UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K405
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1998
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 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, FL 33777
(Address and zip code of principal executive offices)
(813) 395-6000
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each
Title of each class exchange on which registered
------------------- ----------------------------
9 1/4% Senior Subordinated Notes Due 2004 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
--- ---
Indicate by check mark if 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-K405 or any
amendment to this Form 10-K405. [ X ]
The registrant has no voting or nonvoting common equity held by
non-affiliates.
As of March 31, 1998, the registrant had 100 shares of common stock
outstanding.
Documents Incorporated by Reference: None.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K405 WITH THE
REDUCED DISCLOSURE FORMAT PROVIDED FOR IN GENERAL INSTRUCTION I TO FORM 10-K.
ECKERD CORPORATION
JANUARY 31, 1998 FORM 10-K405 ANNUAL REPORT
Table of Contents
Item Page
- ---- ----
PART I
1. Business 3
2. Properties 9
3. Legal Proceedings 10
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters 11
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
8. Financial Statements and Supplementary Data 13
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 14
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 15
2
PART I
Item 1. Business
General
Eckerd Corporation (the "Company" or "Eckerd") was formed by J. C. Penney
Company, Inc.("JCPenney")in 1996 for the purpose of acquiring the former Eckerd
Corporation ("Old Eckerd") in a transaction effected through a cash tender offer
of $35.00 per share for 50.1% of Old Eckerd's outstanding common stock (which
was completed in December 1996), followed by a second step merger completed on
February 27, 1997 in which Old Eckerd stockholders received 0.6604 shares of
JCPenney common stock for each remaining share of Old Eckerd common stock not
purchased in the tender offer (the "Acquisition"). Unless the context requires
otherwise, references to the Company or Eckerd relating to time periods prior to
February 27, 1997 are to Old Eckerd.
The Company, which is a wholly owned subsidiary of JCPenney , operates the
Eckerd drugstore chain, which is one of the largest drugstore chains in the
United States. At January 31, 1998, the Eckerd chain consisted of 1,873 stores
in 14 states located primarily in the Sunbelt. Over its 45-year history, the
Eckerd drugstore chain has built a strong market position in areas where
demographic characteristics are favorable to drugstore growth. Eckerd stores are
concentrated in 10 of the 12 metropolitan statistical areas with the largest
percentage growth in population from 1980 to 1990.
At January 31, 1998, the Company also managed 905 stores ("Managed
Stores") in 15 states, which are indirectly wholly owned by JCPenney and
operated under the Eckerd name. The Managed Stores were formerly operated as
Thrift and Fay's drugstores. No financial results for the Managed Stores are
included in the following discussion or financial results. The Company receives
a management fee for such management services.
The primary focus of Eckerd stores is the sale of prescription drugs,
which, during fiscal 1997, generated approximately 57% of the Company's sales.
Eckerd stores sell a wide variety of nonpharmacy merchandise, including health
and beauty aids, convenience foods, greeting cards and numerous other
convenience products. Another significant focus of Eckerd stores is
photofinishing. All Eckerd stores offer overnight photofinishing services, and
at January 31, 1998 there were Eckerd Express Photo one-hour photofinishing
mini-labs in 712 stores.
The Company believes that customer service and convenience are critical
in positioning itself as the alternative to mass merchandisers, supermarkets and
other large format retailing channels. The Company emphasizes service and
convenience through pharmacy support services, store location and design,
merchandising programs and operating hours geared to the needs of the particular
market.
The Drugstore Industry
Prescription and over-the-counter medications have traditionally been
sold by independent drugstores as well as drugstore chains, such as Eckerd. The
drugstore industry has recently undergone significant changes as a result of the
following important trends: (i) the increase in third-party payments for
prescription drugs, (ii) the consolidation within the drugstore industry, (iii)
the aging of the United States population and (iv) the increase in competition
from non-traditional retailers of prescription and over-the-counter drugs.
3
During the last several years, a growing percentage of prescription drug
volume throughout the industry has been accounted for by sales to customers who
are covered by third-party payment programs ("managed care sales"). In a typical
managed care sale, the drugstore has a contract with a managed care payor, such
as an insurance company, health maintenance organization ("HMO"), preferred
provider organization ("PPO"), other managed care provider, government agency or
private employer, which agrees to pay for part or all of the customer's eligible
prescription purchases. Although these managed care sales contracts often
provide a high volume of prescription sales, such sales typically generate lower
gross margins than non-managed care sales due principally to the highly
competitive nature of this business and the high level of competition between
managed care firms and the resulting efforts to reduce costs. Larger drugstore
chains, such as Eckerd, are typically better able to service the growing managed
care segment than independent drugstores and smaller chains as a result of the
larger chains' more sophisticated technology systems, larger number of stores
and greater penetration within their markets.
As a result of the economies of scale from which larger drugstore chains
benefit as well as the managed care payment trend, the number of independent
drugstores and smaller drugstore chains has decreased as many of such retailers
have been acquired by larger drugstore chains. This trend is expected to
continue because larger chains are better positioned to handle the increased
managed care sales, purchase inventory on more advantageous terms and achieve
other economies of scale with respect to their marketing, advertising,
distribution and other expenditures.
Strong demographic trends have also contributed to changes in the
drugstore industry, as the group of persons over age 50 is the fastest growing
segment of the United States population. This trend has had, and is expected to
continue to have, a marked effect on the pharmacy business in the United States
because consumer prescription and over-the-counter drug usage generally
increases with age. The Company's markets have large concentrations of, and are
continuing to experience significant growth in, the number of persons over age
65.
Eckerd Drugstores
As of January 31, 1998, the Company operated and managed the number of
Eckerd stores and Eckerd Express Photo centers indicated below in each of the
following states:
The Company Managed Stores
----------- --------------
Eckerd Drugstores with Eckerd
Drug Eckerd Express Drug Stores
Stores Photo Centers -----------
------ ------------- Pennsylvania 358
Florida 575 304 New York 244
Texas 459 181 New Jersey 110
Georgia 187 80 North Carolina 76
North Carolina 183 72 South Carolina 42
Virginia 113 - Missouri 16
Louisiana 97 24 Maryland 14
South Carolina 83 25 Kansas 13
New Jersey 49 10 Delaware 11
Tennessee 38 5 Ohio 7
Oklahoma 33 5 West Virginia 7
Mississippi 26 1 Vermont 3
Alabama 16 3 Kentucky 2
Delaware 12 2 New Hampshire 1
Maryland 2 - Virginia 1
----- --- ---
Total 1,873 712 905
===== === ===
4
Over the past five years the Company has implemented several initiatives
designed to improve the quality and operating performance of the Company's store
base. Among such initiatives are the opening, relocation and acquisition of
additional stores, the closure or divestiture of underperforming stores and an
extensive remodeling program. The Company has also increased the degree to which
merchandise is tailored to specific markets, instituted a chainwide shrinkage
reduction program and made a significant investment in its management
information systems.
The following table summarizes the number of Eckerd drugstores operated
by the Company and the sales on an aggregate and per store basis for the last
five years
<TABLE>
<CAPTION>
Fiscal Years
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of Eckerd drugstores at
beginning of period 1,756 1,715 1,735 1,718 1,696
Stores opened or acquired (1) 189 (2) 73 88 (3) 39 52
Stores sold or closed (72) (32) (108) (4) (22) (30)
----- ----- ----- ----- -----
Number of Eckerd drugstores
at end of period 1,873 1,756 1,715 1,735 1,718
===== ===== ===== ===== =====
Number with Express Photo centers 712 587 515 481 413
Sales of Eckerd drugstores (in thousands) $6,042,429 5,359,611 4,986,804 4,436,926 4,052,302
Average annual sales per Eckerd drug
store (in thousands) $3,330 3,103 2,925 2,584 2,388
</TABLE>
- ------------------------------
(1) Excludes relocations.
(2) Includes 113 acquired Virginia stores.
(3) Includes 40 Florida stores acquired from Rite Aid of Florida, Inc.
(4) Consists of (i) 84 stores that were closed as a result of the Company's
decision in the fourth quarter of fiscal 1994 to accelerate the closing
of approximately 90 geographically dispersed, underperforming stores, and
(ii) 24 stores closed in the normal course of business.
The Company opened or acquired 301 drugstores (including 112
relocations) in fiscal 1997. The majority of the new and relocated stores are
freestanding locations. In addition to such openings and acquisitions, the
Company sold or closed 72 drugstores in fiscal 1997. The Company intends to
continue to expand its business through both internal expansion and acquisitions
of drugstore chains and independent drugstores. Although the Company currently
plans to expand within the Company's existing markets, the Company also
considers strategic acquisitions in other markets. The cash costs associated
with opening a new drugstore are estimated to be approximately $770,000, which
includes initial inventory costs of approximately $385,000. The Company intends
to use cash flow from operations and borrowings to finance the cash costs of
this growth.
In determining the areas in which to open or acquire drugstores, the
Company evaluates a number of demographic considerations, including the size,
growth pattern and per capita income of the population, as well as the
competitive environment and the accessibility of a proposed site to the customer
and to the Company's warehouse and distribution facilities. The Company also
continually reviews these factors and the performance of individual stores in
determining whether to close or relocate certain stores.
Products and Services
Pharmacy
The primary focus of Eckerd drugstores is the sale of prescription and
over-the-counter drugs. The Company seeks to position pharmacists as health-care
professionals who build relationships with their customers. Over the years,
marketing and advertising campaigns have been focused on reinforcing the
5
professionalism of the Company's pharmacists and positioning them as a key
factor in high quality pharmacy service. The Company has also instituted several
health-related programs such as health screenings, education and outreach
programs.
Eckerd pharmacy departments are modern, clean and clearly identified by
attractive signs. The pharmacy areas in the Company's newer and remodeled stores
provide a consultation area and a waiting area with comfortable seating,
informational brochures and free blood pressure testing. The pharmacy areas are
designed to be conducive to customer service and counseling by the pharmacists.
The Company has devoted substantial resources to marketing to managed
care payors, such as insurance companies, HMO's, PPO's and other managed care
providers and government agencies. This effort has produced managed care sales
of approximately 80% of prescription sales in fiscal 1997 compared to
approximately 58% in fiscal 1993.
Nonpharmacy Merchandise
In addition to prescription and over-the-counter drugs, Eckerd stores
sell a wide variety of nonpharmacy merchandise, including health and beauty
aids, convenience foods, greeting cards and numerous other convenience products.
