<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the 53 weeks ended January 31, 1998 Commission file number 1-777
J. C. PENNEY COMPANY, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-5583779
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(State of incorporation) (I.R.S. Employer ID No.)
6501 LEGACY DRIVE, PLANO, TEXAS 75024-3698
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 431-1000
- - -------------------------------------------------- --------------
Securities registered pursuant to Section 12(b) of the Act:
- - ----------------------------------------------------------
Name of each exchange on
Title of each class which registered
- - ------------------------------- ------------------------
Common Stock of 50c par value New York Stock Exchange
Preferred Stock Purchase Rights 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant: $19,890,899,116 as of March 16, 1998.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 252,176,384 shares
of Common Stock of 50c par value, as of March 16, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
<TABLE>
<CAPTION>
Documents from which portions Parts of the Form 10-K
are incorporated by reference into which incorporated
----------------------------- -----------------------
<S> <C>
1. J. C. Penney Company, Inc. Part I, Part II, and
1997 Annual Report to Stockholders Part IV
2. J. C. Penney Company, Inc. Part III
1998 Proxy Statement
3. J. C. Penney Funding Corporation Part I and Part IV
Form 10-K for fiscal year 1997
</TABLE>
<PAGE>
PART I
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1. BUSINESS.
J. C. Penney Company, Inc. ("Company") was founded by James Cash Penney in
1902. Incorporated in Delaware in 1924, the Company has grown to be a major
retailer. The major portion of the Company's business consists of providing
merchandise and services to consumers through department stores that include
catalog departments. The Company markets predominantly family apparel, jewelry,
shoes, accessories, and home furnishings. In addition, the Company, through its
wholly-owned subsidiary, Eckerd Corporation ("Eckerd"), operates a chain of
approximately 2,780 drugstores located throughout the northeast, southeast, and
Sunbelt regions of the United States. The Company also has several direct
marketing insurance subsidiaries, the principal of which is J. C. Penney Life
Insurance Company, which market life, health, accident and credit insurance as
well as a growing portfolio of non-insurance products.
The business of marketing merchandise and services is highly competitive.
Although the Company is one of the largest department store and drugstore
retailers in the United States, it has numerous competitors. Many factors enter
into the competition for the consumer's patronage, including price, quality,
style, service, product mix, convenience, and credit availability. The
Company's annual earnings depend to a significant extent on the results of
operations for the last quarter of its fiscal year. Sales for that period
average approximately one-third of annual sales.
Information about certain aspects of the business of the Company included
under the captions of "Investments and Fair Value of Financial Instruments"
(page 25), and "Segment Reporting" (page 30), which appear in the section of the
Company's 1997 Annual Report to Stockholders entitled "Notes to Consolidated
Financial Statements", "Five Year Financial Summary" (page 31), "Five Year
Operations Summary" (page 32), and "Supplemental Data (unaudited)" (pages 33 and
34), which appear in the Company's 1997 Annual Report to Stockholders on the
pages indicated in the parenthetical references, is incorporated herein by
reference and filed hereto as Exhibit 13 in response to Item 1 of Form 10-K.
In addition, information about J. C. Penney Funding Corporation, a wholly
owned consolidated subsidiary of the Company, which appears in Item 1 of its
separate Annual Report on Form 10-K for the fiscal year ended January 31, 1998,
is incorporated herein by reference and filed hereto as Exhibit 99(a) in
response to Item 1 of Form 10-K.
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SUPPLIERS. The Company purchases its merchandise from approximately 4,300
domestic and foreign suppliers, many of whom have done business with the Company
for many years. In addition, Eckerd purchases merchandise and pharmaceuticals
from approximately 3,300 suppliers, substantially all of which are domestic.
The majority of Eckerd's suppliers have done business with Eckerd for many
years. In addition to its Plano, Texas home office, the Company, through its
international purchasing subsidiary and as of January 31, 1998, maintained
buying offices in Guatemala, Hong Kong, India, Italy, Korea, Mexico, the
Philippines, Singapore, Taiwan and Thailand.
EMPLOYMENT. The Company and its consolidated subsidiaries employed
approximately 260,000 persons as of January 31, 1998.
ENVIRONMENT. Environmental protection requirements did not have a material
effect upon the Company's operations during fiscal 1997. While management
believes it unlikely, it is possible that compliance with such requirements will
lengthen lead time in expansion plans and increase construction, and therefore
operating, costs due, in part, to the expense and time required to conduct
environmental and ecological studies.
2. PROPERTIES.
At January 31, 1998, the Company operated 3,981 retail stores, comprised of
1,203 JCPenney department stores and 2,778 drugstores, in all 50 states, Puerto
Rico, Mexico, and Chile, of which 282 JCPenney department stores and 16
drugstores were owned. In addition, the Company owns ten store locations that
are leased to other tenants and not operated as units of the Company. The
Company also operated six catalog fulfillment centers, of which four were owned,
and owned one store distribution center, three drugstore distribution centers,
the insurance company and Eckerd corporate offices, and the Company's home
office facility and approximately 244 acres of property in Plano, Texas,
adjacent to the facility. Information relating to certain of the Company's
facilities included under the captions of "Five Year Financial Summary" and
"Five Year Operations Summary", which appear on pages 31 and 32, respectively,
of the Company's 1997 Annual Report to Stockholders, is incorporated herein by
reference and filed hereto as Exhibit 13 in response to Item 2 of Form 10-K.
3. LEGAL PROCEEDINGS.
On February 4, 1998, Eckerd Corporation 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
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<PAGE>
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 Eckerd and is pending. Additionally, Eckerd 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. Eckerd 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.
Eckerd 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.
Eckerd 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.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of stockholders during the fourth quarter
of fiscal 1997.
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EXECUTIVE OFFICERS OF THE REGISTRANT.
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The following is a list, as of March 2, 1998, of the names and ages of the
executive officers of the Company and of the offices and other positions held by
each such person with the Company. The terms of all executive officers will
expire on May 15, 1998. There is no family relationship between any of the
named persons.
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<CAPTION>
OFFICES AND OTHER POSITIONS
NAME HELD WITH THE COMPANY AGE
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<S> <C> <C>
James E. Oesterreicher................ Chairman of the Board and
Chief Executive Officer; Director 56
W. Barger Tygart...................... Vice Chairman of the Board; Director 62
John T. Cody, Jr...................... President and Chief Operating Officer,
JCPenney Stores, Merchandising,
Marketing, and Catalog 58
Gary L. Davis......................... Senior Vice President, Director
of Human Resources and
Administration 55
Gale Duff-Bloom....................... President, Marketing and Company
Communications 58
David V. Evans........................ Senior Vice President, Chief
Information Officer 53
John E. Fesperman..................... President and Chief Operating Officer,
JCPenney Insurance, Credit, and
Facilities Services 52
Thomas D. Hutchens.................... President and Chief Operating
Officer, International 57
Charles R. Lotter..................... Executive Vice President, Secretary
and General Counsel 60
William E. McCarthy................... Formerly President, Catalog,
Distribution, and Purchasing 56
Donald A. McKay....................... Executive Vice President and
Chief Financial Officer 52
Francis A. Newman..................... Chairman of the Board,
President and Chief Executive
Officer, Eckerd Corporation 49
Ted L. Spurlock....................... Formerly Senior Vice President,
Director of Financial Services
and Government Relations 59
</TABLE>
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Mr. Oesterreicher was elected Chairman of the Board effective January 1997 and
has served as Chief Executive Officer since 1995. He served as Vice Chairman of
the Board from 1995 to 1997. From 1992 to 1995, he served as President of
JCPenney Stores and Catalog.
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Mr. Tygart, who will retire from the Company in 1998, was elected Vice
Chairman of the Board, effective November 1, 1997. From 1995 to 1997 he served
as President and Chief Operating Officer and a director of the Company. He was
elected a Senior Executive Vice President and was named Director of
Merchandising, Quality Assurance and Distribution in 1992. In 1993, he was
appointed Director of Merchandising and Support Operations, and served in that
capacity until 1995. He has also served as a director of Eckerd Corporation
since February 1997.
Mr. Cody was elected President and Chief Operating Officer, JCPenney Stores,
Merchandising, Marketing, and Catalog, effective November 1, 1997. From 1995 to
May 1997, he served as President of JCPenney Stores, and from May 1997 to
November 1997, he served as President of Merchandising. He was elected an
Executive Vice President in 1992 and served as Director of JCPenney Stores from
1992 to 1995.
Mr. Davis, who was elected Executive Vice President, Chief Human Resources and
Administration Officer, effective April 1, 1998, has served as Senior Vice
President, Director of Human Resources and Administration since 1997. From 1996
to 1997, he served as Senior Vice President and Director of Personnel and
Administration. He was elected President of the Northwestern Region in 1992 and
served in that capacity until 1996.
Ms. Duff-Bloom was elected President of Marketing and Company Communications
in February 1996. She was elected Senior Executive Vice President and served as
Director of Personnel and Company Communications from January 1995 to February
1996. She was elected an Executive Vice President in 1993 and served as
Director of Administration from 1993 to 1995. She served as Senior Vice
President and Associate Director of Merchandising from 1990 to 1993.
Mr. Evans was elected Senior Vice President, Chief Information Officer,
effective November 1, 1997. Prior to that, he served as Senior Vice President,
Director of Information Systems and from 1995 to 1997 he served as Senior Vice
President, Director of Planning and Information Systems. He was elected a Vice
President in 1987 and served as Director of Information Systems from 1987 to
1995.
Mr. Fesperman was elected President and Chief Operating Officer, JCPenney
Insurance, Credit, and Facilities Services effective December 1, 1997. Prior to
that, he served as Senior Vice President, Director of Planning, Facilities, and
International Development and from 1996 to 1997 he served as Senior Vice
President and Director of Support Services and Subsidiary Operations. He was
elected a Vice President in 1993 and served as Director of Insurance from 1991
to 1996.
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Mr. Hutchens was elected President and Chief Operating Officer, International,
effective November 1, 1997. From 1995 to May 1997, he served as President of
Merchandising Worldwide, and from May 1997 to November 1997, he served as
President of JCPenney Stores. He was elected an Executive Vice President in
1992 and served as Director of Merchandising from 1992 to 1995.
Mr. Lotter was elected an Executive Vice President in 1993. He was elected
Senior Vice President, General Counsel and Secretary in 1987. He has also
served as a director of Eckerd Corporation since December 1996.
Mr. McCarthy, who will retire from the Company in 1998, served as President of
Catalog, Distribution, and Purchasing from 1995 to 1998. He was elected
President, Catalog Division in 1992, and served in that capacity until 1995.
Mr. McKay was elected an Executive Vice President in 1997. He was elected
Senior Vice President and Chief Financial Officer in 1996. From 1994 to 1996,
he served as Vice President and Controller. He was elected Vice President and
Treasurer in 1985 and served in that capacity until 1994. He has also served as
a director of Eckerd Corporation since December 1996.
Mr. Newman was elected Chairman of the Board of Eckerd Corporation in May
1997. He has served as Chief Executive Officer of Eckerd Corporation since
February 1996. He is also President and a director of Eckerd Corporation,
positions he has held since July 1993. Prior to joining Eckerd, Mr. Newman
served as President, Chief Executive Officer and a director of F&M Distributors,
Inc. ("F&M"), a drugstore chain, since 1986. F&M filed bankruptcy under Chapter
11 of the United States Bankruptcy Code in December 1994. Prior to joining F&M,
he was the Executive Vice President of Household Merchandising, Inc., a retail
firm, from 1984 to 1986 and the Senior Vice President of Merchandising for F. W.
Woolworth, a retail firm, from 1980 to 1984.
Mr. Spurlock, who will retire from the Company in 1998, was elected a Senior
Vice President in 1992. He served as Director of Financial Services and
Government Relations from 1995 to 1997 and Director of Financial Services and
Company Communications from 1992 to 1995.
PART II
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5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded principally on the New York Stock
Exchange, as well as on other exchanges in the United States. In addition, the
Company has issued approximately 1.2 million shares of Series B ESOP Convertible
Preferred Stock pursuant to a leveraged
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employee stock ownership plan. Additional information relating to the Common
Stock and Preferred Stock of the Company included under the captions
"Consolidated Statements of Stockholders' Equity" (page 19), "Capital Stock"
(page 26), and "Quarterly Data (Unaudited)" (page 31), which appear in the
Company's 1997 Annual Report to Stockholders on the pages indicated in the
parenthetical references, is incorporated herein by reference and filed hereto
as Exhibit 13 in response to Item 5 of Form 10-K.
6. SELECTED FINANCIAL DATA.
Information for the fiscal years 1993-1997 included in the "Five Year
Financial Summary" on page 31 of the Company's 1997 Annual Report to
Stockholders is incorporated herein by reference and filed hereto as Exhibit 13
in response to Item 6 of Form 10-K.
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The discussion and analysis included under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations", which
appears in the Company's 1997 Annual Report to Stockholders on pages 13 through
17 thereof, is incorporated herein by reference and filed hereto as Exhibit 13
in response to Item 7 of Form 10-K.
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Balance Sheets of the Company and subsidiaries as of January
31, 1998 and January 25, 1997, and the related Consolidated Statements of
Income, Stockholders' Equity and Cash Flows for each of the years in the three-
year period ended January 31, 1998, appearing on pages 18 through 21 of the
Company's 1997 Annual Report to Stockholders, together with the Independent
Auditors' Report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing on page 22 of the Company's 1997 Annual Report to
Stockholders, the Notes to Consolidated Financial Statements on pages 23 through
30, and the quarterly financial highlights ("Quarterly Data
(unaudited)")appearing on page 31 thereof, are incorporated herein by reference
and filed hereto as Exhibit 13 in response to Item 8 of Form 10-K.
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
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The Company has had no change in, or disagreements with, its independent
certified public accountants on accounting or auditing matters or on financial
statement disclosure.
PART III*
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10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.*
11. EXECUTIVE COMPENSATION.*
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.*
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.*
- - -----------------
* Pursuant to General Instruction G to Form 10-K, the information called for
by Items 10, with respect to directors of the Company (to the extent not set
forth in Part I hereof), 11, 12, and 13 is incorporated by reference to the
Company's 1998 Proxy Statement, which involves the election of directors, the
final copy of which the Company filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, on April 9, 1998.
PART IV
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14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.
(a)(1) All Financial Statements. See Item 8 of this Annual Report on Form 10-
K for financial statements incorporated by reference to the Company's 1997
Annual Report to Stockholders.
(a)(2) Financial Statement Schedules. The following schedule is attached on
Page F-1.
II. Valuation and Qualifying Accounts and Reserves
See Independent Auditors' Report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing on page 12 of this Annual Report on Form
10-K.
All other schedules have been omitted as they are inapplicable or not required
under the rules, or the information has been submitted in the consolidated
financial statements and related material to the
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Company's 1997 Annual Report to Stockholders incorporated herein by reference
and filed hereto as Exhibit 13.
Separate financial statements are filed for J. C. Penney Funding Corporation,
a wholly owned consolidated subsidiary, in its separate Annual Report on Form
10-K for the 53 weeks ended January 31, 1998, which financial statements,
together with the Independent Auditors' Report of KPMG Peat Marwick LLP thereon,
are incorporated herein by reference and filed hereto as Exhibit 99(b).
(a)(3) Exhibits. See separate Exhibit Index on pages G-1 through G-11.
(b) Current Reports on Form 8-K. None.
(c) Each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this form is filed as part of the separate
Exhibit Index on pages G-1 through G-11 and specifically identified as such
beginning on page G-6.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
J. C. PENNEY COMPANY, INC.
--------------------------
(Registrant)
By /s/ C. R. LOTTER
-----------------------------
C. R. Lotter
Executive Vice President,
Secretary and General Counsel
Dated: April 30, 1998
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Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
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<S> <C> <C>
J. E. Oesterreicher* Chairman of the Board and April 30, 1998
- - ---------------------- Chief Executive Officer (principal
executive officer); Director
J. E. Oesterreicher
W. B. Tygart* Vice Chairman of the Board; April 30, 1998
- - ---------------------- Director
W. B. Tygart
D. A. McKay* Executive Vice President and April 30, 1998
- - ---------------------- Chief Financial Officer
(principal financial officer)
D. A. McKay
W. J. Alcorn* Vice President and Controller April 30, 1998
- - ---------------------- (principal accounting officer)
W. J. Alcorn
M. A. Burns* Director April 30, 1998
- - ----------------------
M. A. Burns
V. E. Jordan, Jr.* Director April 30, 1998
- - ----------------------
V. E. Jordan, Jr.
George Nigh* Director April 30, 1998
- - ----------------------
George Nigh
J. C. Pfeiffer* Director April 30, 1998
- - ----------------------
J. C. Pfeiffer
A. W. Richards* Director April 30, 1998
- - ----------------------
A. W. Richards
F. Sanchez-Loaeza* Director April 30, 1998
- - ----------------------
F. Sanchez-Loaeza
C. S. Sanford, Jr.* Director April 30, 1998
- - ----------------------
C. S. Sanford, Jr.
R. G. Turner* Director April 30, 1998
- - ----------------------
R. G. Turner
J. D. Williams* Director April 30, 1998
- - ----------------------
J. D. Williams
</TABLE>
*By /s/ C. R. Lotter
--------------------------
C. R. Lotter
Attorney-in-fact
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INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors of
J. C. Penney Company, Inc.:
Under date of February 26, 1998, we reported on the consolidated balance sheets
of J. C. Penney Company, Inc. and subsidiaries as of January 31, 1998 and
January 25, 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended January 31, 1998, as contained in the 1997 Annual Report to
Stockholders. These consolidated financial statements and our report thereon
are incorporated by reference in the Company's Annual Report on Form 10-K for
the 1997 fiscal year. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule listed in Item 14(a)(2) of the Annual Report on
Form 10-K. 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
Dallas, Texas
February 26, 1998
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SCHEDULE II
J. C. PENNEY COMPANY, INC.
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Amounts in millions)
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------
53 Weeks 52 Weeks Ended
Ended -------------------------
January 31, January 25, January 27,
DESCRIPTION 1998 1997 1996
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserves deducted from assets
- - -----------------------------
Allowance for doubtful accounts (1)
Balance at beginning of period $ 77 $ 63 $ 55
Additions charged to costs and
expenses 249 196 163
Deductions of write-offs, less
recoveries (221) (182) (155)
----- ----- -----
Balance at end of period $ 105 $ 77 $ 63
===== ===== =====
</TABLE>
(1) Excludes amounts related to the Company's retained interest in JCP
Master Credit Card Trust.
