PENNEY J C CO INC, PRES14A, 1999-07-16

PENNEY J C CO INC
PRES14A, 1999-07-16
DEPARTMENT STORES

Previous: PENN TRAFFIC CO, SC 13D, 1999-07-16

Next: PENNZENERGY CO, DEFM14A, 1999-07-16

<PAGE>

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

Filed by the Registrant [X]

Filed by a Party other than the Registrant [_]

Check the appropriate box:

[X] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
[_] Definitive Proxy Statement RULE 14A-6(E)(2))

[_] Definitive Additional Materials

[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12

J. C. Penney Company, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

(2) Aggregate number of securities to which transaction applies:

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

[_] Fee paid previously with preliminary materials.

[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

(2) Form, Schedule or Registration Statement No.:

(3) Filing Party:

(4) Date Filed:

<PAGE>

[LETTERHEAD OF JCPENNEY]

James E. Oesterreicher
Chairman of the Board
and Chief Executive
Officer

, 1999

Dear Stockholders:

On behalf of your Board of Directors and your management, I cordially invite
you to attend a Special Meeting of Stockholders of your Company. It will be
held on , 1999 at 10:00 A.M., local time, at the Company's Home Office
located at 6501 Legacy Drive, Plano, Texas 75024-3698.

At the Special Meeting, you will be asked to consider and approve a proposal
that is being recommended by your Board of Directors to restructure the
existing common stock of the Company into two classes intended to track the
separate performances of the department store, catalog and direct marketing
businesses of the Company (the "Penney Group") and the drugstore business of
the Company (the "Eckerd Group"). We refer to this proposal in this proxy
statement as the "tracking stock proposal."

The Board of Directors adopted the tracking stock proposal following its
review of various alternatives to support the Company's strategic objectives
and increase the overall return to stockholders. The Board of Directors
believes that the recent historical price performance of the existing common
stock of the Company has been more closely linked to the department store
business and has failed to adequately reflect the value of the Company's
drugstore business. The tracking stock proposal will, among other things:

. permit the market to value the Penney Group and the Eckerd Group
separately;

. allow investors to invest in either Penney Group Common Stock or Eckerd
Group Common Stock or both, depending on their particular investment
objectives;

. preserve the financial, strategic and operational benefits the Company
currently receives, and may in the future receive, from operating as a
single enterprise;

. provide the Company with additional and potentially lower cost means for
raising capital and completing acquisitions; and

. provide flexibility to link employee incentive compensation plans with
the different businesses.

The key elements of the tracking stock proposal include:

. Reclassification of the existing common stock. Our existing common
stock, par value $.50 per share (the "existing common stock") will be
reclassified as the ["J. C. Penney Company, Inc.--Penney Group Common
Stock,"] tracking the separate performance of the Company's department
store, catalog and direct marketing businesses. We refer to this class
of stock in this proxy statement as the "Penney Group Common Stock."
Each share of existing common stock will be automatically reclassified
as one share of Penney Group Common Stock at the time we implement the
tracking stock proposal.

. Creation of the Eckerd Group Common Stock. We will create a new class of
the Company's common stock designed to track the separate performance of
the Company's drugstore business, which will be designated as the ["J.
C. Penney Company, Inc.--Eckerd Group Common Stock."] We refer to this
class of stock in this proxy statement as the "Eckerd Group Common
Stock."

. Initial public offering of Eckerd Group Common Stock. We currently plan
to offer shares of Eckerd Group Common Stock representing approximately
20 percent of the equity value of the Eckerd Group to the public for
cash, subject to market and other conditions. The remaining equity value
of the Eckerd Group initially will be held by the Penney Group.
<PAGE>

. Planned distribution of Eckerd Group Common Stock. We currently plan to
distribute (via a dividend) the remaining equity value of the Eckerd
Group to the holders of Penney Group Common Stock approximately six to
twelve months after the initial public offering of the Eckerd Group
Common Stock. If this distribution occurs, each holder of existing
common stock ultimately will hold two separate classes of common stock
representing separate interests in the Penney Group and the Eckerd
Group.

You will also be asked to consider and approve related proposals to amend
the Company's Restated Certificate of Incorporation, as amended, to increase
the total authorized shares of common stock so that the Company may address
future capital needs as they arise and to amend the Company's 1997 Equity
Compensation Plan to reflect the creation of the separate tracking stocks.

The vote of each and every stockholder is most important to us. We are
gratified that so many of you have in the past exercised your right to vote
your shares.

Whether or not you plan to attend, please sign and return the enclosed proxy
in the accompanying envelope, or vote via telephone as set forth in the proxy,
as soon as possible so that your shares will be voted at the meeting.

Please note that your completed proxy will not prevent you from attending
the meeting and voting in person should you so choose. We look forward to
seeing you at this meeting. If you plan to attend, please so indicate in the
appropriate box on your proxy.

Thank you for your cooperation and continued support and interest in
JCPenney.

Regards,

Any stockholder having a disability requiring special assistance who would
like to attend this Special Meeting should call the Secretary of the Company
at (972) 431-1201 and reasonable accommodations will be made to meet such
needs.

Please see page 17 for risk factors you should consider relating to the
tracking stock proposal.

J. C. Penney Company, Inc. . P.O. Box 10001 . Dallas, TX 75301-0001
Home Office . 6501 Legacy Drive . Plano, TX 75024-3698
<PAGE>

J. C. PENNEY COMPANY, INC.
6501 Legacy Drive
Plano, Texas 75024-3698

Notice of Special Meeting of Stockholders To Be Held on , 1999

A Special Meeting of Stockholders of J. C. Penney Company, Inc. will be held
at the Company's Home Office at 6501 Legacy Drive, Plano, Texas 75024-3698 on
, 1999, at 10:00 A. M., local time.

The Special Meeting will be held for the following purposes:

1. To consider and vote on a proposal to authorize certain amendments to
the Company's Restated Certificate of Incorporation, as amended, that
would:

a. provide for two classes of common stock of the Company, of which
shares initially would be designated as the ["J. C. Penney Company,
Inc.--Penney Group Common Stock"] and shares initially would be
designated as the ["J. C. Penney Company, Inc.--Eckerd Group Common
Stock"]; and

b. reclassify each outstanding share of the existing common stock of
the Company as one share of Penney Group Common Stock.

We refer to this proposal in this proxy statement as the "tracking stock
proposal."

2. To consider and vote on a related proposal to further amend the Restated
Certificate of Incorporation, as amended, to increase the number of
shares of common stock authorized for issuance from 1,250,000,000 shares
to 1,750,000,000 shares.

A complete copy of the amendments to the Restated Certificate of
Incorporation, as amended, is attached to this document as Annex I.

3. To consider and vote on a related proposal to amend the J. C. Penney
Company, Inc. 1997 Equity Compensation Plan to reflect the creation of
the tracking stock. A complete copy of the amendments to the J. C.
Penney Company, Inc. 1997 Equity Compensation Plan is attached to this
document as Annex II.

Stockholders of record at the close of business on , 1999, are entitled
to vote at the meeting. A complete list of those stockholders will be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours at the Company's Home Office located at 6501
Legacy Drive, Plano, Texas 75024-3698, for a period of 10 days prior to the
meeting. This proxy statement is first being mailed to our stockholders on or
about , 1999.

Plano, Texas
, 1999

C. R. Lotter, Secretary

YOUR VOTE IS IMPORTANT
PLEASE SIGN, DATE, & RETURN YOUR PROXY CARD OR VOTE BY TELEPHONE

<PAGE>

REFERENCES TO ADDITIONAL INFORMATION

This document incorporates important business and financial information
about JCPenney from other documents that are not included in or delivered with
this document. This information is available to you without charge upon your
written or oral request. You can obtain documents incorporated by reference in
this document, other than certain exhibits to those documents, by requesting
them in writing or by telephone from JCPenney at the following address:

J. C. Penney Company, Inc.
6501 Legacy Drive
Plano, Texas 75024
Attention:

If you would like to request documents, please do so by , 1999, in
order to receive them before the special meeting.

See "Where You Can Find More Information" on page 23.

ii
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE TRACKING STOCK PROPOSAL................... 1

PROXY STATEMENT SUMMARY................................................... 3

Special Meeting......................................................... 3

The Tracking Stock Proposal............................................. 3

General............................................................... 3

Risk Factors.......................................................... 4

Retained Interest of the Penney Group in the Eckerd Group............. 5

Net Proceeds.......................................................... 5

Reasons for the Tracking Stock Proposal............................... 5

Dividend Policy....................................................... 6

No Dissenters' Rights................................................. 6

U.S. Federal Income Tax Considerations................................ 6

Summary Comparison of Terms of Existing Common Stock with Terms of
Penney Group Common Stock and Eckerd Group Common Stock.............. 7

Related Proposals....................................................... 12

The Company--Summary Consolidated Financial Data.......................... 13

The Penney Group--Summary Financial Data.................................. 14

The Eckerd Group--Summary Financial Data.................................. 15

The Eckerd Group--Summary Operating Data.................................. 16

RISK FACTORS.............................................................. 17

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS................. 22

GENERAL................................................................... 23

Where You Can Find More Information..................................... 23

Information About the Special Meeting and Voting........................ 23

Date, Time and Place of Meeting....................................... 23

Record Date........................................................... 23

Proposals to be Considered at the Meeting............................. 23

Vote Required to Approve the Proposals................................ 24

Quorum................................................................ 24

Procedures for Voting by Proxy........................................ 24

Confidential Voting................................................... 25

COMMON STOCK PRICE RANGE.................................................. 25

PROPOSAL 1--THE TRACKING STOCK PROPOSAL................................... 26

General................................................................. 26

</TABLE>

iii
<PAGE>

<TABLE>
<CAPTION>
Page
----
<S> <C>
Background and Reasons for the Tracking Stock Proposal................... 27

Recommendation of the Board of Directors................................. 28

Dividend Policy.......................................................... 28

Certain Management and Allocation Policies............................... 29

General................................................................ 29

Fiduciary and Management Responsibilities.............................. 29

Financial Statements................................................... 29

Financing Activities................................................... 30

Competition Between Groups............................................. 31

Transfers of Assets Between Groups..................................... 31

Review of Corporate Opportunities...................................... 31

Allocation Matters..................................................... 31

Description of Penney Group Common Stock and Eckerd Group Common Stock... 32

General................................................................ 32

Conversion and Redemption.............................................. 33

Mandatory Dividend, Redemption or Conversion of Tracking Stock....... 33

Conversion of Common Stock at Option of the Company.................. 34

Redemption in Exchange for Stock of Subsidiary....................... 35

General Conversion and Redemption Provisions......................... 36
Voting Rights.......................................................... 37

Liquidation............................................................ 38

Retained Interest of the Penney Group in the Eckerd Group................ 39

Net Proceeds............................................................. 39

Effect on Series B ESOP Convertible Preferred Stock...................... 39

Amended and Restated Rights Agreement.................................... 40

Stock Transfer Agent and Registrar....................................... 42

Stock Exchange Listings.................................................. 42

No Dissenters' Rights.................................................... 42

Certain U.S. Federal Income Tax Considerations........................... 43

Tax Implications to the Stockholders................................... 43

No IRS Ruling.......................................................... 44

Clinton Administration Proposal........................................ 44

Non-U.S. Holders....................................................... 44

Backup Withholding..................................................... 45

</TABLE>

iv
<PAGE>

<TABLE>
<CAPTION>
Page
----
<S> <C>
Tax Implications to the Company....................................... 45

Anti-takeover Considerations............................................ 45

Delaware Law.......................................................... 46

Restated Certificate of Incorporation, as amended, and Bylaws......... 46

Authorized Shares................................................... 46

Classified Board of Directors; Removal of Directors; Action by
Written Consent.................................................... 46

Business Combinations with Interested Stockholders.................. 47

Stockholder Proposals and Nominations............................... 47

Restated Rights Agreement........................................... 48

PROPOSAL 2--AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION AS
AMENDED, RELATING TO INCREASED AUTHORIZATION OF COMMON STOCK............. 49

General................................................................. 49

Vote Required........................................................... 49

Recommendation of the Board of Directors................................ 49

PROPOSAL 3--AMENDMENTS TO THE J. C. PENNEY COMPANY, INC. 1997 EQUITY
COMPENSATION PLAN........................................................ 50

General................................................................. 50

Amendments to 1997 Equity Compensation Plan............................. 50

Description of 1997 Equity Compensation Plan as Proposed to be Amended.. 50

Principal Features of the 1997 Equity Compensation Plan............... 50

Associate Participants................................................ 51

Stock Options......................................................... 51

Price................................................................. 51

Stock Awards.......................................................... 51

Terms of Options and Stock Awards..................................... 51

Transferability....................................................... 52

Deferral.............................................................. 52

Term of Plan.......................................................... 52

Change of Control..................................................... 52

U.S. Federal Income Tax and Accounting Consequences................... 52

Non-Associate Director Participants................................... 53

General............................................................. 53

Non-transferability................................................. 53

U.S. Federal Income Tax and Accounting Consequences................. 53

Miscellaneous......................................................... 53

</TABLE>

v
<PAGE>

<TABLE>
<CAPTION>
Page
---------
<S> <C>
Vote Required...................................................... 53

Recommendation of the Board of Directors........................... 53

EXECUTIVE COMPENSATION............................................... 54

Summary Compensation Table......................................... 54

Option/Sar Grants in Last Fiscal Year.............................. 55

Aggregated Option/Sar Exercises in Last Fiscal Year and Fiscal
Year-End Option/Sar Values........................................ 56

Estimated Retirement Income Table.................................. 57

Compensation Committee Interlocks and Insider Participation........ 59

Directors' Compensation............................................ 60

BENEFICIAL OWNERSHIP TABLES.......................................... 62

Security Ownership of Certain Stockholders........................... 62

Security Ownership of Management..................................... 63

OTHER INFORMATION.................................................... 64

Solicitation of Proxies............................................ 64

Stockholder Proposals.............................................. 64

Independent Auditors............................................... 64

Legal Opinions..................................................... 64

Amendments to J. C. Penney Company, Inc. Restated Certificate of
Incorporation,
as amended.......................................................... Annex I

J. C. Penney Company, Inc. 1997 Equity Compensation Plan (as proposed
to
be amended)......................................................... Annex II

Penney Group Description of Business................................. Annex III

Eckerd Group Description of Business................................. Annex IV

Financial Information of J. C. Penney Company, Inc................... Annex V

Financial Information of the Penney Group............................ Annex VI

Financial Information of the Eckerd Group............................ Annex VII
</TABLE>

vi
<PAGE>

QUESTIONS AND ANSWERS
ABOUT THE TRACKING STOCK PROPOSAL

If you have any questions relating to the matters discussed in this
document, please call our Investor Relations Department at .

Q. Why am I receiving this proxy statement?

A. We are distributing this proxy statement to you in connection with a
proposal to amend the Company's Restated Certificate of Incorporation,
as amended, to restructure our existing common stock into two classes of
common stock of the Company, the Penney Group Common Stock and the
Eckerd Group Common Stock. We are also distributing this proxy statement
in connection with proposals to increase the number of shares of common
stock authorized under the Restated Certificate of Incorporation, as
amended, and to adopt amendments to our 1997 Equity Compensation Plan to
reflect changes to the existing common stock.

Q. What will be the new classes of common stock?

A. The new classes of common stock will be the Penney Group Common Stock
and the Eckerd Group Common Stock.

. The Penney Group Common Stock is intended to reflect the separate
performance of the department store, catalog and direct marketing
businesses of the Company. We refer to these businesses as the
Penney Group.

. The Eckerd Group Common Stock is intended to reflect the separate
performance of our drugstore business. We refer to this business as
the Eckerd Group.

Investors commonly refer to this type of stock as tracking stock or
targeted stock, because the stock is intended to track or target the
separate performance of a group of assets or a division of a company.

Q. What will my existing shares represent if the tracking stock proposal is
implemented?

A. Each share of your existing common stock will be reclassified as one
share of Penney Group Common Stock. We currently plan to offer shares of
Eckerd Group Common Stock representing approximately 20 percent of the
equity value of the Eckerd Group to the public for cash, subject to
market and other conditions. In addition, we currently plan to
distribute (via a dividend) the remaining equity value of the Eckerd
Group to the holders of Penney Group Common Stock six to twelve months
after the initial public offering, although there can be no assurance as
to whether or when this distribution will occur. If the distribution
occurs, each holder of existing common stock ultimately will hold two
separate classes of common stock representing separate interests in the
Penney Group and the Eckerd Group.

Q. When will the tracking stock proposal be implemented?

A. If the tracking stock proposal is approved by the Company's
stockholders, it will be implemented by our board of directors by filing
amendments to the Restated Certificate of Incorporation, as amended,
with the Secretary of State of the State of Delaware, just prior to the
initial public offering of the Eckerd Group Common Stock. At any time
prior to the effectiveness of the amendments to the Restated Certificate
of Incorporation, as amended, the board of directors in its sole
discretion may determine to abandon the tracking stock proposal and the
two related proposals without further action by stockholders.

Q. What kind of financial information will I receive in the future?

A. You will continue to receive consolidated financial information for J.
C. Penney Company, Inc. as a whole. In addition, you will receive
separate business and financial information for both the Penney Group
and the Eckerd Group.

Q. Will the tracking stock proposal result in a change of control of the
Company?

A. No.

1
<PAGE>

Q. Will the tracking stock proposal result in a spin-off?

A. No. This proposal will not result in a distribution or spin-off of any
of our assets or liabilities and will not affect ownership of our assets
or responsibility for our liabilities. Holders of Penney Group Common
Stock and Eckerd Group Common Stock will all be stockholders of the same
company and subject to all risks associated with an investment in J. C.
Penney Company, Inc. and all of our businesses, assets and liabilities.
The two classes of common stock do not represent ownership interests in
either group and do not entitle their holders to any special rights to
receive specific assets of either group.

Q. If I hold my shares through a broker, how do I vote on the tracking
stock proposal?

A. You should contact your broker directly to determine the procedures
through which you can vote on the tracking stock proposal.

Q. What are the consequences of my not voting on the tracking stock
proposal?

A. Your failure to vote on the tracking stock proposal will have the same
effect as a vote against the proposal.

Q. Do I need to send in my stock certificate?

A. No. Each share of existing common stock of the Company will
automatically be reclassified as one share of Penney Group Common Stock
and your existing stock certificate will automatically represent the
same number of shares of Penney Group Common Stock. You do not need to
send in your stock certificates. If the Company proceeds with the
distribution described above, you will receive a separate certificate
representing shares of Eckerd Group Common Stock.

Q. What are the tax consequences of the tracking stock proposal to me?

A. We have been advised by our counsel that, for U.S. Federal income tax
purposes, you will not recognize any income, gain or loss on your
receipt of Penney Group Common Stock or Eckerd Group Common Stock,
except for any cash you receive for fractional shares in the event of
the distribution of Eckerd Group Common Stock to the holders of Penney
Group Common Stock. If you receive cash in lieu of a fractional share,
you will recognize a gain if the amount of cash you receive exceeds your
tax basis in the fractional share and you will recognize a loss if the
amount of cash you receive is less than your tax basis in the fractional
share. You should consult a tax adviser about the tax consequences of
the tracking stock proposal to you.

2
<PAGE>

PROXY STATEMENT SUMMARY

This summary highlights important selected information from this document. To
understand the tracking stock proposal fully and for a more complete
description of the legal terms of the tracking stock proposal and the related
proposals, you should read carefully this entire proxy statement and the
documents referred to within this proxy statement. As used in this proxy
statement, the terms "Company" and "JCPenney" refer to J. C. Penney Company,
Inc. and its consolidated subsidiaries, unless the context otherwise requires.

Special Meeting

This proxy statement and the enclosed form of proxy are being furnished in
connection with the solicitation of proxies by the board of directors of the
Company for use at the special meeting of stockholders to be held at the
Company's Home Office at 6501 Legacy Drive, Plano, Texas 75024-3698 on ,
1999, at 10:00 A.M., local time. Only holders of record of the outstanding
stock of the Company as of , 1999 are entitled to vote at the special
meeting. The special meeting will be held to consider and vote on the following
proposals:

. Proposal 1: Amendment of the Restated Certificate of Incorporation, as
amended, to provide for two classes of common stock of the Company,
intended to track the separate performances of the department store,
catalog and direct marketing businesses of the Company (the Penney
Group) and the drugstore business of the Company (the Eckerd Group). We
refer to this proposal as the "tracking stock proposal."

. Proposal 2: Amendment of the Restated Certificate of Incorporation, as
amended, to increase the number of shares of common stock authorized for
issuance from 1,250,000,000 shares to 1,750,000,000 shares.

. Proposal 3: Amendment of the Company's 1997 Equity Compensation Plan in
connection with the tracking stock proposal.

The favorable vote of the holders of a majority of the voting power of the
outstanding stock of the Company is required to approve each proposal. If
Proposal 1 is approved, we will, subject to market and other conditions,
implement it whether or not Proposal 2 or 3 is approved; however, the approval
of Proposal 1 is necessary before we will implement Proposal 2 or 3.

The board of directors has carefully considered the proposals and believes
that the approval of these proposals is advisable and in the best interests of
the Company and its stockholders. The board of directors unanimously declares
the proposals advisable and recommends that you vote for the proposals.

The Tracking Stock Proposal

General

You are being asked to consider and vote in favor of the tracking stock
proposal, which would authorize amendments to the Restated Certificate of
Incorporation, as amended, of the Company. The amendments would, among other
things:

. provide for two classes of common stock of the Company, the Penney Group
Common Stock and the Eckerd Group Common Stock, of which shares
initially would be designated as Penney Group Common Stock and
shares initially would be designated as Eckerd Group Common Stock. The
voting and other rights of each class are described on pages 32 to 39 of
this proxy statement; and

. reclassify each share of existing common stock of the Company as one
share of Penney Group Common Stock.

3
<PAGE>

If the holders of a majority of the voting power of the outstanding stock of
the Company approve the proposal described above, the board of directors
currently plans to offer shares of Eckerd Group Common Stock representing
approximately 20 percent of the equity value of the Eckerd Group to the public
for cash, subject to market and other conditions. The Company currently intends
to use the net proceeds of the initial public offering of the Eckerd Group
Common Stock primarily to buy back Penney Group Common Stock in the open market
after the distribution of the remaining equity value of the Eckerd Group to the
holders of Penney Group Common Stock as described below. Any remaining net
proceeds will be used for general corporate purposes. Pending any specific
application of such proceeds, the Penney Group intends to invest the net
proceeds in short-term, investment-grade securities. The Company may offer more
or less than 20 percent of the equity value of the Eckerd Group depending on
market conditions and other circumstances that may exist at the time of the
initial public offering.

The Penney Group will initially hold the balance of the equity value of the
Eckerd Group. We currently intend to distribute (via a dividend) the remaining
equity value of the Eckerd Group to the holders of the Penney Group Common
Stock approximately six to twelve months after the initial public offering of
the Eckerd Group Common Stock, subject to market and other conditions. There
can be no assurance as to whether or when the distribution will occur, and the
board of directors, in its sole discretion, may abandon the tracking stock
proposal at any time prior to the effectiveness of the amendments to the
Restated Certificate of Incorporation, as amended, implementing the tracking
stock proposal.

If the holders of a majority of the voting power of the outstanding stock of
the Company do not approve the tracking stock proposal, or the board of
directors, in its sole discretion, determines not to proceed with the initial
public offering of Eckerd Group Common Stock, the existing common stock will
not be reclassified as Penney Group Common Stock and the Eckerd Group Common
Stock will not be issued.

Authorized but unissued shares of Penney Group Common Stock and Eckerd Group
Common Stock will be available for issuance by the Company from time to time at
the discretion of the board of directors. The board of directors could
authorize issuance of the remaining shares for any proper corporate purpose,
such as raising capital, paying stock dividends, providing compensation or
benefits to employees or acquiring other companies or businesses. The approval
of the stockholders of the Company is not necessary for the issuance of the
remaining authorized but unissued shares of common stock as Penney Group Common
Stock or Eckerd Group Common Stock unless such approval is required by the
board of directors, Delaware Law, or NYSE rules.

Risk Factors

When evaluating whether to vote in favor of the tracking stock proposal, you
should be aware that there are many risks relating to such proposal. Some of
the risks are set forth below:

. financial effects on one group could adversely affect the other;

. actions by directors and officers may have a disadvantageous effect on
either class of common stock;

. the board of directors may pay more or less dividends on one group's
tracking stock than if that group was a separate company;

. allocation of corporate opportunities could favor one group over the
other;

. holders of one group's common stock may receive less consideration upon
a sale of assets than if that group was a separate company;

. the combined market value of the Penney Group Common Stock and the
Eckerd Group Common Stock issued in connection with the tracking stock
proposal may be less than the market value of the existing common stock;

4
<PAGE>

. in circumstances where a separate class vote is not required, holders of
Eckerd Group Common Stock may initially have limited influence on
stockholder votes;

. provisions governing tracking stock could discourage a change of
control; and

. the IRS could assert that the receipt of tracking stock is taxable.

You should carefully consider these risks, described more fully in "Risk
Factors" beginning on page 17, as well as the other information and data
included in this proxy statement before you vote on the tracking stock
proposal.

Retained Interest of the Penney Group in the Eckerd Group

Subject to the approval of the tracking stock proposal by the existing
stockholders, the Company currently plans to issue shares of Eckerd Group
Common Stock representing approximately 20 percent of the equity value of the
Eckerd Group to the public for cash, subject to market and other conditions.
The remaining equity value of the Eckerd Group initially will be held by the
Penney Group. This retained interest held by the Penney Group cannot be voted
by the Penney Group.

After the initial public offering, we would adjust the Penney Group's
retained interest in the Eckerd Group as appropriate to reflect issuances or
repurchases of Eckerd Group Common Stock, capital contributions to, or returns
of capital from, the Eckerd Group and certain other events, including our
currently planned distribution of Eckerd Group Common Stock representing all of
Penney Group's retained interest in the Eckerd Group to the holders of Penney
Group Common Stock. There can be no assurance as to when or whether the planned
distribution will occur.

Net Proceeds

The net proceeds of the initial public offering of the Eckerd Group Common
Stock will be allocated to the Penney Group. We currently plan to use the
proceeds primarily to buy back shares of Penney Group Common Stock in the open
market after the distribution of the remaining equity value of the Eckerd Group
to the holders of Penney Group Common Stock. Any remaining proceeds will be
used for general corporate purposes.

Pending any specific application of such proceeds, the Penney Group intends
to invest the net proceeds of the offering of Eckerd Group Common Stock in
short-term, investment-grade securities. Since the proceeds of the offering are
not expected to be applied until after the distribution of the remaining equity
value of the Eckerd Group to the holders of Penney Group Common Stock, the
actual use of proceeds could vary significantly from the proposed use described
above. The board of directors will determine the actual use of proceeds which
could include any general corporate purpose, based on the best interests of the
Company and its stockholders.

Although we currently have no plans to make an additional sale of Eckerd
Group Common Stock, it is within the sole discretion of the board of directors
to do so.

Reasons for the Tracking Stock Proposal

The tracking stock proposal was adopted by the board of directors of the
Company following its review of various alternatives to enhance stockholder
value and support the Company's strategic objectives. The board of directors
believes that the recent historical price performance of the existing common
stock has failed to adequately reflect the value of the business of the Eckerd
Group. The tracking stock proposal will:

. permit the market to value the Penney Group and the Eckerd Group
separately;

. allow investors to invest in either Penney Group Common Stock or Eckerd
Group Common Stock or both, depending on their investment objectives;

5
<PAGE>

. preserve the financial, strategic and operational benefits the Company
currently receives, and may in the future receive, from operating as a
single enterprise;

. provide the Company with additional and potentially lower cost means for
raising capital and completing acquisitions; and

. provide flexibility to link employee incentive compensation plans with
the different businesses.

Dividend Policy

The Company has paid consecutive quarterly cash dividends on the existing
common stock for over 67 years through the first quarter of 1999. All dividend
decisions are within the sole discretion of the board of directors. The board
of directors will base future dividend decisions primarily on the financial
condition, results of operations and business requirements of each group and
the Company as a whole.

No Dissenters' Rights

Under Delaware law, stockholders will not have appraisal rights in connection
with the tracking stock proposal.

U.S. Federal Income Tax Considerations

We have been advised by Cravath, Swaine & Moore that, for U.S. Federal income
tax purposes, Penney Group Common Stock and Eckerd Group Common Stock will be
treated as stock of the Company and, except for cash received in lieu of
fractional shares in the event of the distribution of Eckerd Group Common Stock
to the holders of Penney Group Common Stock, no gain or loss will be recognized
by you as a result of the tracking stock proposal. However, there are no court
decisions or other authorities that bear directly on the effect of the features
of the Penney Group Common Stock and Eckerd Group Common Stock. In addition,
the Internal Revenue Service has announced that it will not issue advance
rulings on the classification of an instrument with characteristics similar to
those of Penney Group Common Stock and Eckerd Group Common Stock. The Federal
income tax treatment of the tracking stock proposal is therefore subject to
some uncertainty. See "Proposal 1-- The Tracking Stock Proposal; Certain U.S.
Federal Income Tax Considerations."

