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 Thirty-Eight Weeks Ended October 25, 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 November 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.
1
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: 10/25/97 2/1/97
--------- ---------
<S> <C> <C>
Cash (including short-term investments of $2,000 and $57,000) $ 37,834 71,874
Receivables 126,733 102,393
Merchandise inventories 1,228,423 973,265
Prepaid expenses and other current assets 5,311 3,909
--------- ---------
Total current assets 1,398,301 1,151,441
--------- ---------
Property and equipment, at cost 879,539 775,690
Less accumulated depreciation 370,451 329,490
--------- ---------
Net property and equipment 509,088 446,200
--------- ---------
Excess of cost over net assets acquired, less
accumulated amortization 113,743 85,656
Favorable lease interests, less accumulated amortization 89,606 108,125
Deferred income taxes 64,343 64,343
Due from affiliates 290,824 -
Other assets 54,518 36,187
--------- ---------
$2,520,423 1,891,952
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Bank debit balances $ 15,489 54,252
Current installments of long-term debt 781 768
Accounts payable 435,145 404,945
Accrued expenses 384,439 323,717
--------- ---------
Total current liabilities 835,854 783,682
--------- ---------
Other noncurrent liabilities 149,608 168,240
Long-term debt, excluding current installments 1,279,870 779,951
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 (66,163) (161,175)
--------- ---------
Total stockholder's equity 255,091 160,079
--------- ---------
$2,520,423 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)
Thirty-Eight Thirty-Nine
Thirteen Weeks Ended Weeks Ended Weeks Ended
------------------------- ------------ -----------
10/25/97 11/02/96 10/25/97 11/02/96
--------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Sales and other operating revenue $1,467,190 1,280,375 4,276,610 3,887,422
--------- --------- --------- ---------
Costs and expenses:
Cost of sales, including store
occupancy, warehousing and
delivery expense 1,165,450 1,012,451 3,347,352 3,043,658
Operating and administrative expenses 266,194 238,295 746,393 712,036
--------- --------- ---------- ---------
Earnings before interest expense 35,546 29,629 182,865 131,728
Interest expense:
Interest expense, net 18,107 15,320 46,141 45,327
Amortization of original issue discount
and deferred debt expenses 133 261 402 765
--------- --------- --------- ---------
Total interest expense 18,240 15,581 46,543 46,092
--------- --------- --------- ---------
Earnings before income taxes 17,306 14,048 136,322 85,636
Income tax expense 5,194 3,118 41,310 18,840
--------- --------- --------- ---------
Net earnings $ 12,112 10,930 95,012 66,796
========= ========= ========= =========
</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)
Thirty-Eight Weeks Thirty-Nine Weeks
Ended 10/25/97 Ended 11/02/96
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 95,012 66,796
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 74,917 68,484
Amortization of original issue discount
and deferred debt expenses 402 765
Increase in receivables, merchandise
inventories and prepaid expenses (253,474) (148,086)
Increase in accounts payable and
accrued expenses 77,743 91,698
Increase in due from affiliate (290,822) -
--------- ---------
Net cash provided by (used in) operating activities (296,222) 79,657
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (115,967) (89,791)
Sale of property, plant and equipment 4,809 2,822
Acquisition of certain drugstore assets (84,618) (15,922)
Other (2,431) (2,738)
--------- ---------
Net cash used in investing activities (198,207) (105,629)
--------- ---------
Cash flows from financing activities:
Decrease in bank debit balances (38,763) (42,701)
Additions to long-term debt 22 -
Reductions of long-term debt (34,543) (829)
Net additions under intercompany note to J. C. Penney Company, Inc. 535,000 -
Net additions under credit agreements - 67,500
Redemption of 9.25% Senior Subordinated Notes (1,327) -
Other - 2,501
--------- ---------
Net cash provided by financing activities 460,389 26,471
--------- ---------
Net increase (decrease) in cash and short-term investments (34,040) 499
Cash and short-term investments at beginning of period 71,874 7,922
--------- ---------
Cash and short-term investments at end of period $ 37,834 8,421
========= =========
</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 $48,632 for
the thirty-eight week period 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
and third quarters consisted of thirteen weeks ended July 27, 1997 and October
25, 1997, with a year-to-date total of thirty-eight weeks ended October 25,
1997. Certain amounts in the February 1, 1997 condensed consolidated balance
sheet have been reclassified to conform to the October 25, 1997 presentation.
Note 3.