<TABLE>
<S> <C> <C> <C>
Allowance for loan losses -
JCPenney National Bank
Balance at beginning of period $ 51 $ 47 $ 44
Additions charged to costs and
expenses 8 83 45
Deductions of write-offs, less
recoveries (11) (79) (42)
Reduction in reserves related
to the sale of the bank
receivables portfolio (48) -- --
----- ----- -----
Balance at end of period $ -- $ 51 $ 47
===== ===== =====
Other reserves
Valuation reserve - retained interest
in JCP Master Credit Card Trust 40 28 21
Other receivables 7 -- --
----- ----- -----
Balance at end of period $ 47 $ 28 $ 21
===== ===== =====
</TABLE>
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EXHIBIT INDEX
-------------
Exhibit
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3. (i) ARTICLES OF INCORPORATION Restated Certificate of Incorporation of
the Company(incorporated by reference to Exhibit (3)(i) to Company's
Quarterly Report on Form 10-Q for the thirteen week period ended
April 27, 1996*).
(ii) BYLAWS Bylaws of Company, as amended to January 11, 1995
(incorporated by reference to Exhibit 3(ii)(a) to Company's Annual
Report on Form 10-K for the 52 week period ended January 28, 1995*).
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
(a) Indenture, dated as of October 1, 1982, between the Company and
U.S. Bank Trust National Association (formerly First Trust of
California, National Association) (as Successor Trustee to Bank of
America National Trust and Savings Association) (incorporated by
reference to Exhibit 4(a) to Company's Annual Report on Form 10-K
for the 52 week period ended January 29, 1994*).
(b) First Supplemental Indenture, dated as of March 15, 1983, between
the Company and U.S. Bank Trust National Association (formerly
First Trust of California, National Association) (as Successor
Trustee to Bank of America National Trust and Savings
Association)(incorporated by reference to Exhibit 4(b) to
Company's Annual Report on Form 10-K for the 52 week period ended
January 29, 1994*).
(c) Second Supplemental Indenture, dated as of May 1, 1984, between
the Company and U.S. Bank Trust National Association (formerly
First Trust of California, National Association)(as Successor
Trustee to Bank of America National Trust and Savings
Association)(incorporated by reference to Exhibit 4(c) to
Company's Annual Report on Form 10-K for the 52 week period ended
January 29, 1994*).
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(d) Third Supplemental Indenture, dated as of March 7, 1986, between
the Company and U.S. Bank Trust National Association (formerly
First Trust of California, National Association) (as Successor
Trustee to Bank of America National Trust and Savings
Association)(incorporated by reference to Exhibit 4(d) to
Company's Registration Statement on Form S-3, SEC File No.33-
3882).
(e) Fourth Supplemental Indenture, dated as of June 7, 1991, between
the Company and U.S. Bank Trust National Association (formerly
First Trust of California, National Association) (as Successor
Trustee to Bank of America National Trust and Savings
Association)(incorporated by reference to Exhibit 4(e) to
Registrant's Registration Statement on Form S-3, SEC File No. 33-
41186).
(f) Indenture, dated as of April 1, 1994, between the Company and U.S.
Bank Trust National Association (formerly First Trust of
California, National Association) (as Successor Trustee to Bank of
America National Trust and Savings Association) (incorporated by
reference to Exhibit 4(a) to Company's Registration Statement on
Form S-3, SEC File No. 33-53275).
(g) Rights Agreement dated as of February 14, 1990 between Company and
First Chicago Trust Company of New York, as Rights Agent
(incorporated by reference to Exhibit 1 to Company's Current
Report on Form 8-K, Date of Report - February 6, 1990*).
(h) Amendment to Rights Agreement, dated as of February 14, 1990,
between Company and First Chicago Trust Company of New York, as
Rights Agent, effective as of January 13, 1992, among Company,
First Chicago Trust Company of New York, and Manufacturers Hanover
Trust Company of New York (now ChaseMellon Shareholder Services,
L.L.C.), as successor Rights Agent (incorporated by reference to
Exhibit 4(b) to Company's Annual Report on Form 10-K for the 52
week period ended January 25, 1992*).
(i) Letter to Company stockholders dated May 1, 1993 explaining
adjustments to Rights and to underlying Series A Junior
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Participating Preferred Stock, including exercise price of such
Rights, and the voting rights and participating dividend on such
Preferred Stock as a result of the two-for-one stock split payable
May 1, 1993 to stockholders of record on April 12, 1993
(incorporated by reference to Exhibit 4(c) to Company's Annual
Report on Form 10-K for the 53 week period ended January 30,
1993*).
(j) Explanation of adjustments to Rights and to underlying Series A
Junior Participating Preferred Stock and changes to shares of
Series B Convertible Preferred Stock held by Trustee of Company's
Savings, Profit-Sharing and Stock Ownership Plan on behalf of Plan
participants as a result of the two-for-one stock split payable
May 1, 1993 to stockholders of record on April 12, 1993
(incorporated by reference to Item 5 of Company's Current Report
on Form 8-K dated March 10, 1993*).
(k) Amended and Restated 364-Day Revolving Credit Agreement dated as
of December 3, 1996, among J. C. Penney Company, Inc., J. C.
Penney Funding Corporation, the Lenders party thereto, Morgan
Guaranty Trust Company of New York, as Agent for the Lenders, and
Bank of America Illinois, Bankers Trust Company, The Chase
Manhattan Bank, Citibank, N.A., Credit Suisse, and NationsBank of
Texas, N.A., as Co-Agents for the Lenders (incorporated by
reference to Exhibit 4(d) to J. C. Penney Funding Corporation's
Annual Report on Form 10-K for the 52 weeks ended January 25,
1997, SEC File No. 1-4947-1).
(l) Amended and Restated Five-Year Revolving Credit Agreement dated as
of December 3, 1996, among J. C. Penney Company, Inc., J. C.
Penney Funding Corporation, the Lenders party thereto, Morgan
Guaranty Trust Company of New York, as Agent for the Lenders, and
Bank of America Illinois, Bankers Trust Company, The Chase
Manhattan Bank, Citibank, N.A., Credit Suisse, and NationsBank of
Texas, N.A., as Co-Agents for the Lenders (incorporated by
reference to Exhibit 4(e) to J. C. Penney Funding Corporation's
Annual Report on Form 10-K for the 52 weeks ended January 25,
1997, SEC File No. 1-4947-1).
G-3
<PAGE>
(m) Amendment and Restatement Agreement to 364-Day Revolving Credit
Agreement, dated as November 21, 1997, among J. C. Penney Company,
Inc., J. C. Penney Funding Corporation, the Lenders party thereto,
Morgan Guaranty Trust Company of New York, as Agent, and Bank of
America National Trust and Savings Association, Bankers Trust
Company, The Chase Manhattan Bank, Citibank, N.A., Credit Suisse
First Boston and NationsBank of Texas, N.A., as Managing Agents
(incorporated by reference to Exhibit 4(f) to J. C. Penney Funding
Corporation's Annual Report on Form 10-K for the 53 weeks ended
January 31, 1998, SEC File No. 1-4947-1).
(n) Amendment and Restatement Agreement to Five-Year Revolving Credit
Agreement, dated as of November 21, 1997, among J. C. Penney
Company, Inc., J. C. Penney Funding Corporation, the Lenders party
thereto, Morgan Guaranty Trust Company of New York, as Agent, and
Bank of America National Trust and Savings Association, Bankers
Trust Company, The Chase Manhattan Bank, Citibank, N.A., Credit
Suisse First Boston and NationsBank of Texas, N.A., as Managing
Agents (incorporated by reference to Exhibit 4(g) to J. C. Penney
Funding Corporation's Annual Report on Form 10-K for the 53 weeks
ended January 31, 1998, SEC File No. 1-4947-1).
(o) Guaranty dated as of February 17, 1997, executed by J. C. Penney
Company, Inc. (incorporated by reference to Exhibit 4(c) to J. C.
Penney Funding Corporation's Annual Report on Form 10-K for the 52
weeks ended January 25, 1997, SEC File No. 1-4947-1).
(p) Guaranty dated as of December 3, 1996, executed by J. C. Penney
Company Inc. with respect to the Amended and Restated 364-Day and
Five-Year Revolving Credit Agreements, each dated as of December
3, 1996 (incorporated by reference to Exhibit 4(m) to J. C. Penney
Funding Corporation's Annual Report on Form 10-K for the 52 weeks
ended January 25, 1997, SEC File No. 1-4947-1).
Other instruments evidencing long-term debt have not been filed as exhibits
hereto because none of the debt authorized under any such instrument exceeds
10 percent of the total assets of the Registrant and its consolidated
subsidiaries. The Registrant agrees to
G-4
<PAGE>
furnish a copy of any of its long-term debt instruments to the Securities
and Exchange Commission upon request.
10. MATERIAL CONTRACTS
(i) OTHER THAN COMPENSATORY PLANS OR
ARRANGEMENTS
(a) Amended and Restated Receivables Agreement dated as of January 29,
1980 between Company and J. C. Penney Funding Corporation
(incorporated by reference to Exhibit 10(i)(a) to Company's Annual
Report on Form 10-K for the 52 week period ended January 29,
1994*).
(b) Amendment No. 1 to Amended and Restated Receivables Agreement
dated as of January 25, 1983 between Company and J. C. Penney
Funding Corporation (incorporated by reference to Exhibit 10(i)(b)
to Company's Annual Report on Form 10-K for the 52 week period
ended January 29, 1994*).
(c) Loan Agreement dated as of January 28, 1986 between Company and J.
C. Penney Funding Corporation (incorporated by reference to
Exhibit 4 to Company's Current Report on Form 8-K, Date of
Report -January 28, 1986*).
(d) Amendment No. 1 to Loan Agreement dated as of January 28, 1986
between Company and J. C. Penney Funding Corporation (incorporated
by reference to Exhibit 1 to Company's Current Report on Form 8-K,
Date of Report -December 31, 1986*).
(e) Amendment No. 2 to Loan Agreement dated as of January 28, 1986
between Company and J. C. Penney Funding Corporation (incorporated
by reference to Exhibit 10(i)(e) to Company's Annual Report on
Form 10-K for the 52 weeks ended January 25, 1997*).
(f) Personal Services Agreement dated as of February 12, 1997 between
Company and W. R. Howell (incorporated by reference to Exhibit
10(i)(f) to Company's Annual Report on Form 10-K for the 52 weeks
ended January 25, 1997*).
G-5
<PAGE>
(ii) COMPENSATORY PLANS OR ARRANGEMENTS REQUIRED TO BE FILED AS EXHIBITS TO
THIS REPORT PURSUANT TO ITEM 14 (C) OF THIS REPORT.
(a) J. C. Penney Company, Inc. 1989 Management Incentive Compensation
Program as amended through March 27, 1990 (incorporated by
reference to Exhibit 10(e) to Company's Annual Report on Form 10-
K for the 52 week period ended January 27, 1990*).
(b) September 1995 Amendment to J. C. Penney Company, Inc. 1989
Management Incentive Compensation Program, as amended
(incorporated by reference to Exhibit 10(ii)(b)to Company's
Annual Report on Form 10-K for the 52 weeks ended January 25,
1997*).
(c) Supplemental Retirement Program for Management Profit-Sharing
Associates of J. C. Penney Company, Inc., as amended through
April 1, 1996 (incorporated by reference to Exhibit 10(ii)(c) to
Company's Annual Report on Form 10-K for the 52 weeks ended
January 25, 1997*).
(d) July 1997 Amendment to Supplemental Retirement Program for
Management Profit-Sharing Associates of J. C. Penney Company,
Inc. (incorporated by reference to Exhibit 10(b) to Company's
Quarterly Report on Form 10-Q for the 13 and 39 week periods
ended October 25, 1997*).
(e) December 1997 Amendment to Supplemental Retirement Program for
Management Profit-Sharing Associates of J. C. Penney Company,
Inc.
(f) J. C. Penney Company, Inc. Retirement Plan for Non-Associate
Directors (incorporated by reference to Exhibit 10(b) to
Company's Quarterly Report on Form 10-Q for the 13 week period
ended April 26, 1997*).
(g) J. C. Penney Company, Inc. Directors' Equity Program Tandem
Restricted Stock Award/Stock Option Plan (incorporated by
reference to Exhibit 10(k) to Company's Annual Report on Form 10-
K for the 52 week period ended January 28, 1989*).
G-6
<PAGE>
(h) J. C. Penney Company, Inc. 1984 Equity Compensation Plan, as
amended through January 31, 1989 (incorporated by reference to
Exhibit 10(l) to Company's Annual Report on Form 10-K for the 52
week period ended January 28, 1989*).
(i) February 1995 Amendment to J. C. Penney Company, Inc. 1984 Equity
Compensation Plan, as amended (incorporated by reference to
Exhibit 10(ii)(j) to Company's Annual Report on Form 10-K for the
52 week period ended January 28, 1995*).
(j) J. C. Penney Company, Inc. 1989 Equity Compensation Plan
(incorporated by reference to Exhibit A to Company's definitive
Proxy Statement for its Annual Meeting of Stockholders held on
May 19, 1989*).
(k) February 1995 Amendment to J. C. Penney Company, Inc. 1989 Equity
Compensation Plan (incorporated by reference to Exhibit 10(ii)(k)
to Company's Annual Report on Form 10-K for the 52 week period
ended January 28, 1995*).
(l) February 1996 Amendment to J. C. Penney Company, Inc. 1989 Equity
Compensation Plan, as amended (incorporated by reference to
Exhibit 10(ii)(k) to Company's Annual Report on Form 10-K for the
52 week period ended January 27, 1996*).
(m) J. C. Penney Company, Inc. 1993 Equity Compensation Plan
(incorporated by reference to Exhibit A to Company's definitive
Proxy Statement for its Annual Meeting of Stockholders held on
May 21, 1993*).
(n) February 1995 Amendment to J. C. Penney Company, Inc. 1993 Equity
Compensation Plan (incorporated by reference to Exhibit 10(ii)(l)
to Company's Annual Report on Form 10-K for the 52 week period
ended January 28, 1995*).
(o) November 1995 Amendment to J. C. Penney Company, Inc. 1993 Equity
Compensation Plan, as amended (incorporated by reference to
Exhibit 10(ii)(n) to Company's Annual Report on Form 10-K for the
52 week period ended January 27, 1996*).
G-7
<PAGE>
(p) J. C. Penney Company, Inc. 1993 Non-Associate Directors' Equity
Plan (incorporated by reference to Exhibit B to Company's
definitive Proxy Statement for its Annual Meeting of Stockholders
held on May 21, 1993*) .
(q) February 1995 Amendment to J. C. Penney Company, Inc. 1993 Non-
Associate Directors' Equity Plan (incorporated by reference to
Exhibit 10(ii)(m) to Company's Annual Report on Form 10-K for the
52 week period ended January 28, 1995*).
(r) J. C. Penney Company, Inc. Deferred Compensation Plan as amended
through July 14, 1993 (incorporated by reference to Exhibit 10(a)
to Company's Report on Form 10-Q for the 13 and 26 week periods
ended July 31, 1993*).
(s) J. C. Penney Company, Inc. Deferred Compensation Plan for
Directors, as amended effective April 9, 1997 (incorporated by
reference to Exhibit 10(a) to Company's Quarterly Report on Form
10-Q for the 13 week period ended April 26, 1997*).
(t) J. C. Penney Company, Inc. 1995 Deferred Compensation Plan
(incorporated by reference to Exhibit 10 to Company's
Registration Statement on Form S-8, SEC File No. 33-56993).
(u) November 1995 amendment to J. C. Penney Company, Inc. 1995
Deferred Compensation Plan (incorporated by reference to Exhibit
10(ii)(u) to Company's Annual Report on Form 10-K for the 52 week
period ended January 27, 1996*).
(v) April 1997 amendment to J. C. Penney Company, Inc. 1995 Deferred
Compensation Plan (incorporated by reference to Exhibit 10(d) to
Company's Quarterly Report on Form 10-Q for the 13 and 39 week
periods ended October 25, 1997*).
(w) Directors' Charitable Award Program (incorporated by reference to
Exhibit 10(r) to Company's Annual Report on Form 10-K for the 52
week period ended January 27, 1990*).
G-8
<PAGE>
(x) Form of Indemnification Trust Agreement between Company and
Chemical Bank dated as of July 30, 1986, as amended (incorporated
by reference to Exhibit 1 to Exhibit B to Company's definitive
Proxy Statement for its Annual Meeting of Stockholders held on
May 29, 1987*).
(y) Form of Indemnification Agreement between Company and individual
Indemnitees (incorporated by reference to Exhibit B to Company's
definitive Proxy Statement for its Annual Meeting of Stockholders
held on May 29, 1987*).