6
<PAGE>

SUMMARY COMPARISON OF TERMS OF
EXISTING COMMON STOCK WITH TERMS OF PENNEY
GROUP COMMON STOCK AND ECKERD GROUP COMMON STOCK

7
<PAGE>

<TABLE>
<CAPTION>
The Tracking Stock Proposal
----------------------------------------------------------
Existing Penney Group Eckerd Group
Common Stock Common Stock Common Stock
------------ ------------ ------------
<S> <C> <C> <C>
Dividends: The Company has Dividends on the Penney Dividends on the Eckerd
paid consecutive Group Common Stock will be Group Common Stock will be
quarterly cash paid at the sole discretion paid at the sole discretion
dividends on the of the board of directors, of the board of directors
existing common based primarily on the based primarily upon the
stock for over financial condition, results financial condition, results
67 years through of operations and business of operations and business
the first requirements of the Penney requirements of the Eckerd
quarter of 1999. Group and the Company as a Group and the Company as a
whole. Dividends will be whole. Dividends will be
payable out of all funds of payable out of all funds of
the Company legally the Company legally
available for the payment of available for the payment of
dividends. dividends.
Dividends on the The board of directors, The board of directors,
existing common subject to the limitations subject to the limitations
stock are set forth above, may, in its set forth above, may in its
payable at the sole discretion, declare and sole discretion, declare and
sole discretion pay dividends exclusively on pay dividends exclusively on
of the board of the Penney Group Common the Eckerd Group Common
directors and Stock, exclusively on the Stock, exclusively on the
are determined Eckerd Group Common Stock or Penney Group Common Stock or
after on both classes of common on both classes of common
consideration of stock, in equal or unequal stock, in equal or unequal
various factors amounts. amounts.
including
(without
limitation) the
earnings and
financial
condition of the
Company and its
subsidiaries.
Voting Rights: One vote per The Penney Group Common The Eckerd Group Common
share. Stock will have one vote per Stock will initially have
share. of a vote per share. The
number of votes per share
for the Eckerd Group Common
Stock will be adjusted on
the record date for the
first meeting of
stockholders after the five-
year anniversary of the
initial public offering of
the Eckerd Group Common
Stock and on the record date
for the first meeting of
stockholders after each 24-
month anniversary thereafter
based on the relative market
capitalizations of the
Eckerd Group Common Stock
and the Penney Group Common
Stock.
Because each share of Eckerd Because each share of Eckerd
Group Common Stock will have Group Common Stock will have
a variable number of votes a variable number of votes
after the five-year after the five-year
anniversary of the initial anniversary of the initial
public offering of Eckerd public offering of the
Group Common Stock, the Eckerd Group Common Stock,
relative voting power per the relative voting power
share of the Penney Group per share of the Penney
Common Stock and the Eckerd Group Common Stock and the
Group Common Stock will Eckerd Group Common Stock
fluctuate after such fifth will fluctuate after such
anniversary, as described five-year anniversary, as
more fully on page 37. described more fully on page
37.
The holders of Penney Group The holders of Eckerd Group
Common Stock and Eckerd Common Stock and Penney
Group Common Stock will vote Group Common Stock will vote
together as a single class together as a single class
except for certain class except for certain class
votes as provided under votes as provided under
Delaware law or by NYSE Delaware law or by NYSE
rules. rules.
</TABLE>

8
<PAGE>

<TABLE>
<CAPTION>
The Tracking Stock Proposal
----------------------------------------------------------
Existing Penney Group Eckerd Group
Common Stock Common Stock Common Stock
------------ ------------ ------------
<S> <C> <C> <C>
Rights on Disposition: None. If the Company disposes of If the Company disposes of
all or substantially all of all or substantially all of
the properties and assets the properties and assets
attributed to the Penney attributed to the Eckerd
Group (i.e., 80 percent or Group (i.e., 80 percent or
more on a current market more on a current market
value basis), other than in value basis), other than in
a transaction in which the a transaction in which the
Company receives primarily Company receives primarily
equity securities of an equity securities of an
entity engaged or proposing entity engaged or proposing
to engage primarily in a to engage primarily in a
business similar or business similar or
complementary to the complementary to the
business of the Penney business of the Eckerd
Group, the Company must Group, the Company must
either (1) pay a dividend to either (1) pay a dividend to
the holders of Penney Group the holders of Eckerd Group
Common Stock in cash and/or Common Stock in cash and/or
securities or other property securities or other property
having a value equal to the having a value equal to the
net proceeds of such net proceeds of such
disposition, (2) redeem a disposition, (2) redeem a
number of shares of Penney number of shares of Eckerd
Group Common Stock in Group Common Stock in
exchange for cash and/or exchange for cash and/or
other securities having a other securities having a
value equal to the net value equal to the net
proceeds of the disposition proceeds of the disposition
or (3) convert each share of or (3) convert each share of
Penney Group Common Stock Eckerd Group Common Stock
into a number of shares of into a number of shares of
Eckerd Group Common Stock Penney Group Common Stock
equal to 115 percent of the equal to 115 percent of the
ratio of the average market ratio of the average market
value of one share of Penney value of one share of Eckerd
Group Common Stock to the Group Common Stock to the
average market value of one average market value of one
share of Eckerd Group Common share of Penney Group Common
Stock, calculated during the Stock, calculated during the
20-day trading period ending 20-day trading period ending
on the fifth trading day on the fifth trading day
prior to the first public prior to the first public
announcement of such announcement of such
disposition transaction. disposition transaction.
Sales of Less than The proceeds from any The proceeds from any
Substantially All of the disposition of assets that disposition of assets that
Assets of a Group: do not comprise all or do not comprise all or
substantially all of the substantially all of the
properties and assets properties and assets
attributed to the Penney attributed to the Eckerd
Group will be assets Group will be assets
attributed to the Penney attributed to the Eckerd
Group and used for its Group and used for its
benefit, subject to the benefit, subject to the
policies described under policies described under
"Proposal 1--The Tracking "Proposal 1--The Tracking
Stock Proposal--Certain Stock Proposal--Certain
Management and Allocation Management and Allocation
Policies." Policies."
</TABLE>

9
<PAGE>

<TABLE>
<CAPTION>
The Tracking Stock Proposal
----------------------------------------------------------
Existing Penney Group Eckerd Group
Common Stock Common Stock Common Stock
------------ ------------ ------------
<S> <C> <C> <C>
Conversion at Option of None. None. The Company may, at any
Company: time, convert each share of
Eckerd Group Common Stock
into a number of shares of
Penney Group Common Stock
equal to 115 percent of the
ratio of the average market
value of the Eckerd Group
Common Stock to the average
market value of the Penney
Group Common Stock over a
20-day trading period ending
on the fifth trading day
prior to mailing the
conversion notice.
The Company may convert the
Eckerd Group Common Stock
into shares of Penney Group
Common Stock at any time
without any premium if there
are certain adverse U.S.
Federal income tax
consequences, as further
explained on page 42.
The market value of the
Eckerd Group Common Stock
could be influenced by many
factors, including the
results of operations of the
Company and each of the
groups, trading volume,
share issuances and
repurchases and general
economic and market
conditions.
Redemption in Exchange None. None. Although we have no present
for Stock of Subsidiary: intention to do so, our
board of directors may in
the future decide to spin-
off the Eckerd Group. To do
so, the Company may redeem
the Eckerd Group Common
Stock for a number of shares
of one or more wholly owned
subsidiaries of the Company
then owning all of the
assets and liabilities of
Eckerd Group.
Liquidation: Holders of Holders of Penney Group Holders of Eckerd Group
existing common Common Stock will be Common Stock will be
stock are entitled to a portion of the entitled to a portion of the
entitled to assets remaining for assets remaining for
receive the net distribution to holders of distribution to holders of
assets of the common stock on a per share common stock on a per share
Company, if any, basis in proportion to the basis in proportion to the
remaining for liquidation units per share liquidation units per share
distribution to of Penney Group Common of Eckerd Group Common
holders of Stock. Each share of Penney Stock. Each share of Eckerd
existing common Group Common Stock will have Group Common Stock will have
stock in equal one liquidation unit. of a liquidation unit.
amounts per
share.
</TABLE>

10
<PAGE>

<TABLE>
<CAPTION>
The Tracking Stock Proposal
----------------------------------------------------------
Existing Penney Group Eckerd Group
Common Stock Common Stock Common Stock
------------ ------------ ------------
<S> <C> <C> <C>
Certain Management and The Company has established The Company has established
Allocation Policies: guidelines for allocation of guidelines for allocation of
corporate costs and charges corporate costs and charges
between the groups, between the groups,
including: (1) allocation of including: (1) allocation of
indebtedness of the Company, indebtedness of the Company,
(2) accounting for transfers (2) accounting for transfers
of cash or property from one of cash or property from one
group to the other, (3) the group to the other, (3) the
allocation of shared allocation of shared
services and corporate services and corporate
general and administrative general and administrative
costs, (4) allocation of costs, (4) allocation of
retirement plan costs and retirement plan costs and
(5) the allocation of taxes (5) the allocation of taxes
and tax benefits. The and tax benefits. The
Company has also established Company has also established
guidelines to handle certain guidelines to handle certain
corporate opportunity and corporate opportunity and
fiduciary duty questions. fiduciary duty questions.
The board of directors or The board of directors or
management may modify or management may modify or
rescind these policies at rescind these policies at
any time, or may adopt any time, or may adopt
additional policies, at any additional policies, at any
time, in its or their sole time, in its or their sole
discretion, without discretion, without
stockholder approval. These stockholder approval. These
policies are described more policies are described more
fully on pages 29 to 32. fully on pages 29 to 32.
Stockholders of One Holders of Penney Group Holders of Eckerd Group
Company: Common Stock will continue Common Stock will continue
to be subject to the risks to be subject to the risks
associated with an associated with an
investment in the Company investment in the Company
and all of its businesses, and all of its businesses,
assets and liabilities. assets and liabilities.
Financial effects arising Financial effects arising
from the Eckerd Group that from the Penney Group that
affect the Company's overall affect the Company's overall
results of operations or results of operations or
financial condition could, financial condition could,
if significant, affect the if significant, affect the
results of operations or results of operations or
financial position of the financial position of the
Penney Group or the market Eckerd Group or the market
price of the Penney Group price of the Eckerd Group
Common Stock. Common Stock.
Any net losses of the Penney Any net losses of the Eckerd
Group or the Eckerd Group, Group or the Penney Group,
and dividends or and dividends or
distributions on, or distributions on, or
repurchases of, Penney Group repurchases of, Eckerd Group
Common Stock, Eckerd Group Common Stock, Penney Group
Common Stock or any Common Stock or any
preferred stock, will reduce preferred stock, will reduce
the assets of the Company the assets of the Company
legally available for legally available for
payment of future dividends payment of future dividends
on the Penney Group Common on the Eckerd Group Common
Stock and the Eckerd Group Stock and the Penney Group
Common Stock. Common Stock.
</TABLE>

11
<PAGE>

Related Proposals

At the special meeting, you will also be asked to consider and vote in favor
of two related proposals:

. amendment of the Restated Certificate of Incorporation, as amended, to
increase the number of shares of common stock authorized for issuance
from 1,250,000,000 shares to 1,750,000,000 shares in order to allow the
Company to address any future capital needs that may arise (Proposal 2);
and

. amendment of the Company's 1997 Equity Compensation Plan to authorize
the granting of awards in either Penney Group Common Stock or Eckerd
Group Common Stock, or both, and an increase in the number of shares of
common stock to be reserved for issuance under the plan (Proposal 3).

12
<PAGE>

The Company--Summary Consolidated Financial Data

The summary consolidated financial data and the fully distributed summary
consolidated financial data presented below as of May 1, 1999, and for the
three months ended May 1, 1999 and May 2, 1998 were derived from the Company's
unaudited interim consolidated financial statements set forth in Annex V
hereto, which include all adjustments, consisting of normal recurring accruals,
that the Company considers necessary to present fairly such data for an interim
period. Operating results for the three months ended May 1, 1999 are not
necessarily indicative of the results that may be expected for the full year.
The summary consolidated financial data presented below as of January 30, 1999,
and for each of the years in the three-year period ended January 30, 1999, were
derived from the Company's consolidated financial statements set forth in Annex
V hereto, which have been audited by KPMG LLP, independent auditors. The fully
distributed consolidated financial data presented below for the 52 weeks ended
January 30, 1999 was derived from the Company's consolidated financial
statements set forth in Annex V hereto. The summary consolidated financial data
and fully distributed summary consolidated financial data should be read in
conjunction with the Financial Information of J.C. Penney Company, Inc. in
Annex V of this document.

<TABLE>
<CAPTION>
Thirteen Weeks Ended Fiscal Year Fully Distributed(1)
-------------------- --------------------------- --------------------------
Thirteen Weeks
May 1, May 2, 52 Weeks 53 Weeks 52 Weeks Ended Fiscal Year
1999 1998 1998 1997 1996 May 1, 1999 1998
---------- ---------- -------- -------- -------- -------------- -----------
($ in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Results of Operations
Sales and revenue....... $ 7,569 $ 7,052 $30,678 $30,546 $23,471 $ 7,569 $30,678
Operating profit(2)..... 350 406 1,500 1,929 1,468 347 1,490
Other charges, net(3)... -- -- (22) 379 303 -- (22)
Income before income
taxes.................. 267 284 955 925 909 191 938
Net income.............. 167 174 594 566 565 121 583
Balance Sheet Data
Total assets............ $ 23,788 $ 22,810 $23,638 $23,493 $22,088 $20,510 --
Total debt.............. 9,366 8,932 9,505 8,852 8,765 6,088 --
Total stockholders'
equity................. 7,549 7,445 7,169 7,357 5,952 7,549 --
Per Common Share
Net income--diluted..... $ 0.61 $ 0.64 $ 2.19 $ 2.10 $ 2.25 $ -- $ --
Dividends............... 0.545 0.545 2.18 2.14 2.08 -- --
Equity.................. 27.34 27.74 26.99 27.57 25.67 -- --
</TABLE>
- --------
(1) Assumes the outsourcing of the management of the Penney Group's proprietary
credit card business and the related sale of the underlying receivables,
the implementation of the tracking stock proposal, the initial public
offering of shares of Eckerd Group Common Stock representing approximately
20 percent of the equity value of the Eckerd Group, the distribution of the
remaining equity value of the Eckerd Group to holders of Penney Group
Common Stock approximately six to twelve months after the initial public
offering, and the use of proceeds from the initial public offering of
Eckerd Group Common Stock to purchase shares of Penney Group Common Stock
in the open market.
(2) Operating profit excludes the effects of real estate and other, net
interest expense and credit operations, acquisition amortization, and other
charges, net.
(3) Other charges, net, consist principally of business acquisition and
integration costs associated with the Eckerd acquisition, FAS 121
impairment write-downs for both department store and drugstore facilities,
the present value of future lease obligations for such facilities, and
costs associated with early retirement and reduction in force programs for
department stores and catalog.

13
<PAGE>

The Penney Group--Summary Financial Data

The summary financial data and the fully distributed summary financial data
presented below as of May 1, 1999, and for the three months ended May 1, 1999
and May 2, 1998 were derived from the Penney Group's unaudited interim
financial statements set forth in Annex VI hereto, which include all
adjustments, consisting of normal recurring accruals, that the Company
considers necessary to present fairly such data for an interim period.
Operating results for the three months ended May 1, 1999 are not necessarily
indicative of the results that may be expected for the full year. The summary
financial data presented below as of January 30, 1999, and for each of the
years in the three-year period ended January 30, 1999, were derived from the
Penney Group's financial statements set forth in Annex VI hereto, which have
been audited by KPMG LLP, independent auditors. As discussed in the report of
KPMG LLP, the Penney Group has accounted for its interest in the Eckerd Group
in a manner similar to the equity method of accounting. Generally accepted
accounting principles require that the Eckerd Group be consolidated with the
Penney Group. The fully distributed summary financial data presented below for
the 52 weeks ended January 30, 1999 was derived from the Penney Group's
consolidated financial statements set forth in Annex VI hereto and is not
audited. The summary financial data and the fully distributed summary financial
data should be read in conjunction with the Financial Information of the Penney
Group in Annex VI as well as the Financial Information of J.C. Penney Company,
Inc. in Annex V of this document.

<TABLE>
<CAPTION>
Fully
Distributed(1)
----------------
Thirteen
Weeks Fiscal
Thirteen Weeks Ended Fiscal Year Ended Year
--------------------- --------------------------- -------- -------
May 1, May 2, 52 Weeks 53 Weeks 52 Weeks May 1,
1999 1998 1998 1997 1996 1999 1998
---------- ---------- -------- -------- -------- -------- -------
($ in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Results of Operations
Sales and revenue....... $ 4,522 $ 4,488 $20,353 $20,883 $20,324 $ 4,522 $20,353
Operating profit(2)..... 221 287 1,246 1,582 1,369 218 1,236
Other charges, net(3)... -- -- (22) 276 11 -- (22)
Income before income
taxes and retained
interest in the Eckerd
Group.................. 203 228 924 907 1,137 127 907
Income before retained
interest in the Eckerd
Group.................. 136 148 597 576 710
Net income(4)........... 167 174 594 566 565 90 586
EBITDA(5)............... 425 452 1,791 2,036 1,843 300 1,577
Balance Sheet Data
Total assets(4)......... $ 20,598 $ 20,094 $20,677 $20,580 $19,095 $13,357 --
Allocated portion of
total debt............. 7,781 7,407 7,980 7,327 7,240 4,503 $ --
Total group equity(4)... 7,549 7,445 7,169 7,357 5,952 3,586 --
Net income per share
Basic................. [ ] [ ]
Diluted............... [ ] [ ]
</TABLE>
- --------
(1) Assumes the outsourcing of the management of the Penney Group's proprietary
credit card business and the related sale of the underlying receivables,
implementation of the tracking stock proposal, the initial public offering
of shares of Eckerd Group Common Stock representing approximately 20
percent of the equity value of the Eckerd Group, the distribution of the
remaining equity value of the Eckerd Group to holders of Penney Group
Common Stock approximately six to twelve months after the initial public
offering, and the use of proceeds from the initial public offering of
Eckerd Group Common Stock to purchase shares of Penney Group Common Stock
in the open market.
(2) Operating profit excludes the effects of real estate, other, net interest
expense and credit operations, and other charges, net.
(3) Other charges, net consist principally of costs associated with the
voluntary early retirement and reduction in force programs, FAS 121
impairment write-downs for underperforming stores, and the present value of
future lease obligations for such stores.
(4) Includes 100 percent retained interest in the Eckerd Group.
(5) Earnings before interest, income taxes, depreciation and amortization and
other charges, net. Penney Group EBITDA excludes any retained interest in
the Eckerd Group. EBITDA is provided as an alternative assessment of
operating performance and is not intended to be a substitute for GAAP
measurements. Calculations may vary for other companies.

14
<PAGE>

The Eckerd Group--Summary Financial Data

The summary financial data and the fully distributed summary financial data
presented below as of May 1, 1999, and for the three months ended May 1, 1999
and May 2, 1998 were derived from the Eckerd Group's unaudited interim
financial statements set forth in Annex VII hereto, which include all
adjustments, consisting of normal recurring accruals, that the Company
considers necessary to present fairly such data for an interim period.
Operating results for the three months ended May 1, 1999 are not necessarily
indicative of the results that may be expected for the full year. The summary
financial data presented below as of January 30, 1999, and for each of the
years in the three-year period ended January 30, 1999, were derived from the
Eckerd Group's financial statements set forth in Annex VII hereto, which have
been audited by KPMG LLP, independent auditors. The fully distributed summary
financial data presented below for the 52 weeks ended January 30, 1999 was
derived from the Eckerd Group's financial statements set forth in Annex VII
hereto and is not audited. The summary financial data and the fully distributed
summary financial data should be read in conjunction with the Financial
Information of the Eckerd Group in Annex VII as well as the Financial
Information of J.C. Penney Company, Inc. in Annex V of this document.

<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------------
52 Weeks
Thirteen Weeks Ended 1996
-------------------- ----------------------
May 1, May 2, 52 Weeks 53 Weeks As
1999 1998 1998 1997 Adjusted(1) Historical
---------- ---------- -------- -------- ----------- ----------
($ in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Results of Operations
Retail sales, net....... $ 3,047 $ 2,564 $10,325 $9,663 $8,526 $3,147
Operating profit(2)..... 129 119 254 347 306 99
Other charges, net(3)... -- -- -- 103 292 292
Income/(loss) before
income taxes........... 64 56 31 18 (207) (228)
Net income/(loss)....... 31 26 (3) (10) (151) (145)
EBITDA(4)............... 169 149 506 504 432 171
Balance Sheet Data
Total assets............ $ 7,153 $ 6,269 $6,478 $6,181 $ -- $4,387
Allocated portion of
total debt............. 1,585 1,525 1,525 1,525 -- 1,525
Total Group equity...... 3,963 3,553 3,517 3,268 -- 1,394
Net income/(loss) per share (Fully
Distributed)(5)
Basic................. [ ] [ ]
Diluted............... [ ] [ ]
</TABLE>
- --------
(1) Reflects the 1996 drugstore acquisitions as if they had occurred at the
beginning of the year.
(2) Operating profit excludes interest expense, acquisition amortization, and
other charges, net. Operating profit includes charges for inventory
integration losses and other integration charges of $114 million, $45
million and $31 million in 1998, 1997 and 1996, respectively.
(3) Other charges, net, consist principally of business acquisition and
integration costs associated with the Eckerd acquisition and include FAS
121 impairment write-downs, the present value of future lease obligations
for closed stores, systems and store integration costs, and severance and
outplacement costs for certain facilities, offset by a gain on the sale of
the institutional drugstore business.
(4) Earnings before interest, income taxes, depreciation and amortization,
other charges, net, and other integration related charges of $114 million
in 1998, $45 million in 1997, and $31 million in 1996. EBITDA is provided
as an alternative assessment of operating performance and is not intended
to be a substitute for GAAP measurements. Calculations may vary for other
companies.
(5) The calculation of earnings or loss per share assumes implementation of the
tracking stock proposal, the initial public offering of shares of Eckerd
Group Common Stock representing approximately 20 percent of the equity
value of the Eckerd Group and the distribution of the remaining equity
value of the Eckerd Group to holders of Penney Group Common Stock
approximately six to twelve months after the initial public offering.
Diluted net income per share (on a fully distributed basis) includes the
effects of the exercise of outstanding stock options and the conversion of
outstanding preferred stock.

15
<PAGE>

The Eckerd Group--Summary Operating Data

The following table summarizes the number of drugstores operated by the
Eckerd Group and the sales on an aggregate and per store basis for the thirteen
weeks ended May 1, 1999 and each of the last three fiscal years.

<TABLE>
<CAPTION>
Thirteen Weeks Ended Fiscal Years
May 1, --------------------------
1999 1998 1997 1996
-------------------- ------- ------ ------
<S> <C> <C> <C> <C>
Number of Eckerd
drugstores at beginning
of period................ 2,756 2,778 2,699 645
Stores opened or
acquired(1).............. 187 (2) 256 399 (3) 2,067 (4)
Stores sold or closed(1).. (54) (278) (320) (13)
------ ------- ------ ------
Number of Eckerd
drugstores at end
of period................ 2,889 2,756 2,778 2,699
====== ======= ====== ======
Number with Express Photo
centers.................. 947 906 744 577
====== ======= ====== ======
Retail sales, net (in
millions)................ $3,047 $10,325 $9,663 $3,147
Average annual sales per
Eckerd drugstore
(in millions)............ n/a $ 3,455 $3,184 $2,466
</TABLE>
- --------
(1) Includes relocations.
(2) Includes 141 acquired Genovese stores.
(3) Includes 113 acquired RiteAid/Revco stores.
(4) Includes the stores acquired in the Eckerd and Fay's acquisitions.

16
<PAGE>

RISK FACTORS

Financial effects on one group could adversely affect the other group

Holders of Penney Group Common Stock and Eckerd Group Common Stock will all
be common stockholders of the same company. Penney Group and Eckerd Group will
not be separate legal entities. As a result, stockholders will continue to be
subject to all of the risks of an investment in the Company and all of our
businesses, assets and liabilities. The reclassification of the existing
common stock as the Penney Group Common Stock, the issuance of the Eckerd
Group Common Stock and the allocation of assets and liabilities and
stockholders' equity between the Penney Group and the Eckerd Group will not
result in a distribution or spin-off to stockholders of any of our assets or
liabilities and will not affect ownership of our assets or responsibility for
our liabilities or those of our subsidiaries. As a result, the implementation
of the tracking stock proposal will not affect the rights of the holders of
any debt of the Company or its subsidiaries. The assets we attribute to one
group will be subject to the liabilities of the other group, whether such
liabilities arise from lawsuits, contracts or indebtedness that we attribute
to the other group. If we are unable to satisfy one group's liabilities out of
the assets we attribute to it, we may be required to satisfy those liabilities
with assets we have attributed to the other group. Further, holders of Penney
Group Common Stock and Eckerd Group Common Stock will only have the rights
specified in the Restated Certificate of Incorporation, as amended, and will
not have any legal rights related to specific assets of either group and in
any liquidation will receive a fixed share of the net assets of the Company
which may not reflect the actual trading prices of the respective groups at
such time.

Financial effects on one group that affect our consolidated results of
operations or financial condition could, if significant, affect the results of
operations or financial condition of the other group and the market price of
the tracking stock relating to the other group. In addition, net losses of
either group and dividends and distributions on, or repurchases of, either
class of tracking stock or repurchases of preferred stock at a price per share
greater than par value will reduce the funds we can pay on each class of
tracking stock under Delaware law. For these reasons, you should read our
consolidated financial information in addition to the financial information we
provide for each group.

Holders of Penney Group Common Stock or Eckerd Group Common Stock will have
stockholder rights specific to their group only in limited circumstances

Holders of Penney Group Common Stock or Eckerd Group Common Stock generally
will not have stockholder rights specific to their corresponding groups.
Instead, holders will have customary stockholder rights relating to the
Company as a whole. For example, holders of Penney Group Common Stock and
Eckerd Group Common Stock would vote as a single class to approve a
disposition of all or substantially all of the assets of the Company. Holders
of either Penney Group Common Stock or Eckerd Group Common Stock will have
only the following rights with respect to their particular group:

. an opportunity to receive dividends if any, when, as, and if declared by
the board of directors for their group;

. mandatory dividend, redemption or conversion upon the disposition of all
or substantially all of the assets of their group as set forth in the
Restated Certificate of Incorporation, as amended; and

. a right to vote separately as a class on certain matters as may be
required under Delaware law and NYSE rules.

Limits exist on voting power of tracking stock

Except for certain limited matters on which a separate class vote may be
required, the Penney Group Common Stock and the Eckerd Group Common Stock will
vote together as a single class on all matters requiring a stockholder vote.
Certain matters on which the Penney Group Common Stock and the Eckerd Group
Common Stock will vote together may involve an apparent or real divergence of
interest between the holders of each class of tracking stock in the aggregate.
Initially, the aggregate voting power of all outstanding shares of Penney
Group

17
<PAGE>

Common Stock will represent a majority of the outstanding voting power of all
outstanding shares of common stock. To the extent that matters come before the
stockholders on which the stockholders of Penney Group Common Stock and the
stockholders of Eckerd Group Common Stock have a divergence of interests, the
stockholders of Penney Group Common Stock, to the extent they vote in a
similar manner, will initially be able to control such vote. These matters may
include mergers or other extraordinary transactions. In addition, the issuance
or repurchase of shares of either class of common stock could cause
fluctuations in the relative voting power of the groups.

After the five-year anniversary of the initial public offering of the Eckerd
Group Common Stock, the relative voting power of the Penney Group Common Stock
and the Eckerd Group Common Stock will be periodically adjusted based on the
relative market values of the two classes of stock. As a result, holders of
shares of only one of the two classes of common stock cannot ensure that their
voting power will be sufficient to protect their interests where the holders
of the Penney Group Common Stock and the Eckerd Group Common Stock vote
together as a single class.

In circumstances where a separate class vote is required, the class of
tracking stock with less than majority voting power can block action

If Delaware law, New York Stock Exchange rules or the board of directors
requires a separate vote on a matter by the holders of either the Penney Group
Common Stock or the Eckerd Group Common Stock, those holders could prevent
approval of the matter--even if the holders of a majority of the total number
of votes cast or entitled to be cast, voting together as a class, were to vote
in favor of it.