- -------
Substantially all inventories are determined on a last-in, first-out (LIFO) cost
basis. At October 25, 1997 and February 1, 1997, inventories would have been
greater by approximately $125,100 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 Thirty-Nine Weeks Ended
--------------------------- -----------------------------
10/25/97 11/02/96 10/25/97 11/02/96
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales and other operating revenue $ 1,467,190 1,280,375 4,384,276 3,887,422
Costs of sales 1,165,450 1,012,451 3,431,593 3,043,658
Operating and administrative expenses 266,194 238,295 764,740 712,036
---------- ---------- ---------- ----------
Operating earnings 35,546 29,629 187,943 131,728
Total interest expense 18,240 15,581 47,551 46,092
---------- ---------- ---------- ----------
Earnings before income taxes 17,306 14,048 140,392 85,636
Income tax expense 5,194 3,118 42,116 18,840
---------- ---------- ---------- ----------
Net earnings $ 12,112 10,930 98,276 66,796
========== ========== ========== ==========
</TABLE>
For comparative purposes only, the above Condensed Consolidated Statements of
Earnings and the following analysis of results of operations compares the
thirteen and thirty-nine weeks ended October 25, 1997 to the thirteen and
thirty-nine weeks ended November 2, 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 thirty-eight weeks ended October 25, 1997.
Sales and other operating revenue for the third quarter and thirty-nine weeks
ended October 25, 1997 increased 14.6% and 12.8%, respectively, over the 1996
comparable periods to $1.5 billion and $4.4 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 8.6% for both the
thirteen and thirty-nine week periods compared to a 7.4% and 8.4% increase in
the respective 1996 periods. 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 category.
Prescription sales as a percentage of drugstore sales were 59.9% and 58.6%
compared to 57.7% and 56.6% for the comparable third quarter and thirty-nine
week 1996 periods. The growth in prescription sales was primarily the result of
increased managed care prescription sales. Managed care prescription sales
increased to 80.9% and 79.3% of prescription sales compared to 76.4% and 75.1%
in 1996. 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.
As a percentage of sales, cost of sales and related expenses were 79.4% and
78.3% for the third quarter and thirty-nine weeks ended October 25, 1997
6
compared to 79.1% and 78.3% for the 1996 comparable periods. Cost of sales and
related expenses are currently benefiting from a slowing in the decline in
prescription gross profit margins as well as improvement in front end gross
profit margins which were largely offset in the third quarter by increased lower
margin promotional activity. The LIFO charge for the 1997 third quarter and
thirty-nine week periods was $5.1 million and $15.2 million, respectively,
compared to $4.6 million and $13.2 million for the 1996 third quarter and
thirty-nine weeks.
Operating and administrative expenses, net of $10.2 million and $50.1 million of
management fees and business integration costs charged to affiliates, for the
third quarter and thirty-nine weeks increased 11.7% and 7.4%, respectively, over
1996 to $266.2 million and $764.7 million, and as a percentage of sales were
18.2% and 17.4%, compared to 18.6% and 18.3% in 1996. The decrease for the third
quarter and thirty-nine weeks 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
insurance and advertising for the third quarter and payroll and insurance for
thirty-nine weeks.
Total interest expense for the 1997 third quarter and thirty-nine weeks
increased 17.1% and 3.2%, over 1996 to $18.2 million and $47.5 million. The
increase was due to higher average borrowings and higher interest rates in both
the third quarter and thirty-nine weeks compared to 1996.
Earnings before income taxes for the third quarter and thirty-nine weeks
increased 23.2% and 63.9%, to $17.3 million and $140.4 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 partially offset by higher interest expense.
Income tax expense for the 1997 third quarter and thirty-nine weeks was $5.2
million (30%) and $42.1 million (30%), respectively, compared to $3.1 million
(22%) and $18.8 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 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 October 25, 1997, and the related condensed consolidated
statements of earnings and cash flows for the thirteen and thirty-eight weeks
ended October 25, 1997 and the thirteen and thirty-nine weeks ended November 2,
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
December 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
The Company did not file any reports on Form 8-K during the thirteen weeks
ended October 25, 1997.
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)
December 8, 1997 /s/ 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 Gentlemen:
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 December 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 thirty-eight weeks ended October 25,
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
December 8, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000031364
<NAME> Eckerd Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Jan-31-1998
<PERIOD-START> Feb-02-1997
<PERIOD-END> Oct-25-1997
<CASH> 37,834
<SECURITIES> 0
<RECEIVABLES> 129,733
<ALLOWANCES> 3,000
<INVENTORY> 1,228,423
<CURRENT-ASSETS> 1,398,301
<PP&E> 889,324
<DEPRECIATION> 370,451
<TOTAL-ASSETS> 2,520,423
<CURRENT-LIABILITIES> 835,854
<BONDS> 1,279,870
<COMMON> 0
0
0
<OTHER-SE> 255,091
<TOTAL-LIABILITY-AND-EQUITY> 2,520,423
<SALES> 4,276,610
<TOTAL-REVENUES> 4,276,610
<CGS> 3,347,352
<TOTAL-COSTS> 3,347,352
<OTHER-EXPENSES> 743,698
<LOSS-PROVISION> 2,695
<INTEREST-EXPENSE> 46,543
<INCOME-PRETAX> 136,322
<INCOME-TAX> 41,310
<INCOME-CONTINUING> 95,012
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95,012
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