Eckerd-brand products, which are attractively priced and generally provide
higher margins than similar national brand products, represent a growing segment
of products offered. Items such as Eckerd Award soft drinks, bottled water and
cookies are examples of Eckerd brand products offered by Eckerd stores.
Health merchandise offerings include a broad assortment of popular
national brands as well as private label over-the-counter drugs and other
products related to dental care, foot care, vitamins and nutritional
supplements, feminine hygiene, family planning and baby care. Eckerd stores
offer an assortment of popular brand name cosmetics, fragrances and other beauty
products. Skin care products are an increasingly important component of the
beauty category due to the aging population and growing concern about the
effects of the environment on the skin. The greeting card department in Eckerd
stores offers a wide selection of contemporary and traditional cards, gift wrap,
bows and novelties. This wide selection and the locations of its stores should
enable customers to satisfy their card and gift needs more conveniently than at
traditional card stores. The convenience products merchandise category consists
of an assortment of items, including candy, soft drinks, cookies, bottled water,
tobacco products, books and magazines, household products, seasonal merchandise
and toys. Most Eckerd stores now have a food mart section offering convenience
food items such as staple grocery shelf items, staple and chilled beverages,
snack foods and specialty items. The Company also seeks to serve its customers'
needs by specifically tailoring items in this category to meet the needs of its
customers in specific store locations.
Photofinishing
The Company believes that it is one of the leading sources of
photofinishing in all of the major markets in which it operates. The Company
believes that its branded processing programs, which emphasize quality and
service, have helped position the Company as a leader in photofinishing. The
Company's photo departments also offer camera and photo accessories, small
electronics, batteries and audio and video tapes.
6
Store Operations
The Company will continue to remodel and reset its stores to provide
modern, well-identified stores, which are easily accessible to customers and
will seek to open new stores in easily accessible high traffic locations. The
Company also tailors its merchandising to provide the product mix and selection
to best serve the customers of each particular store. The Company typically
provides several conveniently located, modern stores in a community. The
Company's stores generally range in size from 8,200 to 11,200 square feet and
are located primarily in neighborhood strip centers or freestanding locations.
Such stores are typically open every day of the year except Christmas, with some
open until midnight or 24 hours a day.
Purchasing and Distribution
Merchandising, buying and supplier payments are generally centralized at
Company headquarters to assure consistency and efficiency. The Company uses an
electronic buying system to aid in inventory and gross profit management which
enables the Company to take better advantage of quantity discounts and forward
buying opportunities, which the Company believes will lower the average cost of
inventory.
Approximately 85% of store merchandise is purchased centrally and
distributed, principally by Company-operated trucks, through the Company's five
centrally located distribution facilities located in or near Orlando, Florida;
Atlanta, Georgia; Charlotte, North Carolina; and Dallas and Houston, Texas. The
remainder of store merchandise is shipped directly to the stores, some of which
is purchased at the store level.
Advertising and Marketing
A combination of newspaper advertising and TV and radio commercials is
used throughout the year to promote sales. The Company's concentration of stores
within its markets enables it to achieve economies of scale in its advertising
and marketing expenditures and also enables the Company to negotiate favorable
rates for advertising time and print production. The Company believes that its
current level of advertising expenditures is appropriate to support its existing
marketing strategies.
Information and Technology
The Company intends to continue to invest in information systems to
improve customer service, reduce operating costs, provide information needed to
support management decisions and enhance the Company's competitive position with
managed care payors.
7
In 1993, the Company and IBM Global Services ("IGS"), a wholly-owned
subsidiary of International Business Machines, entered into a Systems Operations
Service Agreement. Under the Company's supervision, IGS manages the entire
information systems operation and is responsible for providing technology
services to the Company. The Systems Operations Services Agreement has a 10-year
term, and the total payments to be made by the Company thereunder are expected
to be approximately $750.0 million over such term, based on currently
anticipated services. The Company believes that this arrangement has and will
continue to enable the Company to further improve customer service, replace the
Company's existing systems, reduce operating costs and capital expenditures for
hardware, obtain information needed to support management decisions on an
improved basis and increase the Company's focus on its core business.
Competition
The Company's retail drugstores operate in a highly competitive
industry. The Company's drugstores compete primarily on the basis of customer
service, convenience of location and store design, price and product mix and
selection.
In addition to traditional competition from independent drugstores and
other drugstore chains, the Company faces competition from discount stores,
supermarkets, combination food and drugstores, mail order distributors,
hospitals and HMOs. These other formats have experienced significant growth in
their market share of the prescription and over-the-counter drug business.
The Company's Express Photo centers compete with a variety of photo
processors including other mini-labs, retail stores and photo specialty stores.
The Company's Express Photo business competes primarily on the basis of quality
of processing, quality and speed of service and value.
Seasonality
The Company's sales and earnings are higher during peak holiday periods
and from Christmas through Easter in selected geographic areas. Sales of
health-related products peak during seasonal outbreaks of cough and cold/flu
virus, typically during the winter and spring. Accordingly, sales and earnings
are typically highest in the fourth quarter followed by the first quarter.
Regulation
All of the Company's pharmacists and stores are required to be licensed
by the appropriate state boards of pharmacy. The Company's drugstores and
distribution centers are also registered with the Federal Drug Enforcement
Administration. Most of the stores sell beer and wine and are subject to various
state and local liquor licensing requirements. By virtue of these license and
registration requirements, the Company is obligated to observe certain rules and
regulations, and a violation of such rules and regulations could result in fines
and/or a suspension or revocation of a license or registration.
The Company has a number of managed care payor contracts pursuant to
which the Company is a provider of prescription drugs. "Freedom of choice" state
statutes, pursuant to which all pharmacies would be entitled to be a provider
under such a contract, have been enacted in certain states, including Alabama,
Delaware, Georgia, Louisiana, Maryland, Mississippi, New Jersey, North Carolina,
South Carolina, Tennessee and Texas, and may be enacted in others. Although such
statutes may adversely affect certain of the Company's managed care contracts,
they may also provide the Company with opportunities regarding additional
managed care contracts.
In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the health care system, either nationally or at the
state level. The Company cannot predict whether any federal or state health care
reform legislation will eventually be passed, and if so, the impact thereof on
the Company's financial position or results of operations. Health care reform,
if implemented, could adversely affect the pricing of prescription drugs or the
amount of reimbursement from governmental agencies and managed care payors, and
consequently could be adverse to the Company. However, to the extent health care
reform expands the number of persons receiving health care benefits covering the
purchase of prescription drugs, it may also result in increased purchases of
such drugs and could thereby have a favorable impact on both the Company and the
8
retail drug industry in general. Nevertheless, there can be no assurance that
any future federal or state health care reform legislation will not adversely
affect the Company or the retail drugstore industry generally.
Employees
As of January 31, 1998, the Company had approximately 53,800 employees,
of which 28,100 were full-time employees. The Company believes that overall
employee relations are good. None of the Company's employees are represented by
unions.
Patents, Trademarks and Tradenames
No patent, trademark, license, franchise or concession is considered to
be of material importance to the business of the Company other than the trade
names under which the Company operates its retail businesses, including the
Eckerd name. The Company also holds servicemarks for its photofinishing
products, private label products and information systems.
Item 2. Properties
The Company conducts substantially all of its retail businesses from
stores located in leased premises. Substantially all of these leases will expire
within the next twenty years. In the normal course of business, however, it is
expected that leases will be renewed through the exercise of existing options or
amendments, or replaced by leases on other properties. Most of the Company's
store leases provide for a fixed minimum rental together with a percentage
rental based on sales.
The material office and distribution center properties owned or leased by the
Company at January 31, 1998 are as follows:
Owned or
Location Square Feet Leased
-------- ----------- --------
Largo, Florida 488,000 Owned (1)
Charlotte, North Carolina 587,000 Owned
Garland, Texas 270,000 Owned
Conroe, Texas 345,000 Owned
Orlando, Florida 827,000 Leased (2)
Newnan, Georgia 244,000 Owned (3)
Hammond, Louisiana 185,000 Owned (3)(4)
---------------------------------------
(1) Includes the Company headquarters.
(2) In January 1993 the Company assumed a lease for an office and
distribution facility of approximately 587,000 square feet (lease expires
2005). The Company's existing Orlando facilities and the Largo
distribution center facility were consolidated into the new facility
during 1993.
(3) Construction was financed pursuant to revenue bond issues. Because these
properties are currently leased subject to nominal purchase options with
development authorities which the Company anticipates it will exercise,
they are listed as owned by the Company.
(4) The Company closed the Hammond distribution center and has subleased the
former Hammond, Louisiana office and distribution center. The Company
currently has a contract to sell this property.
9
The Company considers that all property owned or leased is well
maintained and in good condition.
Item 3. Legal Proceedings
On February 4, 1998, the Company was served with a civil complaint which
was filed jointly in federal court in Tampa, Florida by the Florida Attorney
General, the U.S. Department of Justice, and the U.S. Attorney's Office for the
Middle District of Florida. The complaint relates to a practice, which is not
limited to Eckerd, known in the drugstore industry as "partial filling" of
prescriptions and how they are billed in those relatively limited situations
when a customer fails to pick up the balance of a partially filled prescription.
The complaint seeks triple the amount of monetary damages and penalties up to
$10,000 for each bill for a partially-filled prescription. A Motion to Dismiss
and to Strike has been filed by the Company and is pending. Additionally, the
Company and a current and a former employee have been served with subpoenas
issued by a federal grand jury in the Middle District of Florida, at the
direction of the U.S. Attorney's Office, requesting records and documents
pertaining to the partial fill litigation and related matters. The Company has
also received a Civil Investigative Demand from the Tennessee Attorney General
requesting records and documents pertaining to the partial filling of
prescriptions in that state. The Company is cooperating in each of these
investigations.
On April 22, 1998, a purported class action lawsuit entitled Board of
Trustees of the Carpenters & Millwrights of Houston & Vicinity Welfare Trust
Fund v. Eckerd Corporation (Civil Action No. 598CV149) was filed in the U.S.
District Court for the Eastern District of Texas, Texarkana Division. The
complaint, which seeks certification of a nationwide class comprised of all
non-governmental entities that have allegedly paid Eckerd for pharmaceuticals
and/or prescription medications which were not provided to the entities'
insureds and their family members, alleges certain violations of the
Racketeering Influenced and Corrupt Organizations Act in connection with the
partial filling of prescriptions. The complaint seeks triple the amount of
monetary damages, as well as punitive damages, attorneys' fees, and other
equitable relief.