Holders of either class of tracking stock may be adversely affected by a
conversion of the Eckerd Group Common Stock

At any time, the board of directors, in its sole discretion and without
stockholder approval, could determine to convert shares of Eckerd Group Common
Stock into shares of Penney Group Common Stock, including a conversion at a
time when either or both classes of common stock may be considered to be
overvalued or undervalued. Any conversion at a premium would dilute the
interests in the Company of the holders of the Penney Group Common Stock. Any
conversion would also preclude holders of both classes of tracking stock from
retaining their investment in a security that is intended to reflect
separately the performance of the relevant group. It would also give holders
of shares of the class of tracking stock converted a greater or lesser premium
than any premium that might be paid by a third-party buyer of all or
substantially all of the assets of the group whose stock is converted.

Stockholders may not have any remedies for breach of fiduciary duties if any
action by directors and officers has a disadvantageous effect on either class
of tracking stock

Stockholders may not have any remedies if any action or decision of the
board of directors or officers of the Company has a disadvantageous effect on
the Penney Group Common Stock or the Eckerd Group Common Stock compared to the
other class of common stock.

Although the Delaware Supreme Court has not ruled on the issue, recent cases
in the Delaware Court of Chancery involving tracking stocks have held that
decisions by directors or officers involving differing treatment of tracking
stocks are judged under the business judgment rule unless self-interest is
shown. One of these cases is currently on appeal. The business judgment rule
provides that, absent abuse of discretion, a good faith business decision made
by a disinterested and adequately informed board of directors, committee of
the board of directors or officer with respect to any matter having different
effects on holders of Penney Group Common Stock and holders of Eckerd Group
Common Stock would be a defense to any challenge to such determination made by
or on behalf of the holders of either class of tracking stock. Because of the
business judgment rule, holders of one

18
<PAGE>

group's stock who are disadvantaged by an action of our directors or officers
may not be able to successfully make claims that a decision involving
different treatment of the Penney Group Common Stock or Eckerd Group Common
Stock was wrongful, absent a showing of self-interest by a majority of the
directors.

The board of directors may pay more or less dividends on one group's tracking
stock than if that group was a separate company

Subject to the limitations referred to below, the board of directors has the
authority to declare and pay dividends on the Penney Group Common Stock and
the Eckerd Group Common Stock in any amount. The Board of Directors could, in
its sole discretion, declare and pay dividends exclusively on the Penney Group
Common Stock, exclusively on the Eckerd Group Common Stock, or on both, in
equal or unequal amounts. The performance of one group may cause the board of
directors to pay more or less dividends on the tracking stock relating to the
other group than if that other group was a stand-alone corporation. The board
of directors will not be required to consider the amount of dividends
previously declared on each class, the respective voting or liquidation rights
of each class or any other factor. In addition, net losses of either group,
and any dividends or distributions on, or repurchases of, either class of
common stock, will reduce the assets of the Company legally available for
dividends on both classes of common stock.

Proceeds of mergers or consolidations may be allocated unfavorably

Because the Restated Certificate of Incorporation, as amended, does not
specify how consideration to be received in a merger or consolidation
involving JCPenney will be allocated between the holders of Penney Group
Common Stock and the holders of Eckerd Group Common Stock, the board of
directors will make the determination. That determination could treat the
holders of Penney Group Common Stock and holders of Eckerd Group Common Stock
differently.

Allocation of corporate opportunities could favor one group over the other

The board of directors may be required to allocate corporate opportunities
between the groups. In some cases, the board of directors could determine that
a corporate opportunity, such as a business that we are acquiring, should be
shared by the groups. These decisions could favor one group at the expense of
the other. For additional information on the factors affecting these
decisions, see "Proposal 1--The Tracking Stock Proposal--Certain Management
and Allocation Policies."

The board of directors may change our management and allocation policies
without stockholder approval to the detriment of the other group

The board of directors may modify or rescind our policies with respect to
the allocation of shared services expenses, corporate general and
administrative expenses, taxes, debt, interest, retirement benefit costs, and
other matters, or may adopt additional policies in its sole discretion without
stockholder approval. A decision to modify or rescind these policies, or adopt
additional policies, could have different effects on holders of Penney Group
Common Stock and holders of Eckerd Group Common Stock or could adversely
affect one class of stockholders compared to the other class.

Groups may compete with each other to the detriment of their businesses

The creation of two separate classes of common stock will not prevent the
groups from competing with each other. Any competition between the groups
could be detrimental to the businesses of either or both of the groups.

Either group may finance the other group on terms unfavorable to one of the
groups

We anticipate that we may transfer cash and potentially other property
between groups to finance their business activities. The board of directors
has not adopted specific criteria to determine whether a particular

19
<PAGE>

transfer of cash or property from one group to the other will be accounted for
as a short-term or long-term loan or a sale of assets. These determinations,
including the terms of any transactions accounted for as a loan, could be
unfavorable to either group. For example, we cannot assure you that any terms
that we fix for debt will approximate those that could have been obtained by
the borrowing group if it were a stand-alone company. For additional
information on the financing of the groups' operations, see "Proposal 1--The
Tracking Stock Proposal--Certain Management and Allocation Policies."

Holders of one group's tracking stock may receive less consideration upon a
sale of assets than if the group were a separate company

The Restated Certificate of Incorporation, as amended, provides that if we
dispose of all or substantially all of the assets of either group, we must,
subject to certain exceptions:

(1) distribute to holders of that group's tracking stock an amount equal
to the net proceeds of the disposition;

(2) redeem the outstanding shares of that group with the net proceeds of
the disposition; or

(3) convert each outstanding share of that group's common stock into a
number of shares of the other group's common stock at a 15 percent premium
over the price of that group's common stock prior to the announcement of
the disposition.

If the group whose assets are disposed of were a separate, independent
company and its shares were acquired by another person, certain costs of that
disposition, including corporate level taxes, might not be payable in
connection with that acquisition. As a result, stockholders of the separate,
independent company might receive a greater amount than the net proceeds that
would be received by holders of the group's tracking stock. In addition, we
cannot assure you that the net proceeds per share of that group's tracking
stock will be equal to or more than the market value per share of the tracking
stock prior to or after announcement of a disposition.

The board of directors will decide, in its sole discretion, how to proceed
and is not required to select the option that would result in the highest
value to holders of Penney Group Common Stock or Eckerd Group Common Stock. In
the event of a conversion upon the disposition of one of the group's assets,
the conversion premium may not fully reflect the value of the net proceeds of
the disposition. In making its decision, the board of directors will be
governed by its general fiduciary duties as described above.

Market value of the stock received under the tracking stock proposal may be
less than the market value of the existing common stock

The market prices of the Penney Group Common Stock and the Eckerd Group
Common Stock will be determined in the trading markets and will be influenced
by many factors, including:

. the respective financial results of the Penney Group and the Eckerd
Group;

. the consolidated financial results of the Company;

. investor's expectations for the Penney Group, the Eckerd Group and the
Company as a whole;

. trading volume;

. share issuances and repurchases; and

. general economic conditions.

We cannot assure you that the combined market values of the Penney Group
Common Stock and the Eckerd Group Common Stock will equal or exceed the market
value of the existing common stock.

In addition, we cannot predict the impact that certain terms of the tracking
stock proposal will have on the market price of the two classes of common
stock, such as the mandatory dividend, redemption or conversion provision upon
the sale of all or substantially all assets of the Company, or the optional
conversion provision.

We also cannot assure you that the market values of the Penney Group Common
Stock and the Eckerd Group Common Stock will in fact reflect the performance
of the Penney Group and the Eckerd Group, as we intend. In addition, although
we currently intend to distribute (via a dividend) the remaining equity value
of the Eckerd Group not issued in the initial public offering to holders of
Penney Group Common Stock, we are not required to do so.

20
<PAGE>

Provisions governing tracking stock could discourage a change of control and
the payment of a premium for shares

The existence of two classes of tracking stock could present complexities
and could pose obstacles, financial or otherwise, to an acquiring person. In
addition, provisions of Delaware law, the Restated Certificate of
Incorporation, as amended, and the bylaws may also deter hostile takeover
attempts. For additional information on these provisions, see "Proposal 1--The
Tracking Stock Proposal--Anti-takeover Considerations." If the Penney Group
and the Eckerd Group were separate independent companies, any person
interested in acquiring either group without negotiating with management could
seek control of that entity by obtaining control of its outstanding voting
stock by means of a tender offer or proxy contest. Although we intend the
Penney Group Common Stock and the Eckerd Group Common Stock to reflect the
separate performance of the group to which such stock relates, a person
interested in acquiring only one group without negotiation with the Company's
management would still be required to seek control of the voting power
represented by all the outstanding stock of the Company, including the class
of common stock relating to the other group.

The IRS could assert that the receipt of tracking stock is taxable

We have been advised by our counsel that no income, gain or loss will be
recognized by you for U.S. Federal income tax purposes as a result of the
tracking stock proposal, unless you receive cash in lieu of a fractional share
in the event of the distribution of Eckerd Group Common Stock to the holders
of Penney Group Common Stock. However, the IRS could disagree. There are no
court decisions or other authorities bearing directly on the effect of the
features of the Penney Group Common Stock and the Eckerd Group Common Stock.
In addition, the IRS has announced that it will not issue rulings on the
characterization of stock with characteristics similar to the Penney Group
Common Stock and the Eckerd Group Common Stock. It is possible, therefore,
that the IRS could successfully assert that the receipt of the Penney Group
Common Stock as well as the subsequent conversion of one tracking stock into
the other could be taxable to you and to us as ordinary income.

Recent Clinton Administration proposal, if enacted, could result in taxation
on issuances of tracking stock

A recent proposal by the Clinton Administration would impose a corporate
level tax on the issuance of stock similar to the Penney Group Common Stock or
the Eckerd Group Common Stock. If this proposal is enacted, we could be
subject to tax on an issuance of Penney Group Common Stock or Eckerd Group
Common Stock after the date of enactment. If our stockholders approve the
tracking stock proposal, the Board of Directors currently intends to implement
the proposal, subject to, among other things, further legislative or
administrative developments relating to the Clinton Administration tax
proposal.

Under the Restated Certificate of Incorporation, as amended, we may convert
the Penney Group Common Stock into the Eckerd Group Common Stock without any
premium if there are adverse U.S. Federal income tax law developments. The
proposal of the Clinton Administration would be such an adverse development if
it is enacted.

21
<PAGE>

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS

Many of the statements included in this proxy statement, including those
under the captions "Proxy Statement Summary--The Tracking Stock Proposal,"
"Risk Factors," "Eckerd Group Business Description," "Penney Group Business
Description," "J.C. Penney Company, Inc.--Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Penney Group--Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Eckerd Group--Management's Discussion and Analysis of Financial Condition and
Results of Operations" are forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements can be
identified by the use of forward-looking terms, such as "may," "will,"
"project," "estimate," "anticipate," "believe," "expect," "continue,"
"potential," "opportunity," the negative of those terms, other variations of
those terms or comparable terminology or expressions.

All forward-looking statements are inherently uncertain as they are based on
various expectations and assumptions concerning future events and they are
subject to numerous known and unknown risks and uncertainties. The Private
Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-
looking statements.

In order to comply with the terms of the safe harbor, we note that a variety
of the risks and uncertainties that we discuss in detail under "Risk Factors"
could cause our actual results and experience to differ materially from those
expected. You are cautioned not to place undue reliance on forward-looking
statements in this proxy statement, which speak only as of the date of this
proxy statement.

22
<PAGE>

GENERAL

Where You Can Find More Information

We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for
further information about the public information room.

The SEC allows us to "incorporate by reference" the information we file with
it, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is an
important part of this proxy statement, and information that we file later
with the SEC will automatically update and supersede this information.

We incorporate by reference our documents listed below and any future
filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until the special meeting:

. Annual Report of the Company on Form 10-K for the fiscal year ended
January 30, 1999;

. Quarterly Report of the Company on Form 10-Q for the quarterly period
ended May 1, 1999;

. Annual Report of J. C. Penney Funding Corporation on Form 10-K for the
fiscal year ended January 30, 1999;

. Quarterly report of J. C. Penney Funding Corporation on Form 10-Q for
the quarterly period ended May 1, 1999; and

. Current Reports of the Company on Form 8-K dated March 1, 1999 and March
10, 1999.

You should rely only on the information incorporated by reference or
provided in this proxy statement. We have not authorized anyone else to
provide you with different information. You should not assume that the
information in this proxy statement is accurate as of any date other than the
date on the front of this document.

Information About the Special Meeting and Voting

Date, Time and Place of Meeting

We are providing this proxy statement to you in connection with the
solicitation of proxies by our board of directors for use at the special
meeting. The special meeting will be held on , 1999, at 10:00 A.M., local
time, at our home office at 6501 Legacy Drive, Plano, Texas 75024-3698. This
proxy statement is first being mailed to our stockholders on or about ,
1999.

Record Date

We have established , 1999 as the record date for the special meeting.
Only holders of record of shares of our outstanding stock at the close of
business on this date will be eligible to vote at the special meeting.

Proposals to be Considered at the Meeting

You will be asked to consider and vote on the following proposals:

. Proposal 1: Amendment of the Restated Certificate of Incorporation, as
amended, to provide for two classes of common stock of the Company,
intended to track the separate performances of the department store,
catalog and direct marketing business of the Company (the Penney Group)
and the drugstore business of the Company (the Eckerd Group).

23
<PAGE>

. Proposal 3: Amendment of the 1997 Equity Compensation Plan in connection
with the creation of the tracking stock.

The favorable vote of the holders of a majority of the voting power of the
outstanding stock of the Company is required to approve each proposal. If
Proposal 1 is adopted, we will, subject to market and other conditions,
implement it whether or not Proposals 2 or 3 are approved; however, the
approval of Proposal 1 is necessary before we will implement Proposals 2 or 3.

We do not expect that any other matter will be brought before the special
meeting. If, however, other matters are properly presented, the individuals
named on your proxy card will vote in accordance with their judgment with
respect to those matters.

Vote Required to Approve the Proposals

Holders of outstanding stock at the close of business on , 1999, the
record date, are entitled to vote. As of the record date, we had issued and
outstanding shares of existing common stock and shares of Series B
ESOP Convertible Preferred Stock, which has an existing common stock voting
equivalent of 20 votes per share for a combined total voting equivalent of
shares (referred to in this proxy statement as the "voting stock"). Shares of
stock held in our treasury will not be entitled to vote or counted in
determining the number of outstanding shares.

The approval of each proposal will require the favorable vote of the holders
of a majority of the voting stock. As a result, abstentions and broker non-
votes on the proposals will have the same effect as negative votes. Broker
non-votes occur when a broker returns a proxy but does not have authority to
vote on a particular proposal.

Quorum

In order to carry on the business of the special meeting, we must have a
quorum. This means a majority of the votes eligible to be cast by holders of
our voting stock must be represented in person or by proxy at the special
meeting. Abstentions and broker non-votes will count for quorum purposes.

Procedures for Voting by Proxy

A proxy card is enclosed for your use. To vote without attending the special
meeting in person, you should complete, sign, date and return the proxy card
in the accompanying envelope, which is postage-paid in the United States. In
addition, you may vote by telephone by following the instructions on the
enclosed proxy card.

If you properly fill in your proxy card and send it to us in time to vote
(or vote by telephone using the instructions on the enclosed proxy card), your
shares will be voted as you have directed. If you sign the proxy card but do
not make specific choices, the individuals named on your proxy card will vote
your shares in favor of approval and adoption of each proposal. If you mark
"abstain" on your proxy card, your shares will be counted as present for
purposes of determining the presence of a quorum. If necessary, unless you
have indicated on your proxy card that you wish to vote against either or both
the proposals, the individuals named on your proxy card may vote in favor of a
proposal to adjourn the special meeting to a later date in order to solicit
and obtain sufficient votes for either of the proposals.

If you have completed and returned a proxy card, you can still vote in
person at the special meeting. You may revoke your proxy before it is voted
by:

. submitting a new proxy card with a later date;

. voting in person at the special meeting; or

. filing with our Company or with our transfer agent a written revocation
of proxy.

24
<PAGE>

Confidential Voting

Because we feel that it is in the best interest of our stockholders, we have
adopted a policy that all proxy cards, telephone voting, and vote tabulation
which identify the particular vote of a stockholder are confidential. The
identity and vote of any stockholder will not be disclosed to the Company, the
board of directors, officers, employees, or any third party except in the
limited circumstances described in the next sentence. The identity and vote of
a stockholder may be disclosed (1) to certify election results, (2) to meet
certain legal requirements and to assert or defend claims for or against the
Company, (3) in the event of a proxy solicitation based on an opposition proxy
statement or (4) if a stockholder makes a written comment on the proxy card.

COMMON STOCK PRICE RANGE

The following table sets forth, for the fiscal years indicated, the high and
low sales prices per share for the existing common stock on the NYSE composite
tape, as reported in Dow Jones Interactive.

<TABLE>
<CAPTION>
High Low Dividends
------ -------- ---------
<S> <C> <C> <C>
1997*:
First Quarter.................................... 51 5/8 44 7/8 .0535
Second Quarter................................... 59 45 5/8 .0535
Third Quarter.................................... 64 1/4 54 11/16 .0535
Fourth Quarter................................... 68 1/4 53 1/4 .0535
1998*:
First Quarter.................................... 77 7/8 64 11/16 .0545
Second Quarter................................... 78 3/4 58 .0545
Third Quarter.................................... 59 3/8 42 5/8 .0545
Fourth Quarter................................... 56 1/8 38 1/8 .0545
1999*:
First Quarter.................................... 48 3/8 35 3/8 .0545
</TABLE>
- --------
* Fiscal year ends on the last Saturday in January of the following year.

On May 17, 1999, the last full day the existing common stock traded before
the public announcement of the tracking stock proposal, the reported closing
sales price on the NYSE for the existing common stock was $45 11/16 per share.
On , 1999 the last full day the existing common stock traded before the
printing of this proxy statement, the reported closing sales price on the NYSE
for the existing common stock was $ per share.

As of , 1999 there were approximately holders of record of
existing common stock.

The Company has paid consecutive quarterly cash dividends on the existing
common stock for over 67 years through the first quarter of 1999. For a
description of the Company's intended dividend policy following implementation
of the tracking stock proposal, see "Proposal 1--The Tracking Stock Proposal--
Dividend Policy."

25
<PAGE>

PROPOSAL 1--THE TRACKING STOCK PROPOSAL

General

. provide for two classes of common stock of the Company, of which
shares initially would be designated as Penney Group Common Stock and
shares initially would be designated as Eckerd Group Common Stock;
and

. reclassify each share of existing common stock of the Company as one
share of Penney Group Common Stock.

If the holders of a majority of the voting stock approve the proposal
described above, each holder of one share of the existing common stock would
become the holder of one share of Penney Group Common Stock. Subject to the
approval of the above proposal, we currently plan to offer shares of Eckerd
Group Common Stock representing approximately 20 percent of the equity value
of the Eckerd Group to the public for cash, subject to market and other
conditions. We may offer a greater or lesser percentage of the equity value of
the Eckerd Group to the public, depending on market conditions and other
circumstances.

The Company currently plans to use the net proceeds of the initial public
offering primarily to buy back shares of Penney Group Common Stock in the open
market after the distribution of the remaining equity value of the Eckerd
Group to the holders of Penney Group Common Stock as described below. Any
remaining proceeds would be used for general corporate purposes. Pending any
specific application of the net proceeds of the initial public offering, the
Company intends to invest such proceeds in short-term, investment-grade
securities.

The Penney Group will initially hold the remaining equity value of the
Eckerd Group. This retained interest of the Penney Group in the Eckerd Group
cannot be voted by the Penney Group. We currently intend to distribute (via a
dividend) the remaining equity value of the Eckerd Group to the holders of
Penney Group Common Stock approximately six to twelve months after the initial
public offering of the Eckerd Group Common Stock, subject to market and other
conditions, although there can be no assurance as to whether or when this
distribution will occur. If this distribution occurs, each holder of existing
common stock ultimately will hold two separate classes of common stock
representing separate interests in the Penney Group and the Eckerd Group.

If the tracking stock proposal is approved by the holders of a majority of
the voting stock, the Company will file amendments to the Restated Certificate
of Incorporation, as amended, with the Secretary of State of the State of
Delaware prior to the initial public offering of the Eckerd Group Common
Stock. A copy of the proposed amendments to the Restated Certificate of
Incorporation, as amended (in substantially the same form in which they will
be filed with the Secretary of State of the State of Delaware), is attached to
this proxy statement as Annex I. At any time prior to the effectiveness of the
amendments to the Restated Certificate of Incorporation, as amended, the board
of directors may determine to abandon the tracking stock proposal and the two
related proposals without further action by the stockholders.

If the tracking stock proposal is not approved by the holders of a majority
of the voting stock, or if the board of directors determines, in its sole
discretion, not to proceed with the initial public offering of the Eckerd
Group Common Stock, the existing common stock will not be reclassified as
Penney Group Common Stock and the Eckerd Group Common Stock will not be
issued.

The board of directors would have the authority to increase or decrease from
time to time the total number of authorized shares of each class of common
stock without stockholder approval. However, the board of directors could not
increase the number of shares of authorized stock of a class above a number
which, when added to the number of authorized shares of the other class of
common stock, would exceed the total number of

26
<PAGE>

authorized shares of common stock. In addition, the board of directors could
not decrease the number of shares authorized of either class of common stock
below the number of shares outstanding of such class.

Authorized but unissued shares of Penney Group Common Stock and Eckerd Group
Common Stock would be available for issuance from time to time by the Company
at the discretion of the board of directors for any proper corporate purpose.
For example, the board of directors could issue Penney Group Common Stock or
Eckerd Group Common Stock to raise capital, pay stock dividends, effect a
stock split, provide compensation or benefits to employees of either the
Penney Group or the Eckerd Group or to acquire other companies or businesses.
The Restated Certificate of Incorporation, as amended, will not require
approval of the stockholders for issuance of authorized but unissued shares.
The Company does not plan to seek the approval of the stockholders for any
issuances described above unless it is required by the board of directors,
Delaware law or NYSE rules.

Background and Reasons for the Tracking Stock Proposal

The board of directors approved the tracking stock proposal following its
review of various alternatives to support the Company's strategic objectives
and enhance the overall return to stockholders. The board of directors
believes that the historical price performance of the existing common stock
has been more closely linked to the department store business and has failed
to adequately reflect the value of the Company's drugstore business.
Therefore, our stockholders have been unable to realize the full value of
their investment in the existing common stock.

At board meetings on February 10, 1999, March 10, 1999, and May 3, 1999, the
board of directors met with management of the Company and discussed the
alternatives to achieve the Company's strategies and have the Company's equity
valuation more fully recognize the value of the drugstore business. In these
discussions, our board of directors evaluated the effect that each alternative
would have on our ability to:

. enhance stockholder value;

. raise funds in a cost-effective manner in the capital markets;

. create a more valuable currency for strategic acquisitions; and

. attract and retain key personnel.

The board of directors considered the following alternatives:

. the preservation of our current equity and operating structure;

. the tracking stock proposal; and

. the creation of separate equity securities of subsidiaries.

Our board of directors concluded that the tracking stock proposal would be
most likely to enhance stockholder value and address the Company's strategic
objectives. The board of directors based its decision on its belief that the
proper valuation of the drugstore business was not reflected in the current
equity structure and that there are synergies to be obtained in maintaining
the Company's current operating structure. In reaching its conclusion, our
board of directors consulted with JCPenney's financial advisors, legal counsel
and independent accountants. The board of directors considered various
strategic, financial, legal and tax implications of the tracking stock
proposal and considered the following principal advantages of the tracking
stock proposal:

. The reclassification of the existing common stock into two classes of
common stock that would track the businesses of the Penney Group and the
Eckerd Group separately would increase stockholder value by more
specifically tracking the earnings, growth and cash flows of each group.
The initial public offering of the Eckerd Group Common Stock should
increase the coverage of the stock by financial analysts, which will
help investors to better understand the Eckerd Group and the Company as
a whole.

. We expect that a different group of investors will invest in the Eckerd
Group Common Stock who might otherwise not invest in the existing common
stock.

27
<PAGE>

. The creation of two classes of common stock should provide the Company
with an additional equity security that can be used to raise capital and
can be issued in connection with acquisitions and investments.

. By remaining a single enterprise, the Company believes it will benefit
from cost savings and other synergies between the two groups. In
addition, the Company will retain the benefit of the oversight of
certain key members of the current management.

. The creation of two classes of common stock that track the two different
businesses would provide flexibility to link employee incentive
compensation plans with the different businesses.

The board of directors also considered the following potential disadvantages
of the tracking stock proposal:

. The tracking stock proposal could create diverging or conflicting
interests between the two groups and could pose potential conflicts for
the board of directors.

. The incurrence of additional administrative costs connected with the
creation and ongoing maintenance of two classes of common stock.

. The creation of two classes of common stock increases the complexity of
the Company's capital structure.

. The holders of each class of common stock would continue to be subject
to all the risks associated with investing in the Company as a whole.

. The tracking stock proposal limits the Company's ability to use the
"pooling of interests" method of accounting in future acquisitions and
the Company's ability to receive a ruling from the Internal Revenue
Service in connection with a proposed acquisition using either the
Eckerd Group Common Stock or the Penney Group Common Stock.

. Tax treatment of tracking stock is somewhat uncertain under current law,
and the recent proposal by the Clinton Administration to impose a
corporate level tax on tracking stock similar to the Eckerd Group Common
Stock could require the Company to revise its capital structure.

After considering these factors and others, the board of directors
determined that on balance the potential advantages of the tracking stock
proposal outweighed its potential disadvantages. The board of directors
ultimately concluded that the tracking stock proposal is advisable and in the
best interests of the stockholders and the Company and is the best means for
achieving the Company's strategic goals.

Recommendation of the Board of Directors

The board of directors carefully considered the tracking stock proposal and
believes that its approval by the stockholders is in the best interest of the
Company and its stockholders and, accordingly, unanimously declares the
proposal advisable and recommends that stockholders vote for the tracking
stock proposal.

Dividend Policy

All dividends are at the sole discretion of the board of directors. The
board of directors will base its dividend decisions primarily on the financial
condition, results of operations and business requirements of each group and
the Company as a whole. Dividends for each group will be payable out of all
funds of the Company legally available for the payment of dividends.

While the board of directors does not currently plan to change the policy
for payment of dividends referred to above, the board of directors has the
discretion to change this policy at any time. The amount of funds legally
available for dividends will reflect the gains or losses of both groups, and
the Company may be unable to pay dividends on one group regardless of the
financial condition or results of operations of that group. We cannot assure
you that there will be amounts available for payment of dividends on either
class of common stock.

28
<PAGE>

In addition, subject to the limitations described above, and the limitations
set forth below under "Certain Management and Allocation Policies," the board
of directors may in its sole discretion declare and pay dividends exclusively
on the Penney Group Common Stock, exclusively on the Eckerd Group Common
Stock, or on both. The amount of any dividend may likewise vary between the
groups in the sole discretion of the board of directors.

Certain Management and Allocation Policies

General

A fundamental objective of our board of directors and management is to
highlight the separate performance of each of the Penney Group and the Eckerd
Group and to allow each group to focus on its own business strategy and
financial model. Because the Penney Group and the Eckerd Group will not be
separate legal entities, the Company has carefully considered a number of
issues with respect to the financing of each group, competition between
groups, inter-group business transactions, corporate opportunities and the
allocation of shared services expenses, corporate general and administrative
expenses, debt, interest, taxes, retirement benefit costs, and other support
activities between the two groups. Following is a summary of policies and
guidelines that we plan to follow to help us to allocate costs and charges
between the two groups in a manner that will ensure that transactions between
the groups are made on a basis that in management's judgment would be fair and
equitable. We are not requesting stockholder approval of these policies, and
the policies may be changed at any time without stockholder approval.

Fiduciary and Management Responsibilities

Our directors and officers will have the same fiduciary duties to holders of
Penney Group Common Stock and Eckerd Group Common Stock that they currently
have to the holders of our existing common stock. Under Delaware law, absent
an abuse of discretion, a director or officer will be deemed to have satisfied
his or her fiduciary duties to our Company and our stockholders if that person
is disinterested and acts in accordance with his or her good faith business
judgment in the interests of our Company and all of our stockholders as a
whole. Our board of directors and our chief executive officer, in establishing
policies with regard to intracompany matters such as business transactions
between groups and allocations of assets, liabilities, debt, shared services
expenses, corporate general and administrative costs, taxes, interest,
retirement benefit costs, corporate opportunities and other matters, will
consider various factors and information which could benefit or cause
detriment to the stockholders of the respective groups and will make
determinations in the best interests of our Company and all of our
stockholders as a whole. The Company generally will adhere to the principle
that transactions and transfers between groups should be made on a basis that
in management's judgment would be fair and equitable.