(z) J. C. Penney Company, Inc. Benefit Restoration Plan (incorporated
by reference to Exhibit 10(ii)(y) to Company's Annual Report on
Form 10-K for the 52 week period ended January 27, 1996*).
(aa) February 1996 Amendment to J. C. Penney Company, Inc. Benefit
Restoration Plan (incorporated by reference to Exhibit 10(ii)(z)
to Company's Annual Report on Form 10-K for the 52 weeks ended
January 25, 1997*).
(ab) July 1997 Amendment to J. C. Penney Company, Inc. Benefit
Restoration Plan (incorporated by reference to Exhibit 10(c) to
Company's Quarterly Report on Form 10-Q for the 13 and 39 week
periods ended October 25, 1997*).
(ac) December 1997 Amendment to J. C. Penney Company, Inc. Benefit
Restoration Plan.
(ad) Supplemental Term Life Insurance Plan for Management Profit-
Sharing Associates of J. C. Penney Company, Inc. (incorporated by
reference to Exhibit 10(ii)(aa) to Company's Annual Report on
Form 10-K for the 52 weeks ended January 25, 1997*).
(ae) January 1995 Amendment to Supplemental Term Life Insurance Plan
for Management Profit-Sharing Associates of J. C. Penney Company,
Inc.(incorporated by reference to Exhibit 10(ii)(ab) to Company's
Annual Report on Form 10-K for the 52 weeks ended January 25,
1997*).
(af) November 1997 Amendment to Supplemental Term Life Insurance Plan
for Management Profit-
G-9
<PAGE>
Sharing Associates of J. C. Penney Company, Inc.
(ag) Employment Agreement dated as of February 4, 1996 between Eckerd
Corporation and Francis A. Newman (incorporated by reference to
Exhibit 10.26 to Eckerd Corporation's Annual Report on Form 10-K
for the fiscal year ended February 3, 1996, SEC File No. 1-4844).
(ah) Amendment No. 1, dated as of November 2, 1996, to the Employment
Agreement dated as of February 4, 1996, by and between Eckerd
Corporation and Francis A. Newman (incorporated by reference to
Exhibit (c)(3) to Company's Schedule 14D-1 dated November 2,
1996*).
(ai) J. C. Penney Company, Inc. 1997 Equity Compensation Plan
(incorporated by reference to Exhibit A to Company's definitive
proxy statement for its Annual Meeting of Stockholders held on
May 16, 1997*).
(aj) J. C. Penney Company, Inc. 1998 EVA Performance Plan.
* SEC file number 1-777
11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Computation of Net Income Per Common Share.
12. STATEMENT RE: COMPUTATION OF RATIOS
(a) Computation of Ratios of Available Income to Combined Fixed Charges
and Preferred Stock Dividend Requirement.
(b) Computation of Ratios of Available Income to Fixed Charges.
13. ANNUAL REPORT TO SECURITY HOLDERS
Excerpt from Company's 1997 Annual Report to Stockholders.
G-10
<PAGE>
21. SUBSIDIARIES OF THE REGISTRANT
List of certain subsidiaries of the Company at March 2, 1998.
23. CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
24. POWER OF ATTORNEY
27. FINANCIAL DATA SCHEDULE
(a) Financial Data Schedule for the 53 week period ended January 31, 1998.
(b) Restated Financial Data Schedule for the 52 week period ended January
25, 1997.
(c) Restated Financial Data Schedule for the 52 week period ended January
27, 1996.
99. ADDITIONAL EXHIBITS
(a) Item 1 of J. C. Penney Funding Corporation Annual Report on Form 10-K
for the 53 weeks ended January 31, 1998 (incorporated by reference to
J. C. Penney Funding Corporation Annual Report on Form 10-K for the 53
weeks ended January 31, 1998 filed concurrently herewith, SEC File No.
1-4947-1).
(b) Excerpt from J. C. Penney Funding Corporation Annual Report.
G-11
<PAGE>
EXHIBIT 10(ii)(e)
AMENDMENTS TO
SUPPLEMENTAL RETIREMENT PROGRAM FOR
MANAGEMENT PROFIT-SHARING ASSOCIATES OF
J. C. PENNEY COMPANY, INC.
Adopted by Vice President and Director of Personnel
December 30, 1997
<PAGE>
AMENDMENTS TO
SUPPLEMENTAL RETIREMENT PROGRAM FOR
MANAGEMENT PROFIT-SHARING ASSOCIATES OF
J. C. PENNEY COMPANY, INC.
1. Paragraph (5) (Life Insurance Coverage) of Article IV (Benefits) shall be
amended effective January 1, 1997 to add a subparagraph two to read as
follows:
A Participant whose group term life insurance coverage under the Plan
terminates because of his attainment of age 70 will have the right to
convert his group term life insurance coverage to an individual policy
to the extent, and only to the extent, permitted under the group
policy applicable to the Participant. Any election to convert to
individual coverage must be made within 31 days after the
Participant's coverage under the Plan terminates and must be made in
accordance with all requirements specified in such policy. The amount
of coverage that may be converted shall be the amount in effect
immediately before the Participant attained age 70.
2. Paragraph (3) (Small Annuities) of Article V (Form and Commencement of
Benefit Payments) shall be amended effective January 1, 1998 to revise
sentence one to read as follows:
If the total benefit payable to an Eligible Management Associate under
Paragraph (1) or (2) of Article IV would not provide monthly payments
exceeding $100, the benefit shall be converted into an actuarially
equivalent lump sum payment (applying the actuarial factors utilized
in the Pension Plan).
1
<PAGE>
EXHIBIT 10(ii)(ac)
AMENDMENTS TO
J. C. PENNEY COMPANY, INC.
BENEFIT RESTORATION PLAN
Adopted by Vice President and Director of Personnel
December 30, 1997
<PAGE>
AMENDMENTS TO
J. C. PENNEY COMPANY, INC.
BENEFIT RESTORATION PLAN
1. The first subparagraph of Paragraph (1) (Optional Forms and Commencement of
Benefit Payments) of Article V (Form and Commencement of Benefit Payments)
is amended effective January 1, 1997 in its entirety to read as follows:
Except as otherwise provided in this Plan and subject to such rules
and regulations as the Benefits Administration Committee may establish
from time to time with respect to time and manner of payment, benefits
provided by this Plan shall be payable as follows. For purposes of
the benefit provided by Paragraph (1) of Article IV, a Participant
shall receive the annual benefit payable under Paragraph (1) of
Article IV in such form and at such time and actuarially adjusted in
such a manner as the benefit payable under the Supplemental Retirement
Program. If the Participant is not entitled to a benefit under the
Supplemental Retirement Program, the Participant shall receive the
annual benefit payable under Paragraph (1) of Article IV in such a
form and at such time and actuarially adjusted in such a manner as the
benefit payable under the Pension Plan. Payment of such benefit may
be deferred to a date no later than the Participant's attainment of
age 65 only if the Participant has elected to defer receipt of
benefits under the Pension Plan.
2. The first subparagraph of Paragraph (1) (Optional Forms and Commencement of
Benefit Payments) of Article V (Form and Commencement of Benefit Payments)
is amended effective January 1, 1998 to delete sentences two and three and
to substitute therefor the following sentence:
For purposes of the benefit provided by Paragraph (1) of Article IV,
the Participant shall receive the annual benefit payable under
Paragraph (1) of Article IV in such a form and at such time and
actuarially adjusted in such a manner as the benefit payable under the
Pension Plan.
3. Paragraph (2) (Small Annuities) of Article V (Form and Commencement of
Benefit Payments) is amended effective January 1, 1998 in its entirety to
read as follows:
(2) Small Annuities: If the total benefit payable with respect to a
Participant under Paragraph (1) of Article IV plus the benefits
payable
1
<PAGE>
from the Pension Plan would not provide monthly payments exceeding
$100, the benefit shall be converted into an actuarially equivalent
lump sum payment (applying the actuarial factors utilized in the
Pension Plan).
2
<PAGE>
EXHIBIT 10(ii)(af)
RESOLVED FURTHER, that pursuant to Section 8.2 of the J. C. Penney Company,
Inc. Supplemental Term Life Insurance Plan for Management Profit-Sharing
Associates (the "Supplemental Term Life Plan"), the Supplemental Term Life Plan
is hereby amended to delete the words "on or after age 60" in the first sentence
of Section 2.11; and
<PAGE>
EXHIBIT 10(ii)(aj)
J. C. PENNEY COMPANY, INC.
1998 EVA PERFORMANCE PLAN
1. Purposes of Plan. The general purposes of the 1998 EVA Performance
Plan ("Plan") are to motivate selected management associates of J. C. Penney
Company, Inc. ("Company") and its subsidiaries to continue and increase their
efforts on the Company's behalf to achieve consistent corporate performance over
a long-term horizon and produce sustained improvements in economic value added
for the Company's stockholders and to assist the Company in continuing to
attract, retain, and develop management personnel capable of assuring the
Company's future success.
2. Administration of Plan. The Plan shall be administered by, or under
the direction of, a committee ("Committee") of the Board of Directors of the
Company ("Board") consisting of not less than three Board members who shall not
be eligible, while serving on the Committee, to receive payments under the Plan.
The Committee shall have plenary authority to interpret the Plan and to make all
determinations specified in or permitted by the Plan or deemed necessary or
desirable for its administration or for the conduct of the Committee's business.
All interpretations and determinations of the Committee may be made on an
individual or group basis, and shall be final, conclusive, and binding on all
interested parties.
1
<PAGE>
3. Eligibility and Bases of Participation. Performance units under the
Plan may be awarded to such general management associates (which term as used
herein includes, without limitation, officers of the Company), regional and
district management associates, and such other selected management associates of
the Company and its subsidiaries ("Participants"), and in such amounts, as the
Committee shall determine. The Committee may determine that an otherwise
eligible associate, who remains employed by the Company or a subsidiary, shall
not prospectively participate in the Plan. In determining the Participants who
are to receive performance unit awards and the number of units to be awarded,
the Committee may take into account the nature of services rendered by the
respective associates, their respective contributions to the Company's success,
their respective position responsibility levels and salaries, and such other
factors as the Committee in its discretion shall deem relevant in light of the
purposes of the Plan.
4. Valuation of Performance Unit Awards. Subject to the provisions of
Sections 6, 7, and 8 of the Plan, performance units shall be awarded to
Participants on an annual basis. The Committee shall determine for each fiscal
year a method or methods for measuring performance and for calculating the
dollar value of each performance unit which may be awarded for such fiscal year.
The total dollar value of all performance units awarded for each fiscal year
shall be calculated in accordance with such determinations of the Committee, and
awards shall be credited to each Participant's bonus reserve account (as
described in Section 5) on the basis of such calculation. The Committee shall
adopt such rules and procedures as shall be necessary or desirable in order that
such
2
<PAGE>
calculation will be verified, and such verified calculation shall be submitted
to the Board and shall be final, conclusive, and binding on all interested
parties.
5. Award Payment. A bonus reserve account shall be established for each
Participant for the purpose of making payments to such Participant under the
Plan. Each fiscal year, the total dollar value of all performance units awarded
to a Participant for such fiscal year, calculated in accordance with Section 4,
shall be credited to such Participant's bonus reserve account. Any payments to
such Participant under the Plan in a fiscal year, as determined by the
Committee, shall be made from such Participant's bonus reserve account in cash
at the time or times determined by the Committee. Any amounts not paid to the
Participant in a fiscal year shall remain in such Participant's bonus reserve
account. The amounts held in the bonus reserve accounts are subject to
reduction prior to distribution based upon future Company results. Positive
amounts held in the bonus reserve accounts shall be credited with interest on an
annual basis as of the last day of the fiscal year using an interest rate equal
to the Moody's Single A Corporate Bond Yield in effect as of that date. Except
(a) for payment on account of death under Section 7, or (b) for deduction to
cover Federal (including "FICA"), state, or local withholding taxes arising on
issuance of stock under any Company stock option or other equity compensation
program, or (c) where a Participant relinquishes part or all of an award payment
to extinguish an indebtedness to the Company or a subsidiary, no award or right
thereunder shall be assignable or transferable, and any attempt to do so shall
be void.
3
<PAGE>
6. Employment Termination. Except as otherwise provided in this Section
6, the Committee shall prescribe rules covering, and may determine in individual
cases, the effect, if any, on, the payment of awards for any fiscal year if (a)
a Participant's employment with the Company or a subsidiary terminates for any
reason or (b) a Participant terminates employment and, before or after such
termination, commits any act, or fails to take any action which, in the opinion
of the Committee, results or may result in a detriment to the Company or a
subsidiary.
A Participant shall not receive an award for any fiscal year if prior to
payment the Participant is given a summary dismissal, or resigns in lieu of
summary dismissal, under the Company's personnel procedures in effect from time
to time. All determinations by the Company with respect to the foregoing for
Plan purposes shall be final, conclusive, and binding on all interested parties.
7. Death. The Committee shall prescribe rules covering, and may determine
in individual cases, the effect, if any, on, the payment of awards for any
fiscal year if a Participant or former Participant should die before such
payment. The Committee may permit a Participant to designate one or more
beneficiaries to receive payment of an award in the event of death, and to
change or revoke any such designation, on a form or forms approved by the
Committee, which must be filed with the Company to be effective.
8. Transfers and Leaves of Absence. The Committee shall prescribe rules
4
<PAGE>
covering, and may determine in individual cases, the effect, if any, on, the
payment of awards for any fiscal year if a Participant incurs a change of duties
or position which renders such Participant ineligible to continue to be a
Participant, or if a Participant is granted an excused absence or approved leave
of absence or is placed on layoff under the Company's personnel procedures in
effect from time to time.
9. Right to Continued Employment. Nothing in the Plan shall confer on a
Participant any right to continue in the employ of the Company or any subsidiary
or affect in any way the right of the Company or any subsidiary to terminate
such Participant's employment at any time.
10. Effective Date. The effective date of the Plan shall be February 1,
1998.
11. Termination and Amendment. The Board of Directors may terminate the
Plan or make such amendments as it shall deem advisable, including, but not
limited to, any amendments to conform to or reflect any change in any law,
regulation, or ruling applicable to the Plan. No termination or amendment of
the Plan may adversely affect the right to payment of an award without the
consent of the person to whom the award is payable.
5
<PAGE>
Exhibit 11
J. C. PENNEY COMPANY, INC.
and Consolidated Subsidiaries
Computation of Net Income Per Common Share
-------------------------------------------------
(Amounts in millions except per common share data)
<TABLE>
<CAPTION>
52 Weeks Ended
53 Weeks Ended ----------------------------------------------------------
January 31, 1998 January 25, 1997 January 27, 1996
--------------------------- ------------------------- --------------------------
Shares Income Shares Income Shares Income
----------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic
- - -----
Net income $ 566 $ 565 $ 838
Dividend on Series B ESOP
convertible preferred stock
(after-tax) (40) (40) (41)
--------- ---------- ----------
Adjusted net income 526 525 797
Weighted average number of
shares outstanding 247.4 226.4 226.1
----------- --------- ---------- ---------- ----------- ----------
247.4 $ 526 226.4 $ 525 226.1 $ 797
=========== ========= ========== ========== =========== ==========
Net income per common share $2.13 $2.32 $3.52
===== ===== =====
Diluted
- - -------
Net income $ 566 $ 565 $ 838
Tax benefit differential on ESOP
dividend assuming stock is
fully converted (1) (2) (2)
Assumed additional contribution
to ESOP if preferred stock is
fully converted (3) (3) (6)
--------- ---------- -----------
Adjusted net income 562 560 830
Weighted average number of
shares outstanding (basic) 247.4 226.4 226.1
Stock options and other 2.5 2.7 2.6
Convertible preferred stock 18.2 19.4 20.6
----------- --------- ---------- ---------- ----------- ----------
268.1 $ 562 248.5 $ 560 249.3 $ 830
=========== ========= ========== ========== =========== ==========
Net income per common share $2.10 $2.25 $3.33
===== ===== =====
</TABLE>
<PAGE>
Exhibit 12 (a)
J. C. Penney Company, Inc.
and Consolidated Subsidiaries
Computation of Ratios of Available Income to Combined Fixed Charges
and Preferred Stock Dividend Requirement
<TABLE>
<CAPTION>
53 Weeks 52 Weeks Ended
Ended ---------------------------------------
($ Millions) 01/31/98 01/25/97 01/27/96 01/28/95 01/29/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income from continuing operations $ 882 $ 853 $ 1,285 $ 1,646 $ 1,498
(before income taxes, before
capitalized interest, but after
preferred stock dividend)
Fixed charges
Interest (including capitalized interest) on:
Operating leases 180 110 102 95 97
Short term debt 121 102 129 92 43
Long term debt 527 312 254 225 246
Capital leases 7 6 6 7 9
Other, net (5) 14 1 (1) 0
------- ------- ------- ------- -------
Total fixed charges 830 544 492 418 395
Preferred stock dividend, before taxes 40 46 48 50 52
Combined fixed charges and preferred
------- ------- ------- ------- -------
stock dividend requirement 870 590 540 468 447
Total available income $ 1,752 $ 1,443 $ 1,825 $ 2,114 $ 1,945
======= ======= ======= ======= =======
Ratio of available income to combined
fixed charges and preferred stock
dividend requirement 2.0 2.4 3.4 4.5 4.3
======= ======= ======= ======= =======
</TABLE>
The interest cost of the LESOP notes guaranteed by the Company is not included
in fixed charges above.