The Company denies the aforementioned allegations and intends to pursue
the defense of these actions vigorously. Although it is too early to predict the
outcome of any of the aforementioned lawsuits or investigations, the complaints
focus on a very small percentage of the prescriptions filled by Eckerd and
management is of the opinion that the aforementioned matters should not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Old Eckerd's common stock was listed on the New York Stock Exchange
until February 27, 1997 when the Acquisition was completed (Symbol: ECK). As of
March 31, 1998, there was one holder of the Company's common stock. All market
price per share information below for Old Eckerd has been restated to reflect a
two-for-one stock split effected in the form of a stock dividend declared April
1, 1996 (paid on May 13, 1996).
Fiscal 1996
Quarter Ended
Market Price -------------
Per Share Information 5/4/96 8/3/96 11/2/96 2/1/97
- --------------------- ------ ------ ------- ------
High $25.62 $25.87 $28.87 $34.87
Low 21.31 19.75 22.25 30.02
The Company is subject to restrictive covenants under its 9.25% Senior
Subordinated Notes which restrict the payment of dividends. The Company has not
paid or declared any dividends on its common stock.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following narrative analysis of the Company's results of operations
is presented pursuant to the reduced disclosure format provided for in General
Instruction I to Form 10-K.
Condensed Consolidated Statements of Earnings
(In Thousands)
1997 Fiscal Year 1996 Fiscal Year
Ended January 31, Ended February 1,
1998 1997
---- ----
Sales and other operating revenue $6,111,187 5,376,221
Cost of sales 4,771,318 4,192,848
Operating and administrative
expenses 1,100,445 969,423
Acquisition and other one-time
expenses - 16,000
--------- ---------
Earnings before interest expense 239,424 197,950
Interest expense 65,589 60,691
--------- ---------
Earnings before income taxes 173,835 137,259
Income tax expense 66,298 33,322
--------- ---------
Earnings before extraordinary items 107,537 103,937
Extraordinary items - (1,499)
--------- ---------
Net earnings for the year $ 107,537 102,438
========= =========
Results of Operations
Sales and other operating revenue for 1997 were $6.1 billion, a 13.7%
increase compared to $5.4 billion for 1996. Sales benefited from significant
increases in drugstore prescription sales as well as from increases in
11
non-prescription (front-end) sales. Also contributing to increased sales were
revenues from Virginia drugstores acquired in June 1997 as well as increased
sales in relocated freestanding stores. Prescription sales were $3.5 billion for
1997, a 16.4% increase compared to $3.0 billion in 1996. Comparable drugstore
sales (stores open for one year or more) for identical periods increased 8.6% in
1997 and 7.8% in 1996. The increase in comparable drugstore sales was primarily
attributable to the increase in sales of prescription drugs. Comparable
drugstore sales growth was also positively affected by increased sales of
non-prescription items in the health category.
Prescription sales as a percentage of drugstore sales was 57.1% for
1997 compared with 55.9% for 1996. The growth in prescription sales was
primarily the result of increased managed care prescription sales, and from
prescription sales from the acquired Virginia drugstores. Managed care
prescription sales represented 79.7% and 75.6% of the Company's prescription
sales in 1997 and 1996, respectively. Managed care payors typically negotiate
lower prescription prices than those of non-managed care prescriptions,
resulting in lower gross profit margins on the Company's prescription sales.
However, contracts with managed care payors generally increase the volume of
prescription sales and gross profit dollars.
Cost of sales and related expenses in 1997 were $4.8 billion, a 13.8%
increase compared to $4.2 billion in 1996. As a percentage of sales, cost of
sales and related expenses were 78.1% and 78.0% for 1997 and 1996, respectively.
Cost of sales and related expenses in 1997 benefited from a slowing in the
decline in prescription gross profit margins. The LIFO charge was $18.6 million
in 1997 compared to $18.0 million in 1996. Operating and administrative expenses
net of $58.4 million of management fees and business integration costs charged
to affiliates were $1.1 billion, an increase of 13.5% compared to $969.4 million
in 1996 excluding Acquisition transaction expenses of $12.5 million and other
one-time expenses of $3.5 million. As a percentage of sales, operating and
administrative expenses were 18.0% for 1997 and 1996. Operating and
administrative expenses benefited from operating efficiencies related to higher
sales and cost controls which helped produce lower costs as a percentage of
sales in such expense categories as payroll and insurance which was partially
offset by higher information technology expenses and closed store costs.
Total interest expense was $65.6 million in 1997 compared to $60.7
million in 1996. The increase in interest expense was due to higher average
borrowings and higher interest rates in 1997.
Earnings before income taxes and extraordinary items in 1997 was $173.8
million, a 13.4% increase compared to $153.3 million in 1996 excluding $16.0
million for Acquisition related and other one-time charges. The increase was due
primarily to the increase in gross profit dollars as a result of higher sales
and other operating revenue which was offset partially by higher interest
expense.
Income tax expense was $66.3 million (a 38% effective rate) and $33.3
million (a 24% effective rate) in 1997 and 1996, respectively. Income tax
expense in both years represent federal and state income taxes. The income tax
rate was higher in 1997 when compared to 1996 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 were effective for 1996.
Earnings before extraordinary items for 1997 was $107.5 million, a 3.5%
increase compared to $103.9 million in 1996 including $15.3 million, net of
12
income taxes, for Acquisition related and other one-time expenses. Net income
increased to $107.5 million in 1997 compared to $102.4 million in 1996 including
$15.3 million for Acquisition related and other one-time expenses.
The Company had an extraordinary item of $1.5 million (net of tax
benefit of $0.9 million), in 1996, from the write-off of deferred costs related
to the bank credit agreement which was repaid in December 1996.
The Company has completed a comprehensive review of its internal
computer systems and applications to identify those that might be affected by
the year 2000 issue and has developed an implementation plan to resolve the year
2000 issue. The Company believes it will be able to modify or replace its
affected systems and applications in time to avoid any material detrimental
impact on its operations. The Company is in the process of correcting or
replacing those systems and applications which are not currently year 2000
compliant including some systems for which the year 2000 issue will begin to
impact the Company in 1999. Costs associated with these efforts, which are being
expensed as incurred, have not had, and are not expected to have, a material
impact on the Company's financial results.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements and auditors' report as
of January 31, 1998 and February 1, 1997 and for each of the years in the three
year period ended January 31, 1998 as set forth under item 14 of this Form
10-K405 are incorporated herein by reference:
Consolidated Statements of Earnings
Consolidated Balance Sheets
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Information on selected unaudited quarterly financial data also required
by this item for the years ended January 31, 1998 and February 1, 1997 is
presented below (in thousands, except per share data).
<TABLE>
<CAPTION>
Quarters Ended
--------------
4/26/97 7/26/97 10/25/97 1/31/98
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Year Ended 1/31/98 (52 Weeks)
Sales and other operating revenue $1,381,638 1,427,782 1,467,190 1,834,577
Cost of sales, including store occupancy,
warehousing and delivery expense 1,070,108 1,111,794 1,165,450 1,423,966
Operating and administrative expenses 230,099 250,100 266,194 354,052
Interest expense 11,911 16,392 18,240 19,046
--------- --------- --------- ---------
Earnings before income taxes 69,520 49,496 17,306 37,513
Income taxes 21,267 14,849 5,194 24,988
--------- --------- --------- ---------
Net earnings $ 48,253 34,647 12,112 12,525
========= ========= ========= =========
13
Quarters Ended
--------------
5/4/96 8/3/96 11/2/96 2/1/97
--------- --------- --------- ---------
Year Ended 2/1/97 (52 Weeks)
Sales and other operating revenue $1,354,619 1,252,428 1,280,375 1,488,799
Cost of sales, including store occupancy,
warehousing and delivery expense 1,051,423 979,784 1,012,451 1,149,190
Operating and administrative expenses 237,533 236,208 238,295 257,387
Acquisition and other one time expenses - - - 16,000
Interest expense 15,139 15,372 15,581 14,599
--------- --------- --------- ---------
Earnings before income taxes and
extraordinary item 50,524 21,064 14,048 51,623
Income taxes 11,114 4,608 3,118 14,482
--------- --------- --------- ---------
Earnings before extraordinary item 39,410 16,456 10,930 37,141
Extraordinary item-early retirement of
debt, net of tax benefit - - - (1,499)
--------- --------- --------- ---------
Net earnings $ 39,410 16,456 10,930 35,642
========= ========= ========= =========
Earnings before extraordinary item per
common share basic $.56 .23 .16 .53
Net earnings per common share basic $.56 .23 .16 .51
Basic weighted average common shares
outstanding 69,992 70,046 70,123 70,196
Earnings before extraordinary item per
common share diluted $.55 .23 .15 .51
Net earnings per common share diluted $.55 .23 .15 .49
Diluted weighted average common shares
outstanding 71,887 71,825 72,154 72,589
</TABLE>
Earnings per common share for Old Eckerd are computed independently for each of
the quarters. Therefore, the sum of the quarterly earnings per share may not
equal the annual earnings per common share. All quarters have been restated to
reflect a two-for-one stock split effected in the form of a stock dividend
declared April 1, 1996 (paid on May 13, 1996). Eckerd is a wholly-owned
subsidiary of JCPenney effective February 27, 1997, therefore no earnings per
share is presented for the year ended January 31, 1998.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
14
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Listed below are all financial statements, notes, schedules, and
exhibits filed as part of this Form 10-K405 annual report:
(a) Financial Statements and Schedules
1. The following financial statements and schedules of the Company
together with the Report of Independent Certified Public Accountants
dated February 26, 1998 in this Form 10-K405 are filed herewith:
Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of January 31, 1998 and February
1, 1997
Consolidated Statements of Earnings for the Years Ended January
31, 1998, February 1, 1997 and February 3, 1996
Consolidated Statements of Stockholders' Equity for the Years
Ended January 31, 1998, February 1, 1997 and February
3, 1996
Consolidated Statements of Cash Flows for the Years Ended
January 31, 1998, February 1, 1997 and February 3,
1996
Notes to Consolidated Financial Statements
Schedules:
Independent Auditors' Report
II - Reserves
All other schedules for the Company are omitted as the required
information is inapplicable or the information is presented in the
respective consolidated financial statements or related notes.
Also filed in this Form 10-K405 is the consent of KPMG Peat
Marwick LLP to the incorporation by reference of their auditors'
report dated February 26, 1998, relating to the consolidated financial
statements appearing in the Form 10-K405, into Registration Statement
Number 33-50223 on Form S-3.
2. Exhibits:
Exhibits previously filed or filed by incorporation by reference:
3.1 Certificate of Incorporation of the Company (incorporated by reference
to Exhibit 3.1 of Form 10-K405 of the Company for the period ended
February 1, 1997 (File No. 1-4844)).