Financial Statements

Subject to the approval of the tracking stock proposal, we will prepare
financial statements in accordance with generally accepted accounting
principles, consistently applied, for the Penney Group and the Eckerd Group
and for the Company on a consolidated basis. The Penney Group financial
statements and the Eckerd Group financial statements, taken together, will
comprise all the accounts included in the corresponding consolidated financial
statements of the Company. The financial statements of each of the Penney
Group and the Eckerd Group will reflect the financial condition, results of
operations and cash flows of the businesses included in the corresponding
group.

The financial statements of each group will also include the allocated
portions of debt, interest, retirement benefit costs, shared services costs,
corporate general and administrative costs and taxes for each group. We will
make these allocations for the purposes of preparing the financial statements
of each group. However, the holders of Penney Group Common Stock and Eckerd
Group Common Stock will still be subject to all of the risks associated with
an investment in the Company as a whole.

29
<PAGE>

Financing Activities

The Company plans to continue to manage most financial activities on a
centralized basis. These activities include the investment of surplus cash,
the issuance and repayment of short-term and long-term debt and the issuance
and repurchase of common stock. If we transfer cash or other property
allocated to one group to the other group, we may account for that transfer in
one of the following ways:

. as an adjustment to allocated pooled debt, or as a short-term or long-
term loan between groups, or as a repayment of a previous borrowing, as
described under "Inter-group Loans" below; or

. as a sale of assets between groups.

Our board of directors has not adopted specific criteria to determine which
of the foregoing will be applied to a particular transfer of cash or property
from one group to the other. Our board of directors and management will make
these determinations, either in specific instances or by setting generally
applicable policies, in the exercise of its business judgment. These
determinations will be based on all relevant circumstances, including the
financing needs and objectives of the receiving group, the investment
objectives of the transferring group, the availability, cost and time
associated with alternative financing sources, prevailing interest rates and
general economic conditions. We will make all transfers of assets from one
group to the other on a fair and equitable basis for the foregoing purposes.

Although we may allocate our debt and preferred stock between groups, the
debt will remain the obligation of the Company as a whole and all of our
stockholders will be subject to the risks associated with those obligations.

Company Debt and Preferred Stock. We will allocate our debt between the
groups or, if we so determine, in its entirety to a particular group, for
example, in the case of specific acquisition financing. We will allocate
preferred stock, if issued, in a similar manner. We refer to debt and
preferred stock allocated between groups as "pooled."

The Eckerd Group's allocated portion of the pooled debt will bear interest
for purposes of its financial statements at a rate equal to the weighted
average interest rate of the pooled debt calculated on a monthly basis, one
month in arrears, and applied to the Eckerd Group's allocated portion of the
pooled debt balance at the beginning of each period for which interest expense
is calculable. The remainder of the interest expense on pooled debt for such
period will be allocated to the Penney Group. Preferred stock, if issued and
if pooled in a manner similar to the pooled debt, will bear dividends for
group financial statement purposes at a rate based on the weighted average
dividend rate of the preferred stock similarly calculated and applied. Any
expense related to increases in pooled debt or preferred stock will be
reflected in the weighted average interest or dividend rate of such pooled
debt or preferred stock as a whole.

If we allocate debt for a particular financing in its entirety to one group,
that debt will bear interest for group financial statement purposes at the
rate applicable to such debt. If we allocate preferred stock in its entirety
to one group, we will charge the dividend cost to that group in a similar
manner. Any additional expenses related to debt or preferred stock that is
allocated in its entirety to a group will be allocated in whole to that group.

Inter-group Loans. Cash or other property that we allocate to one group that
is transferred to the other group could be accounted for either as adjustments
to allocated pooled debt, or as a short-term loan or as a long-term loan. We
will establish guidelines for the terms on which loans between the groups will
be made, including the interest rates, amortization schedule, maturity and
redemption terms.

Equity Issuances and Repurchases and Dividends. We will reflect all
financial effects of issuances and repurchases of shares of Penney Group
Common Stock or Eckerd Group Common Stock entirely in the financial statements
of that group. We will reflect financial effects of dividends or other
distributions on, and purchases of, shares of the Penney Group Common Stock or
Eckerd Group Common Stock entirely in the respective financial statements of
the Penney Group or the Eckerd Group.

30
<PAGE>

Competition Between Groups

Although the Penney Group and the Eckerd Group are engaged in different
principal businesses, our board of directors and management recognize that the
two groups may engage in indirect competition from time to time. Our board of
directors and management expect such competition to continue and it may be
necessary, in appropriate circumstances, for the particular businesses that
the groups are engaged in, and hence for the benefit of stockholders, for such
competition to continue.

Transfers of Assets Between Groups

The Restated Certificate of Incorporation, as amended, permits the transfer
of assets between groups without stockholder approval. The Company has
established a policy that all such transfers will be made on a fair and
equitable basis, as determined in good faith by our board of directors or
management. The consideration for such transfers may be paid by one group to
the other in cash or other consideration.

Sales of Products and Services Between Groups. The sale of products or
services between groups will be on a fair and equitable basis, as determined
in good faith by our board of directors or management.

Joint Transactions. The groups may from time to time engage in transactions
jointly, including with third parties. Research and development and other
services performed by one group for a joint venture or other collaborative
arrangement will be charged on a fair and equitable basis.

Review of Corporate Opportunities

Our board of directors will review any significant matter which involves the
allocation of a corporate opportunity to either the Penney Group or the Eckerd
Group or in part to the Penney Group and in part the Eckerd Group. Delaware
law requires our board of directors to make its determination with regard to
the allocation of any such opportunity and the benefit of that opportunity in
accordance with their good faith business judgment of the best interests of
our Company and all of our stockholders as a whole. Among the factors that our
board of directors may consider in making this allocation is:

. whether a particular corporate opportunity is principally related to the
business of the Penney Group and the Eckerd Group;

. whether one group, because of its managerial or operational expertise,
will be better positioned to undertake the corporate opportunity; and

. existing contractual agreements and restrictions.

Allocation Matters

In addition to allocating debt and interest as described above under "--
Financing Activities" and assets as described above under "--Transfers of
Assets Between Groups," we have adopted the following allocation policies,
each of which is reflected in the financial statements of the respective group
included in this proxy statement:

. Shared Services and Support Activities. We will directly charge costs
for certain shared services, including support activities, to the Penney
Group and the Eckerd Group based upon the respective use of such
services and activities and the good faith judgment of our board of
directors or management. Where determinations based on use alone are not
practical, we will use other methods and criteria to provide a
reasonable allocation of the cost of shared services, including support
activities attributable to the groups. Such allocated shared services,
including support activities, represent, among other things, financial
and accounting services, information systems services, certain selling
and marketing activities, executive management, human resources,
corporate finance, legal and corporate planning activities.

. Taxes. We will determine the income tax provisions of JCPenney and its
subsidiaries which own assets allocated between the groups on a
consolidated basis. We will allocate consolidated income tax

31
<PAGE>

provisions and related tax payments or refunds between the groups based
principally on the taxable income and tax credits directly attributable
to each group. These allocations will reflect each group's contribution,
whether positive or negative, to JCPenney's consolidated taxable income
and the consolidated tax liability and tax credit position. We will
credit tax benefits that cannot be used by the group generating those
benefits but can be used on a consolidated basis to the group that
generated such benefits. Inter-group transactions will be treated and
taxed as if each group was a stand-alone company.

Current and deferred taxes and taxes payable or refundable allocated to each
group in its historical financial statements will differ from those that would
have been allocated to each group had they filed separate income tax returns.

Neither our board of directors or management has any current plans to change
the above policies. However, these policies may be modified by the board of
directors or management in its or their sole discretion without the approval
of stockholders. Any modifications to the above policies will be made by the
board of directors or management in its or their good faith business judgment
of the Company's best interests, taking into consideration the interests of
the Company and all of the Company's stockholders.

Description of Penney Group Common Stock and Eckerd Group Common Stock

General

The Restated Certificate of Incorporation, as amended, currently provides
that the Company is authorized to issue 1.275 billion shares of stock,
consisting of 1.25 billion shares of common stock, par value $.50 per share,
and 25 million shares of preferred stock, with no par value. As of May 1,
1999, approximately 260 million shares of common stock were issued and
outstanding. Pursuant to the Restated Certificate of Incorporation, as
amended, our board of directors has the authority to designate the preferred
stock in one or more series, without stockholder approval. Currently, the
board of directors has designated two series of preferred stock: Series A
Junior Participating Preferred Stock and Series B ESOP Convertible Preferred
Stock. Of the 25 million shares of preferred stock, our board of directors has
designated a total of 1.6 million shares of Series A Junior Participating
Preferred Stock in connection with our existing stockholder rights plan, of
which no shares are issued and outstanding. As of May 1, 1999, approximately
772,000 shares of Series B ESOP Convertible Preferred Stock were issued and
outstanding. Each share of Series B ESOP Convertible Preferred Stock is
presently convertible into 20 shares of the existing common stock.

If the tracking stock proposal is adopted, the Restated Certificate of
Incorporation, as amended, will be amended prior to the initial public
offering of the Eckerd Group Common Stock to provide for two classes of common
stock of the Company, of which shares initially will be designated as
Penney Group Common Stock and shares initially will be designated as
Eckerd Group Common Stock. Each share of existing common stock will be
reclassified as one share of Penney Group Common Stock. The Penney Group
Common Stock and the Eckerd Group Common Stock will collectively be referred
to as the "common stock." The board of directors would have the authority to
increase or decrease from time to time the total number of authorized shares
of each class of common stock without stockholder approval. However, the board
of directors could not increase the number of shares of authorized stock of a
class above a number which, when added to the number of authorized shares of
the other class of common stock, would exceed the total number of authorized
shares of common stock. In addition, the board of directors could not decrease
the number of shares authorized of either class of common stock below the
number of shares outstanding of such class. The board of directors will
continue to be able to issue shares of preferred stock in classes, without
stockholder approval.

Authorized but unissued shares of Penney Group Common Stock or Eckerd Group
Common Stock would be available for issuance by the Company from time to time,
as determined by the board of directors, for any proper corporate purpose.
These purposes could include raising capital, paying stock dividends,
effecting a stock split, providing compensation or benefits to employees or
acquiring other companies or businesses. The

32
<PAGE>

Company would not be required to solicit a stockholder vote for any issuance
described above, unless required by the board of directors, Delaware law or
New York Stock Exchange rules.

Conversion and Redemption

The Restated Certificate of Incorporation, as amended, currently does not
provide for either mandatory or optional conversion or redemption of our
existing common stock. The tracking stock proposal will permit the conversion
or redemption of the Penney Group Common Stock and Eckerd Group Common Stock
as described below.

Mandatory Dividend, Redemption or Conversion of Tracking Stock

If we sell or dispose of all or substantially all of the properties and
assets of either group in a transaction other than one described below under
"--Exceptions to the Dividend, Redemption or Conversion Requirement," we will:

. pay a dividend to the holders of shares of that group's common stock in
cash and/or securities or other property having a value equal to the net
proceeds of the disposition; or

. (1) if the disposition involves all of the properties and assets, redeem
all outstanding shares of that group's tracking stock in exchange for
cash and/or securities or other property having a value equal to the net
proceeds of the disposition; or

(2) if the disposition involves substantially all, but not all, of the
properties and assets, redeem a number of whole shares of that group's
common stock in exchange for cash and/or securities or other property
having a value equal to the net proceeds of the disposition; the number
of shares so redeemed will have in the aggregate an average market
value, during the 20 trading day period beginning on the 16th trading
day following consummation of such transaction, equal to the value of
the net proceeds; or

. convert each outstanding share of that group's common stock into a
number of shares of the other group's common stock equal to 115 percent
of the ratio of the average market value of one share of common stock of
the group whose assets are disposed of to the average market value of
one share of the other group's common stock during the 20 trading day
period ending on the fifth trading day prior to the first public
announcement of such disposition transaction.

We may only pay a dividend or redeem shares of either class of common stock
if we have legally available funds under Delaware law. We will pay the
dividend or complete the redemption or conversion on or prior to the 90th
trading day following the disposition date.

For purposes of determining whether a disposition has occurred,
"substantially all of the properties and assets" attributed to either group
means a portion of the properties and assets that represents at least 80
percent of the value of the properties and assets attributed to that group.

The "net proceeds" of a disposition means an amount equal to what remains of
the gross proceeds of the disposition after any payment of, or reasonable
provision is made as determined by our board of directors for:

. any taxes payable by us, or which would have been payable but for the
utilization of tax benefits attributable to the group not subject to the
disposition, in respect of the disposition or in respect of any
resulting dividend or redemption;

. any transaction costs, including, without limitation, any legal,
investment banking and accounting fees and expenses; and

. any liabilities of or attributed to the group whose assets are disposed,
including, without limitation, any liabilities for deferred taxes, any
indemnity or guarantee obligations incurred in connection with the
disposition or otherwise, any liabilities for future purchase price
adjustments and any preferential amounts plus any accumulated and unpaid
dividends in respect of the preferred stock attributed to that group.

33
<PAGE>

We may elect to pay the dividend or redemption price either in the same form
as the proceeds of the disposition or in any other combination of cash,
securities or other property that our board of directors or, in the case of
securities that have not been publicly traded for a period of at least 15
months, an independent investment banking firm, determines will have an
aggregate market value of not less than the value of the net proceeds.

Exceptions to the Dividend, Redemption or Conversion Requirement if a
Disposition Occurs. We are not required to take any of the above actions for
any disposition of all or substantially all of the properties and assets
attributed to the group making such disposition in a transaction or series of
related transactions that results in our receiving for those properties and
assets primarily equity securities of any entity which:

. acquires those properties or assets or succeeds to the business
conducted with those properties or assets or controls such acquiror or
successor; and

. is primarily engaged or proposes to engage primarily in one or more
businesses similar or complementary to the businesses conducted by the
group making such disposition prior to the disposition, as determined by
our board of directors.

The purpose of this exception is to enable us technically to dispose of
properties or assets of either group to other entities engaged or proposing to
engage in businesses similar or complementary to those of that group without
requiring a dividend on, or a conversion or redemption of, the class of common
stock of that group, so long as we hold an equity interest in that entity. A
joint venture in which we own a direct or indirect equity interest is an
example of such an acquiror. We are not required to control that entity,
whether by ownership or contract provisions.

We are also not required to effect a dividend, redemption or conversion if:

. the disposition is of all or substantially all of our properties and
assets in one transaction or a series of related transactions in
connection with our dissolution, liquidation or winding up and the
distribution of our assets to stockholders;

. the disposition is on a pro rata basis, such as in a spin-off, to the
holders of all outstanding shares of such group;

. the disposition is made to any person or entity controlled by us, as
determined by the board of directors;

. the disposition is made at a time when only one class of common stock is
outstanding; or

. before the 30th trading day following the disposition, we have mailed a
notice stating that we are exercising our right to exchange all of the
outstanding shares of Eckerd Group Common Stock for newly issued shares
of Penney Group Common Stock as contemplated under "Conversion of Common
Stock at Option of the Company" below.

Sale of less than substantially all the assets of either group. The
proceeds from any disposition of assets that do not compromise all or
substantially all of the properties and assets attributed to one group will be
allocated to that group and used for its benefit, subject to the policies
described under "--Certain Management and Allocation Policies."

Conversion of Common Stock at Option of the Company

At any time following implementation of the tracking stock proposal, the
board of directors, in its sole discretion, may convert each share of Eckerd
Group Common Stock into a number of shares of Penney Group Common Stock equal
to 115 percent of the ratio of the average market values of the Eckerd Group
Common Stock to the Penney Group Common Stock over a 20 trading day period. We
will calculate the ratio of average market values as of the fifth trading day
prior to the date we mail the conversion notice to holders.

34
<PAGE>

If, however, the conversion results from the occurrence of a tax event, a
factor of 100 percent rather than 115 percent will be applied to the ratio of
the average market values. In such case, the holders of the Eckerd Group
Common Stock being converted would not receive any premium in a conversion.

"Tax event" means the receipt by our company of an opinion of tax counsel
that, as a result of:

. any amendment to, or change in, the laws or regulations interpreting the
laws of the United States or any political subdivision or taxing
authority thereof or therein, including any announced proposed change in
such regulations by an administrative agency; or

. any official or administrative pronouncement, action or judicial
decision interpreting or applying those laws or regulations (regardless
of whether such pronouncement, action or judicial decision involves the
Company),

it is more likely than not that for U.S. Federal income tax purposes:

. JCPenney or our stockholders are, or at any time in the future will be,
subject to tax upon the issuance of shares of either Penney Group Common
Stock or Eckerd Group Common Stock, or

. either Penney Group Common Stock or Eckerd Group Common Stock is not or
at any time in the future will not be treated solely as stock of
JCPenney.

For purposes of rendering this opinion, tax counsel will assume that any
administrative proposals will be adopted as proposed. However, in the event of
an announced proposed legislative change, tax counsel shall render an opinion
only in the event of enactment.

These provisions allow us the flexibility to recapitalize the two classes of
tracking stock into one class of common stock that would, after the
recapitalization, represent an equity interest in all of our businesses. The
optional conversion could be exercised at any future time if our board of
directors determines that, under the facts and circumstances then existing, an
equity structure consisting of two classes of tracking stock was no longer in
the best interests of all of our stockholders. A conversion could be
exercised, however, at a time that is disadvantageous to the holders of one or
both of the classes of tracking stock. For additional information on the risks
of a conversion and the limited remedies available to stockholders, see "Risk
Factors--Holders of either class of tracking stock may be adversely affected
by a conversion of one group's tracking stock."

Conversion would be based upon the relative market values of the Penney
Group Common Stock and the Eckerd Group Common Stock. Many factors could
affect the market values of the Penney Group Common Stock and the Eckerd Group
Common Stock, including our results of operations and those of each of the
groups, trading volume and general economic and market conditions. Market
values could also be affected by decisions by our board of directors or our
management that investors perceive to affect adversely one class of tracking
stock compared to the other. These decisions could include changes to our
management and allocation policies, transfers of assets between groups,
allocations of corporate opportunities and financing resources between the
groups and changes in dividend policies.

Redemption in Exchange for Stock of Subsidiary

Although it currently has no intention to do so, the board of directors may
redeem on a pro rata basis all of the outstanding shares of Eckerd Group
Common Stock for shares of the common stock of one or more of our wholly owned
subsidiaries which own all of the assets and liabilities attributed to the
Eckerd Group (and no other assets or liabilities). We may redeem shares of
tracking stock for subsidiary stock only if we have legally available funds
under Delaware law. In connection with any such exchange, in the event that we
have a retained interest in the Eckerd Group, we could retain any remaining
shares of common stock of the subsidiary holding the Eckerd Group or
distribute those shares as a dividend on the Penney Group Common Stock.

As a result of a redemption in exchange for stock of a subsidiary, holders
of each class of common stock would hold securities of separate legal entities
operating in distinct lines of business. This redemption could be

35
<PAGE>

authorized by the board of directors at any time in the future if it
determines that, under the facts and circumstances then existing, an equity
structure comprised of the Penney Group Common Stock and the Eckerd Group
Common Stock is no longer in the best interests of all of our stockholders as
a whole.

General Conversion and Redemption Provisions

Notices Upon Disposition of Group Assets. Not later than the 20th trading
day after the consummation of a sale of all or substantially all of the assets
of a group, we will announce publicly by press release:

. the estimated net proceeds of the disposition;

. the number of shares of common stock outstanding of the group whose
assets were disposed of; and

. the number of shares of the other group's common stock into which the
common stock of the group whose assets were disposed of is convertible
and the conversion, exchange or exercise price of those convertible
securities.

Not later than the 40th trading day after the consummation of the
disposition, we will announce publicly by press release whether we will pay a
dividend or redeem shares of tracking stock with the net proceeds of the
disposition or convert the shares of tracking stock of the group whose assets
are disposed into the other group's tracking stock.

We will mail to each holder of shares of common stock of the group whose
assets were disposed of any additional notices and other information required
by the Restated Certificate of Incorporation, as amended.

Notice upon Optional Conversion or Redemption in Exchange for Stock of a
Subsidiary. If the Company determines to convert shares of Eckerd Group Common
Stock into shares of Penney Group Common Stock or into shares of stock of a
subsidiary as described above, the Company will send each holder of common
stock a notice not less than 30 nor more than 45 days prior to the conversion
or redemption date. Such notice will contain:

. a statement that all outstanding shares of such class will be converted
or redeemed, as applicable;

. the conversion or redemption date;

. the number of shares of the other class of common stock or the number of
shares of stock of the subsidiary, as the case may be, which each holder
of a share of the class being converted or redeemed will receive;

. the place or method for redemption or conversion; and

. any other information required by the Restated Certificate of
Incorporation, as amended.

Selection of Shares for Redemption. If less than all of the outstanding
shares of a class of tracking stock are to be redeemed, we will redeem those
shares proportionately from among the holders of outstanding shares of that
tracking stock or by such method as may be determined by our board of
directors to be equitable.

Fractional Interests; Transfer Taxes. We will not be required to issue
fractional shares of any capital stock or any fractional securities to any
holder of either class of tracking stock upon any conversion, redemption,
dividend or other distribution described above. If a fraction is not issued to
a holder, we will pay cash instead of that fraction.

We will pay all documentary, stamp or similar issue or transfer taxes that
may be payable in respect of the issue or delivery of any shares of capital
stock and/or other securities on conversion or redemption of shares. We would
not, however, be required to pay any tax that might be payable in respect of
any transfer involved in the issue or delivery of any shares of capital stock
and/or other securities in a name other than that in which the shares so
exchanged or redeemed were registered, and no such issue or delivery will be
made unless and until the person requesting such issue pays to the Company the
amount of any such tax or establishes to our satisfaction that such tax has
been paid.

36
<PAGE>

Stockholder Rights Upon Conversion or Redemption. If shares of either class
of common stock are converted or redeemed as previously described, after such
conversion or redemption, all rights of a holder of shares of such class of
common stock that were converted or redeemed will cease. The only right a
holder of shares of the class of common stock converted or redeemed would have
at that time is the right to receive the cash and/or the certificates
representing shares of capital stock, securities or other property into which
the class of common stock was converted or for which it was redeemed, together
with any payments for fractional shares or rights to dividends, as provided
above, without interest. No holder of a certificate that prior to the
conversion or redemption of common stock represented shares of such class of
common stock will be entitled to receive any dividends or other distribution
or interest payment with respect to shares of any kind of capital stock into,
or in exchange for which, shares of such common stock were converted or
redeemed until surrender of such holder's certificate in exchange for a
certificate(s) representing shares of such capital stock. Upon the surrender
of the holder's certificate, there will be paid to the holder the amount of
any dividends or other distributions (without interest) which theretofore
became payable with respect to a record date occurring after the conversion,
but which were not paid by reason of the foregoing, with respect to the number
of whole shares of capital stock represented by the certificate or
certificates issued upon such surrender. From and after a conversion, the
Company will, however, be entitled to treat the certificates for such common
stock that have not yet been surrendered for conversion as being evidence of
the ownership of the number of whole shares of capital stock into which the
shares of such common stock represented by such certificates should have been
converted, notwithstanding the failure to surrender such certificates.

Voting Rights

Holders of the Penney Group Common Stock and holders of the Eckerd Group
Common Stock will generally vote as a single class on all matters requiring a
stockholder vote.

Until the record date for the first meeting of stockholders after the five-
year anniversary of the initial public offering of the Eckerd Group Common
Stock, on all matters as to which both classes of tracking stock will vote
together as a single class:

. each share of the Penney Group Common Stock will have one vote; and

. each share of the Eckerd Group Common Stock will have of one vote.

On the record date for the first meeting of stockholders after the five-year
anniversary of the initial public offering of the Eckerd Group Common Stock
and on the record date for the first meeting of stockholders after each 24-
month anniversary thereafter, the aggregate voting power of the Penney Group
Common Stock and the Eckerd Group Common Stock will be adjusted as follows:

. each share of the Penney Group Common Stock will have one vote; and

. each share of the Eckerd Group Common Stock will have a number of votes
(or a fraction of a vote) based on the average market capitalization of
the Eckerd Group Common Stock compared to the combined average market
capitalization of the Company as a whole during the 20 consecutive
trading days ending on (and including) the applicable record date.

The voting formula above is intended to equate the relative voting rights of
each class of common stock to its relative market capitalization at the time
of each adjustment. The periodic adjustments could influence an investor
interested in acquiring and maintaining a fixed percentage of the voting power
of the Company's outstanding stock to acquire such percentage of all classes
of common stock, and would limit the ability of investors in one class to
acquire for the same consideration relatively more or less votes per share
than investors in the other class.

When the holders of Penney Group Common Stock and Eckerd Group Common Stock
vote together as a single class, the holders of the class of common stock
entitled to a majority of the votes will be in a position to control the
outcome of the vote even if the matter involves a conflict of interest between
the holders of Penney Group Common Stock and Eckerd Group Common Stock.

37
<PAGE>

If shares of only one class of tracking stock are outstanding, each share of
that class will have one vote. If either class of tracking stock is entitled
to vote as a separate class with respect to any matter, each share of that
class will, for purposes of such vote, have one vote on such matter.

If the tracking stock proposal is approved by the stockholders and
implemented by the board of directors, we will disclose in our annual and
quarterly reports the number of outstanding shares of each class of common
stock and will disclose in any proxy statement for a stockholders' meeting the
number of outstanding shares and the per share voting rights of the Penney
Group Common Stock and the Eckerd Group Common Stock.

The holders of Penney Group Common Stock and Eckerd Group Common Stock will
not have any rights to vote separately as a class on any matter coming before
our stockholders, except for the limited class voting rights provided under
Delaware law described below or by NYSE rules. In addition to the approval of
the holders of a majority of the voting power of all shares of tracking stock
voting together as a single class, the approval of a majority of the
outstanding shares of the Penney Group Common Stock and Eckerd Group Common
Stock, each voting as a separate class, would be required under Delaware law
to approve any amendment to the Restated Certificate of Incorporation, as
amended, that would change the par value of the shares of the class or alter
or change the powers, preferences or special rights of the shares of the class
so as to affect them adversely. As permitted by Delaware law, the Restated
Certificate of Incorporation, as amended, will provide that an amendment to
the Restated Certificate of Incorporation, as amended, that increases or
decreases the number of authorized shares of Penney Group Common Stock and/or
Eckerd Group Common Stock will only require the approval of the holders of a
majority of the voting power of the outstanding stock, voting together as a
single class, and will not require the approval of the holders of the class of
tracking stock affected by the amendment, voting as a separate class.

Liquidation

Currently, in the event of the Company's liquidation, dissolution or
termination after payment, or provision for payment, of our debts and other
liabilities and the payment of full preferential amounts to which the holders
of any preferred stock are entitled, holders of existing common stock are
entitled to share equally in our remaining net assets.

If the tracking stock proposal is approved, in the event of our dissolution,
liquidation or winding up, the holders of Eckerd Group Common Stock and Penney
Group Common Stock will be entitled to receive our assets remaining for
distribution to holders of common stock on a per share basis in proportion to
the liquidation units per share, after payment or provision for payment of the
debts and other liabilities and full preferential amounts to which holders of
any preferred stock are entitled.

Each share of Penney Group Common Stock will have one liquidation unit. Each
share of Eckerd Group Common Stock will have of a liquidation unit. In the
event of an issuance of additional shares of either class of common stock, the
liquidation rights of each class of common stock in the aggregate may vary.
Thus, the liquidation rights of the holders of the respective class may not
bear any relationship to the relative market values or the relative voting
rights of the two classes.

We determined the liquidation units for the Penney Group Common Stock and
the Eckerd Group Common Stock after consulting with our financial and legal
advisors, based on the level of debt and equity capitalization for each group,
the historical capitalization for each group, the historical financial
performance of each group, the market prices of shares of comparable companies
and certain other factors. We consider liquidation to be a remote contingency,
and our financial advisors believe that, in general, these liquidation
provisions will be immaterial to trading in the Penney Group Common Stock and
the Eckerd Group Common Stock.

No holder of Penney Group Common Stock will have any special right to
receive specific assets of the Penney Group and no holder of the Eckerd Group
Common Stock will have any special right to receive specific assets of the
Eckerd Group in the case of our dissolution, liquidation or winding up.

38
<PAGE>

If we subdivide or combine the outstanding shares of either class of common
stock or declare a dividend or other distribution of shares of either class of
common stock to holders of that class of common stock, the number of
liquidation units of either class of common stock will be appropriately
adjusted. This adjustment will be made by the board of directors, to avoid any
dilution in the aggregate, relative liquidation rights of any class of common
stock.

