UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Thirteen Weeks Ended May 2, 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 No. 1-4844
ECKERD CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 51-0378122
(State of incorporation) (I.R.S. Employer Identification No.)
8333 Bryan Dairy Road
Largo, Florida 33777
(Address and zip code of principal executive offices)
(813) 395-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of May 31, 1998 the registrant had 100 shares of common stock outstanding.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED
DISCLOSURE FORMAT PROVIDED FOR IN GENERAL INSTRUCTION H TO FORM 10-Q.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ECKERD CORPORATION AND SUBSIDIARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Unaudited Audited
5/2/98 1/31/98
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash (including short-term investments of $50,500 and $0) $ 55,314 24,883
Receivables 126,903 141,954
Merchandise inventories 1,269,601 1,290,708
Prepaid expenses and other current assets 5,007 4,995
--------- ---------
Total current assets 1,456,825 1,462,540
--------- ---------
Property and equipment, at cost 993,710 951,597
Less accumulated depreciation 400,760 384,630
--------- ---------
Net property and equipment 592,950 566,967
--------- ---------
Excess of cost over net assets acquired, less
accumulated amortization 129,347 123,962
Favorable lease interests, less accumulated amortization 76,742 82,918
Deferred income taxes 34,119 34,119
Due from affiliates 352,822 292,162
Other assets 51,722 57,412
--------- ---------
$2,694,527 2,620,080
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Bank debit balances $ 10,058 53,580
Current installments of long-term debt 16,898 16,898
Accounts payable 280,328 393,195
Accrued expenses 337,589 367,965
--------- ---------
Total current liabilities 644,873 831,638
--------- ---------
Other noncurrent liabilities 125,385 141,895
Long-term debt, excluding current installments 222,859 223,931
Intercompany loan payable to J. C. Penney Company, Inc. 1,390,000 1,155,000
Stockholder's equity:
Voting common stock of $.01 par value.
Authorized 1,000 shares; issued 100 - -
Capital in excess of par value 321,254 321,254
Retained deficit (9,844) (53,638)
--------- ---------
Total stockholder's equity 311,410 267,616
--------- ---------
$2,694,527 2,620,080
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
ECKERD CORPORATION AND SUBSIDIARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Thirteen Twelve
Weeks Ended Weeks Ended
5/2/98 4/26/97
--------- ---------
<S> <C> <C>
Sales and other operating revenue $1,736,846 1,381,638
--------- ---------
Costs and expenses:
Cost of sales, including store
occupancy, warehousing and
delivery expense 1,341,165 1,070,108
Operating and administrative expenses 302,393 230,099
--------- ---------
Earnings before interest expense 93,288 81,431
Interest expense:
Interest expense on intercompany loan with J. C. Penney Company, Inc. 17,600 7,552
Interest expense, net 4,920 4,224
Amortization of original issue discount
and deferred debt expenses 131 135
--------- ---------
Total interest expense 22,651 11,911
--------- ---------
Earnings before income taxes 70,637 69,520
Income tax expense 26,843 21,267
--------- ---------
Net earnings $ 43,794 48,253
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
ECKERD CORPORATION AND SUBSIDIARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Thirteen Weeks Twelve Weeks
Ended 5/2/98 Ended 4/26/97
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 43,794 48,253
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 27,958 23,143
Amortization of original issue discount
and deferred debt expenses 131 135
Decrease (increase) in receivables, merchandise
inventories and prepaid expenses 41,785 (27,127)
Decrease in accounts payable and accrued expenses (160,564) (35,028)
Increase in due from affiliate (60,661) (18,000)
---------- ----------
Net cash used in operating activities (107,557) (8,624)
---------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment (48,261) (32,890)
Sale of property, plant and equipment 2,020 1,171
Acquisition of certain drugstore assets (11,617) (894)
Other 5,441 (2,433)
---------- ----------
Net cash used in investing activities (52,417) (35,046)
---------- ----------
Cash flows from financing activities:
Increase (decrease) in bank debit balances (43,522) 16,267
Additions to long-term debt - 22
Reductions of long-term debt (1,073) (32,579)
Net additions under intercompany note to J. C. Penney Company, Inc. 235,000 45,098
Redemption of 9.25% Senior Subordinated Notes - (1,327)
Other - 1
---------- ----------
Net cash provided by financing activities 190,405 27,482
---------- ----------
Net increase (decrease) in cash and short-term investments 30,431 (16,188)
Cash and short-term investments at beginning of period 24,883 71,874
---------- ----------
Cash and short-term investments at end of period $ 55,314 55,686
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
ECKERD CORPORATION AND SUBSIDIARIES
(A wholly-owned subsidiary of J. C. Penney Company, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
Note 1.