15
3.2 First Amendment to Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.2 of Form 10-K405 of the
Company for the period ended February 1, 1997 (File No. 1-4844)).
3.3 By-laws of the Company, as amended (incorporated by reference to
Exhibit 3.3 of Form 10-K405 of the Company for the period ended
February 1, 1997 (File No. 1-4844)).
4.1 Form of 9.25% Senior Subordinated Notes Due 2004 of the Company
(incorporated by reference to Exhibit 4.01 to the Current Report on
Form 8-K dated October 26, 1993 of the Company (File No. 1-4844)).
4.2 Indenture dated as of November 1, 1993 between the Company and State
Street Bank and Trust Company of Connecticut, National Association, as
Trustee relating to the Company's 9-1/4% Senior Subordinated Notes Due
2004 (incorporated by reference to Exhibit 4.02 to the Current Report
on Form 8-K dated October 26, 1993 of the Company (File No. 1-4844)).
4.3 First Supplemental Indenture, dated as of February 27, 1997, between
the Company and State Street Bank and Trust Company of Connecticut,
National Association, as Trustee (incorporated by reference to Exhibit
4.3 of Form 10-K405 of the Company for the period ended February 1,
1997 (File No. 1-4844)).
10.1 Master Lease Agreement I dated as of May 18, 1993 between the Company
and Imaging Financial Services d/b/a EKCC ("IFS") (incorporated by
reference to Exhibit 10.28 to Amendment No. 1 to the Registration
Statement on Form S-2 of the Company (No. 33-64906)).
10.2 Master Lease Agreement II dated as of June 15, 1993 between the
Company and IFS (incorporated by reference to Exhibit 10.29 to
Amendment No. 1 to the Registration Statement on Form S-2 of the
Company (No. 33-64906)).
10.3 Systems Operations Service Agreement dated as of July 14, 1993 between
the Company and Integrated Systems Solutions Corporation (incorporated
by reference to Exhibit 10.30 to Amendment No. 1 to the Registration
Statement on Form S-2 of the Company (No. 33-64906)).
10.4 Letter dated March 16, 1993 between IFS and the Company relating to
IFS Sale and Leaseback (incorporated by reference to Exhibit 10.31 to
Amendment No. 2 of the Registration Statement on Form S-2 of the
Company (No.
33-64906)).
10.5 Receivables Purchase Agreement dated as of January 26, 1995 between
the Company and Three Rivers Funding Corporation (incorporated by
reference to Exhibit 10.18 to Form 10-K405 for the year ended January
28, 1995 of the Company (File No. 1-4844)).
10.6 First Amendment to Receivables Purchase Agreement dated as of March
31, 1995 between the Company and Three Rivers Funding Corporation
(incorporated by reference to Exhibit 10.19 to Form 10-K405 for the
year ended January 28, 1995 of the Company (File No. 1-4844)).
16
10.7 Employment Agreement dated February 4, 1996 between the Company and
Francis A. Newman (incorporated by reference to Exhibit 10.26 to Form
10-K for the year ended February 3, 1996 of the Company (File No.
1-4844)).
10.8 Employment Agreement dated February 4, 1996 between the Company and
James M. Santo (incorporated by reference to Exhibit 10.27 to Form
10-K for the year ended February 3, 1996 of the Company (File No.
1-4844)).
10.9 Employment Agreement dated February 4, 1996 between the Company and
Samuel G. Wright (incorporated by reference to Exhibit 10.28 to Form
10-K for the year ended February 3, 1996 of the Company (File No.
1-4844)).
10.10 Employment Agreement dated February 4, 1996 between the Company and
Kenneth L. Flynn (incorporated by reference to Exhibit 10.29 to Form
10-K for the year ended February 3, 1996 of the Company (File No.
1-4844)).
10.11 Amendment No. 1 dated as of November 2, 1996 to Employment Agreement
dated February 4, 1996 between the Company and Francis A. Newman
(incorporated by reference to Exhibit 11 to the Schedule 14D-9 of the
Company (File No. 1-4844)).
Exhibits filed herewith:
12.1 Statement regarding computation of ratio of earnings to fixed charges
of the Company.
23.1 Consent of Independent Certified Public Accountants.
27 Financial data schedule year ended January 31, 1998.
Restated Financial data schedule year ended February 1, 1997.
Restated Financial data schedule year ended February 3, 1996.
(b) Reports on Form 8-K
None
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K405 report to
be signed on its behalf by the undersigned, thereunto duly authorized.
April 30, 1998 ECKERD CORPORATION
By:/s/Samuel G. Wright
-------------------
Samuel G. Wright
Executive Vice President
Chief Financial and Accounting Officer
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 indicated on the date indicated.
Signature Titles Date
--------- ------ ----
/s/Francis A. Newman Chairman of the Board,
----------------------- President, Chief Executive
Francis A. Newman Officer and Director April 30, 1998
/s/Robert W. Hannan
-----------------------
Robert W. Hannan Director, Vice Chairman April 30, 1998
/s/Stewart Turley
-----------------------
Stewart Turley Director April 30, 1998
/s/Charles R. Lotter
-----------------------
Charles R. Lotter Director April 30, 1998
/s/Donald A. McKay
-----------------------
Donald A. McKay Director April 30, 1998
/s/W. Barger Tygart
-----------------------
W. Barger Tygart Director April 30, 1998
/s/Joseph D. Williams
-----------------------
Joseph D. Williams Director April 30, 1998
18
Independent Auditors' Report
----------------------------
The Board of Directors
Eckerd Corporation:
We have audited the accompanying consolidated balance sheets of Eckerd
Corporation and subsidiaries (a wholly-owned subsidiary of J. C. Penney
Company, Inc.) as of January 31, 1998 and February 1, 1997, and the
related consolidated statements of earnings, stockholders' equity, and
cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Eckerd Corporation and subsidiaries (a wholly-owned subsidiary of J. C.
Penney Company, Inc.) as of January 31, 1998 and February 1, 1997, and
the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Tampa, Florida
February 26, 1998
ECKERD CORPORATION AND SUBSIDARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Consolidated Balance Sheets
January 31, 1998 and February 1, 1997
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Assets 1998 1997
------ ---- ----
<S> <C> <C>
Current assets:
Cash (including short-term investments of $57,000 in 1997) $ 24,883 71,874
Receivables, less allowance for doubtful receivables of $3,000 141,954 102,393
Merchandise inventories 1,290,708 973,265
Prepaid expenses and other current assets 4,995 3,909
--------- ---------
Total current assets 1,462,540 1,151,441
--------- ---------
Property and equipment, at cost:
Land 35,631 34,478
Buildings 96,920 92,728
Furniture and equipment 587,210 440,253
Transportation equipment 16,558 14,700
Leasehold improvements 215,278 193,531
--------- ---------
951,597 775,690
Less accumulated depreciation and amortization 384,630 329,490
--------- ---------
Net property and equipment 566,967 446,200
--------- ---------
Excess of cost over net assets acquired, less accumulated
amortization of $31,490 and $24,393 123,962 85,656
Favorable lease interests, less accumulated amortization
of $430,955 and $417,745 82,918 108,125
Unamortized debt expenses (note 3) 3,019 3,553
Other assets 88,512 96,977
Due from affiliates (note 9) 292,162 -
--------- ---------
$2,620,080 1,891,952
========= =========
Liabilities and Stockholders' Equity 1998 1997
------------------------------------ ---- ----
Current liabilities:
Bank debit balances $ 53,580 54,252
Current installments of long-term debt (note 3) 16,898 768
Accounts payable 393,195 404,945
Accrued interest 23,567 15,241
Accrued payroll 73,880 67,172
Other accrued expenses (note 10) 270,518 241,304
--------- ---------
Total current liabilities 831,638 783,682
--------- ---------
Other noncurrent liabilities (note 10) 141,895 168,240
Long-term debt, excluding current installments (note 3) 223,931 274,951
Intercompany loan payable to J. C. Penney (note 3) 1,155,000 505,000
Stockholders' equity (notes 1 and 4):
Preferred stock of $.01 par value. Authorized 20,000,000 shares;
none issued or outstanding - -
Voting common stock of $.01 par value. Authorized 1,000 and
96,481,272 shares; issued and outstanding 100 and 70,419,975 - 704
Nonvoting common stock of $.01 par value. Authorized
3,518,728 shares; no shares issued - -
Capital in excess of par value 321,254 320,550
Retained deficit (53,638) (161,175)
--------- ---------
Net stockholders' equity 267,616 160,079
Commitments, contingencies and related party transactions
(notes 8, 9, 11 and 12)
--------- ---------
$2,620,080 1,891,952
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
ECKERD CORPORATION AND SUBSIDIARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Consolidated Statements of Earnings
Years ended January 31, 1998, February 1, 1997
and February 3, 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
January 31, February 1, February 3,
1998 1997 1996
(52 weeks) (52 weeks) (53 weeks)
--------- --------- ---------
<S> <C> <C> <C>
Sales and other operating revenue $6,111,187 5,376,221 4,997,073
--------- --------- ---------
Costs and expenses:
Cost of sales, including store occupancy,
warehousing, and delivery expense 4,771,318 4,192,848 3,874,723
Operating and administrative expenses (note 10) 1,100,445 969,423 922,131
Acquisition and other one-time expenses (note 1(b)) - 16,000 -
--------- --------- ---------
5,871,763 5,178,271 4,796,854
--------- --------- ---------
Earnings before interest expense 239,424 197,950 200,219
--------- --------- ---------
Interest expense:
Interest expense on intercompany loan with J. C. Penney 44,988 4,154 -
Interest expense, net 20,067 55,565 75,030
Amortization of original issue discount
and deferred debt expenses 534 972 1,806
--------- --------- ---------
Total interest expense 65,589 60,691 76,836
--------- --------- ---------
Earnings before income taxes
and extraordinary items 173,835 137,259 123,383
Income taxes (note 7) 66,298 33,322 20,600
--------- --------- ---------
Earnings before extraordinary items 107,537 103,937 102,783
Extraordinary items:
Early retirement of debt, net of tax benefit of $928 and
$1,907 in 1997 and 1996, respectively (note 3) - (1,499) (9,306)
--------- ---------- ---------
Net earnings $ 107,537 102,438 93,477
========= ========== =========
Basic earnings per share:
Earnings before extraordinary items $ 1.48 1.53
Extraordinary items (.02) (.14)
---------- ---------
Net earnings $ 1.46 1.39
========== =========
Diluted earnings per share assuming dilution:
Earnings before extraordinary items $ 1.44 1.50
Extraordinary items (.02) (.14)
---------- ---------
Net earnings $ 1.42 1.36
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
ECKERD CORPORATION AND SUBSIDARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Consolidated Statements of Stockholders' Equity
Years ended January 31, 1998, February 1, 1997
and February 3, 1996
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Capital Net
Voting Nonvoting in stockholders'
common common excess of Retained equity
stock stock par value deficit (deficit)
----- ----- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at January 28, 1995 $ 642 - 233,706 (357,090) (122,742)
Common stock sold in public stock offering,
net of expenses of sale 54 - 82,340 - 82,394