Neither a merger nor consolidation of the Company into or with any other
corporation, nor any sale, transfer or lease of all or any part of our assets,
will, alone, be deemed a liquidation or winding up of the Company, or cause
the dissolution of the Company, for purposes of these liquidation provisions.

Retained Interest of the Penney Group in the Eckerd Group

Subject to the approval of the tracking stock proposal by stockholders, the
Company currently plans to offer shares of Eckerd Group Common Stock
representing 20 percent of the equity value of the Eckerd Group to the public
for cash, subject to market and other conditions. The remaining equity value
of the Eckerd Group initially will be held by the Penney Group. This retained
interest held by the Penney Group cannot be voted by the Penney Group. After
the initial public offering, we will adjust the Penney Group's retained
interest in the Eckerd Group, as appropriate, to reflect issuances or
repurchases of Eckerd Group Common Stock, capital contributions to, or returns
of capital from, the Eckerd Group and certain other events, including our
currently planned distribution of Eckerd Group Common Stock representing all
of our retained interest to holders of Penney Group Common Stock. There can be
no assurance as to when or whether the planned distribution will occur.

The number of shares of Eckerd Group Common Stock that, if issued, would
initially represent 100 percent of the equity value of the Eckerd Group will
be determined based on the historical and projected financial and operating
information of the Eckerd Group, the market prices of securities and certain
financial and operating information of companies engaged in activities similar
to those of the Eckerd Group, prevailing equity market conditions and the
desired range of the initial public offering price of the Eckerd Group Common
Stock, following discussion with the Company's independent financial advisors.

Net Proceeds

The net proceeds of the initial public offering of the Eckerd Group Common
Stock will be allocated to the Penney Group. The Company currently plans to
use the net proceeds primarily to buy back shares of Penney Group Common Stock
in the open market after the distribution of the remaining equity value of the
Eckerd Group to holders of Penney Group Common Stock. Any remaining proceeds
would be used for general corporate purposes.

Pending any specific application of such proceeds, the Company intends to
invest the net proceeds of the offering in short-term, investment-grade
securities. Since the proceeds of the offering will not be applied until after
the distribution of the retained interest of the Penney Group in the Eckerd
Group to holders of Penney Group Common Stock, the actual use of proceeds
could vary significantly from the proposed use described above. The board of
directors will determine the actual use of proceeds which could include any
general corporate purpose based on the best interests of the Company and its
stockholders.

Although we currently have no plans to have an additional sale of Eckerd
Group Common Stock, it is within the sole discretion of the board of directors
to do so.

Effect on Series B ESOP Convertible Preferred Stock

If a share of Series B ESOP Convertible Preferred Stock is converted after
the reclassification of the existing common stock into Penney Group Common
Stock but prior to the distribution of the remaining equity value of the
Eckerd Group to holders of Penney Group Common Stock, each share will be
converted into 20 shares of Penney Group Common Stock. If a share of Series B
ESOP Convertible Preferred Stock is converted after the distribution of the
remaining equity value of the Eckerd Group, each share of Series B ESOP
Convertible

39
<PAGE>

Preferred will be converted into 20 shares of Penney Group Common Stock and a
number of shares of Eckerd Group Common Stock equal to 20 times the number of
shares of Eckerd Group Common Stock distributed as a dividend on each share of
Penney Group Common Stock.

Amended and Restated Rights Agreement

We have issued existing preferred stock purchase rights to all holders of
our existing common stock under a rights agreement dated as of March 26, 1999,
between our Company and ChaseMellon Shareholder Services L.L.C., as rights
agent. Each existing right entitles the holder to purchase shares of Series A
Junior Participating Preferred Stock under conditions described in the
existing rights agreement. The existing rights expire on March 26, 2009.

Pursuant to the tracking stock proposal, our board of directors has
determined to amend and restate the existing rights agreement to:

. provide that each existing right will be redesignated as a Penney right,
which will continue to allow holders to purchase shares of Series A
Junior Participating Preferred Stock of the Company if a "distribution
date" occurs; and

. provide that for each share of Eckerd Group Common Stock issued between
the date of the amended and restated rights agreement and the expiration
date of the rights there shall be issued one Eckerd right, which will
allow holders to purchase shares of a newly designated Series C Junior
Participating Preferred Stock of the company if a "distribution date"
occurs.

We refer to the Penney rights and the Eckerd rights as the "rights." The
amended and restated rights agreement contains provisions designed to, among
other things:

. reflect our new equity structure; and

. reset the prices at which rights issued under the amended and restated
rights agreement may be exercised for shares of the applicable series of
junior participating preferred stock.

A "distribution date" will occur upon the earlier of:

. the tenth day (or a later day determined by our board of directors)
after a public announcement that a person or group of affiliated or
associated persons other than us, any subsidiary of the company, or any
of our or our subsidiaries' employee benefit plans (an "acquiring
person") has acquired beneficial ownership of 15 percent or more of the
voting power of all the shares of common stock of our Company; or

. the tenth business day (or a later day determined by our board of
directors) following the commencement of or announcement of the
intention to commence a tender or exchange offer that would result in
such person or group beneficially owning 15 percent or more of the
voting power of all the shares of common stock of our Company.

Until the distribution date, the rights will not be represented by a
separate certificate and may be transferred only with their respective class
of common stock.

Following the distribution date, holders of rights will be entitled to
purchase from us:

. in the case of a Penney right, one one-thousandth of a share of Series A
Junior Participating Preferred Stock at a purchase price to be
determined by our board of directors, subject to adjustment; and

. in the case of an Eckerd right, one one-thousandth of a share of Series
C Junior Participating Preferred Stock at a purchase price to be
determined by our board of directors, subject to adjustment. The
purchase prices discussed above are referred to as the "Series A
purchase price" and the "Series C purchase price."

40
<PAGE>

Under the existing rights agreement, an existing right entitles the holder
to purchase one one-thousandth of a share of Series A Junior Participating
Preferred Stock at a purchase price of $140 upon the occurrence of a
distribution date.

Unless the rights are earlier redeemed, if any person or group becomes an
acquiring person:

. a Penney right will entitle its holder other than any acquiring person
(whose rights will thereupon become null and void) to purchase, at the
Series A purchase price, a number of one one-thousandths of a share of
Series A Junior Participating Preferred Stock with a market value equal
to twice such purchase price; and

. an Eckerd right will entitle its holder other than any acquiring person
(whose rights will thereupon become null and void) to purchase, at the
Series C purchase price, a number of one one-thousandths of a share of
Series C Junior Participating Preferred Stock with a market value equal
to twice such purchase price.

After the rights have been triggered, the board of directors may exchange
the rights, other than rights owned by an acquiring person, at an exchange
ratio of one share of Penney Group Common Stock per Penney right, subject to
adjustment, and one share of Eckerd Group Common Stock per Eckerd right,
subject to adjustment. The board of directors may not exercise this right of
exchange if any person has acquired 50 percent or more of the voting power of
all the shares of common stock of our Company.

Unless the rights are earlier redeemed, if, following the time a person
becomes an acquiring person:

. JCPenney is acquired in a merger or other business combination
transaction and JCPenney is not the surviving corporation;

. any person consolidates or merges with JCPenney and all or part of the
common stock is converted or exchanged for securities, cash or property
of any other person or of JCPenney; or

. 50 percent or more of JCPenney's assets or earning power is sold or
transferred,

each Penney right and each Eckerd right will entitle its holder other than any
acquiring person to purchase, for the Series A purchase price or Series C
purchase price, as the case may be, a number of shares of common stock of the
surviving entity in any such merger, consolidation or other business
combination of or the purchaser in any such sale or transfer with a market
value equal to twice the Series A purchase price or Series C purchase price,
as the case may be.

The rights will expire on March 26, 2009, unless we extend or terminate them
as described below.

At any time until the close of business on the tenth day following a public
announcement that an acquiring person has become such, our board of directors
may redeem all of the rights at a price of $0.005 per right. On the redemption
date, the right to exercise the rights will terminate and the only right of
the holders of rights will be to receive such redemption price.

So long as the rights are redeemable as described in the preceding
paragraph, the board of directors may, without the approval of any holders of
rights, supplement or amend any provision of the amended and restated rights
agreement in any manner, whether or not such supplement or amendment is
adverse to any holders of the rights. At such time as the rights are not
redeemable, the board of directors may, without the approval of any holders of
rights, supplement or amend the amended and restated rights agreement:

. to cure any ambiguity,

. to correct or supplement any provision that may be defective or
inconsistent with any other provision, or

. in any manner that it may deem necessary or desirable and which does not
materially adversely affect the interests of the holders of rights.

41
<PAGE>

A holder of a right will not have any rights as a stockholder of JCPenney,
including the right to vote or to receive dividends, until a right is
exercised.

The amended and restated rights agreement contains provisions designed to
prevent the inadvertent triggering of the rights. A person will not be deemed
an acquiring person if the board of directors of the Company approved the
acquisition by such person of shares of common stock prior to such person
otherwise becoming an acquiring person. In addition, the amended and restated
rights agreement gives a person who has inadvertently acquired 15 percent or
more of the voting power of all the shares of common stock of our Company and
does not have any intention of changing or influencing the control of JCPenney
the opportunity to sell a sufficient number of shares so that such acquisition
would not trigger the rights. In addition, the rights will not be triggered
and a divestiture of shares will not be required by our repurchase of shares
of common stock outstanding which could raise the proportion of voting power
held by a person to over the applicable 15 percent threshold. However, any
person who exceeds such threshold as a result of our stock repurchases will
trigger the rights if the person subsequently acquires an additional 1 percent
of the voting power of all the shares of common stock.

The amended and restated rights agreement contains a provision obligating
the board of directors of the company to appoint a committee of the board
referred to as the "TIDE Committee." The TIDE Committee is composed of
directors of the Company who are not officers, employees or affiliates of the
Company. At least every three years the TIDE Committee will review and
evaluate the amended and restated rights agreement to determine whether it
continues to be in the interests of the Company, its stockholders and any
other relevant constituencies of the Company. A review could be instituted
sooner if any person shall have made a proposal or taken any other action
which could cause that person to become an acquiring person, if a majority of
the members of the TIDE Committee deem such review to be appropriate.
Following such review the TIDE Committee will communicate its conclusions to
the full board of directors, including any recommendation as to whether the
amended and restated rights agreement should be modified or the rights
redeemed.

A copy of the form of amended and restated rights agreement will be filed
with the Commission as an exhibit to the registration statement relating to
the initial public offering of Eckerd Group Common Stock. A copy of the
existing rights agreement previously has been filed with the Commission as an
exhibit to the Company's Current Report on Form 8-K dated March 10, 1999, and
is incorporated herein by reference. A copy of the form of amended and
restated rights agreement will be available free of charge from the Company.
This summary description of the existing rights agreement and restated rights
agreement does not purport to be complete and is qualified in its entirety by
reference to the agreements.

Stock Transfer Agent and Registrar

ChaseMellon Shareholder Services L.L.C. will act as the registrar and
transfer agent for both the Penney Group Common Stock and the Eckerd Group
Common Stock.

Stock Exchange Listings

The existing common stock is currently listed on the NYSE under the symbol
"JCP." The Company will apply to the NYSE for redesignation of the existing
common stock as Penney Group Common Stock, which would continue to trade under
the symbol "JCP." The Company will also apply to the NYSE for the listing of
the Eckerd Group Common Stock under the symbol .

No Dissenters' Rights

Under Delaware law, stockholders will not have appraisal rights in
connection with the tracking stock proposal.

42
<PAGE>

Certain U.S. Federal Income Tax Considerations

The following discussion is a summary of the principal U.S. Federal income
tax consequences of the implementation of our tracking stock proposal. This
discussion, including the opinion of Cravath, Swaine & Moore discussed below,
is based on the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Department regulations, published positions of the IRS and court
decisions now in effect, all of which are subject to change. In particular,
Congress could enact legislation affecting the treatment of stock with
characteristics similar to the Penney Group Common Stock and Eckerd Group
Common Stock, or the Treasury Department could issue regulations or other
guidance that could affect the conclusions set forth herein. Any future
legislation, regulations or other guidance could apply retroactively to the
implementation of the tracking stock proposal. See "--Clinton Administration
Proposal" below.

This discussion addresses only those of you who hold your existing common
stock and would hold your Penney Group Common Stock and Eckerd Group Common
Stock as capital assets. We have included this discussion for general
information only; it does not discuss all aspects of U.S. Federal income
taxation that may be relevant to you in light of your particular tax
circumstances, nor does it discuss any state, local, foreign or non-income tax
consequences. This discussion does not apply to you if you are a tax-exempt
entity, partnership, S corporation or other pass-through entity, mutual fund,
small business investment company, regulated investment company, insurance
company or other financial institution, broker-dealer or are otherwise subject
to special tax treatment under the Federal income tax laws. This discussion
also does not apply to those of you who hold your existing common stock as
part of a straddle, hedge, constructive sale or conversion transaction. You
should consult your own tax advisor about the application of the U.S. Federal
income tax laws as well as the applicability and effect of any state, local or
foreign tax laws to which you may be subject.

Tax Implications to the Stockholders

In the opinion of Cravath, Swaine & Moore:

. The Penney Group Common Stock and the Eckerd Group Common Stock will be
treated as stock of the Company for U.S. Federal income tax purposes.

. You will not recognize any income, gain or loss on your receipt of
Penney Group Common Stock or Eckerd Group Common Stock unless you
receive cash in lieu of a fractional share in the event of the
distribution of Eckerd Group Common Stock to holders of Penney Group
Common Stock.

. Neither Penney Group Common Stock nor Eckerd Group Common Stock will be
"Section 306 stock" within the meaning of Section 306 of the Code or
"nonqualified preferred stock" within the meaning of Section 351(g) of
the Code.

. On the reclassification of your existing common stock as Penney Group
Common Stock, your tax basis in your existing common stock will be
carried over to the Penney Group Common Stock you receive. If and when
we subsequently distribute Eckerd Group Common Stock to you, your tax
basis in your Penney Group Common Stock will be allocated between your
Penney Group Common Stock and the Eckerd Group Common Stock in
proportion to their relative fair market values at the time of the
distribution.

. Your holding period for the Penney Group Common Stock and the Eckerd
Group Common Stock will include your holding period for your existing
common stock.

. You will not recognize any income, gain or loss on the conversion of
Eckerd Group Common Stock into Penney Group Common Stock either pursuant
to our option or on our disposition of all or substantially all the
assets of the Eckerd Group unless you receive cash in lieu of a
fractional share.

. The tax basis of the Penney Group Common Stock you receive upon such
conversion will be the tax basis of the converted Eckerd Group Common
Stock, and the holding period of such Penney Group Common Stock received
will include the holding period of such Eckerd Group Common Stock.

43
<PAGE>

. If you receive cash in lieu of a fractional share, you will recognize a
gain if the amount of cash you receive exceeds your tax basis in the
fractional share and you will recognize a loss if the amount of cash you
receive is less than your tax basis in the fractional share.

No IRS Ruling

We have not sought any ruling from the IRS in connection with our tracking
stock proposal. The IRS has announced that it will not issue any advance
rulings on the classification of an instrument that has certain voting and
liquidation rights in an issuing corporation but whose dividend rights are
determined by reference to the earnings of a segregated portion of the issuing
corporation's assets, including assets held by a subsidiary. In addition,
there are no court decisions or other authorities that bear directly on the
effect of the features of the Penney Group Common Stock and the Eckerd Group
Common Stock. The opinion of Cravath, Swaine & Moore is not binding on the IRS
or the courts.

It is possible, therefore, that the IRS could take the position that (a)
Penney Group Common Stock or Eckerd Group Common Stock is stock of a separate
corporation, not stock of the Company; (b) your receipt of Penney Group Common
Stock and Eckerd Group Common Stock is a taxable event to you and to us; and
(c) any later conversion of Eckerd Group Common Stock into Penney Group Common
Stock is a taxable event to you. As indicated above, tax counsel is of the
opinion that the IRS would not prevail in any such assertion.

Clinton Administration Proposal

A recent proposal by the Clinton Administration would impose a corporate
level tax on the issuance of stock similar to the Penney Group Common Stock
and Eckerd Group Common Stock. For a description of the risks associated with
this proposal, see "Risk Factors--Recent Clinton Administration proposal could
result in taxation on issuances of tracking stock."

Non-U.S. Holders

The following discussion applies to you if you are a foreign corporation,
nonresident alien individual or a foreign estate or trust (a "Non-U.S.
Holder").

Dividend payments you receive on shares of Penney Group Common Stock or
Eckerd Group Common Stock will be subject to withholding of U.S. Federal
income tax in the same manner as would dividends on the shares of the existing
common stock.

You will generally be subject to U.S. Federal income tax on any gain
realized on the taxable sale or exchange of your Penney Group Common Stock or
Eckerd Group Common Stock if:

. the gain is effectively connected with your conduct of a trade or
business within the United States,

. you derived the gain from sources within the United States and you are a
nonresident alien individual who is present in the United States for 183
days or more in the taxable year of such sale or exchange,

. you are subject to tax pursuant to the provisions of the Code applicable
to certain United States expatriates, or

. we are a "United States real property holding corporation" under the
Foreign Investment in Real Property Tax Act of 1980 and you have owned,
directly or indirectly, more than five percent of the value of the class
of stock in question at any time during the five-year period ending at
the time of the sale or exchange. We do not believe we are currently a
United States real property holding corporation and do not anticipate
that we will be a United States real property holding corporation in the
future.

44
<PAGE>

Backup Withholding

Certain noncorporate holders of Penney Group Common Stock and Eckerd Group
Common Stock might be subject to backup withholding at a rate of 31 percent on
the payment of dividends on such stock. Backup withholding will apply only if
you:

. fail to furnish your taxpayer identification number ("TIN"),

. furnish an incorrect TIN,

. are notified by the IRS that you have failed properly to report payments
of interest or dividends, or

. under certain circumstances, fail to certify, under penalties of
perjury, that you have furnished a correct TIN and have not been
notified by the IRS that you are subject to backup withholding for
failure to report payments of interest or dividends.

You should consult your tax adviser regarding your qualification for an
exemption from backup withholding and the procedure for obtaining such an
exemption, if applicable. The amount of any backup withholding from a payment
to you on Penney Group Common Stock or Eckerd Group Common Stock will be
allowed as a credit against your Federal income tax liability and may entitle
you to a refund, provided that you furnish the necessary information to the
IRS.

Recently issued United States Treasury regulations would modify certain of
the certification requirements for backup withholding. The modifications
generally will become effective January 1, 2001. It is possible that you may
be required to provide to withholding agents a new certification of exemption
from backup withholding to remain exempt after the new regulations become
effective. You should consult your tax adviser concerning the effect, if any,
of the adoption of the new regulations on your ownership of Penney Group
Common Stock or Eckerd Group Common Stock.

Tax Implications to the Company

In the opinion of tax counsel, Penney Group Common Stock and Eckerd Group
Common Stock will be treated as stock of the Company for Federal income tax
purposes and no gain or loss will be recognized by the Company upon
implementation of the tracking stock proposal. If either Penney Group Common
Stock or Eckerd Group Common Stock were treated as other than stock of the
Company, the Company could recognize a significant taxable gain on the
issuance of such stock in an amount equal to the excess of the fair market
value of such stock over the Company's tax basis in such stock. In addition,
if the Eckerd Group Common Stock (or Penney Group Common Stock) were treated
as stock of a subsidiary of the Company, and not as stock of the Company, the
Eckerd Group (or the Penney Group) might not be includable in the Company's
consolidated Federal income tax return, and any dividends paid or deemed paid
to the Company by the Eckerd Group (or Penney Group) could be taxable to the
Company, subject to any applicable dividends received deduction. Although it
is possible that the IRS might assert that Eckerd Group Common Stock (or
Penney Group Common Stock) is not stock of the Company, it is the opinion of
tax counsel that the IRS would not prevail in any such assertion. A recent
proposal by the Clinton Administration would impose a corporate level tax on
the issuance of stock similar to the Penney Group Common Stock and Eckerd
Group Common Stock. For a description of the risks associated with this
proposal, see "Risk Factors--Recent Clinton Administration proposal could
result in taxation on issuances of tracking stock."

Anti-takeover Considerations

The following discussion concerns certain provisions of Delaware law, the
Restated Certificate of Incorporation, as amended, our bylaws, and the amended
and restated rights agreement that could be viewed as having the effect of
discouraging an attempt to obtain control of JCPenney. These provisions are
similar in many respects to those currently applicable to us.

45
<PAGE>

Delaware Law

Section 203 of the General Corporation Law of the State of Delaware applies
to the Company. Under certain circumstances, Section 203 limits the ability of
an "interested stockholder" to effect various business combinations with the
Company for a three-year period following the time that such stockholder
became an interested stockholder. An "interested stockholder" is defined as a
holder of 15 percent or more of the outstanding voting stock.

An interested stockholder may engage in a business combination transaction
with the Company within the three-year period only if:

. our board of directors approved the transaction before the stockholder
became an interested stockholder or approved the transaction in which
the stockholder became an interested stockholder;

. the interested stockholder acquired at least 85 percent of the voting
stock in the transaction in which it became an interested stockholder;
or

. our board of directors and the holders of shares entitled to cast two-
thirds of the votes entitled to be cast by all of the outstanding voting
shares held by all disinterested stockholders approve the transaction.

Restated Certificate of Incorporation, as amended, and Bylaws

Authorized Shares

The Restated Certificate of Incorporation, as amended by the tracking stock
proposal, will provide that we may from time to time issue shares of preferred
stock in one or more series, the terms of which will be determined by our
board of directors, and common stock of either class. We will not solicit
approval of our stockholders unless our board of directors believes that
approval is advisable or is required by NYSE rules or Delaware law. This could
enable our board of directors to issue shares to persons friendly to current
management which could render more difficult or discourage an attempt to
obtain control of our Company by means of a merger, tender offer, proxy
contest or otherwise, and protect the continuity of our management. These
additional shares also could be used to dilute the stock ownership of persons
seeking to obtain control of our Company.

Classified Board of Directors; Removal of Directors; Action by Written
Consent

The Restated Certificate of Incorporation, as amended, will continue to
provide that our board of directors shall be divided into three classes and
shall consist of such number of directors as is set in our bylaws. The bylaws
provide that the board of directors will be divided into three classes of an
approximately equal number of directors with each class of directors having a
three-year term of office. The provisions in the Restated Certificate of
Incorporation, as amended, and bylaws described in this paragraph may only be
amended by a vote of 80 percent of the voting power of all classes of common
stock of the Company.

The Restated Certificate of Incorporation, as amended, will continue to
provide that members of our board of directors may be removed, with or without
cause, only upon the vote of 80 percent of the voting power of all classes of
common stock of the Company.

The Restated Certificate of Incorporation, as amended, and the bylaws will
each continue to provide that stockholders of the Company may only take action
at an annual or special meeting of the stockholders and not by written consent
of stockholders. The provisions regarding action by written consent require
the vote of 80 percent of the voting power of all classes of common stock of
the Company in order to remove or amend them.

The effect of the provisions regarding classification of our board of
directors, removal of directors and action by written consent may have the
effect of discouraging anyone from attempting to acquire control of the
Company and thereby of discouraging open market purchases of either class of
common stock.

46
<PAGE>

Business Combinations with Interested Stockholders

The Restated Certificate of Incorporation, as amended, will continue to
provide that business combinations with interested stockholders will require
the vote of 80 percent of the voting power of all classes of common stock of
the Company to approve such transaction.

An "interested stockholder" is defined as a person who or which:

. is the beneficial owner of 10 percent or more of the voting power of all
classes of common stock of the Company;

. is an affiliate of the Company and at any time within the two-year
period before the date in question owned or was the beneficial owner of
10 percent or more of the voting power of all classes of common stock of
the Company; or

. is an assignee of shares of common stock which were owned by an
interested stockholder in the preceding two years.

A "business combination" is defined to mean:

. a merger or consolidation with an interested stockholder;

. a sale of property of the Company having a fair market value of $100
million to an interested stockholder or a purchase by the Company from
an interested stockholder of property having such fair market value;

. any recapitalization of the Company that has the effect of increasing
the voting power of an interested stockholder; and

. transactions having a similar effect to those listed above.

The business combination will not need to receive the 80 percent vote
outlined above if it meets one of the following tests:

. the business combination is approved by a majority of the members of the
board of directors who are not affiliated with the interested
stockholder and who were board members prior to the interested
stockholder becoming an interested stockholder; or

. the consideration to be paid by the interested stockholder in the
business combination meets various tests set forth in the Restated
Certificate of Incorporation, as amended, designed to ensure that the
form and amount of consideration to be paid by the interested
stockholder is fair to the other holders of shares of common stock.

The business combination provisions outlined above may have the effect of
discouraging anyone from attempting to acquire control of the Company and
thereby of discouraging open market purchases of common stock.

Stockholder Proposals and Nominations

The bylaws provide that any stockholder may present a nomination for a
directorship at an annual meeting of stockholders only if advance notice of
such nomination has been delivered to the Company not less than 90 days prior
to the meeting. If an election of directors is to be held at a special meeting
of stockholders, notice by the stockholder must be received not later than
seven days after the notice of such meeting was given to stockholders.
Similarly, any stockholder may present a proposal at an annual meeting only if
advance notice of the proposal has been delivered to the Company not less than
90 days prior to the meeting. The foregoing notices must describe the proposal
to be brought at the meeting or the nominee for director, as applicable, as
well as provide personal information regarding the stockholder giving the
notice, the number of shares owned by the stockholder, his or her interest in
such proposal and, with respect to nominations for directorships, such
information with respect to the nominees as would be required to be included
in a proxy statement filed by the Company with the Securities and Exchange
Commission. In addition, the bylaws provide that only the board of

47
<PAGE>

directors can call special meetings of stockholders and that the only business
that may be brought before a special meeting is such business specified by the
board of directors in the notice of such meeting. These procedural
requirements could have the effect of delaying or preventing the submission of
matters proposed by any stockholder to a vote of the stockholders. The
provisions of the bylaws containing the procedural requirements regarding
advance notice of nominations for our board of directors may only be amended
by a vote of 80 percent of the voting power of all classes of common stock of
the Company.

Restated Rights Agreement

As described under "--Restated Rights Agreement," the restated rights
agreement will permit disinterested stockholders to acquire additional shares
of the Company or of an acquiring company at a substantial discount in the
event of certain described changes in control. The restated rights agreement
is intended to discourage anyone from buying shares of common stock having
more than 15 percent of the voting power of all classes of common stock of the
Company without prior approval by the board of directors.

48
<PAGE>

PROPOSAL 2--AMENDMENT TO THE RESTATED CERTIFICATE OF
INCORPORATION, AS AMENDED, RELATING TO INCREASED
AUTHORIZATION OF COMMON STOCK

General

You are being asked to consider and vote upon a related amendment to the
Restated Certificate of Incorporation, as amended, that would increase the
number of shares of common stock authorized for issuance from 1,250,000,000
shares of common stock to 1,750,000,000 shares of common stock, in order to
allow the Company to address any future capital needs that may arise. The
description of this amendment to the Restated Certificate of Incorporation, as
amended, is qualified in its entirety by reference to the text of the
amendments to Restated Certificate of Incorporation, as amended, which are set
forth in Annex I.

The additional authorized but unissued shares of common stock would remain
available for issuance by the Company from time to time at the discretion of
the board of directors as Penney Group Common Stock or Eckerd Group Common
Stock. The board of directors could authorize issuance of the remaining shares
for any proper corporate purpose, such as raising capital, paying stock
dividends, effecting a stock split, providing compensation or benefits to
employees or acquiring other companies or businesses. The approval of the
stockholders of the Company is not necessary for the issuance of the
authorized but unissued shares of common stock, unless such approval is
required by Delaware law or NYSE rules.

The Company has no present agreements or understandings with respect to the
issuance of any of the shares of common stock that will be authorized for
issuance if Proposal 2 is approved by the stockholders. Although our board of
directors has no present intention to do so, the additional shares of common
stock that would be authorized if Proposal 2 is adopted by the stockholders
could be issued in one or more transactions (subject to applicable law) that
would make a takeover of the Company more difficult and less likely to occur,
even though such a takeover may be economically beneficial to the Company and
its stockholders. Our board of directors and our management have no knowledge
of any person or entity that intends to seek a controlling interest in, or to
make a takeover proposal with respect to, the Company.

Vote Required

Approval of Proposal 2 will require the favorable vote of the holders of a
majority of the voting stock. Proposal 2 relates to the proposed restructuring
of our existing common stock and, therefore, is conditioned upon approval of
the tracking stock proposal. Proposal 2 will not be implemented if the
tracking stock proposal is not approved by the stockholders and implemented by
the board of directors. Accordingly, a vote against the tracking stock
proposal will have the effect of a vote against Proposal 2. Abstentions and
broker non-votes on Proposal 2 will have the same effect as negative votes.