- -------
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 two-step
process consisting of (i) 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, and (ii) the February 27, 1997 exchange in which Old Company stockholders
received 0.6604 of a share 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 the Old Company.
Note 2.
- --------
The interim condensed consolidated financial information is unaudited but, in
the opinion of the Company, includes all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation. The condensed
consolidated financial information should be read in conjunction with the
audited consolidated financial statements included in the Company's Annual
Report on Form 10-K405 for the 52 weeks ended January 31, 1998. The results of
operations of the periods indicated should not be considered as necessarily
indicative of operations for the full year. The Company also manages
approximately 900 drugstores which are indirectly wholly-owned by JCPenney and
operated under the Eckerd name. A management fee which is netted against
operating and administrative expenses totaling $8,683 and $9,025 for the
thirteen and twelve week periods ended May 2, 1998 and April 26, 1997,
respectively, have been charged to affiliates. In addition, for the twelve week
period ended April 26, 1997, $8,975 of certain business integration expenses
were charged to affiliates. The results of the managed stores are not included
in the financial results of the Company. Prior to the acquisition, Old Company's
fiscal year ended the Saturday closest to January 31st each year. In order to
make its fiscal year end conform to that of JCPenney, the Company changed its
fiscal year end to the last Saturday in January of each year. Accordingly, to
conform to the JCPenney fiscal calendar, the first quarter of fiscal year 1997
consisted of twelve weeks ended April 26, 1997.
Note 3.
- -------
Substantially all inventories are determined on a last-in, first-out (LIFO) cost
basis. At May 2, 1998 and January 31, 1998, inventories would have been greater
by approximately $134,600 and $128,900, respectively, if inventories were valued
on a first-in, first-out (FIFO) cost basis. Since LIFO inventory costs can only
be determined at the end of each fiscal year when inflation rates and inventory
levels are finalized, estimates of LIFO inventory costs are used for interim
financial statements. The cost of merchandise sold is calculated on an estimated
basis and adjusted based on inventories taken during the fiscal year.
5
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
The following narrative analysis of the Company's results of operations is
presented pursuant to the reduced disclosure format provided for in General
Instruction H to Form 10-Q.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
---------------------------
5/2/98 4/26/97
--------- ---------
<S> <C> <C>
Sales and other operating revenue $1,736,846 1,489,304
Costs of sales 1,341,165 1,154,349
Operating and administrative expenses 302,393 248,446
--------- ---------
Operating earnings 93,288 86,509
Total interest expense 22,651 12,919
--------- ---------
Earnings before income taxes 70,637 73,590
Income tax expense 26,843 22,073
--------- ---------
Net earnings $ 43,794 51,517
========= =========
</TABLE>
For comparative purposes only, the above Condensed Consolidated Statements of
Earnings and the following analysis of results of operations compares the
thirteen weeks ended May 2, 1998 to the thirteen weeks ended April 26, 1997. As
noted previously, as a result of the change by the Company of its fiscal year,
Item 1 Financial Information for the 1997 first quarter is presented for the
twelve weeks ended April 26, 1997.
Sales and other operating revenue for the first quarter ended May 2, 1998
increased 16.6% over the 1997 comparable period to $1.737 billion. Sales
benefited from significant increases in drugstore prescription sales as well as
from increases in non-prescription (front end) sales, increases from acquired
Virginia drugstores, and increased sales in relocated freestanding stores.
Comparable drugstore sales (stores open one year or more) increased 9.4% for the
thirteen week period compared to an 8.0% increase in the respective 1997 period.
The increases in comparable drugstore sales were primarily attributable to the
increase in sales of prescription drugs as well as increased sales of
non-prescription items in the health category.
Prescription sales as a percentage of drugstore sales were 59.9% compared to
57.3% for the comparable first quarter 1997 period. The growth in prescription
sales was primarily the result of increased managed care prescription sales and
prescription sales from the acquired Virginia drugstores. Managed care
prescription sales increased to 82.1% of prescription sales compared to 78.3% in
1997. Managed care payors typically negotiate lower prescription prices than
those on non-managed care prescriptions, resulting in decreasing gross profit
margins on prescription sales. However, contracts with managed care payors
generally increase the volume of prescription sales and gross profit dollars.
6
As a percentage of sales, cost of sales and related expenses were 77.2% for the
first quarter ended May 2, 1998 compared to 77.5% for the 1997 comparable
period. Cost of sales and related expenses are currently benefiting from a
slowing in the decline in prescription gross profit margins as well as
improvement in front end gross profit margins. The LIFO charge for the 1998
first quarter period was $5.7 million compared to $5.2 million for the 1997
first quarter.