Expenses for secondary public stock offering - - (329) - (329)
Common stock sold under employee stock option plan 2 - 1,043 - 1,045
Contribution of common stock to profit sharing plan 2 - 894 - 896
Net earnings - - - 93,477 93,477
----- ----- -------- ------- -------
Balance at February 3, 1996 700 - 317,654 (263,613) 54,741
Common stock sold under employee stock option plan 2 - 2,002 - 2,004
Contribution of common stock to profit sharing plan 2 - 894 - 896
Net earnings - - - 102,438 102,438
----- ----- -------- ------- -------
Balance at February 1, 1997 704 - 320,550 (161,175) 160,079
Acquisition of Company by wholly-owned subsidiary
of J. C. Penney Company, Inc. (704) - 704 - -
Issuance of shares to J. C. Penney Company, Inc. - - - - -
Net earnings - - - 107,537 107,537
----- ----- -------- ------- -------
Balance at January 31, 1998 $ - - 321,254 (53,638) 267,616
===== ===== ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
ECKERD CORPORATION AND SUBSIDARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Consolidated Statements of Cash Flows
Years ended January 31, 1998, February 1, 1997
and February 3, 1996
(In thousands)
<TABLE>
<CAPTION>
January 31, February 1, February 3,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 107,537 102,438 93,477
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Extraordinary charge related to early
retirement of debt - 2,427 11,213
Depreciation and amortization 106,737 94,182 84,750
Amortization of original issue discount
and deferred debt expenses 534 972 1,806
Decrease (increase) in deferred income taxes 10,285 (40,372) -
Increase in receivables (39,561) (32,256) (17,650)
Increase in merchandise inventories (290,775) (129,631) (44,475)
Increase in prepaid expenses and other assets (1,086) (739) (2,030)
Increase in accounts payable and
accrued expenses 49,565 196,720 46,803
Increase in due from affiliates (292,162) - -
------- ------- -------
Net cash provided by (used in)
operating activities (348,926) 193,741 173,894
------- ------- -------
Cash flows from investing activities:
Additions to property and equipment (213,143) (167,761) (109,782)
Sale of property and equipment 8,165 7,105 8,255
Net proceeds from sale of subsidiaries - - 5,231
Acquisition of certain drugstore assets (89,639) (41,181) (76,902)
Other (17,887) (3,226) (7,887)
------- ------- -------
Net cash used in investing activities (312,504) (205,063) (181,085)
------- ------- -------
</TABLE>
(Continued)
ECKERD CORPORATION AND SUBSIDARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Consolidated Statements of Cash Flows, Continued
(In thousands)
<TABLE>
<CAPTION>
January 31, February 1, February 3,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Increase (decrease) in bank debit balances $ (672) (5,368) 15,247
Additions to long-term debt 762 33,801 1,985
Reductions of long-term debt (34,325) (901) (1,848)
Net additions (reductions) under credit agreement - (460,000) 4,627
Net additions under intercompany note to
J. C. Penney Company, Inc. 650,000 505,000 -
Common stock sold in public stock offering,
net of expenses of sale - - 82,394
Redemption of 11.125% subordinated debentures - - (95,500)
Redemption of 9.25% Senior Subordinated Notes (1,326) - -
Other, including proceeds from exercise of stock
options and deferred financing costs - 2,742 (690)
------- ------- -------
Net cash provided by financing activities 614,439 75,274 6,215
------- ------- -------
Net increase (decrease) in cash
and short-term investments (46,991) 63,952 (976)
Cash and short-term investments at beginning of year 71,874 7,922 8,898
------- ------- -------
Cash and short-term investments at end of year $ 24,883 71,874 7,922
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
ECKERD CORPORATION AND SUBSIDARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Notes to Consolidated Financial Statements
January 31, 1998, February 1, 1997 and February 3, 1996
(In thousands, except share amounts)
(1) Organization of Business
(a) Description of Business
Eckerd Corporation (Company) operates the Eckerd drugstore chain,
which is one of the largest drugstore chains in the United States.
The Company's stores are located in 14 states, with the largest
concentration of stores being in Florida and Texas.
For the years ended January 31, 1998, February 1, 1997 and
February 3, 1996, the Company purchased 179 drugstores in six
transactions at an aggregate cost of $162,620. The operations of
such stores, which have been included in the consolidated
financial statements from dates of acquisition, are not material
to the Company and, accordingly, pro forma comparative operating
numbers are not presented.
(b) Merger With Wholly-Owned Subsidiary
of J. C. Penney Company, Inc.
On November 2, 1996, the predecessor Eckerd Corporation (Old
Company) 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 Company debt
and the cash out of certain outstanding Old Company employee stock
options, was approximately $3.3 billion. The transaction was
effected through a cash tender offer at $35.00 per share for 50.1%
of the outstanding common stock of the Old Company, which was
completed in December 1996. The remaining shares of outstanding
common stock of the Old Company were exchanged in a second-step
merger completed on February 27, 1997, in which Old Company
stockholders received 0.6604 shares of JCPenney common stock for
each share of Old Company common stock. After completing the
acquisition of Old Company on February 27, 1997, Omega changed its
name to Eckerd Corporation (the Company). References to the
Company regarding time periods prior to February 27, 1997 are to
Old Eckerd. The Company also manages approximately 900 drugstores
which are indirectly wholly-owned by JCPenney and operated under
the Eckerd name (see note 9).
(c) Secondary Public Offerings
On August 3, 1995, the Company completed an underwritten primary
and secondary offering of 12,351,000 shares of its Common Stock
for $16.12 per share. The offering consisted of 5,350,000 shares
sold by the Company and 7,001,000 shares sold by certain
institutional stockholders.
(Continued)
ECKERD CORPORATION AND SUBSIDARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
On December 15, 1995, the Company completed an underwritten
secondary offering of 12,000,000 shares of its Common Stock for
$21.00 per share. The secondary offering only included shares
owned by certain institutional stockholders. The Company did not
receive any of the proceeds from the sale of shares of common
stock and was required to pay certain expenses of the secondary
offering.
(2) Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires
that management estimate certain amounts that are reported. Actual
results may differ from these estimates.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in the
consolidation.
(c) Fiscal Year
The Company's fiscal year ends on the last Saturday in January.
Fiscal year 1997 ended January 31, 1998 and consisted of 52 weeks.
Old Eckerd's fiscal year 1996 ended February 1, 1997 and consisted
of 52 weeks. Old Eckerd's fiscal year 1995 ended February 3, 1996
and consisted of 53 weeks.
(d) Merchandise Inventories
Inventories consist principally of merchandise held for resale and
are based on physical inventories taken throughout the year.
Inventories are stated at the lower of cost (last-in, first-out)
or market. At January 31, 1998 and February 1, 1997, inventories
would have been higher than reported by approximately $128,900 and
$110,300, respectively, if the first-in, first-out method of
valuing inventories had been used by the Company.
(Continued)
ECKERD CORPORATION AND SUBSIDARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(e) Property and Equipment
Property and equipment are recorded at cost. Depreciation is
computed on the straight-line method over the estimated useful
lives of the assets. The estimated useful lives in years are:
buildings, 16-45; furniture and equipment, 1-10; transportation
equipment, 1-8; and leasehold improvements, 2-20 or term of lease.
Maintenance and repairs are charged to expense as incurred. The
Company's policy is to capitalize expenditures for renewals and
betterments and to reduce the asset accounts and the related
allowance for depreciation for the cost and accumulated
depreciation of items replaced, retired or fully depreciated.
(f) Favorable Lease Interests
Favorable lease interests represent the present value of the
excess of current market rents at dates of acquisition over the
below market rents of leases acquired (principally store
locations). Such costs are amortized over the lives of the
favorable leases, averaging twenty years.
(g) Unamortized Debt Expenses
Unamortized debt expenses represent underwriting discounts,
professional fees and other costs related to long-term debt which
are capitalized and amortized to interest expense over the life of
the debt instruments.
(h) Advertising Costs
Net advertising costs are expensed when incurred and were $24,198,
$24,848 and $24,752 for the years ended January 31, 1998, February
1, 1997 and February 3, 1996, respectively.
(i) Supplemental Cash Flow Information
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Cash paid for interest was $65,147, $57,214 and $82,152 for the
years ended January 31, 1998, February 1, 1997 and February 3,
1996, respectively.
Cash paid for income taxes was $45,489, $23,281 and $5,337 for the
years ended January 31, 1998, February 1, 1997 and February 3,
1996, respectively.
(Continued)
ECKERD CORPORATION AND SUBSIDARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(j) Earnings Per Share and Stock Split
The Company has adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share (SFAS No. 128). SFAS No. 128
requires the presentation of basic and diluted earnings per share.
Basic earnings per share is computed as net earnings divided by
the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflect the potential dilution
that could occur from issuance of common equivalent shares.
Basic earnings per share and diluted earnings per share have been
computed based on the weighted average number of shares of common
stock outstanding; in addition, diluted earnings per share assumes
the exercise of stock options during each fiscal year (70,195,980
and 72,113,725 in 1996 and 67,017,252 and 68,606,482 in 1995).
All share information in these consolidated financial statements
has been restated to reflect the two-for-one stock split effected
in the form of a stock dividend declared April 1, 1996 (paid on
May 13, 1996).
(k) Recent Accounting Pronouncements
In April 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128, Earnings Per Share. The Company adopted SFAS
No. 128 in the fiscal year ending January 31, 1998. In accordance
with SFAS No. 128, both basic net earnings per share and diluted
net earnings per share have been presented in the financial
statements. Earnings per share for prior periods have been
restated to reflect the provisions of this statement. In February
1998, the FASB issued SFAS No. 132, Employers' Disclosures About
Pensions and Other Postretirement Benefits. SFAS No. 132 was
adopted by the Company in fiscal 1997; prior year numbers have
been restated as required. None of the new rules had a material
impact on the Company.