<PAGE>
Exhibit 12 (b)
J. C. Penney Company, Inc.
and Consolidated Subsidiaries
Computation of Ratios of Available Income to Fixed Charges
<TABLE>
<CAPTION>
53 Weeks 52 Weeks Ended
Ended ---------------------------------------
($ Millions) 01/25/97 01/25/97 01/27/96 01/28/95 01/29/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income from continuing operations $ 922 $ 899 $ 1,333 $ 1,696 $ 1,550
(before income taxes and
capitalized interest)
Fixed charges
Interest (including capitalized interest) on:
Operating leases 180 110 102 95 97
Short term debt 121 102 129 92 43
Long term debt 527 312 254 225 246
Capital leases 7 6 6 7 9
Other, net (5) 14 1 (1) 0
------- ------- ------- ------- -------
Total fixed charges 830 544 492 418 395
------- ------- ------- ------- -------
Total available income $ 1,752 $ 1,443 $ 1,825 $ 2,114 $ 1,945
======= ======= ======= ======= =======
Ratio of available income to combined
fixed charges and preferred stock
dividend requirement 2.1 2.7 3.7 5.1 4.9
======= ======= ======= ======= =======
</TABLE>
The interest cost of the LESOP notes guaranteed by the Company is not included
in fixed charges above.
<PAGE>
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fiscal 1997 was a year of transition and new initiatives for JCPenney.
During the course of the year, the Company:
. Completed the acquisition of Eckerd Corporation (Eckerd) and
converted its existing drugstores, consisting of approximately 1,100
former Thrift, Fay's, and Kerr drugstores, to the Eckerd nameplate
and format. This provides us with new growth opportunities and will
provide expected cost savings of $100 million per year.
. Announced a voluntary early retirement program, a corporate
restructuring, and the closing of underperforming stores and support
facilities, which will improve profitability in JCPenney stores and
catalog.
. Continued to generate record profits in its direct marketing
insurance operation.
Each of our business segments, which are described on page 2 of this Annual
Report, offers a unique opportunity for future growth. This is enhanced by
increased synergy that management believes can be achieved. The Company is
committed to maintaining a leadership position in the businesses in which it
operates, maintaining its financial strength, and enhancing stockholder value.
13
<PAGE>
MD&A (CONTINUED)
RESULTS OF
OPERATIONS
Earnings before restructuring and business integration expenses (one-time
charges), net of tax, totaled $839 million, or $3.12 per diluted share, in 1997
compared with $793 million, or $3.17 per share, in 1996 and $838 million, or
$3.33 per share, in 1995. Net income totaled $566 million, or $2.10 per diluted
share compared with $565 million, or $2.25 per share in 1996 and $838 million,
or $3.33 per share, in 1995. In 1997, the Company had an average of
approximately 20 million additional shares outstanding, primarily as a result of
the Eckerd acquisition.
During 1997, the Company recorded one-time charges of $447 million on a
pre-tax basis. These charges consisted of $151 million for a voluntary early
retirement program, $66 million for corporate restructurings, principally
related to JCPenney stores and catalog support functions, $148 million for
drugstore integration activities, and $145 million for store and support unit
closings. These amounts were offset by $63 million of gains from the sale of
certain business units. The Company expects to realize significant ongoing
savings, primarily from lower salary costs, once these initiatives have been
fully implemented.
FOURTH QUARTER
The Company finished the year with strong operating performance. Fourth
quarter earnings before one-time charges, net of tax, totaled $365 million, or
$1.36 per diluted share, compared with $301 million, or $1.20 per share, in last
year's fourth quarter, an increase of 21 per cent. Including one-time charges,
net income was $224 million, or 85 cents per share, compared with $94 million,
or 36 cents per share, in the comparable 1996 period, which also included one-
time charges. Fourth quarter operating results were positively impacted by
improvement in gross margin, primarily as a result of reduced markdown activity
for JCPenney stores and catalog, and continued strong profits from the direct
marketing insurance operation.
JCPENNEY STORES AND CATALOG
($ in millions) 1997 1996 1995
- - ----------------------------------------------------------------
JCPenney store sales $16,047 $15,734 $14,973
% inc/(dec)................... 2.0 (1) 5.1 (0.3)
Comp store % inc/(dec)........ (0.3)(2) 3.4 (1.4)
Catalog sales.................. $ 3,908 $ 3,772 $ 3,738
% inc/(dec)................... 3.6 (1) 0.9 (2.1)
FIFO gross margin %............ 30.8 30.1 30.8
LIFO gross margin %............ 30.9 30.2 30.8
SG&A %......................... 24.0 24.0 24.4
Operating earnings (FIFO)(3)... $ 1,371 $ 1,183 $ 1,199
% of sales.................... 6.8 6.1 6.4
================================================================
(1) Fiscal 1997 was comprised of 53 weeks. On a comparable 52-week basis,
JCPenney store sales increased 0.7 per cent and Catalog sales increased 2.7
per cent.
(2) 1997 comparable store sales are shown on a 52-week fiscal year basis.
(3) Operating earnings excludes net interest and credit operations, and one-time
charges.
1997 COMPARED WITH 1996
FIFO operating earnings increased to $1,371 million in 1997, up 15.9 per
cent compared with $1,183 million in 1996. The increase was principally the
result of improvements to gross margin and managing of selling, general, and
administrative (SG&A) expenses. Sales for JCPenney stores increased by 4.5 per
cent in the first half of the year and slowed in the second half of 1997. Sales
in the second half of 1996 and the first half of 1997 were stimulated by
promotional markdowns resulting from high inventory levels. Sales performance in
JCPenney stores in 1997 was led by the women's apparel division, particularly in
dresses and career and casual wear, and the children's and shoe division.
Catalog sales increased by 3.6 per cent in 1997 compared with 1996 and were led
by women's and men's apparel as well as the home division.
FIFO gross margin increased by 70 basis points in 1997 compared with 1996,
despite a very promotional first half of the year. The Company recorded a LIFO
credit of $20 million in both 1997 and 1996. SG&A expenses were well managed
across all areas of the Company, particularly advertising, and were flat as a
percentage of sales as compared with 1996.
14
<PAGE>
MD&A (CONTINUED)
1996 COMPARED WITH 1995
FIFO operating earnings were $1,183 million in 1996 compared with $1,199
million in 1995. Sales in JCPenney stores were soft in the first half of 1996
compared with 1995 and accelerated in the second half as inventory levels rose
and the Company implemented aggressive marketing programs to drive traffic in
the stores. Catalog sales were weak through most of the year but strengthened in
December and January, generating a small sales gain for the year. FIFO gross
margin declined by 70 basis points in 1996 compared with 1995, primarily as a
result of aggressive marketing programs designed to boost sales volumes and
reduce inventory levels. In 1995, the Company recorded a $7 million LIFO credit.
SG&A expenses were well managed in 1996, improving by 40 basis points as a per
cent of sales.
ECKERD DRUGSTORES
Pro Forma
---------------
($ in millions) 1997 1996 1995
- - -------------------------------------------------------------------------------
Sales $9,663 $8,526 $7,730
% increase 13.3(1) 10.3 9.6
Comp store % increase 7.4(2) 7.8 7.8
FIFO gross margin % 21.7 21.9 22.9
LIFO gross margin % 21.4 21.7 22.9
SG&A % 17.3 17.7 18.9
Operating earnings (FIFO)(3) $ 424 $ 360 $ 311
% of sales 4.4 4.2 4.0
===============================================================================
(1) Fiscal 1997 was comprised of 53 weeks. On a comparable 52-week basis, sales
increased 11.2 per cent.
(2) 1997 comparable store sales are shown on a 52-week fiscal year basis.
(3) Operating earnings excludes interest expense, amortization of intangibles,
and one-time charges.
The following commentary compares 1997 actual results with 1996 and 1995
pro forma results, assuming that the Company's drugstore acquisitions had
occurred as of the beginning of 1995, to provide a more meaningful evaluation of
operating performance.
1997 COMPARED WITH 1996
Throughout 1997, Eckerd was heavily involved in the integration of the
former Thrift, Fay's, and Kerr drugstore operations into the Eckerd nameplate
and format. Despite the significant integration activities, FIFO operating
earnings increased $64 million to $424 million, an increase of 17.8 per cent
compared with 1996 results. The increase was driven primarily by sales volumes
and reduced SG&A expenses from the combined operations. Sales growth was strong
the entire year, increasing by 7.4 per cent on a comparable store basis (those
stores open at least one year), and was strongest in the Southeast and Sunbelt
regions, which comprise historical Eckerd markets. Sales improvement was driven
by a 16.1 per cent increase in prescription drug sales, which represented 53 per
cent of total sales for the year. Prescription drug sales continue to be
positively impacted by growth in managed care sales, which exceed 80 per cent of
the prescription business.
FIFO gross margin increased by $229 million in 1997 but declined by 20
basis points as a per cent of sales. The decline in gross margin per cent was
primarily attributable to grand reopening promotional activities for the
converted regions and the growth in the managed care prescription business,
which carries lower margins. In 1997, Eckerd recorded a $32 million LIFO charge
compared with a pro forma charge of $23 million in 1996, reflecting continued
inflation in prescription drug prices. SG&A expenses were well leveraged as a
result of higher sales volumes and the elimination of duplicate support
functions. For the year, SG&A expenses improved by 40 basis points as a per cent
of sales. Both gross margin and SG&A expenses were positively impacted by
synergies arising from consolidation of the drugstore operations.
1996 COMPARED WITH 1995
FIFO operating earnings increased in 1996, principally as a result of
strong sales growth. Sales for the year grew at a 10.3 per cent rate, driven
primarily by managed care prescription sales growth. Drugstore gross margin
increased on a dollar basis in 1996, primarily as a result of higher sales
levels, but decreased as a per cent of sales, primarily as a result of declines
in managed care prescription gross margins. There was no LIFO impact in 1995.
SG&A expenses were well leveraged in 1996 compared with 1995.
15
<PAGE>
MD&A (CONTINUED)
JCPENNEY INSURANCE
($ in millions) 1997 1996 1995
- - --------------------------------------------------------
Revenue $ 928 $ 818 $ 680
% increase 13.4 20.3 22.1
Operating earnings $ 214 $ 186 $ 157
% increase 15.1 18.5 23.6
% of revenue 23.1 22.7 23.1
========================================================
JCPenney Insurance continues to be a solid contributor to the Company's
operating performance. In 1997, revenues grew to $928 million compared with $818
million in 1996 and $680 million in 1995. The revenue growth over the three-year
period is primarily attributable to successfully maintaining and enhancing
marketing relationships with third-party businesses throughout the United States
and Canada, principally banks, oil companies, and retailers. Revenue and
operating earnings have been enhanced by growth in the non-insurance segment,
which consists of marketing membership discount services through existing
business relationships. Operating earnings increased to $214 million in 1997
compared with $186 million in 1996 and $157 million in 1995. The increase in
operating earnings continued to be driven by strong growth in revenue.
NET INTEREST EXPENSE AND CREDIT OPERATIONS
($ in millions) 1997 1996 1995
- - ---------------------------------------------------------------------------
Finance charge revenue(1) $(673) $(641) $(631)
Credit costs(1) 639 560 489
Interest expense, net 581 359 325
- - ---------------------------------------------------------------------------
Net interest and credit costs $ 547 $ 278 $ 183
Delinquency rate 3.9% 3.7% 3.3%
===========================================================================
(1) Includes amounts related to the Company's retained interest in JCP Master
Credit Card Trust.
Net interest and credit costs increased in 1997 compared with 1996, due
principally to bad debt on customer receivables and interest expense for the
drugstore acquisitions. Finance charge revenue increased in 1997 compared with
1996 levels, primarily as a result of modifications that were made to credit
terms in selected states. These increases were more than offset by bad debt
expense. In 1997, bad debt expense, including additions to reserves for future
bad debt losses, was $343 million compared with $267 million in 1996. In both
1997 and 1996, bad debt expense was negatively impacted by continuing high
levels of delinquencies and personal bankruptcies. Interest expense in 1997
exceeded the prior year, primarily as a result of $3.0 billion of debt that was
issued in connection with the Eckerd acquisition.
In 1996, finance charge revenue was relatively flat with 1995 levels.
Credit operating costs increased as a result of rising bad debt expense. The
increase in interest expense in 1996 compared with 1995 was generally related to
higher levels of debt required to finance increases in working capital,
drugstore acquisitions, and capital spending for JCPenney stores.
INCOME TAXES
The effective income tax rate in 1997 increased to 38.8 per cent compared
with 37.9 per cent in 1996 and 37.5 per cent in 1995. The increase in 1997 was
primarily related to amortization of goodwill associated with the drugstore
acquisitions, which provides no tax benefit.
FINANCIAL
CONDITION
The Company's goal is to maintain a strong balance sheet in order to
provide financial flexibility and increase stockholder value. The Company's
financial condition has remained strong and market capitalization has increased
to $18.1 billion, an increase of $6.8 billion, or 60 per cent, over the past two
years. Total stockholder return, which includes price appreciation and
dividends, was 47 per cent in 1997. The Company's strong financial condition has
allowed a consistent increase in the dividend on common stock, including an
increase to an indicated annual rate of $2.18 which was approved by the Board of
Directors in March 1998. The dividend has increased in each of the last six
years, over which time it has increased in excess of 65 per cent.
MERCHANDISE INVENTORY
($ in millions) 1997 1996 1995
- - -----------------------------------------------------------
JCPenney stores and catalog $4,239 $4,311 $3,815
Eckerd drugstores 2,148 1,676 346
Less LIFO reserves (225) (265) (226)
- - -----------------------------------------------------------
Total $6,162 $5,722 $3,935
===========================================================
Merchandise inventory levels for JCPenney stores and catalog declined by
1.7 per cent from the prior year, primarily as a result of better management of
the merchandise procurement process. Inventory levels increased by 13 per cent
in 1996 compared with 1995, partly as a result of the addition of three million
square feet of
16
<PAGE>
MD&A (CONTINUED)
gross selling space. Inventory levels for Eckerd in 1997 increased by 28 per
cent compared to 1996. The increase was primarily related to conversion
activities and the addition of 1.0 million square feet of new space. The
increase from 1995 levels was principally the result of the Eckerd and Fay's
acquisitions.
INTANGIBLE ASSETS
Intangible assets consist principally of favorable lease rights,
prescription files, software, trade name, and goodwill. They represent the
excess of the purchase price over the fair value of assets received in the
Company's drugstore acquisitions. The increase from 1996 levels is related to
the completion of the Eckerd acquisition in February 1997.
DEBT TO CAPITAL
1997 1996 1995
- - ----------------------------------------------------------
Debt to capital per cent 60.4% 64.5%* 52.6%
==========================================================
* Upon completion of the Eckerd acquisition, the Company's debt to capital per
cent decreased to 60.1 per cent.
The Company issued $3.0 billion of long term debt in the first quarter of
1997, which represented a conversion of short term debt that had been issued in
connection with the Eckerd acquisition. The average effective interest rate on
this debt was 7.5 per cent and the average maturity was 30 years. With the
issuance of this debt, the Company's average interest rate decreased by about 10
basis points and the average maturity was extended, capitalizing on a favorable
interest rate environment. Total debt, both on and off-balance-sheet, was
$11,237 million at the end of 1997 compared with $10,807 million and $6,542
million at the end of fiscal 1996 and 1995, respectively. The increase in debt
over the past two years is primarily related to the acquisition of Eckerd and
the growth of the drugstore operation.
During the last two years, the Company issued 28.4 million shares of common
stock in connection with its drugstore acquisitions. In addition, the Company
acquired 7.5 million shares of its common stock in 1996 for $366 million, as
part of a share purchase program. The Company has the authority to acquire an
additional 10 million shares under previously approved share purchase programs.
The Company's debt ratings did not change during the year (see Supplemental
Data, page 34, for current ratings) and continue to be among the highest in the
retail industry.
CAPITAL EXPENDITURES
($ in millions) 1997 1996 1995
- - ------------------------------------------------------------
JCPenney stores and catalog $ 443 $ 636 $ 615
Eckerd drugstores 341 103 53
Other 26 51 81
- - ------------------------------------------------------------
Total $ 810 $ 790 $ 749
============================================================
Capital expenditures in 1997 increased over 1996 and 1995 levels, due
primarily to growth in the Company's drugstore operations. Eckerd added 272 new
or acquired drugstores and relocated an additional 127 drugstores in 1997,
primarily in the Southeast and Sunbelt areas of the country. In 1997 and 1996,
the Company committed approximately $200 million per year to the modernization
and updating of existing JCPenney store locations. 1995 reflects $173 million
for the purchase of seven department stores in the Washington, D.C. area. It is
anticipated that capital spending in 1998 will total approximately $500 million
for JCPenney stores and catalog, with the majority of the spending related to
new and relocated stores and improvements to existing space. Capital spending
for Eckerd in 1998 is expected to total approximately $250 million as the
Company continues to expand its drugstore operation and to relocate drugstores
to more profitable freestanding locations.
CASH FLOW
The Company expects to generate sufficient cash flow internally to meet
substantially all of its cash flow requirements for working capital, capital
expenditures, and dividends in the foreseeable future.
YEAR 2000
The Company has initiated actions to address the year 2000 issue. It is
expected that compliance work will be substantially completed by the end of
1998. Total costs associated with these efforts, which are being expensed as
incurred, have not had, and are not expected to have, a material impact on the
Company's financial results.
INFLATION AND CHANGING PRICES
Inflation and changing prices have not had a significant impact on the
Company in recent years due to low levels of inflation.