Operating and administrative expenses for the first quarter, net of $8.7 million
and $9.8 million of management fees in 1998 and 1997, respectively, and $9.7
million of business integration costs in 1997 charged to affiliates, as a
percentage of sales was 17.4% compared to 16.7% in 1997. The increase for the
first quarter as a percentage of sales resulted primarily from increased costs
as a percentage of sales in such expense categories as information technology,
year 2000 compliance and advertising expenses.
Total interest expense for the 1998 first quarter increased 75.3% over 1997 to
$22.7 million, including $17.6 million of interest expense from intercompany
loans with JCPenney. The increase was due to higher average borrowings and
higher interest rates in the first quarter compared to 1997.
Operating earnings for the first quarter increased 7.8% to $93.3 million. The
increase was due to an increase in gross profit dollars as a result of higher
sales and other operating revenue, which was partially offset by the increase in
operating and administrative expenses. Earnings before income taxes decreased
4.0% to $70.6 million. The decrease was due primarily to the increase in
interest expense.
Income tax expense for the 1998 first quarter was $26.8 million (38%) compared
to $22.1 million (30%) in 1997. Income tax expense in both periods represent
federal and state income taxes. In addition, the 1997 period included the use of
alternative minimum tax credits and other tax credit carryforwards.
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Company's independent public accountants have made a limited review of the
financial information furnished herein in accordance with standards established
by the American Institute of Certified Public Accountants. The Independent
Auditors' Review Report is presented on page 8 of this report.
7
Independent Auditors' Review Report
-----------------------------------
The Board of Directors
Eckerd Corporation:
We have reviewed the condensed consolidated balance sheet of Eckerd Corporation
and subsidiaries (a wholly-owned subsidiary of J. C. Penney Company, Inc.) as of
May 2, 1998, and the related condensed consolidated statements of earnings and
cash flows for the thirteen weeks ended May 2, 1998 and the twelve weeks ended
April 26, 1997. These condensed consolidated financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Eckerd Corporation and subsidiaries
(a wholly-owned subsidiary of J. C. Penney Company, Inc.) as of January 31,
1998, and the related consolidated statements of earnings, stockholders' equity,
and cash flows for the year then ended (not presented herein); and in our report
dated February 26, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of January 31, 1998, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ KPMG PEAT MARWICK LLP
June 15, 1998
8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company has no material legal proceedings pending against it. Information
regarding certain legal proceedings involving the Company was previously
reported in the Company's Annual Report on Form 10-K405 for the fiscal year
ended January 31, 1998. As reported in that Form 10-K405, management is of the
opinion that such legal proceedings should not have a material adverse effect on
the Company's consolidated financial position or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
15.1 Letter re unaudited interim financial information.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated February 4, 1998 ( Item
5 - Other Events).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECKERD CORPORATION
(Registrant)
June 15, 1998 /s/ Samuel G. Wright
--------------------
Samuel G. Wright
Executive Vice President/
Chief Financial Officer
(Principal Accounting Officer)
9
Exhibit Index
Eckerd Corporation
Form 10-Q
Exhibit No. Description of Exhibit
- ----------- ----------------------
15.1 Letter re unaudited interim financial information
27 Financial Data Schedule
10
EXHIBIT 15.1
Board of Directors
Eckerd Corporation:
RE: Registration Statement on Form S-3 (No. 33-50223)
With respect to the subject registration statement, we acknowledge our awareness
of the use therein of our report dated June 15, 1998, related to our review of
interim financial information, which report was included in the Form 10-Q of
Eckerd Corporation and subsidiaries (a wholly-owned subsidiary of J. C. Penney
Company, Inc.) for the thirteen weeks ended May 2, 1998.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Act.
/s/ KPMG PEAT MARWICK LLP
Tampa, Florida
June 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000031364
<NAME> Eckerd Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jan-30-1999
<PERIOD-START> Feb-01-1998
<PERIOD-END> Jan-30-1999
<CASH> 55,314
<SECURITIES> 0
<RECEIVABLES> 129,903
<ALLOWANCES> 3,000
<INVENTORY> 1,269,601
<CURRENT-ASSETS> 1,456,825
<PP&E> 993,710
<DEPRECIATION> 400,760
<TOTAL-ASSETS> 2,694,527
<CURRENT-LIABILITIES> 644,873
<BONDS> 1,612,859
<COMMON> 0
0
0
<OTHER-SE> 311,410
<TOTAL-LIABILITY-AND-EQUITY> 2,694,527
<SALES> 1,736,846
<TOTAL-REVENUES> 1,736,846
<CGS> 1,341,165
<TOTAL-COSTS> 1,341,165
<OTHER-EXPENSES> 301,536
<LOSS-PROVISION> 857
<INTEREST-EXPENSE> 22,651
<INCOME-PRETAX> 70,637
<INCOME-TAX> 26,843
<INCOME-CONTINUING> 43,794
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,794
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