(l) Acquisition and Other One-Time Expenses
In fiscal year 1996, acquisition and other one-time expenses
include acquisition transaction costs of $12,500 and other
one-time costs of $3,500.
(Continued)
ECKERD CORPORATION AND SUBSIDARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(m) Fair Value of Financial Instruments
The Company's financial instruments consist primarily of current
assets and current liabilities stated at fair market value. The
fair value of the intercompany loan payable to JCPenney and the
variable rate demand industrial development revenue refunding
bonds approximate their carrying value, based on the frequency of
the interest rate reset periods. The fair value of the Notes is
approximately $212,581, based on their quoted market price. The
fair value of the other long-term debt approximates its carrying
value, based on the relatively short remaining maturity of the
debt.
(n) Recoverability of Long-Lived Assets
The Company has adopted Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets To Be Disposed Of (SFAS No. 121),
which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. The
Company has evaluated all long-lived assets and determined that no
impairment existed at January 31, 1998 and February 1, 1997,
respectively.
(3) Long-Term Debt
Long-term debt at January 31, 1998 and February 1, 1997 was:
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
---- ----
<S> <C> <C>
Intercompany loan payable to JCPenney (a) $ 1,155,000 505,000
9.25% Senior Subordinated Notes due February 15, 2004,
$198,674 face amount (b) 198,674 200,000
Variable rate demand industrial development revenue
refunding bonds, due March 1, 2009 and
May 1, 2013 (c) 18,250 18,250
Other (principally notes secured by buildings, fixtures
and equipment) 23,905 57,469
--------- -------
Total long-term debt 1,395,829 780,719
Less amounts due within one year 16,898 768
--------- -------
Amounts due after one year $ 1,378,931 779,951
========= =======
</TABLE>
(Continued)
ECKERD CORPORATION AND SUBSIDARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
The aggregate minimum annual maturities of long-term debt for the next
five fiscal years are: 1998 - $16,898; 1999 - $185; 2000 - $79; 2001 -
$1,155,000; and 2002, $0.
(a) On December 17, 1996, the Company entered into an intercompany
loan facility with JCPenney. Proceeds from this intercompany loan
facility were used to repay the remaining outstanding balances
under the Credit Agreement. The intercompany loan is unsecured and
bears interest at .125% over the applicable JCPenney cost of
funds. The intercompany loan facility matures on December 17,
2001. At January 31, 1998, the interest rate on the principal
amount outstanding under the intercompany loan was 7.23%.
(b) On November 2, 1993, the Company issued $200,000 aggregate
principal amount of 9.25% Senior Subordinated Notes (Notes) due
February 15, 2004. The Notes are unsecured and subordinated to all
existing and future senior debt (as defined) of the Company and
are redeemable at the option of the Company, in whole or in part,
at any time after February 15, 1999 at various redemption prices
(as defined) plus accrued interest to the date of redemption.
Interest is payable semi-annually on February 15 and August 15 of
each year.
(c) The variable rate demand industrial development revenue refunding
bonds currently have an interest rate which is a daily rate
established by First National Bank of Chicago and is indicative of
current bid-side yields of high grade tax-exempt securities. At
the Company's option, and under certain conditions, the interest
rate may be changed to a monthly rate or a fixed rate. The bonds
are secured by the related buildings, leases and letters of
credit. At January 31, 1998, the interest rate on the principal
amount of these bonds was 3.65%.
Extraordinary charges were recognized during the years ended February 1,
1997 and February 3, 1996, primarily from the write-off of unamortized
debt expenses related to the significant revision of the previous credit
agreement in 1995, as well as from the redemption of the 11.125%
Subordinated Debentures in 1995, and the termination of the Credit
Agreement in 1996.
(4) Stockholders' Equity
(a) Common Stock
The Company's authorized common stock consists of 1,000 shares of
Common Stock, par value $.01 per share. The Old Company's
authorized common stock consisted of 100,000,000 shares of Common
Stock, par value $.01 per share (of which 3,518,728 shares were
Nonvoting Common Stock (Series I), par value $.01 per share).
(Continued)
ECKERD CORPORATION AND SUBSIDARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(b) Preferred Stock
The Company has not authorized any preferred stock as of January
31, 1998. The Old Company's authorized preferred stock consisted
of 20,000,000 shares. The preferred stock was issuable in series
with terms as fixed by the Board of Directors. No preferred stock
was issued.
(5) Stock-Based Compensation
The Old Company had reserved 6,437,957 shares of its Common Stock for the
granting of stock options and other incentive awards to officers,
directors and key employees under the 1993 and 1995 Stock Option and
Incentive Plans of Eckerd Corporation. Options were granted at prices
which were not less than the fair market value of a share of common stock
on the date of grant. Commencing three years after the date of grant, all
options were exercisable to the extent of 50%, with an additional 25%
exercisable after each of the next two successive years. Unexercised
options expire ten years after the date of grant. Options granted under
prior plans were surrendered and granted under the terms of the 1993
plan. In December 1996, after a change of control when JCPenney purchased
50.1% of the outstanding common stock of the Company, all stock options
outstanding became 100% exercisable. In connection with the acquisition
of the Company by JCPenney, all option holders were given the right to
elect, in whole or in part, to convert their options into an amount of
cash from JCPenney equal to the difference between $35.00 and the
exercise price of their options. On February 27, 1997, all options
outstanding were either converted into cash, if elected, or converted
into a pro rata number of options to acquire JCPenney common stock. After
February 27, 1997, no options were available for grant under the 1993 and
1995 plans. At January 31, 1998, there were options for 235,555 shares of
Old Company Common Stock, exercisable at $5.00 to $24.38 per share, with
a weighted average option price of $10.34, which converts into 155,561
options to acquire JCPenney Common Stock.
As of February 1, 1997 and February 3, 1996, 2,836,442 and 3,531,658
shares of Old Company Common Stock were available for grant. At February
1, 1997, options for 3,601,515 shares of Common Stock were exercisable at
$2.59 to $28.25 per share, with a weighted average option price of
$12.93. At February 3, 1996, options for 758,308 shares of Common Stock
were exercisable at $2.59 to $7.00 per share, with a weighted average
option price of $5.04.
(Continued)
ECKERD CORPORATION AND SUBSIDARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
A summary of changes during the years ended January 31, 1998, February 1,
1997 and February 3, 1996 is set forth below:
<TABLE>
<CAPTION>
Shares under Option Weighted average
option prices option price
----- ----- ----------
<S> <C> <C> <C>
Outstanding January 28, 1995 2,551,992 $ .28 - $14.63 $ 6.32
Granted 1,059,134 $12.81 - $22.00 $15.71
Exercised (227,940) $ .28 - $ 7.00 $ 4.16
Canceled (132,438) $ 7.00 - $19.31 $ 8.84
---------
Outstanding at February 3, 1996 3,250,748 $ 2.59 - $22.00 $ 9.42
Granted 919,100 $20.75 - $28.25 $22.49
Exercised (344,449) $ 2.59 - $ 8.44 $ 5.39
Canceled (223,884) $ 7.00 - $27.25 $12.84
---------
Outstanding at February 1, 1997 3,601,515 $ 2.59 - $28.25 $12.93
Exercised/Converted (3,361,150) $ 2.59 - $28.25 $13.11
Canceled (4,810) $ 7.00 - $24.38 $ 7.18
---------
Outstanding at January 31, 1998 235,555 $ 5.00 - $24.38 $10.34
=========
</TABLE>
The Company has elected to continue accounting for stock-based
compensation under the provisions of APB No. 25, Accounting for Stock
Issued to Employees. Accordingly, net income and earnings per share shown
in the consolidated statements of income do not reflect any compensation
cost for the Company's stock options. In accordance with SFAS No. 123,
Accounting for Stock-Based Compensation, the fair value of each fixed
option granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions. There were no
options granted in the year ended January 31, 1998.
1996
----
Dividend yield 0%
Expected volatility 24.8%
Risk-free interest rate 6.3%
Expected life of option 5 years
Fair value per share of options granted $7.90
SFAS 123 compensation expense (thousands) $2,273
The effect on earnings per share of recording compensation expense under
SFAS No. 123 was a reduction of approximately two cents per share in
1996.
(Continued)
ECKERD CORPORATION AND SUBSIDARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(6) Employees' Benefit Plans
(a) Profit Sharing Plan
The Company has a noncontributory profit sharing plan which covers
all full-time employees. The Company makes annual contributions to
the Plan at the discretion of the Company's Board of Directors.
All funds are held by a bank as trustee under a trust agreement.
Included in operating and administrative expenses are charges
accrued for contributions to the Plan of $13,655, $11,827 and
$11,231 for the years ended January 31, 1998, February 1, 1997 and
February 3, 1996, respectively.
Plan assets at fair value, consisting of fixed income securities,
JCPenney's stock and listed stocks, amounted to approximately
$350,800 for the plan year ended December 31, 1997.
(b) Pension Plans
The Company has a noncontributory pension plan covering all
full-time employees who qualify as to age and length of service.
Benefits are computed based on the average annual compensation for
the five consecutive years that produce the highest average during
the final ten years of creditable service. The Company's policy is
to fund the Plan in accordance with minimum Internal Revenue
Service (IRS) requirements.
Assets and obligations of the Company's pension plan at January
31, 1998 and February 1, 1997 were:
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
---- ----
(Projected)
<S> <C> <C>
Accumulated benefit obligation $ 46,900 47,843
====== ======
Projected benefit obligation:
Beginning of year $ 61,436 56,237
Service and interest cost 7,831 8,025
Actuarial gain (8,997) (1,326)
Benefits paid (2,636) (1,500)
------ ------
End of year 57,634 61,436
------ ------
</TABLE>
(Continued)
ECKERD CORPORATION AND SUBSIDARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
---- ----
(Projected)
<S> <C> <C>
Fair value of plan assets:
Beginning of year $ 55,471 44,751
Company contributions 3,694 5,081
Net gains 12,496 7,052
Benefits paid (2,636) (1,500)
------ ------
End of year 69,025 55,384
------ ------
Excess fair value over projected benefits 11,391 (6,052)
Transition asset, net of gains and prior
service cost (unrecognized) (11,975) 4,626
------ ------
Accrued pension cost $ (584) (1,426)
====== ======
</TABLE>
The pension costs for the years ended January 31, 1998, February
1, 1997 and February 3, 1996 included the following (income)
expense components:
<TABLE>
<CAPTION>
January 31, February 1, February 3,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service costs (benefits earned during
the period) $ 3,969 3,963 3,606
Interest cost on projected benefit
obligation 3,862 4,062 3,790
Actual return on assets (12,496) (7,052) (10,308)
Net amortization and deferral 7,516 2,983 6,387
------ ----- ------
Net pension cost $ 2,851 3,956 3,475
====== ===== ======
</TABLE>
Principal assumptions used in determining the accumulated and
projected benefit obligations were:
<TABLE>
<CAPTION>
January 31, February 1, February 3,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate 7.5% 7.5% 7.5%
Weighted average long-term
rate of return on assets 9% 9% 9%
Weighted average rate of
compensation increases 5% 5% 5%
</TABLE>
(Continued)
ECKERD CORPORATION AND SUBSIDARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
The Company has in effect an Executive Supplemental Benefit Plan
to provide additional income for certain of its executives after
their retirement as well as pre-retirement death benefits to
beneficiaries of such executives. Annual benefits will generally
be no greater than 25 percent of the participant's salary
mid-point on the date the participant retires or separates from
service with the Company.
