,116
<INCOME-CONTINUING> 82,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82,900
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