17
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the Year ($ in millions except per share data) 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE
Retail sales $29,618 $22,653 $20,562
Insurance revenue 928 818 680
------------------------------
Total revenue 30,546 23,471 21,242
------------------------------
COSTS AND EXPENSES
Cost of goods sold, occupancy, buying, and warehousing costs 21,379 16,058 14,352
Selling, general, and administrative expenses 6,456 5,262 4,923
Costs and expenses of insurance operations 714 632 523
Other unallocated (39) (45) (80)
Net interest expense and credit operations 547 278 183
Amortization of intangibles and minority interest 117 23 --
Restructuring and business integration expenses, net 447 354 --
------------------------------
Total costs and expenses 29,621 22,562 19,901
------------------------------
INCOME BEFORE INCOME TAXES 925 909 1,341
Income taxes 359 344 503
- - --------------------------------------------------------------------------------------------------------
NET INCOME $ 566 $ 565 $ 838
=========================================================================================================
</TABLE>
EARNINGS PER COMMON SHARE
(In millions, except per share data)
<TABLE>
<CAPTION>
1997 Income Shares EPS
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 566
Less: preferred stock dividends (40)
------------------------------
Basic EPS 526 247 $ 2.13
Stock options and convertible preferred stock 36 21
------------------------------
Diluted EPS $ 562 268 $ 2.10
------------------------------
1996
- - --------------------------------------------------------------------------------------------------------
Net income $ 565
Less: preferred stock dividends (40)
------------------------------
Basic EPS 525 226 $ 2.32
Stock options and convertible preferred stock 35 22
------------------------------
Diluted EPS $ 560 248 $ 2.25
------------------------------
1995
- - --------------------------------------------------------------------------------------------------------
Net income $ 838
Less: preferred stock dividends (41)
------------------------------
Basic EPS 797 226 $ 3.52
Stock options and convertible preferred stock 33 23
------------------------------
Diluted EPS $ 830 249 $ 3.33
========================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements on pages 23 through 30.
18
<PAGE>
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Guaranteed Total
Common Preferred LESOP Reinvested Stockholders'
($ in millions) Stock Stock Obligation Earnings Equity
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January 28, 1995 $ 1,030 $ 630 $ (307) $4,262 $5,615
Comprehensive income
Net income 838 838
Net unrealized change in
debt and equity securities 82 82
Currency translation adjustments (10) (10)
----------------------------------------------------------
Total comprehensive income 910 910
Dividend declared (474) (474)
Common stock issued 113 113
Common stock retired (31) (301) (332)
Preferred stock retired (27) (27)
LESOP payment 79 79
- - -----------------------------------------------------------------------------------------------------------
January 27, 1996 1,112 603 (228) 4,397 5,884
Comprehensive income
Net income 565 565
Net unrealized change in
debt and equity securities (18) (18)
Currency translation adjustments (3) (3)
----------------------------------------------------------
Total comprehensive income 544 544
Dividend declared (511) (511)
Common stock issued 350 350
Common stock retired (46) (320) (366)
Preferred stock retired (35) (35)
LESOP payment 86 86
- - -----------------------------------------------------------------------------------------------------------
January 25, 1997 1,416 568 (142) 4,110 5,952
Comprehensive income
Net income 566 566
Net unrealized change in
debt and equity securities 14 14
Currency translation adjustments (3) (3)
----------------------------------------------------------
Total comprehensive income 577 577
Dividend declared (573) (573)
Common stock issued 1,350 1,350
Preferred stock retired (42) (42)
LESOP payment 93 93
- - -----------------------------------------------------------------------------------------------------------
January 31, 1998 $ 2,766 $ 526 $ (49) $4,114 $7,357
===========================================================================================================
</TABLE>
The accumulated balances for net unrealized changes in debt and equity
securities were $66, $52, and $70, and for currency translation adjustments were
($18), ($15), and ($12) at the end of 1997, 1996, and 1995, respectively.
See Notes to Consolidated Financial Statements on pages 23 through 30.
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
ASSETS ($ in millions) 1997 1996
- - ----------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash (including short term investments of $208 and $131) $ 287 $ 131
Retained interest in JCP Master Credit Card Trust 1,073 1,111
Receivables, net (bad debt reserves of $105 and $77) 3,819 4,646
Merchandise inventory (including LIFO reserves of $225 and $265) 6,162 5,722
Prepaid expenses 143 102
------------------
TOTAL CURRENT ASSETS 11,484 11,712
Property and equipment
Land and building 2,993 2,931
Furniture and fixtures 4,089 3,710
Leasehold improvements and other 1,192 1,074
Accumulated depreciation (2,945) (2,701)
------------------
Property and equipment, net 5,329 5,014
Investments, primarily insurance operations 1,774 1,605
Deferred insurance policy acquisition costs 752 666
Goodwill and other intangible assets, net (amortization of $108 and $6) 2,940 1,861
Other assets 1,214 1,230
- - ----------------------------------------------------------------------------------------------
$ 23,493 $22,088
==============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY ($ in millions)
- - ----------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses
(including trade payables of $1,551 and $1,558) $ 4,155 $ 3,738
Short term debt 1,417 3,950
Current maturities of long term debt 449 250
Deferred taxes 116 28
------------------
TOTAL CURRENT LIABILITIES 6,137 7,966
Long term debt 6,986 4,565
Deferred taxes 1,325 1,362
Insurance policy and claims reserves 872 781
Other liabilities (including bank deposits of $724 in 1996) 816 1,462
STOCKHOLDERS' EQUITY
Preferred stock 526 568
Guaranteed LESOP obligation (49) (142)
Common stock 2,766 1,416
Reinvested earnings 4,114 4,110
------------------
TOTAL STOCKHOLDERS' EQUITY 7,357 5,952
- - ----------------------------------------------------------------------------------------------
$ 23,493 $22,088
==============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements on pages 23 through 30.
20
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the Year ($ in millions) 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 566 $ 565 $ 838
Gain on the sale of consumer banking assets (52) -- --
Restructuring and business integration expenses 371 310 --
Depreciation and amortization, including intangibles 584 381 341
Deferred taxes 1 (18) 144
Change in cash from:
Customer receivables 215 (172) 40
Inventory, net of trade payables (395) (521) (55)
Other assets and liabilities, net (72) (163) 95
-----------------------------
1,218 382 1,403
-----------------------------
INVESTING ACTIVITIES
Capital expenditures (824) (704) (717)
Proceeds from the sale of consumer banking assets, net 276 -- --
Eckerd acquisition -- (1,776) --
Purchases of investment securities (401) (471) (583)
Proceeds from sales of investment securities 252 493 420
-----------------------------
(697) (2,458) (880)
-----------------------------
FINANCING ACTIVITIES
Change in short term debt (2,533) 2,401 (583)
Issuance of long term debt 2,990 596 991
Payments of long term debt (343) (133) (244)
Common stock issued, net 121 68 50
Common stock purchased and retired -- (366) (335)
Preferred stock retired (42) (35) (27)
Dividends paid, preferred and common (558) (497) (463)
-----------------------------
(365) 2,034 (611)
-----------------------------
NET INCREASE/(DECREASE) IN CASH AND SHORT TERM INVESTMENTS 156 (42) (88)
Cash and short term investments at beginning of year 131 173 261
- - --------------------------------------------------------------------------------------------------------
CASH AND SHORT TERM INVESTMENTS AT END OF YEAR $ 287 $ 131 $ 173
========================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 564 $ 390 $ 355
Interest received 45 60 54
Income taxes paid 225 356 409
</TABLE>
Non-Cash Transactions. Since February 1995, the Company has expanded its
drugstore portfolio through acquisitions that were accomplished in whole or in
part through the exchange of common stock. See footnote 2 for discussion of the
acquisition transactions.
See Notes to Consolidated Financial Statements on pages 23 through 30.
21
<PAGE>
COMPANY STATEMENT ON FINANCIAL INFORMATION
The Company is responsible for the information presented in this Annual
Report. The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and are considered to present
fairly in all material respects the Company's results of operations, financial
position, and cash flows. Certain amounts included in the consolidated financial
statements are estimated based on currently available information and judgment
as to the outcome of future conditions and circumstances. Financial information
elsewhere in this Annual Report is consistent with that in the consolidated
financial statements.
The Company's system of internal controls is supported by written policies
and procedures and supplemented by a staff of internal auditors. This system is
designed to provide reasonable assurance, at suitable costs, that assets are
safeguarded and that transactions are executed in accordance with appropriate
authorization and are recorded and reported properly. The system is continually
reviewed, evaluated, and where appropriate, modified to accommodate current
conditions. Emphasis is placed on the careful selection, training, and
development of professional managers.
An organizational alignment that is premised upon appropriate delegation of
authority and division of responsibility is fundamental to this system.
Communication programs are aimed at assuring that established policies and
procedures are disseminated and understood throughout the Company.
The consolidated financial statements have been audited by independent
auditors whose report appears below. This audit was conducted in accordance with
generally accepted auditing standards, which include the consideration of the
Company's internal controls to the extent necessary to form an independent
opinion on the consolidated financial statements prepared by management.
The Audit Committee of the Board of Directors is composed solely of
directors who are not officers or employees of the Company. The Audit
Committee's responsibilities include recommending to the Board for stockholder
approval the independent auditors for the annual audit of the Company's
consolidated financial statements. The Committee also reviews the independent
auditors' audit strategy and plan, scope, fees, audit results, and non-audit
services and related fees; internal audit reports on the adequacy of internal
controls; the Company's ethics program; status of significant legal matters; the
scope of the internal auditors' plans and budget and results of their audits;
and the effectiveness of the Company's program for correcting audit findings.
The independent auditors and Company personnel, including internal auditors,
meet periodically with the Audit Committee to discuss auditing and financial
reporting matters.
/s/ Da MCKAY
Donald A. McKay
Executive Vice President and
Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
of J. C. Penney Company, Inc.:
We have audited the accompanying consolidated balance sheets of J. C.
Penney Company, Inc. and Subsidiaries as of January 31, 1998 and January 25,
1997, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three year period ended January 31,
1998. 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 J. C. Penney
Company, Inc. and Subsidiaries as of January 31, 1998 and January 25, 1997, and
the results of their operations and their cash flows for each of the years in
the three year period ended January 31, 1998 in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Dallas, Texas
February 26, 1998
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
2. DRUGSTORE ACQUISITIONS
3. RETAINED INTEREST IN JCP MASTER CREDIT CARD TRUST
4. INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
5. SHORT TERM DEBT
6. LONG TERM DEBT
7. CAPITAL STOCK
8. STOCK-BASED COMPENSATION
9. INTEREST EXPENSE, NET
10. LEASE COMMITMENTS
11. ADVERTISING COSTS
12. RETIREMENT PLANS
13. RESTRUCTURING AND BUSINESS INTEGRATION EXPENSES, NET
14. TAXES
15. SEGMENT REPORTING
1
SUMMARY OF
ACCOUNTING POLICIES
BASIS OF PRESENTATION. Certain prior year amounts have been reclassified to
conform with the current year presentation.
BASIS OF CONSOLIDATION. The consolidated financial statements present the
results of J. C. Penney Company, Inc. and its subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
DEFINITION OF FISCAL YEAR. The Company's fiscal year ends on the last
Saturday in January. Fiscal 1997 ended January 31, 1998; fiscal 1996 ended
January 25, 1997; and fiscal 1995 ended January 27, 1996. Fiscal 1997 was a 53-
week year; all other years presented are 52 weeks. The accounts of JCPenney
Insurance are on a calendar year basis.
RETAIL SALES. Retail sales include merchandise and services, net of
returns, and exclude all taxes.
EARNINGS PER COMMON SHARE. Basic earnings per share are computed by
dividing net income less dividend requirements on the Series B LESOP convertible
preferred stock, net of tax, by the weighted average common stock outstanding.
Diluted earnings per share assume the exercise of stock options and the
conversion of the Series B LESOP convertible preferred stock into the Company's
common stock. Additionally, it assumes adjustment of net income for the
additional cash requirements, net of tax, needed to fund the LESOP debt service
resulting from the assumed replacement of the preferred dividends with common
stock dividends.
CASH AND SHORT TERM INVESTMENTS. Cash invested in instruments with
remaining maturities of three months or less from time of investment is
reflected as short term investments.
ACCOUNTS RECEIVABLE. The Company's policy is to write off accounts when the
scheduled minimum payment has not been received for six consecutive months, if
any portion of the balance is more than 12 months past due, or if it is
otherwise determined that the customer is unable to pay. Collection efforts
continue subsequent to write-off, and recoveries are applied as a reduction of
bad debt losses.
MERCHANDISE INVENTORY. Substantially all merchandise inventory is valued at
the lower of cost (last-in, first-out) or market, determined by the retail
method. The Company applies internally developed indices to measure increases
and decreases in its own retail prices.
DEPRECIATION AND AMORTIZATION. The cost of buildings and equipment is
depreciated on a straight line basis over the estimated useful lives of the
assets. The primary useful life for buildings is 50 years, and ranges between
three and 20 years for furniture and equipment. Improvements to leased premises
are amortized over the expected term of the lease or their estimated useful
lives, whichever is shorter. Intangible assets, other than trade name, are
amortized over periods ranging from five to seven years. Trade name and goodwill
are amortized over 40 years.
IMPAIRMENT OF ASSETS. The Company assesses the recoverability of asset
values, including goodwill and other intangible assets, on a periodic basis by
comparing expected cashflows to net book value.
DEFERRED CHARGES. Expenses associated with the opening of new stores are
written off in the year of the store opening. Deferred policy acquisition costs,
principally marketing costs and commissions incurred by JCPenney Insurance to
secure new insurance policies, are amortized over the expected premium-paying
period of the related policies.
INVESTMENTS. The Company's investments are classified as available-for-sale
and are carried at fair value. Changes in unrealized gains and losses are
recorded directly to stockholders' equity, net of applicable income taxes.
Realized gains and losses are determined on a first-in, first-out basis.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INSURANCE POLICY AND CLAIMS RESERVES. Liabilities established by
JCPenney Insurance for future policy benefits are computed using a net level
premium method including assumptions as to investment yields, mortality,
morbidity, and persistency based on the Company's experience.
ADVERTISING. Costs for newspaper, television, radio, and other media
advertising are expensed as incurred. Catalog book preparation and printing
costs, which are considered direct response advertising, are charged to expense
over the life of the catalog, not to exceed six months.
DERIVATIVE FINANCIAL INSTRUMENTS. The Company selectively uses non-
leveraged, off-balance-sheet derivative instruments to manage its market and
interest rate risk, and does not hold derivative positions for trading purposes.
Current derivative positions consist of non-leveraged, off-balance-sheet
interest rate swaps which are accounted for by recording the net interest
received or paid as an adjustment to interest expense on a current basis. Gains
or losses resulting from market movements are not recognized.
USE OF ESTIMATES. The preparation of the Company's consolidated
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.
NEW ACCOUNTING RULES. The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share,
in April 1997, SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information, in June
1997, and SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, in February 1998. SFAS No. 128 was effective in fiscal
1997, and SFAS's No. 130, No. 131 and No. 132 were 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.
2
DRUGSTORE
ACQUISITIONS
In February 1997, the Company completed the acquisition of Eckerd
Corporation (Eckerd), a 1,748 unit drugstore chain located primarily in the
Southeast and Sunbelt. The acquisition was accomplished through a two-step
transaction consisting of a cash tender offer for 50.1 per cent of the
outstanding Eckerd common stock (December 1996), followed by the exchange of
approximately 23.2 million shares of JCPenney common stock for the remaining
49.9 per cent of Eckerd common stock (February 1997). The total value of the
acquisition, including $760 million of Eckerd debt assumed by the Company, was
approximately $3.3 billion. The purchase price was allocated to assets acquired
and liabilities assumed based on their estimated fair value, and accordingly,
the Company recognized intangible assets consisting of favorable lease rights,
prescription files, computer software, and trade name. The excess of the
purchase price over the estimated fair value of assets acquired and liabilities
assumed is classified as goodwill and totaled $2.3 billion at the conclusion of
the acquisition.
In October 1996, the Company acquired Fay's Incorporated (Fay's), a 272
unit drugstore chain located primarily in New York state, through the issuance
of 5.2 million shares of common stock valued at $278 million and assumption of
$75 million of Fay's debt. The excess of the purchase price over the estimated
fair value of assets acquired and liabilities assumed totaled $220 million and
is classified as goodwill.
Both the Eckerd and Fay's acquisitions were accounted for under the
purchase method, and accordingly, the results of operations of both Eckerd and
Fay's are included in the Company's results of operations since the respective
dates of acquisition.
The following unaudited pro forma condensed statements of operations
give effect to the Eckerd and Fay's acquisitions as if the transactions occurred
at the beginning of each of the periods presented.
52 Weeks Ended
- - --------------------------------------------------------------------------------
($ in millions except Jan. 25, 1997 Jan. 27, 1996
per share data) Reported Pro forma Reported Pro forma
- - --------------------------------------------------------------------------------
Retail sales $22,653 $28,028 $20,562 $26,442
Net income 565 519 838 766
Per share, diluted 2.25 1.91 3.33 2.78
- - --------------------------------------------------------------------------------
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
RETAINED INTEREST IN JCP MASTER
CREDIT CARD TRUST
The Company previously transferred portions of its customer receivables
to a trust which, in turn, sold certificates representing undivided interests in
the trust in public offerings. As of January 31, 1998, $652 million of the
certificates were outstanding and the balance of the receivables in the trust
was $1,771 million. The Company owns the remaining undivided interest in the
trust not represented by the certificates and will continue to service all
receivables for the trust. The Company has made available to the trust $78
million in irrevocable letters of credit should such funds be required. None of
the letters of credit was in use as of January 31, 1998.
The retained interest in the trust is accounted for in accordance with SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities, and
is classified as available-for-sale. The carrying value of $1,073 million in
1997 and $1,111 million in 1996 includes a valuation reserve of $40 million and
$28 million, respectively. Due to the short-term nature of this investment, the
carrying value approximates fair value.