(7) Income Taxes
Income tax expense from continuing operations was:
<TABLE>
<CAPTION>
Year ended
----------------------------------------------------
January 31, February 1, February 3,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $45,388 70,065 19,309
State 10,625 3,629 1,291
------ ------ ------
56,013 73,694 20,600
------ ------ ------
Deferred:
Federal 9,473 (37,142) -
State 812 (3,230) -
------ ------ ------
10,285 (40,372) -
------ ------ ------
Total $66,298 33,322 20,600
====== ====== ======
</TABLE>
(Continued)
ECKERD CORPORATION AND SUBSIDARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
For fiscal years 1997, 1996 and 1995, the income tax expense differs from
amounts computed by applying the Federal statutory rate of 35% to
earnings before income taxes and extraordinary items. The actual tax
differs from the expected tax as follows:
<TABLE>
<CAPTION>
Year ended
--------------------------------------------------
January 31, February 1, February 3,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected tax $60,842 48,041 43,184
State taxes, net of Federal benefit 7,434 259 839
Changes in valuation allowance through
the use of loss carryforwards - - (42,239)
Alternative minimum tax expense/
(utilization) - (17,012) 19,189
Other (1,978) 2,034 (373)
------ ------ ------
$66,298 33,322 20,600
====== ====== ======
</TABLE>
During the 1996 fiscal year, the Company reached an agreement with the
Internal Revenue Service for the income tax return examinations relating
to the January 31, 1987 and January 30, 1988 tax years. The settlement
amount for the two-year period was approximately $36,400. In connection
with this settlement, the Company's net operating loss carryforward was
adjusted to zero while deferred tax assets in the form of alternative
minimum tax credit carryforwards and deductions relating to changes in
amortization methods became available. As such, a major portion of the
settlement provided future tax benefits to the Company. The settlement
results had an immaterial effect on the total tax expense for the 1996
fiscal year. The Company reached an agreement with the Internal Revenue
Service during the 1997 fiscal year for the income tax return
examinations relating to the January 28, 1989, February 3, 1990, February
2, 1991 and February 1, 1992 tax years. The settlement amount for the
four-year period was $1,032. This result had an immaterial effect on the
total income tax expense for the current year. The federal income tax
returns for the fiscal years ended January 30, 1993, January 29, 1994 and
January 28, 1995 are currently being examined.
(Continued)
ECKERD CORPORATION AND SUBSIDARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Reserves and other liabilities $30,135 3,204
Amortization 41,065 42,326
Other 17,755 23,842
Loss carryforwards - -
Credit carryforwards - 22,756
------ -------
Gross deferred tax assets 88,955 92,128
Less valuation allowance - -
------ -------
Net deferred tax assets 88,955 92,128
------ -------
Deferred tax liabilities:
Inventory 35,245 35,371
Fixed assets 23,623 16,385
------ -------
Gross deferred tax liabilities 58,868 51,756
------ -------
Net deferred tax assets $30,087 40,372
====== =======
</TABLE>
(8) Transactions With Related Parties
During 1996, Merrill Lynch & Co. (which, through affiliated entities,
controlled approximately 1% of the Company's common stock before the
JCPenney acquisition) acted as the Company's financial advisor in
connection with the acquisition of the Company by JCPenney. The Company
paid Merrill Lynch & Co. $11,500 for its fees and expenses in connection
with the acquisition of the Company by JCPenney.
(Continued)
ECKERD CORPORATION AND SUBSIDARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(9) Affiliate Management Services
The Company manages and operates approximately 900 stores for affiliates
as Eckerd drugstores as of January 31, 1998. The Company provides
management, consulting, administrative and oversight services, which
include carrying out all matters related to the operation of the
drugstores. The Company receives a management fee based on a percentage
of gross revenues of the affiliates. Management fees for 1997 totaled
$58,380 and are netted against operating and administrative expenses. The
results of operations of the managed stores are not included in the
financial statements of the Company.
The Company has advanced cash to its drugstore affiliates to fund their
operations and has charged interest on such advances at the same interest
rate the Company pays to JCPenney. Total interest charged to the
affiliates in 1997 was $10,600, which is netted against interest expense.
(10) Store Closing Charges
In the fourth quarter of 1994, the Company established a $49,000
provision for future store closings. In addition to the small number of
stores the Company would close in the normal course of business, the
Company accelerated the closing of approximately 90 geographically
dispersed under-performing stores. Of the total charge, approximately
$31,000 related to lease settlements and obligations and other expenses
to be incurred in connection with the store closings. The remaining
charge of approximately $18,000 was for the write-off of impaired assets
which included inventory liquidation and the write-off of intangible and
fixed assets.
In 1997, 1996 and 1995, approximately $3,000, $5,000 and $20,000,
respectively, of the provision was utilized for lease obligations,
settlements, and asset write-offs. In 1996, remaining expenses were
anticipated to be less than the balance of the provision; therefore,
approximately $11,000 of the provision was made available and utilized
for 1996 store closings approved in 1995, primarily related to the
relocation of existing stores.
(11) Commitments
The Company conducts the major portion of its retail operations from
leased store premises under leases that will expire within the next 20
years. Such leases generally contain renewal options exercisable at the
option of the Company. In addition to minimum rental payments, certain
leases provide for payment of taxes, maintenance, and percentage rentals
based upon sales in excess of stipulated amounts.
(Continued)
ECKERD CORPORATION AND SUBSIDARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Rental expense for the years ended January 31, 1998, February 1, 1997 and
February 3, 1996 was:
<TABLE>
<CAPTION>
January 31, February 1, February 3,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Minimum rentals $162,963 132,496 118,797
Percentage rentals 24,856 25,666 25,651
------- ------- -------
$187,819 158,162 144,448
======= ======= =======
</TABLE>
At January 31, 1998, minimum rental commitments for the next five fiscal
years and thereafter under noncancelable leases were as follows: 1998 -
$154,130; 1999 - $149,852; 2000 - $139,489; 2001 - $128,800; 2002 -
$123,813; and thereafter - $1,150,421.
In 1987, the Company entered into an operating lease agreement for 72
stores with a third-party lessor established by an affiliate of Merrill
Lynch & Co. (which, through affiliated entities, controlled approximately
1% of the Company's common stock before the JCPenney acquisition). On
February 17, 1997, the Company purchased these properties for $33,111.
This transaction has been included in the February 1, 1997 balance sheet
of the Company as if the transaction had been closed as of that date.
During 1993 through 1995, the Company sold certain photo processing
equipment to an unrelated third party for approximately $34,000, and
entered into five-year leases with respect to such equipment. No gain or
loss was recorded in connection with these transactions. Annual lease
payments by the Company of $6,801 are required over the term of the
leases.
During 1993, the Company and IBM Global Services (IGS) entered into a
Systems Operations Service Agreement (Service Agreement) pursuant to
which IGS will manage the Company's entire information systems operation.
The Service Agreement has a ten year term and the total payments to be
made by the Company are expected to be approximately $750,000 over such
term, based on currently anticipated services. Of these payments,
$168,000 has been accounted for as capital expenditures as of January 31,
1998.
(Continued)
ECKERD CORPORATION AND SUBSIDARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(12) Contingencies
In the ordinary course of its business, the Company and its subsidaries
are parties to various legal actions which the Company believes are
incidental to the operation of the business of the Company and its
subsidiaries. Company management is of the opinion that although the
outcome of such litigation cannot be forecast with certanity, the final
disposition should not have a material adverse effect on the Company's
consolidated financial position or results of operations.
Independent Auditors' Report
----------------------------
The Board of Directors
Eckerd Corporation:
Under date of February 26, 1998, we reported on the consolidated balance sheets
of Eckerd Corporation and subsidiaries (a wholly-owned subsidiary of J. C.
Penney Company, Inc.) as of January 31, 1998 and February 1, 1997, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended January 31, 1998,
which are included in the Form 10-K405. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule in the Form 10-K405. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Tampa, Florida
February 26, 1998
Schedule II
ECKERD CORPORATION AND SUBSIDIARIES
RESERVES
Years ended January 31, 1998, February 1, 1997 and February 3, 1996
(In Thousands)
<TABLE>
<CAPTION>
Balance at Charged Balance at
Beginning to End
Description of Period earnings Deductions Other of Period
----------- ---------- -------- ---------- ----- ----------
Allowance for doubtful receivables (a)
<S> <C> <C> <C> <C> <C>
Year ended January 31, 1998 $3,000 $4,365 $4,365 - $3,000
====== ====== ====== ========== ======
Year ended February 1, 1997 $3,000 $5,122 $5,122 - $3,000
====== ====== ====== ========== ======
Year ended February 3, 1996 $3,000 $4,564 $4,564 - $3,000
====== ====== ====== ========== ======
</TABLE>
- --------------
Notes:
(a) This reserve is deducted from receivables in the balance sheets.
EXHIBIT INDEX
Exhibits previously filed or filed by incorporation by reference:
3.1 Certificate of Incorporation of the Company (incorporated by reference
to Exhibit 3.1 of Form 10-K405 of the Company for the period ended
February 1, 1997 (File No. 1-4844)).
3.2 First Amendment to Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.2 of Form 10-K405 of the
Company for the period ended February 1, 1997 (File No. 1-4844)).
3.3 By-laws of the Company, as amended (incorporated by reference to
Exhibit 3.3 of Form 10-K405 of the Company for the period ended
February 1, 1997 (File No. 1-4844)).
4.1 Form of 9.25% Senior Subordinated Notes Due 2004 of the Company
(incorporated by reference to Exhibit 4.01 to the Current Report on
Form 8-K dated October 26, 1993 of the Company (File No. 1-4844)).