Recommendation of the Board of Directors

The board of directors has carefully considered Proposal 2 and believes that
its approval by the stockholders is in the best interests of the Company and
its stockholders and, accordingly, unanimously declares the proposal advisable
and recommends that stockholders vote for Proposal 2.

49
<PAGE>

PROPOSAL 3--AMENDMENTS TO J. C. PENNEY COMPANY, INC.
1997 EQUITY COMPENSATION PLAN

General

You are being asked to consider and vote in favor of certain amendments to
the Company's 1997 Equity Compensation Plan, as described herein and set forth
in Annex II to this document. The 1997 Equity Compensation Plan was previously
adopted by the board of directors and approved by the Company's stockholders.
On , 1999, the board of directors approved the amendments to the 1997
Equity Compensation Plan reflected in this Proposal 3, subject to approval of
this proposal by stockholders as well as approval by stockholders, and
subsequent implementation by the board of directors, of the tracking stock
proposal. The descriptions of the 1997 Equity Compensation Plan and the
proposed amendments thereto are qualified in their entirety by reference to
the text of such plan, as it is proposed to be amended, set forth in Annex II.

Amendments to 1997 Equity Compensation Plan

If the tracking stock proposal is adopted by stockholders and implemented by
the board of directors, it is proposed that the 1997 Equity Compensation Plan
be amended as of the date that the amendments to the Restated Certificate of
Incorporation, as amended, are filed with the Delaware Secretary of State to:

. increase the number of shares of common stock subject to the plan from
14,000,000 to ;

. reserve shares of Eckerd Group Common Stock and shares of
Penney Group Common Stock for issuance pursuant to awards made under the
1997 Equity Compensation Plan; and

. clarify that grants made after such date may be made with respect to
either Penney Group Common Stock or Eckerd Group Common Stock, or both,
in the same manner and to the same extent as is permitted with respect
to the existing common stock.

We believe it is desirable for the Company to maintain its flexibility to
use option grants to attract, retain and reward exceptional personnel. In this
regard, we believe that, if Eckerd Group Common Stock is issued by the
Company, options for Eckerd Group Common Stock, Penney Group Common Stock, or
a combination thereof, will provide a more effective and direct incentive for
employees of both groups.

The board of directors has concluded that the amendments to the 1997 Equity
Compensation Plan are appropriate to reflect the change in the equity
structure of the Company. The 1997 Equity Compensation Plan provisions
authorizing awards as well as provisions relating to adjustments to reserved
shares and outstanding awards implicitly permit the use of more than one class
of voting common stock for awards under the plan. Nevertheless, the board of
directors believes that it is desirable to amend the plan to provide
explicitly that shares of both Penney Group Common Stock and Eckerd Group
Common Stock are available for awards.

Outstanding awards under the 1997 Equity Compensation Plan, as well as under
the Company's prior 1989 Equity Compensation Plan, 1993 Non-Associate
Directors' Plan, and 1993 Equity Compensation Plan, will be adjusted to
reflect the tracking stock proposal in accordance with the adjustment
provisions of such plans and in a manner that preserves the value of the
option to the holder.

Description of 1997 Equity Compensation Plan as Proposed to be Amended

Principal Features of the 1997 Equity Compensation Plan

The 1997 Equity Compensation Plan provides for grants of stock options and
stock awards to "Associate Participants" and "Non-Associate Director
Participants."

50
<PAGE>

Associate Participants

The purpose of the 1997 Equity Compensation Plan is to motivate employees to
perform on the Company's behalf by aligning their interests with stockholders,
and to assist the Company in attracting and retaining high caliber employees.
The board of directors has reserved an aggregate of authorized but unissued
shares of common stock, subject to increase under limited circumstances, for
issuance upon the exercise of options and for payment of stock awards,
including in all cases dividend equivalent rights, over the term of the plan.
Of such shares, shares of Penney Group Common Stock and shares of
Eckerd Group Common Stock are reserved for issuance.

No discount options, stock appreciation rights, or tax benefit rights may be
issued under the plan. Associate Participants in the 1997 Equity Compensation
Plan are generally to be selected management employees of the Company and its
subsidiaries and affiliates as determined by the committee administering the
1997 Equity Compensation Plan, consisting of not less than three disinterested
directors appointed by the board of directors. The Personnel and Compensation
Committee of the board of directors has been designated as the committee to
administer the 1997 Equity Compensation Plan and approximately 2,000
management associates are eligible to participate.

Stock Options

Option grants will generally be made in amounts based on a participant's
"position responsibility level," or, in the case of a store manager, upon his
or her store's sales volume. The number of shares covered by each option grant
is generally determined pursuant to a schedule adopted by the committee
administering the plan. The plan committee has the discretion to alter this
schedule at any time. A participant may receive one or more option grants and
may receive non-qualified stock options and incentive stock options, as
determined by the plan committee.

Price

The option price under each option may not be less than 100 percent of the
fair market value of the shares of Penney Group Common Stock or Eckerd Group
Common Stock covered by the grant on such dates. The closing price of existing
common stock on , 1999, as reported on the New York Stock Exchange
composite tape, was $ per share.

The option price upon the exercise of an option may be paid in any one or
more of the following ways:

(a) in cash;

(b) in shares of Penney Group Common Stock or Eckerd Group Common Stock;

(d) in any combination of (a), (b), or (c), as the plan committee may
determine.

Stock Awards

The committee administering the 1997 Equity Compensation Plan may award
shares of common stock of either class, as additional compensation, to such
participants and on such bases as it may determine. The plan committee may
determine the types of awards made, the number of shares, and any other terms,
conditions, or restrictions relating to the awards as it may deem appropriate.
No more than 30 percent of the shares reserved for issuance under the Plan may
be issued as stock awards. As of , 1999, shares of existing common
stock had been issued as stock awards.

Terms of Options and Stock Awards

An option granted under the 1997 Equity Compensation Plan will become
exercisable upon such terms and at such times as the plan committee may
determine. Options may generally be exercised only during continuance

51
<PAGE>

of a participant's employment. In the event of employment termination through
death, disability, retirement, or other circumstances deemed appropriate by
the plan committee, the plan authorizes post-termination exercise periods, but
not beyond the original expiration date of the option. In no event may an
option be exercised by or on behalf of a participant (a) in the case of an
incentive stock option, more than 10 years after its date of grant, and (b) in
the case of a non-qualified stock option, after such period of time following
its date of grant as determined by the plan committee.

Transferability

Options or unearned stock awards are not assignable or transferable except
by will or the laws of descent or distribution, or by such other means as the
plan committee, in its discretion, may approve.

Deferral

The plan committee, in its discretion, may authorize deferral of all of part
of any cash or stock payment under the 1997 Equity Compensation Plan. The plan
committee may determine the period of deferral, the manner of deferral, and
the method for measuring appreciation on deferred amounts until their payout.

Term of Plan

The 1997 Equity Compensation Plan will terminate on May 31, 2007. After such
date, no awards may be made under the plan.

Change of Control

Upon a "change of control," as defined in the 1997 Equity Compensation Plan,
each participant will have the right to exercise any or all outstanding stock
options held by him or her, and all stock awards will immediately vest and be
deemed to be earned, on such terms as the plan committee may determine.

Federal Income Tax and Accounting Consequences

The grant of an option or the award of restricted stock does not create
taxable income for a participant.

The following are generally taxable to participants as ordinary income:

(a) the excess of the fair market value of common stock acquired over the
option price upon the exercise of a non-qualified stock option;

(b) the fair market value of any stock award received upon the lapse of
certain of the restrictions thereon; and

The tax basis for stock acquired is its fair market value on (a) the
exercise date, for non-qualified stock options, or (b) for stock awards, the
date certain restrictions on the award lapse. The tax basis for stock acquired
upon the exercise of an incentive stock option is generally equal to the
exercise price of the option.

If no disposition of the shares acquired upon an incentive stock option
exercise will have been made within two years from the date of grant and
within one year after transfer of such shares to such participant, then, on
such disposition, the excess of the amount realized over the option price, or
the excess of the option price over the amount so realized, will be reportable
by the participant as long-term capital gain or a long-term capital loss, as
the case may be. If a disposition of the shares acquired upon an incentive
stock option exercise occurs within two years from the date of grant or within
one year after the transfer of such shares to such participant, then on such
disposition, (a) the excess of the fair market value of common stock on the
date of exercise (or the fair market value of common stock on the date of
disposition, if less) over the option price will be taxable to such
participant as ordinary income; and (b) any amount realized in excess of the
fair market value of common stock

52
<PAGE>

on the date of exercise or any loss sustained will be reportable as long-term
or short-term capital gain or loss, as the case may be.

If an amount is taxable to a participant as ordinary income, the Company is
generally entitled to a corresponding tax deduction for the same amount. A
deduction for tax purposes may differ from compensation expense recorded for
financial statement purposes.

For financial statement purposes, the grant of an option at 100 percent of
fair market value does not give rise to any compensation expense. Stock
awards, or restricted stock awards, granted to participants will result in
compensation expense, based on the fair market value, at the date of grant or
over a vesting period, as the case may be.

Non-Associate Director Participants

General

The purpose of the non-associate directors' portion of the 1997 Equity
Compensation Plan is to assist the Company in attracting and retaining capable
directors and to motivate them by aligning their proprietary interests with
stockholders. Each director who is presently not an active employee of the
company will automatically be awarded an annual grant of equity securities in
an amount which the board of directors determines, based upon the advice of
outside consultants, to be competitive by industry standards, and pursuant to
such terms, conditions, and restrictions as determined by the board of
directors. An initial grant in the same amount as the then current annual
grant will also automatically be granted to each new non-associate director
upon his or her first being elected as a director.

Non-transferability

A non-associate director participant may not transfer, sell, assign, pledge,
or otherwise encumber or dispose of any shares of common stock received in
connection with a stock award or the exercise of an option prior to the time
his or her service as a director expires or is terminated.

Federal Income Tax and Accounting Consequences

Generally, the fair market value of any stock award received upon the lapse
of certain restrictions thereon, and any dividend received on a restricted
stock award will be taxable to non-associate director participants as ordinary
income. The Company is generally entitled to a corresponding tax deduction for
the same amount.

Miscellaneous

The provisions of the 1997 Equity Compensation Plan may be terminated or
amended in certain respects, as provided therein, by the board of directors.

Vote Required

Approval of Proposal 3 will require the favorable vote of the holders of a
majority of the voting stock. Proposal 3 relates to the proposed restructuring
of our existing common stock in connection with the tracking stock proposal
and, therefore, is conditioned upon approval of the tracking stock proposal
and will not be implemented if the tracking stock proposal is not approved by
stockholders and implemented by the board of directors. Accordingly, a vote
against the tracking stock proposal will have the effect of a vote against
Proposal 3. Abstentions and broker non-votes on the proposal will have the
same effect as negative votes.

Recommendation of the Board of Directors

The board of directors has carefully considered Proposal 3 and believes that
its approval by the stockholders is in the best interests of the Company and
its stockholders and, accordingly, unanimously declares the proposal advisable
and recommends that stockholders vote for Proposal 3.

53
<PAGE>

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Long-Term
Compensation
-------------------------------
Annual Compensation Awards Payouts
---------------------------------- ----------------------- -------
Other Securities
Annual Restricted Underlying LTIP All Other
Name and Salary Bonus Compensation Stock Options/ Payouts Compensation
Principal Position Year ($) ($) ($)(1) Award(s)(2) SARs (#)(3) ($)(4) ($)(5)
------------------ ---- ------- ------- ------------ ----------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Oesterreicher, J.E. ....
(Chairman of the Board 1998 612,235 449,886 271,478 -- 120,000 -- 81,470
and Chief Executive 1997 560,826 792,784 -- -- 60,000 406,823 79,773
Officer) 1996 458,008 587,613 -- -- 60,000 387,612 56,100
Hutchens, T. D. ........
(President and Chief 1998 324,427 188,208 98,686 -- 19,000 -- 36,395
Operating Officer, 1997 304,968 337,261 -- -- 19,000 147,300 40,210
International) 1996 291,603 306,183 -- -- 19,000 164,318 33,886
Lotter, C. R. ..........
(Executive Vice 1998 292,517 158,383 83,173 -- 12,000 -- 31,631
President, Secretary and 1997 279,396 291,019 -- -- 12,000 119,693 33,653
General Counsel) 1996 256,905 242,865 -- -- 12,000 128,401 28,863
Newman, F. A. .......... 1998 609,760 123,781(6) 163,550 -- 19,000 -- 18,276
(Chairman, President and 1997 595,079(7) 207,200(8) -- -- -- 245,088 40,398
Chief Executive Officer, 1996 578,079 237,542(8) -- -- -- 313,733(9) 23,977
Eckerd Corporation)
Cody, J. T., Jr.*....... 1998 444,453 275,028 128,310 -- 23,000 -- 44,479
(President and Chief 1997 337,215 382,274 -- -- 19,000 167,949 42,280
Operating Officer, 1996 304,598 309,548 -- -- 19,000 171,641 35,396
JCPenney Stores,
Merchandising,
Marketing, and Catalog)
Tygart, W. B.**......... 1998 261,077 161,554 188,164 -- 11,500 -- --
(Vice Chairman of the 1997 405,064 482,188 26,150(10) -- 23,000 218,734 55,632
Board) 1996 390,423 421,813 42,831(10) -- 23,000 245,966 48,345
</TABLE>
- -------
* Mr. Cody retired from the Company on March 1, 1999.
** Mr. Tygart retired from the Company on August 1, 1998.
(1) The amounts shown for 1998 represent termination payments from the
Company's 1984 Performance Unit Plan in recognition of contributions made
by associates during the portion of the Performance Unit Plan award cycle
already completed when the Performance Unit Plan program ended at the end
of fiscal 1997.
(2) Each of the named executive officers received a grant of performance
units in 1998 under the JCPenney Making Profit Grow Program. Based on the
Company's results for fiscal 1998, no JCPenney Making Profit Grow Program
awards vested. In addition, Mr. Newman received a grant of performance
units under the JCPenney Drug Store Partner Incentive Award Program.
Based on Eckerd's results for fiscal 1998, no shares were credited
pursuant to this award. For descriptions of the MPG Program and the
Partner Incentive Award Program, see pages 56 to 57.
(3) No SARs have been granted since 1987. Pursuant to the terms of the
Company's acquisition of Eckerd Corporation, each share of Eckerd common
stock was converted into .6604 of a share of the Company's common stock,
and each option to purchase shares of Eckerd common stock was converted
into an option to purchase shares of the Company's existing common stock
at the same ratio. As a result, Mr. Newman's holdings of Eckerd common
stock and stock options were converted into 4,424 shares of existing
common stock and 120,192 options to purchase shares of existing common
stock, respectively. Mr. Newman received a grant of 90,000 Eckerd stock
options in fiscal 1996 but did not receive any grant of stock options
under the Company's or Eckerd's equity plans in 1997.
(4) For fiscal years prior to 1998, this amount reflects long-term incentive
plan payments made pursuant to the Performance Unit Plan.
(5) Represents Company contributions or allocations on behalf of the
following executive officers under the Company's Savings, Profit-Sharing
and Stock Ownership Plan and the Benefit Restoration Plan, which, for the
last fiscal year, were, respectively: Mr. Oesterreicher, $7,213 and
$74,257; Mr. Hutchens, $7,213 and $29,182; Mr. Lotter, $7,213 and
$24,418; and Mr. Cody, $7,213 and $37,266. For a description of the
Benefit Restoration Plan, see "Retirement Income" on pages 57 to 59. In
the case of Mr. Newman, the amounts shown represent allocations made by
Eckerd Corporation pursuant to the Eckerd Profit-Sharing Plan and the
Eckerd Executive Excess Plan, which, for the last fiscal year, were
$2,651 and $15,625, respectively.
(6) As an executive officer of the Company and of Eckerd, Mr. Newman's 1998
incentive compensation was comprised of payments under both Eckerd's Key
Management Bonus Plan and the Company's 1989 Management Incentive
Compensation Program.
(7) In connection with its acquisition of Eckerd, the Company requested that
Mr. Newman enter into an amendment to his existing employment agreement.
(8) This amount reflects payments made to Mr. Newman pursuant to the Eckerd
Key Management Bonus Plan. Mr. Newman did not participate in the
Company's 1989 Management Incentive Compensation Program in 1996 or 1997.
(9) Represents amounts paid to Mr. Newman under the Eckerd Corporation
Executive Three Year Bonus Plan, which was terminated in connection with
the Company's acquisition of Eckerd Corporation.
(10) Tax benefit rights paid on exercise of certain stock options. No tax
benefit rights have been granted on options since 1987, and cannot be
granted under the 1997 Equity Compensation Plan.

54
<PAGE>

OPTION/SAR GRANTS IN LAST FISCAL YEAR

The following table provides information regarding stock options granted to
the named executive officers during fiscal 1998. Except as otherwise noted,
such options are exercisable after one year from the date of the grant. The
values assigned to each reported option are shown using arbitrarily assumed
annualized rates of stock price appreciation of 5 percent and 10 percent over
the full 10-year term of the options, which would result in a stock price of
$116.11 and $184.89, respectively. In assessing these values it should be kept
in mind that regardless of the theoretical value that is placed on a stock
option on the date of grant, its ultimate value will be dependent on the
market value of the existing common stock at a future date, and as a result of
the efforts of such executives to contribute to the creation of sustainable
stockholder wealth.

<TABLE>
<CAPTION>
Individual Grants
------------------------
Number of Potential Realizable Value
Securities % of Total at Assumed Annual Rates
Underlying Options/SARs of Stock Price Appreciation
Options/SARs Granted to Exercise or for Option Term(2)
Granted Employees in Base Price Expiration ----------------------------
Name (#)(1) Fiscal Year ($/Sh) Date 5% 10%
---- ------------ ------------ ----------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Oesterreicher, J. E. ... 60,000 3.7 71.2812 3/1/08 $2,689,728 $6,816,528
(Chairman of the Board 18,000(3) 1.1 71.2812 3/1/08 $ 806,918 $2,044,958
and Chief Executive 21,000(3) 1.3 71.2812 3/1/08 $ 941,405 $2,385,785
Officer) 21,000(3) 1.3 71.2812 3/1/08 $ 941,405 $2,385,785
Hutchens, T. D. ........ 19,000 1.2 71.2812 3/1/08 $ 851,747 $ 2,158,567
(President and Chief
Operating Officer,
International)
Lotter, C. R. .......... 12,000 0.7 71.2812 3/1/08 $ 537,946 $ 1,363,306
(Executive Vice
President, Secretary and
General Counsel)
Newman, F. A. .......... 19,000 1.2 71.2812 3/1/08 $ 851,747 $ 2,158,567
(Chairman, President and
Chief Executive Officer,
Eckerd Corporation)
Cody, J. T., Jr.*....... 23,000 1.4 71.2812 3/1/08 $ 1,031,062 $ 2,613,002
(President and Chief
Operating Officer,
JCPenney Stores,
Merchandising,
Marketing, and Catalog)
Tygart, W. B.**......... 11,500 0.7 71.2812 3/1/08 $ 515,531 $ 1,306,501
(Vice Chairman of the
Board)
</TABLE>
- --------
* Mr. Cody retired from the Company on March 1, 1999.
** Mr. Tygart retired from the Company on August 1, 1998.
(1) No SARs were granted in the last fiscal year.
(2) The dollar amounts under these columns are the result of calculations at
the 5 percent and 10 percent rates set by the Securities and Exchange
Commission and, therefore, are not intended to forecast possible future
appreciation, if any, of the Company's stock price.
(3) The number of options shown was part of the performance-based stock option
grant covering 60,000 shares of common stock. This grant vests in three
parts as follows: thirty percent of the grant vests when the average of
the high and low sales price of the common stock is at least $75.2812 for
at least three consecutive trading days, thirty-five percent vests when
such average is at least $85.00 for at least three consecutive trading
days, and the remaining thirty-five percent vests when the average is at
least $100.00 for at least three consecutive trading days. At present,
thirty percent of the grant (18,000 shares) has vested.

55
<PAGE>

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES

The following table shows stock option exercises by named executive officers
during fiscal 1998, including the aggregate value of gains on the date of
exercise. In addition, this table includes the number of shares covered by
both exercisable and non-exercisable stock options at fiscal year-end. Also
reported are the values for "in-the-money" options which represent the
positive spread between the exercise price of any such existing stock options
and the fiscal 1998 year-end prices of the existing common stock.

<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Acquired Value Options/SARs at FY-End (#) Options/SARs at FY-End($)
Name on Exercise Realized ($)(1) Exercisable/Unexercisable Exercisable/Unexercisable(2)
---- --------------- --------------- -------------------------- ----------------------------
<S> <C> <C> <C> <C>
Oesterreicher, J. E. ... 10,888 405,897 235,052(E) 560,439
(Chairman of the Board 102,000(U) -0-
and Chief Executive
Officer)
Hutchens, T. D. ........ 20,100 972,211 38,872(E) 26,118
(President and Chief 19,000(U) -0-
Operating Officer,
International)
Lotter, C. R. .......... 12,400 533,422 52,000(E) 116,875
(Executive Vice 12,000(U) -0-
President, Secretary and
General Counsel)
Newman, F. A. .......... 21,500 1,422,971 98,692(E) 2,406,808
(Chairman, President and 19,000(U) -0-
Chief Executive Officer,
Eckerd Corporation)
Cody, J. T., Jr.* ...... 31,910 1,544,063 75,500(E) 50,201
(President and Chief 23,000(U) -0-
Operating Officer,
JCPenney Stores,
Merchandising,
Marketing, and Catalog)
Tygart, W. B.** ........ 7,762 248,449 165,532(E) 752,630
(Vice Chairman of the -0-(U) -0-
Board)
</TABLE>
- --------
* Mr. Cody retired from the Company on March 1, 1999.
** Mr. Tygart retired from the Company on August 1, 1998.
(1) Since most shares reported here continue to be held by participants, and
considering certain shares have holding period requirements, the future
value realized on such shares upon actual disposition may differ from the
value reported here on the exercise date.
(2) Value is based on the closing price on the last trading day of the fiscal
year, which, as of January 29, 1999, was $39.00.

Making Profit Grow Program. Effective March 12, 1997, the Personnel and
Compensation Committee of the board of directors approved the JCPenney Making
Profit Grow Program as an additional equity incentive element of the 1997
Equity Compensation Plan. This program was intended to closely align
management performance with stockholder interests by rewarding performance
which exceeded the Company's 1997 and 1998 profit plans as approved by the
board of directors. For fiscal 1998, no Making Profit Grow Program awards
vested. This program terminated at the end of fiscal 1998.

56
<PAGE>

JCPenney Drug Store Partner Incentive Award Program. Effective March 12,
1997, the Committee also approved the JCPenney Drug Store Partner Incentive
Award Program to motivate and reward key Eckerd Corporation associates for the
achievement of aggressive profit plans for 1997-1999. Under this program,
Partner Incentive Awards are granted to participants in each of the three
years in the measurement period but are only credited after the close of each
fiscal year, if at all, based on Eckerd Corporation's actual operating income
results for such fiscal year compared to planned operating income for the
period. At the conclusion of the program, the number of credited Partner
Incentive Awards which vest, if any, will be based upon Eckerd Corporation's
cumulative sales and operating income results for the three-year period
against plan. Each Partner Incentive Award is equivalent to one share of
common stock for valuation purposes, and, if they vest, will be paid in shares
of common stock having a two-year retention period. For fiscal 1998, no
Partner Incentive Awards were credited.

Associate Stock Ownership Guidelines. The Company has adopted a Stock
Ownership Guidelines Program for certain of its management employees and store
managers. The Guidelines were enacted to further encourage and support a
"stakeholder" mentality among these employees in order to align their
interests with other Company stockholders. Pursuant to the Guidelines, all
participants in the Company's 1997 Equity Compensation Plan are required to
own a minimum amount of common stock based upon a multiple (the "ownership
multiple") of base salary. Under the Guidelines, the ownership multiples range
from seven times base salary for the CEO to one-half times base salary for
non-officers and store managers. Employees subject to the Guidelines may sell
common stock only if their holdings are in excess of the Guidelines.

Deferred Compensation Plan. Participant contributions to qualified savings
plans were limited in 1998 by a $160,000 compensation limit imposed by the
IRS. The board of directors approved the J. C. Penney Company, Inc. 1995
Deferred Compensation Plan as a vehicle for associates earning more than the
compensation limit to defer a portion of their base salary and incentive
compensation payments exceeding the compensation limit as a means of saving
for retirement. Participants in the 1995 Deferred Compensation Plan elect to
defer a percentage of their compensation each year. Deferred amounts are
generally payable upon a participant's retirement, death, or other separation
from the Company. Effective January 1, 1999, the 1995 Deferred Compensation
Plan was merged into the J. C. Penney Company, Inc. Mirror Savings Plan II. As
with the Deferred Compensation Plan, participants in the Mirror Savings Plan
II may elect to defer a percentage of their compensation each year as a means
of saving for retirement.

Retirement Income. The following table shows various estimated maximum
aggregate annual retirement incomes payable to the Company's management
employees who receive profit incentive compensation and retire at age 60 (the
age at which most management personnel currently voluntarily retire).

ESTIMATED RETIREMENT INCOME TABLE

<TABLE>
<CAPTION>
Years of Service
-----------------------------------------------------------
Average Final Compensation 15 20 25 30 35 40
- -------------------------- -------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 250,000........ $ 87,500 $100,000 $112,500 $ 125,000 $ 131,250 $ 137,500
500,000........ 175,000 200,000 225,000 250,000 262,500 275,000
750,000........ 262,500 300,000 337,500 375,000 393,750 412,500
1,000,000........ 350,000 400,000 450,000 500,000 525,000 550,000
1,250,000........ 437,500 500,000 562,500 625,000 656,250 687,500
1,500,000........ 525,000 600,000 675,000 750,000 787,500 825,000
1,750,000........ 612,500 700,000 787,500 875,000 918,750 962,500
2,000,000........ 700,000 800,000 900,000 1,000,000 1,050,000 1,100,000
Each additional
$ 50,000........ 17,500 20,000 22,500 25,000 26,250 27,500
</TABLE>

57
<PAGE>

Average Final Compensation for pension formula purposes generally includes
"Salary," "Bonus," and prior to 1998, payments under the Company's Performance
Unit Plan included in "LTIP Payouts," as reported under these columns of the
Summary Compensation Table on page 54.

The present annual pension benefit payable after normal retirement (age 65
or later) to participants in the Company's Pension Plan with service after
December 31, 1988, generally is equal to the sum of .75 percent times the
"average final compensation" up to the "Average Social Security Wage Base"
plus 1.25 percent times the "average final compensation" in excess of the
"Average Social Security Wage Base" multiplied by the number of years of
"credited service" up to a maximum of 35 such years. In addition to this
annual pension benefit, a participant may receive an annual retirement benefit
generally equal to 0.25 percent of his or her average final compensation times
his or her years of credited service that exceed 25 years of credited service,
but do not exceed 35 such years. "Average final compensation" is the average
of the highest five consecutive full calendar years of compensation out of the
employee's last ten years in the Pension Plan. "Average Social Security Wage
Base" is the average of the 35 consecutive years of wages subject to the
Social Security Tax, ending with the year an employee qualifies for unreduced
Social Security retirement benefits. The Pension Plan contains provisions for
early retirement and optional forms of benefit payments.

A Supplemental Retirement Program for Management Profit-Sharing Associates
provides certain supplemental retirement benefits, including Social Security
substitute payments until age 62, to certain management employees, including
executive officers, who voluntarily retire prior to age 65 in accordance with
the Supplemental Retirement Program and whose aggregate retirement and
estimated Social Security benefits would otherwise be below specified minimum
retirement income levels. Participation in the Supplemental Retirement Program
is limited to associates eligible for participation on or prior to December
31, 1995.

The Code imposes certain limitations on the maximum benefits that may be
earned under "qualified" retirement plans, such as the Pension Plan and the
Company's Savings, Profit-Sharing and Stock Ownership Plan ("LESOP"). In 1995,
the Company adopted the J. C. Penney Company, Inc. Benefit Restoration Plan,
which provides to impacted management associates certain benefits which, under
the Code, cannot be earned under the Pension Plan and LESOP. Effective January
1, 1999, the benefits which, under the Code, could not be earned under the
LESOP and, therefore, were provided pursuant to the Benefit Restoration Plan,
will be provided under the Mirror Savings Plan. Eligible management associates
must make an annual election to participate in the Mirror Savings Plan.