4
INVESTMENTS AND FAIR VALUE
OF FINANCIAL INSTRUMENTS
Amortized Fair
($ in millions) Cost Value
- - ---------------------------------------------
Fixed income securities $1,126 $1,167
Asset-backed certificates 431 459
Other 113 148
- - ---------------------------------------------
Total $1,670 $1,774
=============================================
INVESTMENTS. The Company's investments are recorded at fair value based on
quoted market prices and consist principally of fixed income and equity
securities, substantially all of which are held by JCPenney Insurance, and
asset-backed certificates. The majority of the fixed income securities mature
during the next ten years. Unrealized gains and losses are included in
stockholders' equity, net of tax, and are shown as a component of comprehensive
income.
FINANCIAL LIABILITIES. Financial liabilities are recorded in the
consolidated balance sheets at historical cost, which approximates fair value.
These values are not necessarily indicative of actual market transactions. The
fair value of long term debt, excluding capital leases, is based on the interest
rate environment and the Company's credit rating.
DERIVATIVE FINANCIAL INSTRUMENTS. Current derivative positions consist of
two offsetting interest rate swaps, which were entered into in connection with
the issuance of asset-backed certificates in 1990. These swaps help to protect
certificate holders by reducing the possibility of an early amortization of the
principal. The impact of these interest rate swaps is not material.
CONCENTRATIONS OF CREDIT RISK. The Company has no significant
concentrations of credit risk. Individual accounts comprising accounts
receivable are widely dispersed and investments are well diversified.
5
SHORT TERM
DEBT
($ in millions) 1997 1996
- - ------------------------------------------------------
Commercial paper $1,417 $2,050
Bank debt -- 1,900
- - ------------------------------------------------------
Total $1,417 $3,950
Average interest rate at year end 5.6% 5.5%
======================================================
Committed bank credit facilities available to the Company as of January 31,
1998 totaled $3.0 billion. The facilities, as amended and restated in 1997,
support the Company's short term borrowing program and are comprised of a $1.5
billion, 364-day revolver and a $1.5 billion, five-year revolver. The 364-day
revolver includes a $750 million seasonal credit line for the August to January
period, allowing the Company to match its seasonal borrowing requirements. None
of the borrowing facilities was in use as of January 31, 1998. In the first
quarter of 1997, the Company paid off and retired the acquisition facility used
in connection with the Eckerd acquisition.
Also, the Company has $910 million of uncommitted credit lines in the form
of letters of credit with seven banks to support its direct import merchandise
program. As of January 31, 1998, $293 million of letters of credit issued by the
Company were outstanding.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
LONG TERM
DEBT
Jan. 31, 1998 Jan. 25, 1997
($ in millions) Avg Rate Balance Avg Rate Balance
- - -----------------------------------------------------------------------------
Notes and debentures
Due 0-5 years 7.1% $2,600 7.3% $1,425
Due 6-10 years 7.8% 1,760 8.0% 1,605
Due 11-15 years 8.0% 325 7.6% 425
Due 16-20 years 7.7% 780 7.5% 492
Due 21-30 years 7.5% 887 7.2% 550
Thereafter 7.5% 900 -- --
---------------------------------------------
Total notes and debentures 7.5% 7,252 7.6% 4,497
Guaranteed LESOP notes,
due 1998 49 142
Capital lease obligations
and other 134 176
Less current maturities (449) (250)
- - -----------------------------------------------------------------------------
Total long term debt $6,986 $4,565
=============================================================================
During 1997, the Company issued $3.0 billion of debt. These notes and
debentures had an average maturity of 30 years and an average interest rate of
7.5 per cent. In 1996, the Company issued $600 million in notes with an average
maturity of 20 years and an average interest rate of 7.3 per cent.
7
CAPITAL
STOCK
As of January 31, 1998, there were approximately 58 thousand stockholders
of record. On a combined basis, the Company's savings plans, including the
Company's leveraged employee stock ownership plan (LESOP), held 46.6 million
shares of common stock or 17.3 per cent of the Company's common shares after
giving effect to the conversion of preferred stock.
COMMON STOCK
1,250 million shares, par value $.50 are authorized; 251 million shares
were issued and outstanding as of January 31, 1998, and 224 million shares were
issued and outstanding as of January 25, 1997.
PREFERRED STOCK
In connection with the 1988 adoption of the LESOP, 25 million shares of
Series B LESOP convertible preferred stock, par value $.01 were authorized; 900
thousand shares were issued and outstanding as of January 31, 1998, and one
million shares were issued and outstanding as of January 25, 1997. Each share is
convertible into 20 shares of the Company's common stock at a conversion price
of $30 per common share. Dividends are cumulative and are payable semi-annually
at a rate of $2.37 per common share equivalent, a yield of 7.9 per cent. Shares
may be redeemed at the option of the Company or the LESOP under certain
circumstances. The redemption price may be satisfied in cash or common stock or
a combination of both, at the Company's sole discretion.
PREFERRED STOCK PURCHASE RIGHTS
In 1990, the Board of Directors declared a dividend distribution of one
preferred stock purchase right on each outstanding share of common stock in
connection with the redemption of the Company's then existing preferred stock
purchase rights program. These rights entitle the holder to purchase, for each
right held, 1/400 of a share of Series A junior participating preferred stock at
a price of $140. The rights are exercisable by the holder upon the occurrence of
certain events and are redeemable by the Company under certain circumstances as
described by the rights agreement.
8
STOCK-BASED
COMPENSATION
As of January 31, 1998, the Company had a single stock-based compensation
plan which was approved by stockholders in 1997 and which reserves 14 million
shares of common stock for issuance to plan participants upon the exercise of
options over the 10 year term of the plan. Approximately 2,000 associates,
generally consisting of selected management associates, are eligible to
participate. Shares acquired under the plan generally have a two year retention
requirement. Both the number of shares and the exercise price, which is based on
the average market price, are fixed at the date of grant and have a maximum term
of 10 years. The plan also provides for grants of stock options and stock awards
to members of the Board of Directors not otherwise employed by the Company.
Shares acquired by such directors are not transferable until a director
terminates service.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounts 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 appearing
on page 18 do not reflect any compensation cost for the Company's fixed 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:
<TABLE>
<CAPTION>
1997 1996 1995
- - ------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 4.0% 3.9% 3.9%
Expected volatility 21.3% 22.3% 21.9%
Risk-free interest rate 6.3% 5.6% 7.0%
Expected option term 6 years 5 years 5 years
Fair value per share of options
granted $9.76 $8.88 $8.20
SFAS 123 compensation
expense (millions) $ 11 $ 11 $ 11
==================================================================
</TABLE>
The effect on earnings per share of recording compensation expense under
SFAS No. 123 was a reduction of about four cents per share in each of the years
presented.
The Company records compensation expense for stock and restricted stock
awards granted under the plan, if any, at the date of grant or over the vesting
period. Compensation expense for stock awards was not material in any year
presented.
The following table summarizes the status of the Company's fixed stock
option plans as of January 31, 1998, January 25, 1997, and January 27, 1996:
<TABLE>
<CAPTION>
1997 1996 1995
- - --------------------------------------------------
<S> <C> <C> <C>
Options (in thousands)
Outstanding 7,427 8,633 8,867
Exercisable 6,272 7,419 7,637
Average price
Outstanding $40.07 $36.39 $33.40
Exercisable $38.52 $34.54 $31.87
==================================================
</TABLE>
9
INTEREST
EXPENSE, NET
<TABLE>
<CAPTION>
($ in millions) 1997 1996 1995
- - -------------------------------------------------------------------------
<S> <C> <C> <C>
Short term debt $ 121 $ 102 $ 129
Long term debt 527 312 254
Other, net* (67) (55) (58)
- - -------------------------------------------------------------------------
Interest expense, net $ 581 $ 359 $ 325
=========================================================================
* Includes $34 in each year for interest income from the Company's investment
in asset-backed certificates.
</TABLE>
10
LEASE
COMMITMENTS
The Company conducts the major part of its operations from leased premises
that include retail stores, catalog fulfillment centers, warehouses, offices,
and other facilities. Almost all leases will expire during the next 20 years;
however, most leases will be renewed or replaced by leases on other premises.
Rent expense for real property operating leases totaled $541 million in 1997,
$333 million in 1996, and $281 million in 1995, including contingent rent based
on sales of $72 million, $48 million, and $36 million for the three years,
respectively.
The Company also leases data processing equipment and other personal property
under operating leases of primarily three to five years. Rent expense for
personal property leases was $126 million in 1997, and $106 million in both 1996
and 1995.
Future minimum lease payments for noncancelable operating and capital
leases and subleases as of January 31, 1998 were:
<TABLE>
<CAPTION>
($ in millions) Operating Capital
- - --------------------------------------------------
<S> <C> <C>
1998 $ 431 $13
1999 389 13
2000 354 12
2001 297 13
2002 274 9
Thereafter 1,931 15
- - --------------------------------------------------
Total minimum lease payments $3,676 $75
Present value $2,250 $64
Weighted average interest rate 10% 10%
==================================================
</TABLE>
The minimum lease payments are shown net of estimated executory costs,
which are principally real estate taxes, maintenance, and insurance.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11
ADVERTISING
COSTS
Advertising costs consist principally of newspaper, television, radio, and
catalog book costs. In 1997, the total cost of advertising was $977 million
compared with $988 million in 1996, and $969 million in 1995. The consolidated
balance sheets include deferred catalog book costs of $89 million as of January
31, 1998 and $98 million as of January 25, 1997, which are included in other
assets.
12
RETIREMENT
PLANS
The Company's retirement plans consist principally of a noncontributory
pension plan, a noncontributory supplemental retirement program for certain
management associates, a contributory medical and dental plan, and a savings
plan, including a 401(k) plan and an employee stock ownership plan. Pension plan
assets are invested in a balanced portfolio of equity, including international,
and debt securities managed by third party investment managers. In addition,
Eckerd has a noncontributory pension plan. The cost of these programs and the
December 31 balances of plan assets and obligations are shown below:
<TABLE>
<CAPTION>
EXPENSE
($ in millions) 1997 1996 1995
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Pension and health care:
Service cost $ 68 $ 73 $ 47
Interest cost 200 186 171
Actual return on assets (488) (386) (464)
Net amortization and deferral 248 174 300
-------------------------------------
28 47 54
Savings plan expense 71 56 53
- - -----------------------------------------------------------------------------
Total retirement plans $ 99 $ 103 $ 107
=============================================================================
ASSUMPTIONS
Discount rate 7.25% 8.0% 7.25%
Expected return on plan assets 9.5% 9.5% 9.5%
Salary progression rate 4.0% 4.0% 4.0%
Health care trend rate 7.0% 7.0% 9.0%
=============================================================================
</TABLE>
ASSETS AND OBLIGATIONS
<TABLE>
<CAPTION>
PENSION PLANS*
($ in millions) 1997 1996
- - -----------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation $2,373 $1,895
- - -----------------------------------------------------------------------------
Projected benefit obligation
Beginning of year $2,187 $2,183
Service and interest cost 243 226
Actuarial (gain)/loss 400 (181)
Benefits paid (210) (130)
Amendments and other 129 89
--------------------------
End of year 2,749 2,187
Fair value of plan assets
Beginning of year 2,735 2,292
Company contributions 29 139
Net gains/(losses) 510 434
Benefits paid (210) (130)
--------------------------
End of year 3,064 2,735
Excess fair value over projected benefits 315 548
Transition asset, net of gains and prior
service cost (unrecognized) 125 23
- - -----------------------------------------------------------------------------
Prepaid pension cost $ 440 $ 571
=============================================================================
* Includes supplemental retirement plan
MEDICAL AND DENTAL
Accumulated benefit obligation $ 326 $ 291
Net unrecognized losses 13 45
- - -----------------------------------------------------------------------------
Net medical and dental liability $ 339 $ 336
=============================================================================
</TABLE>
A one per cent change in the health care trend rate would change the
accumulated benefit obligation and expense by approximately $24 million and $2
million, respectively.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13
RESTRUCTURING AND BUSINESS
INTEGRATION EXPENSES, NET
During 1997, the Company recorded restructuring and business integration
expenses totaling $447 million on a pre-tax basis, or $1.02 per diluted share.
These expenses consisted principally of costs for the Company's voluntary early
retirement program, integration of the drugstore operations, restructuring of
corporate support functions, and closing of underperforming department stores
and support facilities. These costs were partially offset by gains resulting
from the sale of certain business operations.
During 1996, the Company recorded costs totaling $354 million on a pre-tax
basis, or 92 cents per share, which were principally related to drugstore
acquisitions, including the Company's agreement with the Federal Trade
Commission to divest certain drugstores in North Carolina and South Carolina.
These expenses consisted of the following:
<TABLE>
<CAPTION>
($ in millions) 1997 1996
- - -------------------------------------------------------
<S> <C> <C>
Voluntary early retirement program $ 151 $ --
Drugstore integration 148 323
Corporate restructuring 66 11
Unit closings and other 145 20
Gain on the sale of business units (63)
---------------
447 354
Income taxes (174) (126)
- - -------------------------------------------------------
Restructuring and business integration
expenses, net $ 273 $ 228
=======================================================
</TABLE>
14
TAXES
Deferred tax assets and liabilities reflected on the Company's consolidated
balance sheet as of January 31, 1998 were measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
The major components of deferred tax (assets)/liabilities as of January 31,
1998 and January 25, 1997 were as follows:
<TABLE>
<CAPTION>
TEMPORARY DIFFERENCES ($ in millions) 1997 1996
- - -----------------------------------------------------------------------
<S> <C> <C>
Depreciation and amortization $ 977 $ 932
Leases 339 318
Restructuring and business
integration expenses (139) (73)
Other including comprehensive income 264 165
------------------
1,441 1,342
Valuation allowance -- 48(1)
- - -----------------------------------------------------------------------
Total(2) $ 1,441 $ 1,390
=======================================================================
</TABLE>
(1) Offsets deferred tax asset related to Eckerd operating loss carryforwards
which were subsequently utilized.
(2) Includes deferred taxes related to drugstore acquisitions of $165 in 1997
and $115 in 1996.
<TABLE>
<CAPTION>
Income tax expense ($ in millions) 1997 1996 1995
<S> <C> <C> <C>
Current
Federal $ 319 $ 321 $ 306
State and local 39 43 56
-----------------------------
358 364 362
-----------------------------
Deferred
Federal 3 (19) 124
State and local (2) (1) 17
-----------------------------
1 (20) 141
- - ------------------------------------------------------------------
Total $ 359 $ 344 $ 503
Effective tax rate 38.8% 37.9% 37.5%
==================================================================
Per cent of pre-tax income
- - ------------------------------------------------------------------
RECONCILIATION OF TAX RATES 1997 1996 1995
- - ------------------------------------------------------------------
Federal income tax at
statutory rate 35.0 35.0 35.0
State and local income
taxes, less federal income
tax benefit 2.8 3.0 3.6
Tax effect of dividends on
allocated LESOP shares (1.3) (1.3) (.8)
Tax credits and other 2.3 1.2 (.3)
- - ------------------------------------------------------------------
Total 38.8 37.9 37.5
==================================================================
</TABLE>
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15
SEGMENT
REPORTING
The Company operates in three business segments: JCPenney stores and
catalog, Eckerd drugstores, and JCPenney Insurance. The results of JCPenney
stores and catalog are combined. JCPenney stores and catalog generally serve the
same customer, have virtually the same mix of merchandise, and the majority of
catalog sales are completed in JCPenney stores. Other items are shown in the
table below for purposes of reconciling to total Company consolidated amounts.
<TABLE>
<CAPTION>
Depreciation
Operating Total Capital and
($ in millions) Year Revenue Earnings Assets Expenditures Amortization
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JCPenney stores and catalog 1997 $19,955 $1,391 $14,980 $464 $366
1996 19,506 1,203 14,754 680 325
1995 18,711 1,206 13,744 689 308
Eckerd drugstores 1997 9,663 392 6,064 341 112
1996 3,147 130 4,389 103 41
1995 1,851 81 618 53 26
JCPenney Insurance 1997 928 214 2,283 5 4
1996 818 186 1,986 7 5
1995 680 157 1,741 7 3
Total Segments 1997 30,546 1,997 23,327 810 482
1996 23,471 1,519 21,129 790 371
1995 21,242 1,444 16,103 749 337
Restructuring and Business
Integration Expenses 1997 (447)
1996 (354)
Net Interest and Credit Operations 1997 (547)
1996 (278)
1995 (183)
Other 1997 (78) 166 102
1996 22 959 10
1995 80 999 4
Total Company 1997 30,546 925 23,493 810 584
1996 23,471 909 22,088 790 381
1995 21,242 1,341 17,102 749 341
==============================================================================================================================
</TABLE>
(1) Total Company operating earnings equals income before income taxes as shown
on the Company's consolidated statements of income.
(2) Other operating earnings includes the banking and business services
operations, insurance capital gains, real estate operations, amortization of
goodwill and other intangible assets, and minority interest.