4.2 Indenture dated as of November 1, 1993 between the Company and State
Street Bank and Trust Company of Connecticut, National Association, as
Trustee relating to the Company's 9-1/4% Senior Subordinated Notes Due
2004 (incorporated by reference to Exhibit 4.02 to the Current Report
on Form 8-K dated October 26, 1993 of the Company (File No. 1-4844)).
4.3 First Supplemental Indenture , dated as of February 27, 1997, between
the Company and State Street Bank and Trust Company of Connecticut,
National Association, as Trustee (incorporated by reference to Exhibit
4.3 of Form 10-K405 of the Company for the period ended February 1,
1997 (File No. 1-4844)).
10.1 Master Lease Agreement I dated as of May 18, 1993 between the Company
and Imaging Financial Services d/b/a EKCC ("IFS") (incorporated by
reference to Exhibit 10.28 to Amendment No. 1 to the Registration
Statement on Form S-2 of the Company (No. 33-64906)).
10.2 Master Lease Agreement II dated as of June 15, 1993 between the
Company and IFS (incorporated by reference to Exhibit 10.29 to
Amendment No. 1 to the Registration Statement on Form S-2 of the
Company (No. 33-64906)).
10.3 Systems Operations Service Agreement dated as of July 14, 1993 between
the Company and Integrated Systems Solutions Corporation (incorporated
by reference to Exhibit 10.30 to Amendment No. 1 to the Registration
Statement on Form S-2 of the Company (No. 33-64906)).
10.4 Letter dated March 16, 1993 between IFS and the Company relating to
IFS Sale and Leaseback (incorporated by reference to Exhibit 10.31 to
Amendment No. 2 of the Registration Statement on Form S-2 of the
Company (No. 33-64906)).
10.5 Receivables Purchase Agreement dated as of January 26, 1995 between
the Company and Three Rivers Funding Corporation (incorporated by
reference to Exhibit 10.18 to Form 10-K405 for the year ended January
28, 1995 of the Company (File No. 1-4844)).
10.6 First Amendment to Receivables Purchase Agreement dated as of March
31, 1995 between the Company and Three Rivers Funding Corporation
(incorporated by reference to Exhibit 10.19 to Form 10-K405 for the
year ended January 28, 1995 of the Company (File No. 1-4844)).
10.7 Employment Agreement dated February 4, 1996 between the Company and
Francis A. Newman (incorporated by reference to Exhibit 10.26 to Form
10-K for the year ended February 3, 1996 of the Company (File No.
1-4844)).
10.8 Employment Agreement dated February 4, 1996 between the Company and
James M. Santo (incorporated by reference to Exhibit 10.27 to Form
10-K for the year ended February 3, 1996 of the Company (File No.
1-4844)).
10.9 Employment Agreement dated February 4, 1996 between the Company and
Samuel G. Wright (incorporated by reference to Exhibit 10.28 to Form
10-K for the year ended February 3, 1996 of the Company (File No.
1-4844)).
10.10 Employment Agreement dated February 4, 1996 between the Company and
Kenneth L. Flynn (incorporated by reference to Exhibit 10.29 to Form
10-K for the year ended February 3, 1996 of the Company (File No.
1-4844)).
10.11 Amendment No. 1 dated as of November 2, 1996 to Employment Agreement
dated February 4, 1996 between the Company and Francis A. Newman
(incorporated by reference to Exhibit 11 to the Schedule 14D-9 of the
Company (File No. 1-4844)).
Exhibits filed herewith:
12.1 Statement regarding computation of ratio of earnings to fixed charges
of the Company.
23.1 Consent of Independent Certified Public Accountants.
27 Financial data schedule year ended January 31, 1998.
Restated Financial data schedule year ended February 1, 1997.
Restated Financial data schedule year ended February 3, 1996.
Exhibit 12.1
ECKERD CORPORATION AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
Years Ended January 31, 1998, February 1, 1997, February 3, 1996,
January 28, 1995 and January 29, 1994
<TABLE>
<CAPTION>
January February February January January
31, 1998 1, 1997 3, 1996 28, 1995 29, 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings before income taxes and
extraordinary item $168,750 137,259 123,383 87,084 43,969
Add:
Portion of rents representative of
the interest factor (*) 55,456 44,165 39,599 37,282 37,024
Interest expense 70,674 60,691 76,836 93,735 113,215
------- ------- ------- ------- -------
Income as adjusted $294,880 242,115 239,818 218,101 194,208
======= ======= ======= ======= =======
Fixed charges:
Interest expense 70,674 60,691 76,836 93,735 113,215
Portion of rents representative of
the interest factor 55,456 44,165 39,599 37,282 37,024
------- ------- ------- ------- -------
Total fixed charges $126,130 104,856 116,435 131,017 150,239
======= ======= ======= ======= =======
Ratio of earnings to fixed charges 2.34 2.31 2.06 1.66 1.29
======= ======= ======= ======= =======
</TABLE>
(*) The portion of rents representative of
the interest factor is calculated
as 33-1/3% of minimum rentals.
Exhibit 23.1
The Board of Directors
Eckerd Corporation:
Re: Registration Statement on Form S-3 (No. 33-50223)
We consent to incorporation by reference in the above referenced registration
statement of Eckerd Corporation and subsidiaries (a wholly-owned subsidiary of
J. C. Penney Company, Inc.) of our report dated February 26, 1998, relating to
the consolidated balance sheets of Eckerd Corporation and subsidiaries (a
wholly-owned subsidiary of J. C. Penney Company, Inc.) as of January 31, 1998
and February 1, 1997, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the years in the three-year
period ended January 31, 1998, and the related schedule, which report appears in
the January 31, 1998 annual report on Form 10-K405 of Eckerd Corporation and
subsidiaries (a wholly-owned subsidiary of J. C. Penney Company, Inc.).
/s/ KPMG Peat Marwick LLP
Tampa, Florida
May 1, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000031364
<NAME> Eckerd Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Jan-31-1998
<PERIOD-START> Feb-02-1997
<PERIOD-END> Jan-31-1998
<CASH> 24,883
<SECURITIES> 0
<RECEIVABLES> 144,954
<ALLOWANCES> 3,000
<INVENTORY> 1,290,708
<CURRENT-ASSETS> 1,462,540
<PP&E> 951,597
<DEPRECIATION> 384,630
<TOTAL-ASSETS> 2,620,080
<CURRENT-LIABILITIES> 831,638
<BONDS> 1,378,931
<COMMON> 0
0
0
<OTHER-SE> 267,616
<TOTAL-LIABILITY-AND-EQUITY> 2,620,080
<SALES> 6,111,187
<TOTAL-REVENUES> 6,111,187
<CGS> 4,771,318
<TOTAL-COSTS> 4,771,318
<OTHER-EXPENSES> 1,096,080
<LOSS-PROVISION> 4,365
<INTEREST-EXPENSE> 65,589
<INCOME-PRETAX> 173,835
<INCOME-TAX> 66,298
<INCOME-CONTINUING> 107,537
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107,537
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000031364
<NAME> ECKERD COPRORATION
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-04-1996
<PERIOD-END> FEB-01-1997
<CASH> 71,874
<SECURITIES> 0
<RECEIVABLES> 105,393
<ALLOWANCES> 3,000
<INVENTORY> 973,265
<CURRENT-ASSETS> 1,151,441
<PP&E> 775,690
<DEPRECIATION> 329,490
<TOTAL-ASSETS> 1,891,952
<CURRENT-LIABILITIES> 783,682
<BONDS> 779,951
<COMMON> 704
0
0
<OTHER-SE> 159,375
<TOTAL-LIABILITY-AND-EQUITY> 1,891,952
<SALES> 5,376,221
<TOTAL-REVENUES> 5,376,221
<CGS> 4,192,848
<TOTAL-COSTS> 4,192,848
<OTHER-EXPENSES> 980,301
<LOSS-PROVISION> 5,122
<INTEREST-EXPENSE> 60,691
<INCOME-PRETAX> 137,259
<INCOME-TAX> 33,322
<INCOME-CONTINUING> 103,937
<DISCONTINUED> 0
<EXTRAORDINARY> (1,499)
<CHANGES> 0
<NET-INCOME> 102,438
<EPS-PRIMARY> 1.46 <F1>
<EPS-DILUTED> 1.42 <F1>
<FN>
<F1>EPS PRIMARY AND DILUTED REFLECTS THE TWO-FOR-ONE STOCK SPLIT EFFECTED IN THE
FORM OF A STOCK DIVIDEND WHICH WAS PAID ON MAY 13, 1996 TO STOCKHOLDERS OF
RECORD ON APRIL 22, 1996.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000031364
<NAME> ECKERD CORPORATION
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-03-1996
<PERIOD-END> FEB-03-1996
<CASH> 7,922
<SECURITIES> 0
<RECEIVABLES> 73,137
<ALLOWANCES> 3,000
<INVENTORY> 835,551
<CURRENT-ASSETS> 918,006
<PP&E> 634,023
<DEPRECIATION> 282,974
<TOTAL-ASSETS> 1,490,699
<CURRENT-LIABILITIES> 597,388
<BONDS> 701,798
<COMMON> 700
0
0
<OTHER-SE> 54,041
<TOTAL-LIABILITY-AND-EQUITY> 1,490,699
<SALES> 4,997,073
<TOTAL-REVENUES> 4,997,073
<CGS> 3,874,723
<TOTAL-COSTS> 3,874,723
<OTHER-EXPENSES> 917,567
<LOSS-PROVISION> 4,564
<INTEREST-EXPENSE> 76,836
<INCOME-PRETAX> 123,383
<INCOME-TAX> 20,600
<INCOME-CONTINUING> 102,783
<DISCONTINUED> 0
<EXTRAORDINARY> (9,306)
<CHANGES> 0
<NET-INCOME> 93,477
<EPS-PRIMARY> 1.39 <F1>
<EPS-DILUTED> 1.36 <F1>
<FN>
<F1>EPS PRIMARY AND DILUTED REFLECTS THE TWO-FOR-ONE STOCK SPLIT EFFECTED IN THE
FORM OF A STOCK DIVIDEND DECLARED APRIL 1, 1996 AND PAYABLE ON OR ABOUT MAY
13, 1996. EPS PRIMARY AND DILUTED FOR PREVIOUSLY FILED FINANCIAL DATA
SCHEDULES HAVE NOT BEEN RESTATED FOR THE STOCK SPLIT.
</FN>
</TABLE>