Estimated annual retirement incomes reflected in the table are assumed for
this purpose to comprise the total of (i) the benefit under the Pension Plan,
(ii) the value at retirement of the aggregate of Company contributions made to
the Company's LESOP and predecessor plans and the Company's Mirror Savings
Plan, and earnings thereon, (iii) the benefit under the Benefit Restoration
Plan, and (iv) the benefit under the Supplemental Retirement Program, assuming
the payment of all such benefits in the form of a straight life annuity. The
Named Executive Officers (other than Messrs. Tygart, Cody and Newman)
currently have, respectively, the following years of "credited service" and
approximate assumed "average final compensation" recognized for calculation of
benefits under the Supplemental Retirement Program: Mr. Oesterreicher, 34
years, $1,504,415; Mr. Hutchens, 37 years, $755,763; and Mr. Lotter, 26 years,
$645,483. Upon their retirement as full-time employees of the Company, Messrs.
Tygart and Cody became entitled to annual retirement incomes of $571,834 and
$455,706, respectively.

Effective January 1, 1999, Mr. Newman became a participant in the Company's
Pension Plan and the Benefit Restoration Plan. Since Mr. Newman is not a
participant in the Company's Supplemental Retirement Program, his annual
retirement income from the Company's defined benefit plans will comprise the
total of (i) the benefit under the Pension Plan and (ii) the benefit under the
Benefit Restoration Plan. As of June 30, 1999, Mr. Newman's years of "credited
service" and "average final compensation" for purposes of calculating his
annual retirement income under the Company's plans were 0.5 years and
$566,491.

58
<PAGE>

Prior to January 1, 1999, Mr. Newman was an active participant in the Eckerd
Corporation Pension Plan and the Eckerd Corporation Executive Excess Plan,
both of which were frozen as of December 31, 1998. The minimum annual
retirement benefit payable to Mr. Newman upon normal retirement under the
Eckerd Corporation Pension Plan and the Executive Excess Plan is $84,341. This
minimum annual retirement benefit is an age 65 single life annuity amount and
is not subject to any deduction for Social Security or other offset amounts,
and includes the income which could be provided by a monthly annuity for life
purchased with the Eckerd Profit Sharing Plan vested account balance.

Mr. Newman also participates in the Eckerd Corporation First Executive
Supplemental Benefit Plan, which was in place at the time the Company acquired
Eckerd and has not been frozen. The Eckerd Corporation First Executive
Supplemental Benefit Plan is a non-qualified, noncontributory plan that
provides for supplemental retirement and death benefits for the executive
officers and other key management employees of Eckerd.

The following table sets out the estimated annual benefits payable under
this Eckerd Corporation First Executive Supplemental Benefit Plan at age 65
for the noted levels of midpoint salaries:

<TABLE>
<CAPTION>
Annual
Benefit
Covered Salary Payable
-------------- --------
<S> <C>
$100,000........................................................ $ 25,000
200,000........................................................ 50,000
300,000........................................................ 75,000
400,000........................................................ 100,000
500,000........................................................ 125,000
600,000........................................................ 150,000
700,000........................................................ 175,000
</TABLE>

Under the Eckerd Corporation First Executive Supplemental Benefit Plan,
Eckerd is obligated to pay a participant an annual amount equal to 25 percent
of the participant's covered salary in equal monthly installments for fifteen
years commencing at age 65. The annual benefit shown assumes that the sum of
the participant's age and the number of years of service (which cannot be less
than five) is at least 70. If it is less than 70, then the annual benefit is
prorated pursuant to a prescribed formula. The covered salary is the midpoint
of a salary range for a particular executive position as calculated by Eckerd.
For purposes of the Eckerd Corporation First Executive Supplemental Benefit
Plan, Mr. Newman's 1998 covered salary was $662,900 and he had five years of
service. The Eckerd Corporation First Executive Supplemental Benefit Plan also
provides that, in the event of the death of a participant prior to retirement,
the participant's beneficiary is entitled to receive either (a) a lump sum
payment equal to four times the participant's covered salary, or (b) an amount
equal to 90 percent of the participant's covered salary for the first year
after death plus 45 percent of the covered salary annually for the next nine
years.

Compensation Committee Interlocks and Insider Participation

The Personnel and Compensation Committee is composed entirely of persons who
are neither employees nor former or current officers of the Company. K. B.
Foster, George Nigh, J. C. Pfeiffer, Francisco Sanchez-Loaeza, and C. S.
Sanford, Jr. served as members of the Committee during the Company's 1998
fiscal year.

Mr. Jordan is a senior partner of Akin, Gump, Strauss, Hauer & Feld, L.L.P.,
which is one of a number of firms which have provided or will provide legal
services to the Company and its subsidiaries.

In connection with its acquisition of Eckerd Corporation, the Company
requested that Mr. Newman, Eckerd's Chairman, President and Chief Executive
Officer, enter into an amendment to his existing employment agreement to
guarantee his continued employment with Eckerd for at least three years after
the acquisition. As amended, the agreement, which provides for an initial base
salary of $575,000, has a three-year term beginning

59
<PAGE>

February 27, 1997, after which it is automatically renewed annually until
terminated by the Company or Mr. Newman. Upon involuntary termination of his
employment, other than for cause, Mr. Newman is entitled to a severance
payment of two times his then current annual base salary, payable in monthly
installments over a two year period. In addition, upon termination by the
Company within two years, or termination by Mr. Newman for Good Reason (as
defined therein) at least one year but less than two years, after a Change of
Control (as defined therein), he will receive a lump sum severance payment of
2.9 times base salary and all previously granted incentive awards will vest
immediately. Unless terminated for cause, Mr. Newman will also receive a pro
rata portion of his applicable bonus compensation and, subject to certain
limitations, the Company will continue certain insurance and medical benefits
for two years.

Directors' Compensation

Company employees are not paid additional amounts for serving as directors.
Directors who are not Company employees ("non-associate directors") are paid
an annual retainer of $26,400, plus $1,200 for attendance at each meeting of
the board of directors and $1,000 for attendance at each meeting of any
committee of the board of directors. Non-associate directors also receive
$1,000 for each written consent of directors in lieu of a meeting, if any. In
fiscal 1998, two such written consents were executed. The chairs of the Audit
Committee and the Personnel and Compensation Committee of the board of
directors are each paid an additional annual fee of $4,500; the chairs of the
Benefit Plans Review Committee, the Corporate Governance Committee, the Public
Affairs Committee, and the Finance Committee of the board of directors are
each paid an additional annual fee of $4,000. Directors are also reimbursed
for expenses incurred for attending any meeting which they attend in their
official capacities as directors. Directors who are representatives under an
Indemnification Trust Agreement between the Company and The Chase Manhattan
Bank, as trustee, (currently directors Jordan and Pfeiffer), are paid an
annual retainer of $5,000, plus $600 for each meeting of the representatives,
and are reimbursed for expenses of meeting attendance. During fiscal 1998, no
such meetings were held. Non-associate directors are also paid $800 for each
full day of service to the Company in addition to those services which they
perform in connection with board of directors and committee responsibilities,
and are reimbursed for expenses in connection with their performance of such
services. During fiscal 1998, non-associate directors Burns, Foster, Jordan,
Richards and Turner were each paid $800, and non-associate directors Nigh (who
retired from the board of directors in May 1999), Pfeiffer, Sanchez-Loaeza and
Sanford were each paid $400, for such services. A director may elect to defer
payment of all or part of any of the above fees under the terms of a deferred
compensation plan for directors. As of the end of fiscal 1998, four directors
had elected such deferral.

Pursuant to a retirement plan for non-associate directors, a director
serving as of February 12, 1997, and any person who served as a Company
director prior to such date, who is not entitled to receive benefits under the
Company's Pension Plan, will be paid a retirement benefit after serving as a
member of the board of directors for a period of not less than five years,
unless such non-associate director elected to discontinue participation in the
retirement plan. For such director retiring on his or her normal retirement
date, as defined in the retirement plan, annualized benefits will equal the
annual retainer for directors from time to time then in effect. During fiscal
1998, each eligible non-associate director who elected to remain in the
retirement plan or who elected not to participate in the retirement plan was
granted a stock award of 400 shares of restricted common stock under the
Company's 1997 Equity Compensation Plan. Each non-associate director who was
not eligible for the retirement plan was granted a stock award of 900 shares
of restricted common stock under the 1997 Equity Compensation Plan. Non-
associate directors elected or appointed to the Company's board of directors
after February 12, 1997 are not eligible to receive retirement benefits.
Pursuant to the Company's bylaws, no person may continue to serve as a
director after the Company's annual meeting of stockholders in the calendar
year in which such person attains age 72.

Directors are eligible to participate in the Company's Directors' Charitable
Award Program. The Directors' Charitable Award Program is designed to
acknowledge the service of directors and to benefit and recognize the mutual
interest of directors and the Company in supporting worthy charitable and
educational institutions. In addition, it enhances the Company's ability to
attract and retain directors of the highest caliber and experience. Pursuant
to the Directors' Charitable Award Program, the Company has purchased joint
life insurance policies

60
<PAGE>

on groups of directors. Each group generally consists of two directors with
the Company named as the beneficiary of each joint life policy. With respect
to each group, the Company will receive a $1,000,000 death benefit upon the
death of the second director of the group. The Company in turn has informally
agreed to donate a total of $1,000,000: $500,000 upon the earlier of (i) five
years after the date of death of the first director of the group to die or
(ii) the death of the second director of the group, and an additional $500,000
upon the death of the second director of the group, to one or more charitable
organizations as recommended by the individual directors. Because all
charitable deductions accrue solely to the Company, the individual directors
derive no financial benefits from this program. The board of directors may, at
any time, without the consent of any participating director, amend, suspend,
or terminate this program. Seven of the current directors have elected to
participate in the Directors' Charitable Award Program.

61
<PAGE>

BENEFICIAL OWNERSHIP TABLES

SECURITY OWNERSHIP OF CERTAIN STOCKHOLDERS

The following table sets forth, as of December 31, 1998, certain information
with respect to each stockholder known to the Company to own beneficially more
than 5 percent of the existing common stock.

<TABLE>
<CAPTION>
Percent of
Shares of existing Percent of voting stock
Name and address of common stock existing common as of
beneficial owner beneficially owned stock outstanding [ ], 1999(1)
------------------- ------------------ ----------------- --------------
<S> <C> <C> <C>
Capital Research and
Management Company....... 30,641,600(2) 12.1 --
333 South Hope Street
Los Angeles, CA 90071
Sanford C. Bernstein &
Co., Inc................. 23,451,363(3) 9.2 --
767 Fifth Avenue
New York, NY 10153
</TABLE>
- --------
(1) Percentages are calculated based on the shares of existing common stock
beneficially owned as of December 31, 1998.
(2) Capital Research and Management Company ("Capital Research") has informed
the Company that it has sole dispositive power with respect to 30,641,600
shares of existing common stock in its capacity as investment adviser to
various investment companies registered under Section 8 of the Investment
Company Act of 1940. Capital Research has disclaimed beneficial ownership
with respect to such shares.
(3) Sanford C. Bernstein & Co., Inc. ("Sanford Bernstein") has informed the
Company that it is the beneficial owner of 23,451,363 shares of existing
common stock held in the accounts of discretionary clients. Of such shares,
Sanford Bernstein has sole voting power with respect to 12,021,829 shares,
shared voting power with respect to 2,983,268 shares, and sole dispositive
power with respect to 23,451,363 shares.

62
<PAGE>

SECURITY OWNERSHIP OF MANAGEMENT

The following table shows, as of March 22, 1999, the beneficial ownership of
shares of voting stock by each present director and by the named executive
officers, and by all present directors and all executive officers of the
Company as a group. The information includes shares held under certain
restrictions and, in the case of executive officers, also includes the number
of shares of voting stock credited to their accounts under the Company's
LESOP. As shown in the last two columns, substantial portions of the shares
indicated as beneficially owned are actually unissued shares attributable to
unexercised and unexpired options for existing common stock. The combined
beneficial ownership of shares of existing common stock and existing common
stock voting equivalents of each director and named executive officer and of
all directors and executive officers as a group (not including shares
attributable to unexercised and unexpired options) constitutes less than 1
percent of the total voting stock as of March 22, 1999.

<TABLE>
<CAPTION>
Number of shares
included in
previous column
attributable to Number of options
unexercised and included in previous
unexpired options column exercisable
Number of shares for existing within 60 days
Name or group beneficially owned common stock of March 22, 1999
- ------------- ------------------ ----------------- --------------------
<S> <C> <C> <C>
Directors:
M. A. Burns............ 14,400 8,800 8,800
T. J. Engibous......... 900 0 0
K. B. Foster........... 1,217(1) 0 0
V. E. Jordan, Jr....... 17,760 12,000 12,000
George Nigh............ 12,619 8,800 8,800
J. E. Oesterreicher.... 598,188 517,052 295,052
J. C. Pfeiffer......... 17,520 10,800 10,800
A. W. Richards......... 4,671 2,400 2,400
F. Sanchez-Loaeza...... 2,400 0 0
C. S. Sanford, Jr...... 11,400 4,800 4,800
R. G. Turner........... 4,748 1,600 1,600
Named Executive
Officers(2):
J. T. Cody, Jr.*....... 190,108 98,500 98,500
T. D. Hutchens......... 146,338 114,872 57,872
C. R. Lotter........... 138,738 100,000 64,000
F. A. Newman........... 191,116 186,692 117,692
W. B. Tygart**......... 228,337 158,300 158,300
All present directors
and executive officers
as a group(3).......... 1,897,302 1,529,473 888,223
</TABLE>
- --------
* Mr. Cody retired from the Company on March 1, 1999.
** Mr. Tygart retired from the Company on August 1, 1998.
(1) Includes 304 shares held by a family limited partnership with respect to
which Mr. Foster has shared voting and dispositive power, but as to which
he disclaims beneficial ownership.
(2) In addition to Mr. Oesterreicher who also serves as a director.
(3) Excludes shares beneficially owned by Messrs. Cody and Tygart who are
retired from the Company.

63
<PAGE>

OTHER INFORMATION

Solicitation of Proxies

In addition to the solicitation of proxies by mail, the Company's employees,
including officers of the Company, may solicit proxies by telephone,
telegraph, or mail. The Company's employees will not be compensated for proxy
solicitation. The Company has also retained Morrow & Co., Inc. to assist in
the solicitation of proxies by mail, telephone, telegraph, and personal
interview, particularly those proxies held in street name by brokers, banks
and other institutions. Morrow & Co., Inc. will receive a fee of approximately
$ plus out-of-pocket expenses for its solicitation efforts. The Company may
also reimburse brokers and other persons holding shares in their names, for
their expenses in sending proxy materials to principals and obtaining their
proxies.

Stockholder Proposals

Under the rules of the SEC, the date by which proposals of stockholders
intended to be presented at the 2000 annual meeting of stockholders must be
received by the Company for inclusion in its proxy statement and form of proxy
relating to that meeting is December 17, 1999.

Under the Company's bylaws, certain procedures are provided which a
stockholder must follow to nominate persons for election as directors or to
introduce an item of business at an annual meeting of stockholders. These
procedures provide, generally, that stockholders desiring to make nominations
for directors, and/or bring a proper subject of business before the meeting,
must do so by a written notice timely received (not later than 90 days in
advance of such meeting) by the Secretary of the Company containing the name
and address of the stockholder, and a representation that the stockholder is a
holder of record and intends to appear in person or by proxy at the meeting.
If the notice relates to a nomination for director, it must also set forth the
name and address of any nominee(s), a description of all arrangements or
understandings between the stockholder and each nominee and any other
person(s) (naming such person(s)) pursuant to which the nomination(s) are to
be made, such other information regarding each nominee as would have been
required to be included in a proxy statement filed pursuant to the proxy rules
of the SEC had each nominee been nominated by the board of directors, and the
consent of each nominee to serve. Notice of an item of business shall include
a brief description of the proposed business and any material interest of the
stockholder in such business.

The chairman of the meeting may refuse to allow the transaction of any
business not presented, or to acknowledge the nomination of any person not
made, in compliance with the foregoing procedures.

It is currently expected that the 2000 annual meeting of stockholders will
be held on or about May 19, 2000 in which event any advance notice of
nominations for directors and items of business (other than proposals intended
to be included in the proxy statement and form of proxy, which, as noted
above, must be received by December 17, 1999) must be given by stockholders by
February 19, 2000. The Company does, however, retain the right to change this
date as it, in its sole discretion, may determine. Notice of any change will
be furnished to stockholders prior to the expiration of the advance notice
period referred to above. Copies of the Company's bylaws are available from
the Secretary of the Company.

Independent Auditors

Representatives of KPMG LLP, the Company's independent auditors, will be
present at the special meeting. Such representatives will have the opportunity
to make a statement if they so desire and will be available to answer
appropriate questions at that time.

Legal Opinions

Cravath, Swaine & Moore, New York, NY, will render an opinion to the Company
concerning the validity of the reclassification of the existing common stock
and certain tax matters.

64
<PAGE>

ANNEX I

AMENDMENT TO

J. C. PENNEY COMPANY, INC.

RESTATED CERTIFICATE OF INCORPORATION,

AS AMENDED

<PAGE>

ANNEX II

J. C. PENNEY COMPANY, INC.

1997 EQUITY COMPENSATION PLAN

(AS PROPOSED TO BE AMENDED)

<PAGE>

ANNEX III

PENNEY GROUP

DESCRIPTION OF BUSINESS

<PAGE>

PENNEY GROUP BUSINESS DESCRIPTION

Overview

The Penney Group consists of the JCPenney department store, catalog, and
direct marketing businesses. The JCPenney department store chain was founded
by James Cash Penney in 1902 and is one of the largest department store
retailers in the United States. In fiscal year 1998, revenues for the Penney
Group totaled $20.4 billion, and net income was $594 million. For the first
quarter of 1999, revenue and net income for the Penney Group totaled $4.5
billion and $167 million, respectively.

Department Stores and Catalog

The Penney Group operates approximately 1,150 JCPenney department stores
located in all 50 states, Puerto Rico, Mexico and Chile. In addition, in
January 1999, the Penney Group acquired a majority interest in a Brazilian
department store chain that operates an additional 21 stores under the Renner
name. The JCPenney stores occupy more retail space in major regional shopping
centers than any other department store retailer in America. The Penney Group
markets predominantly family apparel, jewelry, shoes, accessories and home
furnishings.

The Penney Group's catalog operation is the largest in the United States,
with sales of nearly $4 billion and catalog desks in approximately 1,800
locations, including virtually all JCPenney department stores, a growing
number of Eckerd drugstores, and free-standing catalog stores. The Penney
Group's catalog infrastructure provides well-established capabilities in
fulfillment, telemarketing, and customer service.

Private brands. The department store and catalog business offers 34 private
brands, which give the Group the ability to tailor its apparel and home
merchandise to the needs and wants of targeted customer groups. The eight most
successful private label brands are the Original Arizona Jean Company,
Worthington, Stafford, St. John's Bay, Hunt Club, Jacqueline Ferrar, USA
Olympic, and JCPenney Home Collection. To enhance their store presentations,
the stores now feature these brands in shops containing each brand's total
assortment, much like having a specialty store within the larger store. Shops
have been established for the Original Arizona Jean Company, Worthington,
Stafford, and St. John's Bay in the majority of the larger JCPenney department
stores.

The Penney Group has also leveraged the scale of its power brands to cut
costs. For example, brand managers for Arizona Jean Company ($1 billion in
1998 annual sales) and St. John's Bay ($800 million in 1998 annual sales) now
combine contracts when possible for men's, women's, and children's merchandise
to elicit better pricing, source key fabrics earlier, and ensure manufacturing
commitments.

The department stores and catalog business will continue to offer popular
national brands that complement those private brand offerings, such as
Dockers, Vanity Fair, Jockey, Haggar, and Adidas. In 1998, the Penney Group
successfully launched Crazy Horse, a women's apparel brand produced by Liz
Claiborne exclusively for the JCPenney department stores and catalog. These
brands have been expanded to include special sizes and the number of stores
carrying these brands is expected to grow to more than 500 stores. Exclusive
brands, like Crazy Horse and Joneswear by Jones Apparel, give the Penney Group
a stronger presence in the fashion marketplace and allow it to benefit from
the intelligence and expertise of key suppliers.

Service and savings. To improve service, many stores have clustered point-
of-sale registers in prominent positions on the selling floor to help
customers find assistance and complete transactions more quickly. With the aid
of new technology, the Penney Group has recently consolidated many office and
personnel functions, which enable the Group to focus more resources on
staffing the sales floor and training associates in customer service.

The Penney Group continues to look for ways to cut costs in the department
store and catalog businesses. Recent initiatives include:

. Creating a flatter, more streamlined organization in the buying and store
administrative departments.

III-1
<PAGE>

. Continuing the implementation and refinement of the Penney Group's
Fashion Accelerated Shipping Technique (FAST), which provides a more
efficient means of shipping opening assortments of fashion merchandise to
stores. This program has the potential to improve the consistency of
fashion assortments.

. Combining the department store and catalog inventories, which simplifies
inventory management, provides a means to shift merchandise between
stores and catalog to meet demand, and improves service to customers.

. Consolidating retail distribution and catalog fulfillment into a single
logistics organization that is responsible for moving merchandise along
the supply chain. In addition to greater efficiency, this new
organization--combined with the telemarketing and direct marketing
expertise of our catalog business--positions the Penney Group to explore
third party fulfillment opportunities.

Home shopping. The JCPenney catalog extends the Penney Group's marketing
reach by offering around-the-clock shopping convenience, greater breadth and
depth of merchandise than is available in stores, and the option of home or
store delivery.

Internet strategy. The Penney Group opened its Internet store three years
ago, and by the 1998 holiday season had approximately 4,500 items for sale on
its web site, www.jcpenney.com. In 1999, the entire Fall and Winter Catalog
will be available online. Sales from the Internet shopping service increased
significantly in 1998 over the previous year.

The Penney Group is also developing new formats for online offerings, such
as a special holiday Web site that featured a focused selection of gift
merchandise. The Penney Group's Arizona Jeans web site (www.arizonajeans.com)
targets a young teen audience, and the group plans to launch an exclusive web
site dedicated to full figured women.

International. The Penney Group's international group currently operates
nine JCPenney stores. The international group includes five stores in Puerto
Rico, as well as two in Mexico and two in Chile (one of which is a JCPenney
Home Store). The Penney Group recently expanded its international presence by
acquiring a majority interest in Lojas Renner S.A. of Brazil. Renner operates
23 department stores in 15 cities. The Penney Group recently opened a new
store that replaced its 30-year-old store at Plaza Las Americas shopping
center in Puerto Rico. The Plaza Las Americas store is the largest JCPenney
store and is No. 1 in sales and profit. Two additional stores are planned for
Puerto Rico in 1999 and 2000, and two new stores are scheduled to open in
Mexico in 2000 and 2001. The Penney Group's international expansion is focused
on Latin America. Management believes that the Latin American markets offer an
excellent opportunity to leverage the Penney Group's global sourcing
capabilities, private brands, and expertise as a retailer.

Direct Marketing

J. C. Penney Direct Marketing Services, Inc. is a direct-marketing
organization which markets life, health, accident and credit insurance, as
well as membership services products. It markets to various credit card files
by direct response solicitations in the United States, Canada, Australia and
the United Kingdom.

The Penney Group's direct marketing business has achieved steady growth
through the 1990s by expanding its range of products and services and entering
international markets. The group markets life, health, accident, and credit
insurance and membership services, primarily through telemarketing and direct
mail. Membership services include benefits on dental, pharmacy, vision, and
hearing, as well as services targeted to motorists and travelers. The Penney
Group's direct marketing business now has 14.7 million policies, certificates,
and membership accounts in force, and in 1998 completed its 11th consecutive
year of revenue and earnings growth.

Management believes that the direct marking business of the Penney Group is
well-positioned to benefit from the current growth trend in direct marketing
services--both as a direct seller of products and services and as a provider
of expert marketing solutions for other companies. Through the group's
business relationships with more than 40 credit card issuers, including the
industry's leaders, the group markets to more than 90 million

III-2
<PAGE>

credit card holders. At the same time, the group remains focused on customer
retention and developing business from its own customer list, which includes
the JCPenney credit card file.

The Penney Group's relationships with major credit card issuers--including
banks, petroleum companies, and other retailers--allow the direct marketing
business to leverage that expertise in customer modeling and target marketing
to drive growth. These relationships are a key part of the group's strategy
for moving into international markets. The group's direct marketing business
has amassed a base of more than one million customers in Canada through its
relationships with four credit card sponsors, and in 1998 established a
presence in the United Kingdom. The Penney Group is also exploring other
opportunities for the direct marketing business in the Pacific Rim as it
pursues its intent to become a premier worldwide direct marketer in the 21st
century.

The principal executive offices of the Penney Group are located at 6501
Legacy Drive, Plano, Texas 75024-3698.

III-3
<PAGE>

ANNEX IV

ECKERD GROUP

DESCRIPTION OF BUSINESS

<PAGE>

ECKERD GROUP BUSINESS DESCRIPTION

General Overview

The Eckerd Group operates the Eckerd drugstore chain, which is one of the
four largest drugstore chains in the United States. At May 1, 1999, the Eckerd
drugstore chain consisted of 2,889 stores, located in 20 states. These stores
are primarily concentrated in the Southeast, Sunbelt and Northeast regions of
the United States, including 590 stores in Florida, 450 stores in Texas, 373
stores in New York and 356 stores in Pennsylvania. The Eckerd Group includes
the original Eckerd drugstore chain which JCPenney acquired in 1997,
JCPenney's former Thrift, Fay's and Kerr drugstores and the recently acquired
Genovese drugstore chain operating in the greater metropolitan New York City
area. All of the Eckerd Group's drugstores operate under the Eckerd name and
format except for the recently acquired Genovese stores, which will be
converted to the Eckerd name and format. In addition, the Eckerd Group
includes Eckerd Health Services, a leading mail service pharmacy and pharmacy
benefits manager. Eckerd Health Services operates the largest retail chain-
owned mail service pharmacy in the United States with revenues of $809 million
in 1998.

The Eckerd Group ranks, according to industry sources, first or second in
drugstore sales in 34 (80 percent) of 42 major metropolitan markets in which
it operates, including such markets as Atlanta, Dallas and Miami, as well as
smaller markets such as Austin, Buffalo and Charlotte. As a result of the
consolidation of the former Thrift, Fay's and Kerr drugstores with the Eckerd
drugstores, internal growth and smaller acquisitions, aggregate sales have
increased to $10.3 billion in fiscal 1998. Eckerd drugstores sell
pharmaceuticals and related products as well as general convenience
merchandise.

Over the past several years, the Eckerd Group has implemented certain
initiatives designed to increase the size and improve the quality and
operating performance of its drugstore base. Since the beginning of fiscal
1997, more than 450 new and relocated Eckerd drugstores have been opened, more
than 300 under performing stores have been closed or divested and 384 stores
have been acquired. In addition, in the same period of time, the Eckerd Group
has opened more than 370 Eckerd Express Photo centers in its drugstores. The
Eckerd Group has also increased the degree to which its merchandise mix is
tailored to specific markets, instituted a chainwide shrinkage reduction
program and made a significant investment in its management information
systems.

The Eckerd Group's principal executive offices are located at 8333 Bryan
Dairy Road, Clearwater, Florida 33777.

The Drugstore Industry

Drugstore sales in 1998 increased 7.7 percent from 1997 to approximately
$105.7 billion, according to Drugstore News. Of these drugstore sales,
conventional drugstore chains such as the Eckerd drugstore chain accounted for
76 percent of these sales. Drugstore prescription sales increased 18.1 percent
from 1997 to approximately $67.9 billion in 1998, which represented
approximately 65.8 percent of total retail prescription sales. The remaining
34.2 percent of retail prescription sales was comprised of mail order ($13.4
billion), food/drug combination stores ($11.4 billion) and mass merchandisers
($10.4 billion).

The drugstore industry has recently undergone significant changes as a
result of the following important trends:

. the increase in managed care plans for prescription drugs,

. consolidation within the drugstore industry,

. favorable growth demographics, including an aging population,

. increased numbers of new prescription drugs and greater focus on
prescription drug therapy as a cost effective alternative to hospital
procedures, and

. an increase in competition from non-traditional retailers of
prescription and over-the-counter drugs.

IV-1
<PAGE>

During the last decade, a growing percentage of prescription drug volume
throughout the industry has been accounted for by sales to customers who are
covered by managed care programs. This proliferation of managed care programs
has broadened prescription coverage. Over the last five years the Eckerd
Group's managed care sales have grown from 58 percent to 85 percent of total
pharmacy sales. In a typical managed care sale, the drugstore has a contract
with a managed care payor, such as an insurance company, a health maintenance
organization or HMO, a preferred provider organization or PPO, a pharmacy
benefits manager or PBM, or a government agency, which agrees to pay for part
or all of the customer's eligible prescription purchases in exchange for
reduced prescription prices. Although these managed care sales contracts often
provide a high volume of prescription sales, such sales typically generate
lower gross margins than non-managed care sales due principally to the highly
competitive nature of this business and the increasing emphasis by managed
care firms on reducing costs.