30
<PAGE>
QUARTERLY DATA UNAUDITED
J.C. PENNEY COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
($ in millions except per share data)
First Second Third Fourth
1997 1996 1997 1996 1997 1996 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Retail sales $ 6,481 $ 4,452 $ 6,420 $ 4,507 $ 7,208 $ 5,537 $ 9,509 $ 8,157
Total revenue 6,705 4,644 6,649 4,708 7,441 5,745 9,751 8,374
LIFO gross margin 1,804 1,340 1,709 1,312 2,038 1,700 2,688 2,243
Earnings before one-time
charges, net of tax 140 142 105 93 229 257 365 301
Net income 139 142 90 93 113 236 224 94
Per common share:
Earnings before
one-time
charges, net of tax,
diluted 0.53 0.57 0.38 0.37 0.85 1.03 1.36 1.20
Net income, diluted 0.53 0.57 0.32 0.37 0.40 0.95 0.85 0.36
Dividend 0.535 0.52 0.535 0.52 0.535 0.52 0.535 0.52
Price range
High 51 5/8 51 7/8 59 53 3/8 64 1/4 57 68 1/4 54 1/2
Low 44 7/8 45 3/4 45 5/8 47 1/4 54 11/16 49 1/4 53 1/4 46 1/4
Close 45 7/8 49 3/4 57 15/16 49 5/8 56 7/16 52 7/8 67 3/8 47 5/8
====================================================================================================================================
</TABLE>
FIVE YEAR FINANCIAL SUMMARY
J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(In millions except per share data) 1997 1996 1995 1994 1993
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results for the year:
Total revenue $ 30,546 $23,471 $ 21,242 $20,937 $19,440
Retail sales 29,618 22,653 20,562 20,380 18,983
Per cent increase 30.7 10.2 0.9 7.4 5.4
Earnings before one-time charges, net of tax 839 793 838 1,057 944
Per cent of total revenue 2.7 3.4 3.9 5.0 4.9
Return on beginning
stockholders' equity 11.7* 13.5 14.9 19.7 20.1
Net income 566 565 838 1,057 940
Per common share:
Earnings before one-time charges,
net of tax, diluted 3.12 3.17 3.33 4.05 3.55
Net income, diluted 2.10 2.25 3.33 4.05 3.53
Dividends 2.14 2.08 1.92 1.68 1.44
Stockholders' equity 29.16 25.67 24.76 23.45 21.53
Financial position
Capital expenditures 810 790 749 544 459
Total assets 23,493 22,088 17,102 16,202 14,788
Stockholders' equity 7,357 5,952 5,884 5,615 5,365
Number of common shares outstanding at year end 251 224 224 227 236
Weighted average common shares
Basic 247 226 226 234 236
Diluted 268 248 249 258 261
Number of employees at year end (In thousands) 260 252 205 202 193
==================================================================================================================================
</TABLE>
* Assumes the completion of the Eckerd acquisition in beginning equity.
31
<PAGE>
FIVE YEAR OPERATIONS SUMMARY
<TABLE>
<CAPTION>
J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES
1997 1996 1995 1994 1993
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JCPenney stores
Number of stores
Beginning of year 1,228 1,238 1,233 1,246 1,266
Openings 34 36 43 29 24
Closings (59) (46) (38) (42) (44)
- - -----------------------------------------------------------------------------------------------------------------------------------
End of year 1,203 1,228 1,238 1,233 1,246
Gross selling space (In million sq. ft.) 118.4 117.2 114.3 113.0 113.9
Sales (In millions) $16,047 $15,734 $14,973 $15,023 $14,056
Sales including catalog desks (In millions) 19,089 18,694 17,930 18,048 16,846
Sales per gross square foot 157 159 156 159 146
Catalog
Number of catalog units
JCPenney stores 1,199 1,226 1,228 1,233 1,246
Freestanding sales centers and other 554 569 565 568 557
Drugstores 110 107 106 94 101
- - -----------------------------------------------------------------------------------------------------------------------------------
Total 1,863 1,902 1,899 1,895 1,904
Sales (In millions) $ 3,908 $ 3,772 $ 3,738 $ 3,817 $ 3,514
Eckerd drugstores
Number of stores
Beginning of year 2,699 645 526 506 548
Openings 199* 47 37 46 35
Drugstore acquisitions 200 2,020 97 -- --
Closings (320)* (13) (15) (26) (77)
- - -----------------------------------------------------------------------------------------------------------------------------------
End of year 2,778 2,699 645 526 506
Gross selling space (In million sq. ft.) 27.4 26.4 6.2 4.5 4.6
Sales (In millions) $ 9,663 $ 3,147 $ 1,851 $ 1,540 $ 1,413
Sales per gross square foot 314 261 253 243 235
JCPenney Insurance (In millions)
Revenue $ 928 $ 818 $ 680 $ 557 $ 457
Distribution of revenue
JCPenney customers 53% 56% 65% 73% 83%
Banks, oil companies, and other customers 47% 44% 35% 27% 17%
Policies, certificates, and memberships in
force 13.2 11.3 9.6 7.5 5.8
==================================================================================================================================
* Includes 127 drugstore relocations.
</TABLE>
32
<PAGE>
SUPPLEMENTAL DATA (UNAUDITED)
GENERAL. The following information is provided as a supplement to the
Company's audited financial statements. Its purpose is to facilitate an
understanding of the Company's credit operations, capital structure, and cash
flows.
CREDIT OPERATIONS. The following presents the results of the Company's
proprietary credit card operation and shows both the net cost of credit in
support of the Company's retail businesses and the net cost of credit measured
on an all-inclusive, economic basis. The "economic basis" of the cost of credit
includes the cost of equity capital in addition to debt used to finance accounts
receivable balances. The cost of equity capital is based on the Company's
minimum return on equity objective of 16 per cent. The results presented below
cover all JCPenney credit card accounts receivable serviced.
<TABLE>
<CAPTION>
Pre-tax cost of JCPenney credit card
($ in millions) 1997 1996 1995
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Finance charge revenue $ (799) $ (759) $(743)
--------------------------------------
Bad debt expense 396 311 256
Operating expenses
(including in-store costs) 237 251 255
Interest expense on debt financing 285 281 278
--------------------------------------
Total costs 918 843 789
--------------------------------------
Pre-tax cost of credit -
retail operations 119 84 46
Pre-tax cost of equity capital 144 138 137
--------------------------------------
Pre-tax cost of credit -
economic basis $ 263 $ 222 $ 183
- - -----------------------------------------------------------------------------
Per cent of JCPenney credit sales 3.0% 2.4% 2.0%
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
Credit sales 1997 1996 1995
- - -------------------------------------------------------------------------------------------------------------------------------
Per cent Per cent Per cent
(JCPenney stores Amounts of Eligible Amounts of Eligible Amounts of Eligible
and catalog) (In billions) Sales (In billions) Sales (In billions) Sales
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JCPenney credit card $ 8.6 43.4 $ 9.1 46.9 $ 9.0 48.4
Third party credit cards 4.7 23.5 4.1 21.2 3.7 19.8
- - -------------------------------------------------------------------------------------------------------------------------------
Total $ 13.3 66.9 $13.2 68.1 $12.7 68.2
===============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
KEY JCPENNEY CREDIT CARD INFORMATION
(In millions, except where noted) 1997 1996 1995
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of accounts serviced with balances 14.8 17.0 17.0
Total customer receivables serviced $ 4,721 $5,006 $4,688
Average customer receivables financed 4,431 4,322 4,258
Average account balances
(in dollars) 318 295 275
Average account maturity
(months) 4.5 4.5 4.3
90-day delinquencies 3.9% 3.7% 3.3%
================================================================================
</TABLE>
CAPITAL STRUCTURE. The Company's objective is to maintain a capital
structure that will assure continuing access to financial markets so that it
can, at reasonable cost, provide for future needs and capitalize on attractive
opportunities for growth.
The debt to capital ratio shown in the table below includes both debt
recorded on the Company's consolidated balance sheet as well as off-balance-
sheet debt related to operating leases and the securitization of a portion of
the Company's customer accounts receivable (asset-backed certificates).
<TABLE>
<CAPTION>
Debt to capital ($ in millions) 1997 1996 1995
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Short term debt, net of cash investments $ 1,209 $ 3,818 $ 1,168
Long term debt, including current
maturities 7,435 4,815 4,080
-------------------------------------
8,644 8,633 5,248
Off-balance-sheet debt
Present value of operating leases 2,250 1,800 1,000
Securitization of accounts
receivable, net 343 374 294
-------------------------------------
Total debt 11,237 10,807 6,542
Consolidated equity 7,357 5,952 5,884
- - -------------------------------------------------------------------------------
Total capital $18,594 $16,759 $12,426
Per cent of total debt to capital 60.4% 64.5%* 52.6%
===============================================================================
</TABLE>
* Upon completion of the Eckerd acquisition, the Company's debt to capital ratio
decreased to 60.1 per cent.
The Company builds its capital base according to the different needs and
credit characteristics of its customer receivables and its other core retail
assets. Customer receivables are highly diversified and predictable financial
assets, very different from the core assets of a retailer, which include fixed
assets and merchandise inventories.
33
<PAGE>
SUPPLEMENTAL DATA (CONTINUED)
Accordingly, the Company finances receivables with more leverage, much like a
finance company. The standards for these assets are a debt ratio of
approximately 88 per cent and interest coverage of about 1.5 times. Core assets
are financed with less leverage and are more comparable to the leverage of non-
retail industrial companies with strong credit ratings. The Company's capital
structure as of January 31, 1998 was:
<TABLE>
<CAPTION>
Customer Core
($ in millions) Receivables Assets Combined
- - ---------------------------------------------------------------
<S> <C> <C> <C>
Debt $4,004 $ 7,233 $11,237
Equity 572 6,785 7,357
- - ---------------------------------------------------------------
Total capital $4,576 $14,018 $18,594
Debt to capital per cent 87.5% 51.6% 60.4%
===============================================================
</TABLE>
The historical debt to capital per cent and fixed charge coverage for the
prior three years, on a separate and combined basis, were:
<TABLE>
<CAPTION>
DEBT TO CAPITAL PER CENT 1997 1996 1995
- - ----------------------------------------------------------------------
<S> <C> <C> <C>
Combined 60.4 60.1* 52.6
Core assets 51.6 49.8 32.1
Customer receivables 87.5 87.5 87.5
======================================================================
* Assumes completion of the Eckerd acquisition
FIXED CHARGE COVERAGE 1997 1996 1995
- - ----------------------------------------------------------------------
Combined 2.0 2.4 3.4
Core assets 2.4 3.8 6.0
Customer receivables 1.5 1.5 1.5
======================================================================
</TABLE>
Financing costs incurred by the Company to finance its operations, including
those costs related to off-balance-sheet liabilities, were as follows:
<TABLE>
<CAPTION>
($ in millions) 1997 1996 1995
- - ----------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense, net $581 $359 $325
Interest portion of LESOP debt payment 10 17 23
Off-balance-sheet financing costs
Interest imputed on operating leases 180 110 102
Asset-backed certificates interest 68 68 68
- - ----------------------------------------------------------------------
Total $839 $554 $518
======================================================================
</TABLE>
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION (EBITDA) is a
key measure of cash flow generated. Following is a calculation of EBITDA by
operating segment on an individual and combined basis (excludes other
unallocated):
<TABLE>
<CAPTION>
Stores & Total
1997 Catalog Drugstores Insurance Segments
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $19,955 $9,663 $ 928 $30,546
Operating earnings 1,391 392 214 1,997
Depreciation and amortization 366 112 4 482
Interest and other* 195 97 -- 292
- - --------------------------------------------------------------------------------
EBITDA $ 1,952 $ 601 $ 218 $ 2,771
as a % of revenue 9.8% 6.2% 23.5% 9.1%
================================================================================
1996
- - --------------------------------------------------------------------------------
Revenue $19,506 $3,147 $ 818 $23,471
Operating earnings 1,203 130 186 1,519
Depreciation and amortization 325 41 5 371
Interest and other* 246 30 -- 276
- - --------------------------------------------------------------------------------
EBITDA $ 1,774 $ 201 $ 191 $ 2,166
as a % of revenue 9.1% 6.4% 23.3% 9.2%
================================================================================
1995
- - --------------------------------------------------------------------------------
Revenue $18,711 $1,851 $ 680 $21,242
Operating earnings 1,206 81 157 1,444
Depreciation and amortization 308 26 3 337
Interest and other* 313 22 -- 335
- - --------------------------------------------------------------------------------
EBITDA $ 1,827 $ 129 $ 160 $ 2,116
as a % of revenue 9.8% 7.0% 23.5% 10.3%
================================================================================
</TABLE>
* Consists of interest on operating leases and the LESOP, the impact of asset-
backed certificates, and finance charge revenue net of credit operating costs.
CREDIT RATINGS. Over the years, the Company has maintained one of the
highest credit ratings in the retail industry. The Company's objective is to
maintain a strong investment grade rating on its senior long term debt and
commercial paper. The credit ratings for the Company at year end were:
<TABLE>
<CAPTION>
Long Term Commercial
Debt Paper
- - -----------------------------------------------------------
<S> <C> <C>
Standard & Poor's Corporation A A1
Moody's Investors Service A2 P1
Fitch Investors Service, Inc. A F1
</TABLE>
34
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
------------------------------
Set forth below is a list of certain subsidiaries of the Company at March 2,
1998. All of the voting securities of each named subsidiary are owned by the
Company or by another subsidiary of the Company.
SUBSIDIARIES
Eckerd Corporation (Delaware)
Fay's Incorporated (New York)
J. C. Penney Insurance Group, Inc.(Delaware)
J. C. Penney Funding Corporation (Delaware)
J. C. Penney Life Insurance Company (Vermont)
JCPenney Card Bank (National Association)
J. C. Penney Properties, Inc. (Delaware)
JCP Realty, Inc. (Delaware)
JCP Receivables, Inc. (Delaware)
Thrift Drug, Inc. (Delaware)
Separate financial statements are filed for J. C. Penney Funding Corporation
and Eckerd Corporation, each of which is a consolidated subsidiary, in their
respective separate Annual Reports on Form 10-K.
The names of other subsidiaries have been omitted because these unnamed
subsidiaries, considered in the aggregate as a single subsidiary, do not
constitute a significant subsidiary.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
The Board of Directors of
J. C. Penney Company, Inc.:
We consent to incorporation by reference in: (1) the Registration Statement
(No. 33-28390) on Form S-8;(2) the Registration Statement (No. 33-59666) on Form
S-8; (3)the Registration Statement (No. 33-59668) on Form S-8; (4) the
Registration Statement (No. 33-66070) on Form S-8; (5) the Registration
Statement (No. 33-66072) on Form S-8; (6) the Registration Statement (No. 33-
56995) on Form S-8; (7) the Registration Statement (No. 333-13949) on Form S-8;
(8) the Registration Statement (No. 333-13951) on Form S-8; (9) the Registration
Statement (No. 333-22627) on Form S-8; (10) the Registration Statement (No. 333-
22607) on Form S-8; (11) the Registration Statement (No. 333-33343) on Form S-8;
(12) the Registration Statement (No. 333-27329) on Form S-8; and (13) the
Registration Statement (No. 333-23339) on Form S-3 of J. C. Penney Company, Inc.
of our report dated February 26, 1998, relating to the consolidated balance
sheets of J. C. Penney Company, Inc. and subsidiaries as of January 31, 1998 and
January 25, 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended January 31, 1998, which report appears in the 1997 Annual Report to
Stockholders of J. C. Penney Company, Inc., which Annual Report is incorporated
by reference in the Annual Report on Form 10-K of J. C. Penney Company, Inc. for
the year ended January 31, 1998, and our report dated February 26, 1998,
relating to the financial statement schedule of J. C. Penney Company, Inc. and
subsidiaries for each of the years in the three-year period ended January 31,
1998, which report appears in the Annual Report on Form 10-K of J. C. Penney
Company, Inc. for the year ended January 31, 1998.
/S/ KPMG Peat Marwick LLP
Dallas, Texas
April 30, 1998
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS THAT each of the undersigned directors and
officers of J. C. PENNEY COMPANY, INC., a Delaware corporation ("Company") ,
which will file with the Securities and Exchange Commission, Washington, D.C.
("Commission"), (i) under the provisions of the Securities Act of 1933, as
amended, a Registration Statement on Form S-3 (or any appropriate form then in
effect) for the registration of the Company's debt securities (which may include
debt securities, together with warrants or other rights to purchase or otherwise
acquire debt securities), and (ii) under the provisions of the Securities
Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the 53
weeks ended January 31, 1998, hereby constitutes and appoints W. J. Alcorn, R.
B. Cavanaugh, C. R. Lotter, and D. A. McKay, and each of them, his or her true
and lawful attorneys-in-fact and agents, with full power to each of them to act
without the others, for him or her and in his or her name, place, and stead, in
any and all capacities, to sign (x) said Registration Statement and Prospectus
and Prospectus Supplements, which are about to be filed, and any and all
subsequent amendments thereto (including, without limitation, any and all post-
effective amendments thereto ("Registration Statement")), and (y) said Annual
Report, which is about to be filed, and any and all subsequent amendments to
said Annual Report ("Annual Report"), and to file said Registration Statement
and Annual Report so signed, with all exhibits thereto, and any and all
documents in connection therewith, and to appear before the Commission in
connection with any matter relating to said Registration Statement and Annual
Report, hereby granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform any and all acts and things
requisite and necessary to be done in and about the premises as fully and to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney as of
the 11th day of March, 1998.
/S/ J. E. Oesterreicher /S/ W. B. Tygart
- - ------------------------------ ---------------------------
Chairman of the Board and W. B. Tygart
Chief Executive Officer (principal Vice Chairman of the Board;
executive officer); Director Director
/S/ D. A. McKay /S/ W. J. Alcorn
- - ----------------------------- ---------------------------
D. A. McKay W. J. Alcorn
Executive Vice President and Vice President and Controller
Chief Financial Officer (principal accounting officer)
(principal financial officer)
<PAGE>
/S/ M. A. Burns /S/ V. E. Jordan, Jr.
- - ----------------------------- ---------------------------
M. A. Burns V. E. Jordan, Jr.
Director Director
/S/ George Nigh /S/ J. C. Pfeiffer
- - ----------------------------- ----------------------------
George Nigh J. C. Pfeiffer
Director Director
/S/ A. W. Richards /S/ Francisco Sanchez-Loaeza
- - ----------------------------- ----------------------------
A. W. Richards Francisco Sanchez-Loaeza
Director Director
/S/ C. S. Sanford, Jr. /S/ R. G. Turner
- - ----------------------------- ----------------------------
C. S. Sanford, Jr. R. G. Turner
Director Director
/S/ J. D. Williams
- - -----------------------------
J. D. Williams
Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENT OF INCOME OF
J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES AS OF JANUARY 31, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 287
<SECURITIES> 1,073
<RECEIVABLES> 3,924
<ALLOWANCES> 105
<INVENTORY> 6,162
<CURRENT-ASSETS> 11,484
<PP&E> 8,274
<DEPRECIATION> 2,945
<TOTAL-ASSETS> 23,493
<CURRENT-LIABILITIES> 6,137
<BONDS> 6,986
0
526
<COMMON> 2,766
<OTHER-SE> 4,065
<TOTAL-LIABILITY-AND-EQUITY> 23,493
<SALES> 29,618
<TOTAL-REVENUES> 30,546
<CGS> 21,379
<TOTAL-COSTS> 27,835
<OTHER-EXPENSES> 862
<LOSS-PROVISION> 343
<INTEREST-EXPENSE> 581
<INCOME-PRETAX> 925
<INCOME-TAX> 359
<INCOME-CONTINUING> 566
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 566
<EPS-PRIMARY> 2.13
<EPS-DILUTED> 2.10
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENT OF INCOME OF J.C.
PENNEY COMPANY, INC. AND SUBSIDIARIES AS OF JANUARY 25, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-25-1997
<PERIOD-END> JAN-25-1997
<CASH> 131
<SECURITIES> 1,111
<RECEIVABLES> 4,723
<ALLOWANCES> 77
<INVENTORY> 5,722
<CURRENT-ASSETS> 11,712
<PP&E> 7,715
<DEPRECIATION> 2,701
<TOTAL-ASSETS> 22,088
<CURRENT-LIABILITIES> 7,966
<BONDS> 4,565
0
568
<COMMON> 1,416
<OTHER-SE> 3,968
<TOTAL-LIABILITY-AND-EQUITY> 22,088
<SALES> 22,653
<TOTAL-REVENUES> 23,471
<CGS> 16,058
<TOTAL-COSTS> 21,320
<OTHER-EXPENSES> 616
<LOSS-PROVISION> 267
<INTEREST-EXPENSE> 359
<INCOME-PRETAX> 909
<INCOME-TAX> 344
<INCOME-CONTINUING> 565
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 565
<EPS-PRIMARY> 2.32
<EPS-DILUTED> 2.25
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENT OF INCOME OF J. C.
PENNEY COMPANY, INC. AND SUBSIDIARIES AS OF JANUARY 27, 1996, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-27-1996
<PERIOD-END> JAN-27-1996
<CASH> 173
<SECURITIES> 986
<RECEIVABLES> 4,284
<ALLOWANCES> 63
<INVENTORY> 3,935
<CURRENT-ASSETS> 9,409
<PP&E> 6,408
<DEPRECIATION> 2,127
<TOTAL-ASSETS> 17,102
<CURRENT-LIABILITIES> 4,020
<BONDS> 4,080
0
603
<COMMON> 1,112
<OTHER-SE> 4,169
<TOTAL-LIABILITY-AND-EQUITY> 17,102
<SALES> 20,562
<TOTAL-REVENUES> 21,242
<CGS> 14,352
<TOTAL-COSTS> 19,275
<OTHER-EXPENSES> 82
<LOSS-PROVISION> 219
<INTEREST-EXPENSE> 325
<INCOME-PRETAX> 1,341
<INCOME-TAX> 503
<INCOME-CONTINUING> 838
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 838
<EPS-PRIMARY> 3.52
<EPS-DILUTED> 3.33
</TABLE>
<PAGE>
EXHIBIT 99(b)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 1997 ANNUAL REPORT
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
J. C. Penney Funding Corporation ("Funding") is a wholly-owned consolidated
subsidiary of J. C. Penney Company, Inc. ("JCPenney"). The business of Funding
consists of financing a portion of JCPenney's operations through loans to
JCPenney, the purchase of customer receivable balances that arise from the
retail credit sales of JCPenney, or a combination of both. No receivables have
been purchased by Funding since 1985. The loan agreement between Funding and
JCPenney provides for unsecured loans to be made by Funding to JCPenney. Each
loan is evidenced by a revolving promissory note and is payable upon demand in
whole or in part as may be required by Funding. Copies of Funding's loan and
receivables agreements with JCPenney are available upon request.
Funding issues commercial paper through Credit Suisse First Boston Corporation,
J.P. Morgan Securities Inc., Merrill Lynch Money Markets Inc., and Morgan
Stanley & Co. Incorporated to corporate and institutional investors in the
domestic market. The commercial paper is guaranteed by JCPenney on a
subordinated basis. The commercial paper is rated "A1" by Standard & Poor's
Corporation, "P1" by Moody's Investors Service, and "F1" by Fitch Investors
Service, Inc.
Income is derived primarily from earnings on loans to JCPenney and is designed
to produce earnings sufficient to cover interest expense at a coverage ratio of
at least one and one-half times.
In 1997, net income increased to $43 million from $38 million in 1996. Net
income for 1996 decreased from $43 million in 1995. The increase in 1997 is
attributed to higher borrowing levels and higher interest rates. The decrease
in 1996 is attributed to lower borrowing levels and lower interest rates.
Interest expense was $127 million in 1997 compared with $111 million in 1996 and
$128 million in 1995. Interest earned from JCPenney was $193 million in 1997
compared to $169 million in 1996 and $194 million in 1995.
Commercial paper borrowings averaged $2,129 million in 1997 compared to $1,827
million in 1996 and $2,145 million in 1995. The average interest rate on
commercial paper was 5.7 per cent in 1997, up from 5.4 per cent in 1996 and down
from 5.9 percent in 1995.
1997 total short term debt, including commercial paper and borrowings under the
"acquisition" credit facilities entered into in connection with JCPenney's
acquisition of Eckerd Corporation, averaged $2,247 million in 1997 compared to
$2,041 million in 1996, and $2,145 million in 1995. The average interest rate
on the total short term debt was 5.6 per cent in 1997, up from 5.5 per cent in
1996, and down from 5.9 per cent in 1995. The $1.9 billion credit line debt
under the "acquisition" credit facilities was paid off with proceeds from the
4(2) Commercial Paper Program established by Funding in February 1997.
Committed bank credit facilities available to Funding and JCPenney as of January
31, 1998 amounted to $3 billion. The facilities, as amended and restated in
1997, support JCPenney's short term borrowing program, and are comprised of a
$1.5 billion, 364-day revolver, and a $1.5 billion, five-year revolver. The
364-day revolver includes a $750 million seasonal credit line for the August to
January period thus allowing JCPenney to match its seasonal borrowing
requirements. There were no outstanding borrowings under these credit
facilities at January 31, 1998.
JCPenney has initiated actions to address the Year 2000 issue relating to
Funding. It is expected that compliance work will be substantially completed by
the end of 1998. Total costs associated with these efforts are not expected to
have a material impact on the financial results of either JCPenney or Funding.
In addition, Funding has communicated with its commercial paper dealers to
determine their Year 2000 compliance readiness. However, there can be no
guarantee that the systems of these commercial paper dealers on which Funding
relies will be timely converted, or that a failure to convert would not have a
material adverse effect on Funding's operations.
We would like to express our appreciation to the institutional investment
community, as well as to our credit line participants and commercial paper
dealers for their continued support during 1997.
/s/ ROBERT B. CAVANAUGH
Robert B. Cavanaugh
Chairman of the Board
February 26, 1998
2
<PAGE>
STATEMENTS OF INCOME J. C. PENNEY FUNDING CORPORATION
($ in millions)
FOR THE YEAR 1997 1996 1995
------------------------
INTEREST INCOME FROM JCPENNEY....................... $ 193 $ 169 $ 194
INTEREST EXPENSE.................................... 127 111 128
------ ----- -----
INCOME BEFORE INCOME TAXES.......................... 66 58 66
Income taxes..................................... 23 20 23
------ ----- -----
NET INCOME.......................................... $ 43 $ 38 $ 43
====== ===== =====
STATEMENTS OF REINVESTED EARNINGS
($ in millions)
1997 1996 1995
------------------------
BALANCE AT BEGINNING OF YEAR........................ $ 964 $ 926 $ 883
NET INCOME.......................................... 43 38 43
------ ----- -----
BALANCE AT END OF YEAR.............................. $1,007 $ 964 $ 926
====== ===== =====
-----------
See Notes to Financial Statements on page 6
3
<PAGE>
BALANCE SHEETS J. C. PENNEY FUNDING CORPORATION
(In millions except share data)
1997 1996
---- ----
ASSETS
Loans to JCPenney.............................. $2,591 $5,062
====== ======
LIABILITIES AND EQUITY OF JCPENNEY
CURRENT LIABILITIES
Short term debt................................ $1,416 $3,952
Due to JCPenney................................ 23 1
------ ------
TOTAL CURRENT LIABILITIES................. 1,439 3,953
EQUITY OF JCPENNEY
Common stock (including contributed
capital), par value $100:
Authorized, 750,000 shares -
issued and outstanding, 500,000 shares.... 145 145
Reinvested earnings............................ 1,007 964
------ ------
TOTAL EQUITY OF JCPENNEY.................. 1,152 1,109
------ ------
TOTAL LIABILITIES AND EQUITY OF JCPENNEY.. $2,591 $5,062
====== ======
-----------
See Notes to Financial Statements on page 6
4
<PAGE>
STATEMENTS OF CASH FLOWS J. C. PENNEY FUNDING CORPORATION
($ in millions)
FOR THE YEAR 1997 1996 1995
----------------------------
OPERATING ACTIVITIES
Net income.................................... $ 43 $ 38 $ 43
(Increase)Decrease in loans to JCPenney....... 2,471 (2,499) 551
Increase(Decrease) in amount due to JCPenney.. 22 (9) (2)
------- ------- -----
$ 2,536 $(2,470) $ 592
FINANCING ACTIVITIES
Increase(Decrease) in short term debt......... $(2,536) $ 2,470 $(592)
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid................................. $ 127 $ 111 $ 128
Income taxes paid............................. $ 2 $ 28 $ 26
-----------
See Notes to Financial Statements on page 6
5
<PAGE>
INDEPENDENT AUDITORS' REPORT J. C. PENNEY FUNDING CORPORATION
To the Board of Directors of
J. C. Penney Funding Corporation:
We have audited the accompanying balance sheets of J. C. Penney Funding
Corporation as of January 31, 1998, and January 25, 1997, and the related
statements of income, reinvested earnings, and cash flows for each of the years
in the three year period ended January 31, 1998. These financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of J. C. Penney Funding
Corporation as of January 31, 1998, and January 25, 1997, and the results of its
operations and its cash flows for each of the years in the three year period
ended January 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
February 26, 1998
NOTES TO FINANCIAL STATEMENTS
NATURE OF OPERATIONS
- - --------------------
J. C. Penney Funding Corporation ("Funding") is a wholly-owned consolidated
subsidiary of J. C. Penney Company, Inc. ("JCPenney"). The principal business
of Funding consists of financing a portion of JCPenney's operations through
loans to JCPenney. To finance its operations, Funding issues commercial paper,
which is guaranteed by JCPenney on a subordinated basis, to corporate and
institutional investors in the domestic market. Funding has, from time to time,
issued long term debt in public and private markets in the United States and
abroad.
DEFINITION OF FISCAL YEAR
Funding's fiscal year ends on the last Saturday in January. Fiscal 1997 ended
January 31, 1998, fiscal 1996 ended January 25, 1997, and fiscal 1995 ended
January 27, 1996. Fiscal 1997 was a 53 week year; all other years presented are
52 weeks.
COMMERCIAL PAPER PLACEMENT
Funding places commercial paper solely through dealers. The average interest
rate on commercial paper at year end 1997, 1996, and 1995 was 5.7%, 5.5%, and
5.7%, respectively.
SUMMARY OF ACCOUNTING POLICIES
- - ------------------------------
INCOME TAXES
Funding's taxable income is included in the consolidated federal income tax
return of JCPenney. Income taxes in Funding's statement of income are computed
as if Funding filed a separate federal income tax return.
USE OF ESTIMATES
Funding's financial statements have been prepared in conformity with generally
accepted accounting principles. Certain amounts included in the financial
statements are estimated based on currently available information and
management's judgment as to the outcome of future conditions and circumstances.
While every effort is made to ensure the integrity of such estimates, including
the use of third party specialists where appropriate, actual results could
differ from these estimates.
LOANS TO JCPENNEY
- - -----------------
Funding and JCPenney are parties to a Loan Agreement which provides for
unsecured loans, payable on demand, to be made from time to time by Funding to
JCPenney for the general business purposes of JCPenney, subject to the
terms and conditions of the Loan Agreement. Under the terms of the Loan
Agreement, Funding and JCPenney agree upon a mutually-acceptable earnings
coverage of Funding's interest and other fixed charges. The earnings to fixed
charges ratio has historically been at least one and one-half times.
COMMITTED BANK CREDIT FACILITIES
- - --------------------------------
Committed bank credit facilities available to Funding and JCPenney as of January
31, 1998 amounted to $3 billion. The facilities, as amended and restated in
1997, support JCPenney's short term borrowing program, and are comprised of a
$1.5 billion, 364-day revolver, and a $1.5 billion, five-year revolver. The
364-day revolver includes a $750 million seasonal credit line for the August to
January period thus allowing JCPenney to match its seasonal borrowing
requirements. In the first quarter of 1997, JCPenney paid off and retired the
acquisition credit facilities used in connection with its acquisition of Eckerd
Corporation. There were no outstanding borrowings under these credit facilities
at January 31, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- - -----------------------------------
The fair value of short term debt (commercial paper) at January 31, 1998, and
January 25, 1997 approximates the amount as reflected on the balance sheet due
to its short average maturity.
The fair value of loans to JCPenney at January 31, 1998, and January 25, 1997
also approximates the amount reflected on the balance sheet because the loan is
payable on demand and the interest charged on the loan balance is adjusted to
reflect current market interest rates.
-----------
6
<PAGE>
FIVE YEAR FINANCIAL SUMMARY J. C. PENNEY FUNDING CORPORATION
($ in millions)
AT YEAR END 1997 1996 1995 1994 1993
------------------------------------------
CAPITALIZATION
Short term debt
Commercial paper............ $1,416 $2,049 $1,482 $2,074 $1,284
Credit line advance......... -- 1,903 -- -- --
------ ------ ------ ------ ------
Total short term debt..... 1,416 3,952 1,482 2,074 1,284
Equity of JCPenney............. 1,152 1,109 1,071 1,028 996
------ ------ ------ ------ ------
TOTAL CAPITALIZATION.............. $2,568 $5,061 $2,553 $3,102 $2,280
====== ====== ====== ====== ======
COMMITTED BANK CREDIT FACILITIES.. $3,000 $6,000 $3,000 $2,500 $1,250
FOR THE YEAR
INCOME............................ $ 193 $ 169 $ 194 $ 143 $ 71
EXPENSES.......................... $ 127 $ 111 $ 128 $ 94 $ 47
NET INCOME........................ $ 43 $ 38 $ 43 $ 32 $ 16
FIXED CHARGES - TIMES EARNED...... 1.52 1.52 1.52 1.52 1.52
PEAK SHORT TERM DEBT.............. $4,295 $4,010 $2,771 $2,649 $2,327
AVERAGE DEBT...................... $2,247 $2,041 $2,145 $1,990 $1,347
AVERAGE INTEREST RATES............ 5.6% 5.5% 5.9% 4.6% 3.2%
-----------
7
<PAGE>
QUARTERLY DATA J. C. PENNEY FUNDING CORPORATION
($ in millions) (Unaudited)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
-------------------- -------------------- -------------------- --------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995 1997 1996 1995
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income................ $ 82 32 48 29 33 48 35 36 52 47 68 46
Expenses.............. $ 54 21 31 19 22 32 23 24 34 31 44 31
Income before taxes... $ 28 11 17 10 11 16 12 12 18 16 24 15
Net income............ $ 18 7 11 7 7 10 8 8 12 10 16 10
Fixed charges -
times earned......... 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52
</TABLE>
COMMITTED REVOLVING CREDIT FACILITIES
AS OF JANUARY 31, 1998
Bank of America NT & SA Marine Midland Bank
Bank of Hawaii Mellon Bank, N.A.
The Bank of New York Morgan Guaranty Trust Company
The Bank of Tokyo-Mitsubishi, Ltd. of New York
Bank One, Texas N.A. National Australia Bank Limited
BankBoston, N.A. NationsBank of Texas, N.A.
Bankers Trust Company The Northern Trust Company
Barclays Bank PLC Norwest Bank Minnesota, N.A.
The Chase Manhattan Bank PNC Bank, N.A.
Citibank, N.A. Royal Bank of Canada
CoreStates Bank, N.A. The Sakura Bank, Ltd.
Credit Agricole Indosuez State Street Bank & Trust Company
Credit Suisse First Boston SunTrust Bank, Atlanta
Crestar Bank UMB Bank, N.A.
The First National Bank of Chicago U.S. Bank National Association
First Security Bank of Utah, N.A. Wachovia Bank, N.A.
First Union National Bank Wells Fargo Bank, N.A.
Firstar Bank Milwaukee, N.A. The Yasuda Trust & Banking Co.,
Fleet National Bank Ltd.
The Fuji Bank, Ltd.
Hibernia National Bank
Istituto Bancario San Paolo di
Torino S.p.A.
8