This increase in managed care plans for prescription drugs has contributed
to consolidation in the industry. Larger drugstore chains such as Eckerd are
typically better able to service the growing managed care segment than
independent drugstores and smaller chains as a result of the larger chains'
more sophisticated technology systems, greater number of stores overall and
greater concentration of stores within their markets. In addition, larger
drugstore chains generally achieve economies of scale with respect to
purchasing, marketing, distribution, technology and other expenditures. As a
result of these economies of scale as well as the managed care payment trend,
the number of independent drugstores and smaller drugstore chains has
decreased as many have been acquired by larger drugstore chains.

Changes in demographics have also contributed to changes in the drugstore
industry, as the group of persons over age 50 is the fastest growing segment
of the United States population. This trend has had, and is expected to
continue to have, a marked effect on the pharmacy business in the United
States because consumer prescription and over-the-counter drug usage generally
increases with age. In 1995, persons over age 50 represented approximately 25
percent of the population, although they consumed approximately 50 percent of
all prescription drugs sold in the United States. This segment is projected to
increase to approximately 28 percent of the population by the year 2005. The
average per capita prescription usage in the United States is approximately 7
prescriptions per year, which increases to approximately 12, 17 and 20
prescriptions filled per year for persons ages 55 to 64, 65 to 74 and over 75,
respectively. Many of the Eckerd Group's markets have large concentrations of,
and are continuing to experience significant growth in, the number of persons
over age 65. In addition to purchasing twice as many prescription drugs as the
national average, persons over age 65 purchase 50 percent more over-the-
counter drugs than the national average.

The drugstore industry has experienced a notable increase in the
introduction of new prescription drugs over the last few years, supported by
increased marketing spending by drug manufacturers. Management believes that
the increasing numbers of new prescription drug offerings will have a
favorable impact on revenues and earnings in the drugstore industry generally
and for the Eckerd Group. When drug manufacturers introduce new products, drug
prices rise on average and sales of prescription drugs tend to increase at a
greater rate. This leads to higher comparable store prescription sales for
Eckerd drugstores.

Managed care organizations continually look for new ways to control
escalating health care costs. One of the ways in which these organizations
achieve cost savings is by ensuring that whenever possible patients are
treated with prescription drug therapies as a means of reducing the number of
patients requiring costly hospital procedures. The Eckerd Group believes that
the drugstore industry will benefit from increased sales demand for
prescription drugs because of this greater emphasis on prescription therapy.

In 1998, drugstore chains and independent drugstores represented
approximately 40.3 percent and 25.6 percent, respectively, of all retail
prescription sales in the United States. In the last several years, mass
merchants (including discounters), supermarkets, combination food and
drugstores, mail order distributors, hospitals, HMOs and other managed care
providers have entered the prescription industry. Supermarkets, including
combination food and drugstores, represented approximately 11.0 percent and
mass merchants represented approximately 10.1 percent of all prescription
sales in the United States in 1998. Although the Eckerd Group currently faces

IV-2
<PAGE>

increased competition from these retailers, recent industry studies show that
consumers in the over 65 age group tend to make purchases at traditional
drugstores, such as Eckerd drugstores, and maintain strong store loyalty due
to a number of factors such as store location, brand awareness and personal
relationships with pharmacists.

Key Competitive Strengths

The Eckerd Group believes that it possesses a number of key competitive
strengths that position it to operate effectively in the changing drugstore
environment outlined above. The Eckerd Group's key competitive strengths are
its:

. position as a leading national drugstore chain,

. strong presence in fast growing pharmacy markets,

. strong offering of convenience merchandise and services,

. fully integrated mail service pharmacy and pharmacy benefits management
business, and

. ability to benefit from business synergies through ownership by
JCPenney.

Leading National Drugstore Chain

The Eckerd Group is a leading national drugstore chain consisting of 2,889
stores as of May 1, 1999. Management believes that the size of a drugstore
chain's operations provides a number of critical benefits in a consolidating
drugstore industry. First, larger chains are generally able to purchase most
categories of pharmaceutical and non-pharmaceutical merchandise at lower
prices than are available to smaller chain and independent drugstores. Second,
in an environment where managed care sales continue to grow, the size of the
Eckerd Group's chain enhances its ability to negotiate with managed care
payors, such as HMOs, PPOs, unions and corporations. These managed care
organizations typically include Eckerd drugstores in their networks because of
the concentration of stores that the Eckerd Group has in many of the
geographic areas in which such organizations operate. Third, larger chains
such as the Eckerd Group are typically able to reduce expenses as a percentage
of revenues compared with smaller chains because of economies of scale in such
areas as purchasing, distribution, marketing and technology. Finally, the
Eckerd Group believes its larger size increases brand awareness among
consumers.

Strong Presence in Fast Growing Pharmacy Markets

The Eckerd Group is well positioned geographically to service areas with
growing populations of retirees. According to U.S. Census Bureau estimates,
the number of people over the age of 65 is projected to grow 6.6 percent in
the United States from 1995 to 2005 and 7.0 percent in the markets served by
Eckerd drugstores generally. Such growth is projected to be much higher,
however, in areas where the Eckerd Group has high concentrations of stores.
For example, the number of people over the age of 65 in Florida, Texas and
North Carolina is expected to grow 18.6 percent, 14.7 percent and 15.9
percent, respectively, during the period from 1995 to 2005. Partially as a
result of the Eckerd Group's high concentration of stores in these areas, its
comparable pharmacy sales grew 17.7 percent in the first quarter of 1999 and
15.0 percent in 1998. Management believes that the nexus between these
favorable demographic trends and the Eckerd Group's geographic store
concentrations should provide it with continued strong growth.

Strong Offering of Convenience Merchandise and Services

The Eckerd Group believes it has a very attractive offering of merchandise
and services in the nonpharmacy areas of its stores, referred to in the
industry as the "front-end" of the store, and that sales of such products and
services will be a strong growth driver for the Eckerd Group's revenues. The
two principal components of the Eckerd Group's front-end offering are its
actively managed selection of convenience products, and its Eckerd Express
Photo centers.

IV-3
<PAGE>

Convenience Merchandise Selection. Eckerd drugstores sell a wide variety of
non-pharmacy merchandise, and typically stock over 27,000 different stock
keeping units or SKUs of front-end products. Front-end products consist of
both national brand products and the Eckerd Group's own private label
products. The merchandise selection of each store is actively managed to
emphasize higher profit margin products that are appropriate for the
geographic location of the particular store as well as its principal
demographic groups.

Eckerd drugstores offer a broad assortment of national brand and private
label over-the-counter drugs and other products related to dental care, foot
care, vitamins and nutritional supplements, feminine hygiene, family planning
and baby care. Eckerd drugstores also offer an assortment of popular brand
name cosmetics, fragrances and other beauty products. The group's stores
contain a greeting card department in which a wide selection of contemporary
and traditional cards, gift wrap, bows and novelties are sold. A wide
assortment of consumable and convenience products such as candy, food, tobacco
products, books and magazines, household items, seasonal merchandise and toys
are also sold in Eckerd drugstores.

Eckerd Express Photo Centers. The Eckerd Group believes that one key area
that differentiates the Eckerd Group from its major drugstore chain
competitors is its photo finishing business. Management believes that the
primary reasons for this differentiation are that Eckerd's Express Photo
centers (1) are all manned by specifically trained personnel rather than being
operated by drugstore clerks and (2) typically contain better quality, newer
equipment than the equipment used by competing photocenters. The Eckerd
Group's highly sophisticated express photo business offers increasing support
for Advanced Photo System film and other products. The Eckerd Group typically
offers overnight photo finishing services in Eckerd drugstores and operates
947 Eckerd Express Photo centers, which are one-hour photo processing mini-
labs. The Eckerd Group's photo departments also offer camera and photo
accessories, small electronics and related items.

Fully-Integrated Mail Service Pharmacy and Pharmacy Benefits Management
Business

Eckerd Health Services, the Eckerd Group's pharmacy benefits management
business is fully integrated with its in-house mail service pharmacy. The
Eckerd Group's mail service pharmacy is geared primarily towards selling
prescription drugs to managed care payors such as unions, governments,
employer groups, HMOs and PPOs. Industry sources indicate that mail service
sales represented approximately 13 percent of retail prescription sales in
1998. The Eckerd Group's mail service pharmacy is the largest in the chain
drugstore industry in terms of revenue ($809 million in 1998) and number of
prescriptions filled and the group believes that having this large mail
service capability is important to servicing the increasing number of PBM
clients. The Eckerd Group's mail service operations are run out of three
facilities in Pittsburgh, Pennsylvania, Largo, Florida and Kansas City,
Missouri.

Eckerd Health Services is a full service PBM which designs and administers
comprehensive prescription benefit plans for employers and HMOs and offers a
network of 50,000 participating pharmacies, allowing it to administer larger
national PBM accounts. In a typical PBM contract, a company or other managed
care payor will contract with Eckerd Health Services to manage the
prescription drug portion of their medical benefits plan(s). Eckerd Health
Services then receives a management fee from the managed care payor based on
the number of "covered lives" it is managing for the payor, as well as fees
that are based on the number of prescriptions processed through its system and
fees that are based upon use of services it can provide, such as disease
management and data tracking for cost containment. Management believes that
revenues from its PBM will continue to increase as the group implements the
various growth strategies outlined below. The Eckerd Group believes that it
has the expertise, physical infrastructure and technical capabilities
necessary to facilitate further growth in the PBM business.

The Eckerd Group believes that its ownership of substantial mail service
capabilities which are fully integrated with a growing PBM business provides a
number of key strategic benefits, including: (1) an enhanced ability to
construct full-service prescription networks for the group's PBM customers;
(2) a greater ability to negotiate opportunities with other managed care
programs and PBMs regarding the Eckerd Group's participation in

IV-4
<PAGE>

pharmacy program networks; (3) an incremental source of revenue growth as a
provider of additional PBM services; and (4) a leading prescription fufillment
capability on which to build the Group's electronic commerce efforts.

Ownership by JCPenney Will Provide Business Synergies

Since JCPenney completed its acquisition of Eckerd in 1997, the Company has
primarily focused on achieving synergies by integrating the operations of the
Eckerd drugstore chain with JCPenney's existing Thrift, Fay's and Kerr
drugstores. The integration of those chains is complete and all of JCPenney's
drugstores, including the recently acquired Genovese drugstores, now operate
as part of the Eckerd Group. Because the Eckerd Group will remain a wholly
owned business of JCPenney, management believes that the Penney Group and the
Eckerd Group will benefit from various synergies available between the Groups.
The Eckerd Group has begun utilizing JCPenney's extensive customer database
for some of Eckerd's marketing programs and promotional programs. The
management teams of the two Groups are working together to capitalize on
synergies in various areas, including purchasing, accounts payable, payroll,
technology and benefits management. One of the first direct synergies
available to the Eckerd Group and JCPenney was the placement of JCPenney
catalog desks in Eckerd drugstores. By the end of 1999, more than 300 Eckerd
stores will contain catalog desks and the Eckerd Group receives 10 percent of
the revenues from each catalog desk sale.

Business Growth Strategy

The Eckerd Group believes that it has identified a number of growth
strategies that will allow it to continue to grow by leveraging its key
competitive strengths. The central components of its growth strategy are to:

. relocate older strip center drugstores to free-standing locations in
high traffic areas,

. open new stores in existing geographic markets and selected new markets,

. acquire prescription files from independent drugstores,

. enhance focus on front-end sales initiatives,

. grow its prescription benefits management business,

. pursue initiatives in electronic commerce, and

. consider opportunistic acquisitions of complementary businesses.

Store Relocation Program

Eckerd Group management has determined that the relocation of existing
stores that are in less desirable locations to larger free-standing locations
will contribute a number of benefits to the Group's operations. Many of Eckerd
Group's stores are currently located in older, strip-type shopping centers.
For a variety of reasons, such as a drive through pharmacy capability and
convenient parking, stores that are relocated are more convenient to the
Eckerd customer. The Eckerd Group has observed that when a store is relocated
from a strip center to a larger free-standing location, annual sales increase
by more than 30 percent on average versus the one year period prior to the
relocation. Management believes that these newer free-standing stores generate
such strong sales increases because of: (1) increased customer traffic due to
the greater convenience and higher visibility of free-standing locations,
which are typically located on the corners of major intersections and
therefore provide ease of access; and (2) increased shelf space for placement
of a greater variety and amount of front-end products, which typically have
higher profit margins than pharmacy merchandise.

The Eckerd Group believes that over 1,500 of its current drugstores are
attractive relocation candidates in the next several years and plans to
relocate approximately 645 of its existing stores over the next three years.

IV-5
<PAGE>

New Store Opening Program

A related element of the Eckerd Group's growth strategy is the opening of
new drugstores. The group plans to open approximately 250 new drugstores over
the next three years. Virtually all of these stores will be built in free-
standing locations having the convenience and visibility characteristics
discussed above with respect to relocated stores. The Eckerd Group selects
sites for the new stores with a view towards placing them in areas of the
group's existing markets where there is a gap in its coverage. Management
believes that placing new stores in existing markets is beneficial because the
new store has the advantage of the group's existing advertising spending that
blankets that area, distribution capabilities serving that market and brand
awareness and customer loyalty in that area. Additionally, the Eckerd Group
intends to begin opening stores in select markets which are attractive in
terms of consumer demographics, are not currently served by Eckerd drugstores
and complement the group's existing geographic base. The first markets
management has identified that fit these characteristics are the greater
Washington, D.C. metropolitan area and Puerto Rico.

Acquisition of Prescription Files from Independent Competitors

The Eckerd Group believes that it will be able to continue to acquire
prescription files from independent pharmacies that are located in its markets
because there remain a large number of independent pharmacies operating in the
group's markets that have not been consolidated. The pharmacy industry trend
towards increasing managed care sales relative to cash prescription drug sales
will make it increasingly difficult for many independent pharmacies to remain
commercially viable and independent. Management believes that this trend
encourages such independent pharmacies to negotiate a sale of prescription
files to larger chains such as Eckerd.

The Eckerd Group benefits in a number of ways when it acquires prescription
files from independents in areas where it has a nearby location. The principal
benefit is that prescription sales volume in the nearby store will increase in
proportion to the number of files obtained, which will also indirectly lead to
growth of front-end sales due to higher store customer traffic. Management has
also found that the majority of the acquired pharmacy's existing customers
will patronize the pharmacy which acquired the prescription files especially
when that pharmacy also hires the pharmacist from the former location.
Management currently plans to acquire additional prescription files that are
expected to yield an additional 14,000 prescriptions per day per year through
the end of fiscal 2000.

Enhance Focus on Front-End Sales Initiatives

The Eckerd Group believes that customer service and convenience are critical
in positioning itself as an attractive alternative to mass merchandisers,
supermarkets and other large format retailing channels. In particular,
management believes that it is well positioned to capitalize on its strength
in front-end products and that it can implement a number of initiatives to
increase the value and convenience to customers of drugstore front-end
merchandise and service offerings. As discussed, front-end convenience
products are usually sold at higher profit margins than prescription drugs and
as such are a key component in management's plans to grow sales and earnings.

Expansion of Eckerd Express Photo Centers. The Eckerd Group had 947 Express
Photo Centers in its stores as of May 1, 1999, and intends to continue to
expand its one-hour photo finishing business, with a goal of having
approximately 1,500 stores with Express Photo centers by the end 2000. In
addition, management plans to continue to upgrade the existing Express Photo
Centers to enable increased support for Advanced Photo System products and
film and to offer full support for digital imaging initiatives. Management
believes that the expansion of the Express Photo Centers will be an important
driver of front-end revenue growth both directly and by bringing increased
traffic into the stores.

Increase Offerings of Eckerd Brand Products. Management believes that
customers are becoming increasingly accepting of private label products and
that the loyalty the existing Eckerd private label brands build will allow for
the marketing of additional private label products, especially in the areas of
cosmetics, health and

IV-6
<PAGE>

beauty aids, toiletries and miscellaneous general merchandise. Although
private label products are sold at discounts to comparable products bearing a
national brand name, they generate higher profit margins.

Being "First to Market" on New Items. The Eckerd Group has been successful
in being "first to market" on major new product introductions. First to market
refers to the capability of being one of the first retailers to offer a new
product that is being nationally promoted by a manufacturer. In certain
instances the Eckerd Group, through advanced planning in its supply channels,
has been able to offer certain new products days, and in some cases weeks,
before competing drug chains and mass market retailers. Management believes
that when it brings a potentially popular new product to market before its
competitors it receives two principal benefits: (1) during the initial roll-
out period the market share of the Eckerd Group for that product is
significantly greater in percentage terms than the group's market share in
that category of products generally, with a portion of this higher market
share retained over time and (2) being first to market attracts new customers.

Expanded Vitamins and Herbal Supplements Offering. Management plans to
capitalize on the increasing popularity of vitamins and herbal supplements as
an alternative to traditional prescription and over-the-counter remedies by
expanding the shelf space dedicated to such products. Over the last several
years, nontraditional and homeopathic medicine therapies have gained
increasing acceptance among consumers. By increasing the shelf space dedicated
to these products, the Eckerd Group believes that these products will help
drive an increase in front-end sales.

Grow the Prescription Benefits Management Business

Eckerd Group management believes that significant opportunities exist to
increase revenues from its PBM business and mail service pharmacy business.
Managed care payors are increasingly focused on controlling health care costs
for their customers. One way they can reduce the rate of cost increases is
through use of the Eckerd Group's mail service products, which are
significantly less expensive than prescriptions filled in a store-based
pharmacy. The principal potential area for external growth of the PBM business
is through the acquisition of additional "covered lives" from smaller and
regional PBM service providers, such as regional Blue Cross/Blue Shield
providers. By purchasing the contractual rights to service these covered
lives, the Eckerd Group can directly increase revenues through the management
and pharmacy fees these individuals generate. The principal area of internal
growth for the PBM business is through the offering of additional products and
services to its customers. The Eckerd Group believes that it will be
increasingly able to offer disease management services, drug utilization
review services and outcomes management capabilities to PBM customers and that
the expansion and introduction of these services will provide additional
revenue streams for the PBM business.

Pursue Electronic Commerce Initiatives

The Eckerd Group is in the process of increasing the capabilities of its web
site offering. Currently the web site allows ordering of refills of
prescriptions originally placed with Eckerd Health Services' mail service
pharmacy. The next phase of the group's web offering will (1) add the ability
to order new and refill prescriptions to be delivered by mail or to be picked
up at the store, (2) allow the ordering of vitamins by mail and (3) provide
access to healthcare and prescription information and an "Ask the Pharmacist"
program. This upgrade is expected to be operational by the beginning of
September 1999. A broad mix of front-end products are planned to be available
for purchase from the web site by the end of November 1999.

Management believes that the group's industry leading mail service pharmacy
will facilitate a smooth expansion of the web site because of the similarity
of the mail service business to the filling of orders placed through the web
site. Management believes that the Eckerd Group's state-of-the-art, owned mail
service fulfillment capability gives it a key competitive advantage versus the
other major drugstore chains and the fledgling prescription commerce sites
that already exist on the Internet. Management also plans to utilize the
group's store base to increase the convenience of its online offerings by
allowing customers to choose whether they would prefer to receive orders by
mail, pick up their purchases at an Eckerd location or have them delivered to
their homes for an additional delivery fee. Management believes that these
electronic commerce initiatives will contribute to revenue growth in the
future and enhance the Eckerd Group's reputation for convenient customer
service.

IV-7
<PAGE>

Consider Opportunistic Acquisitions

The final growth strategy that will benefit the Eckerd Group is the pursuit
of further opportunistic acquisitions. Although the Eckerd Group currently
intends to expand within its existing markets and to selectively enter
attractive new markets, the Eckerd Group also considers strategic acquisitions
in other markets. For example, the New York based Genovese drugstore chain was
acquired in March 1999, and is now being integrated into the Eckerd format.
Management expects that this 141-store acquisition will add over $800 million
in annual sales and enable the Eckerd Group to be the leading drugstore chain
by revenues in New York state. The Eckerd Group intends to consider other
acquisition opportunities which complement its existing businesses.

Store Operations

General

Eckerd drugstores are located and designed to maximize customer service and
convenience and are typically situated in areas of high customer traffic. The
Eckerd drugstore format is designed to facilitate customer movement and
features well-stocked shelves, clearly identified aisles and well-lit
interiors to maximize product visibility. Pharmacy departments are generally
located near the back of the store to maximize customer exposure to the
store's front-end merchandise offerings. The stores are equipped with modern
fixtures and equipment and most of them range in size from 8,200 to 13,050
square feet. As the Eckerd Group opens new locations and relocates existing
stores to free-standing locations, the new sites are designed around a format
that is either 11,200 square feet or 13,050 square feet in size depending on
the location. About 85 percent of the floor space is selling area, with the
remainder used for storeroom and office space.

Each drugstore is individually supervised by a manager who receives training
in the Eckerd Group's merchandise offerings, customer service and management
strategy. To enhance productivity per square foot and maintain consistent
merchandising, the Eckerd Group utilizes centrally prepared formats for the
display and stocking of products in the Eckerd Group's stores, while
continuing to allow some flexibility for store managers to modify the
merchandise assortment based on the market in which the store operates.

Products and Services Offered in Eckerd Drugstores

Eckerd Brand Products. Eckerd brand products, which are attractively priced
and provide higher profit margins than similar national brand products,
represent a growing segment of products offered by Eckerd drugstores. Sales of
private label products and Eckerd branded photo finishing products accounted
for $503 million of the group's sales in fiscal 1998. Examples of Eckerd brand
products are over-the-counter drugs, skin care, hair care and dental hygiene
products and disposable diapers.

Over-the-Counter Remedies/Health Products. Eckerd drugstores offer a broad
assortment of popular national brands as well as private label over-the-
counter drugs and other products related to dental care, foot care, vitamins
and nutritional supplements, feminine hygiene, family planning and baby care.
Eckerd drugstores provide a helpful environment in which consumers can obtain
product information from professional pharmacists, knowledgeable sales
associates and store managers or from literature available at the pharmacy.

Health and Beauty Aids. Eckerd drugstores offer an assortment of popular
brand name cosmetics, fragrances and other beauty products. Management
believes that Eckerd drugstores provide the customer with a convenient format
in which to purchase the lines of beauty products offered in its stores. Skin
care products are an increasingly important component of the beauty category
due to the aging population and growing concern about the effects of the
environment on the skin.

Greeting Cards. The greeting card department in Eckerd drugstores offers a
wide selection of contemporary and traditional cards, gift wrap, bows and
novelties. The Eckerd Group believes that the locations of its stores together
with the wide selection offered enables customers to satisfy their card and
gift needs more conveniently than at traditional card stores.

IV-8
<PAGE>

Food Mart and Convenience/Seasonal Products. This merchandise category
consists of an assortment of items, including candy, food, tobacco products,
books and magazines, household products, seasonal merchandise and toys. These
items are carefully positioned to provide optimum convenience to the customer
with easy access in the front part of the store. Eckerd drugstores seek to
serve their customers' needs by specifically tailoring items in this category
to meet the needs of customers in specific store locations. For example,
souvenirs and select summer products are offered in beach and tourist
locations while convenience food is stressed in urban areas and malls.
Management believes food mart sections offering convenience food items such as
staple grocery shelf items, chilled beverages, snack foods and specialty items
help drive customer traffic in stores. The Eckerd Group has opened food mart
sections in approximately 2,000 locations and plans to add food mart sections
to an additional 275 to 325 stores in fiscal 1999.

Eckerd Express Photo Centers. The Eckerd Group offers overnight photo
finishing services in all Eckerd drugstores and as of May 1, 1999, operated
947 Eckerd Express Photo centers, which are one-hour photo processing mini-
labs. The Eckerd Group believes that its branded processing programs, which
emphasize quality and service, have helped position it as a leader in photo
finishing. The Eckerd Group's photo departments also offer camera and photo
accessories, small electronics, and related items.

Pharmacy. The Eckerd pharmacy departments are designed to provide customers
convenient wait areas that include locations for pharmacists to counsel
customers as well as to display health-related literature. Technological
systems improvements such as autodispensing units and the interactive voice
response system in the pharmacy allow the group's pharmacies to efficiently
and accurately fill prescriptions.

Extended Store Hours. One initiative that management is implementing to
increase customer convenience is to increase the number of extended hour and
24-hour drugstores. Extended hours stores are very convenient for customers
and are an important factor in growing the volume of front-end and
pharmaceutical sales. As a further convenience for customers, the Eckerd Group
has introduced a toll-free nationwide phone number, 1-800-ECKERDS, that
enables customers to locate the nearest 24-hour location.

IV-9
<PAGE>

Store Locations

The Eckerd Group has grown to its present size and developed its leading
position in the industry through both internal expansion and acquisitions. As
of May 1, 1999, the Eckerd Group operated the number of drugstores and Eckerd
Express Photo centers indicated below in each of the following states:

<TABLE>
<CAPTION>
The Eckerd Group
--------------------------
Drugstores with
Eckerd Express
Drugstores Photo Centers
---------- ---------------
<S> <C> <C>
Florida........................................... 590 354
Texas............................................. 450 207
New York.......................................... 373 25
Pennsylvania...................................... 356 40
North Carolina.................................... 254 109
Georgia........................................... 185 102
New Jersey........................................ 167 15
South Carolina.................................... 120 36
Virginia.......................................... 111 4
Louisiana......................................... 97 29
Tennessee......................................... 41 14
Oklahoma.......................................... 33 5
Mississippi....................................... 26 1
Delaware.......................................... 23 3
Missouri.......................................... 21 1
Maryland.......................................... 15 0
Kansas............................................ 12 2
Connecticut....................................... 6 0
Ohio.............................................. 5 0
West Virginia..................................... 4 0
----- ---
Total........................................... 2,889 947
===== ===
</TABLE>

The Eckerd Group opened or acquired 256 drugstores (including 175
relocations) in fiscal 1998. Virtually all of the new and relocated stores are
free-standing locations. The Eckerd Group sold or closed 103 drugstores in
fiscal 1998. The Eckerd Group intends to continue to expand the business of
the Eckerd Group through both internal expansion and acquisitions of drugstore
chains and independent drugstores. The cash costs associated with opening a
new drugstore are estimated to be approximately $770,000, which includes
initial inventory costs of approximately $385,000.

In determining the areas in which to open or acquire drugstores, the Eckerd
Group evaluates a number of demographic considerations, including the size,
growth pattern and per capita income of the population, as well as the
competitive environment and the accessibility of a proposed site to the
customer and to the Eckerd Group's warehouse and distribution facilities. The
Eckerd Group also continually reviews these factors and the performance of
individual stores in determining whether to close or relocate certain stores.

Customer Service

The Eckerd Group believes that customer service and convenience are critical
in positioning itself as an attractive alternative to mass merchandisers,
supermarkets and other large format retailing channels. The Eckerd Group will
continue to emphasize service and convenience through pharmacy support
services, such as phone-in refilling of prescriptions, store location and
design, merchandising programs and operating hours geared to the needs of the
particular market.

IV-10
<PAGE>

The Eckerd Group offers a high level of professional pharmacy service, which
management believes provides added value to its customers. The Eckerd Group
provides the "Rx Advisor," a personalized easy-to-read publication, to each
prescription drug customer, which advises the customer of the specific
dosages, contraindications and side effects of his or her prescription
medicine.

The Eckerd Group will continue to remodel its stores to provide modern,
high-visibility/well-identified stores, which typically have drive through
pharmacies and convenient parking. Such stores are typically open every day of
the year except Christmas, with some open until midnight or 24 hours a day.

Other customer service advantages include comfortable pharmacy waiting
areas, free health-related programs and health screenings such as blood
pressure tests, in most new drugstores. The Eckerd Group is continually
testing new customer service features.

Management Information Systems

The Eckerd Group intends to continue to invest in information systems to
improve customer service, reduce operating costs, provide information needed
to support management decisions and enhance the Eckerd Group's competitive
position with managed care payors. The Eckerd Group's Comp-U-Care System
installed in each pharmacy location provides support for the pharmacy and
assists pharmacists in their prescription processing, drug interaction and
drug utilization review activities, which in turn enhances the pharmacy's
ability to service customers. The system's daily transfer of information
between the Eckerd Group's data warehouse and each of the in-store pharmacy
terminals allows central monitoring of prescription sales activity by store
and item, centralized billing of third-party sales and daily updates to the
stores' data files. The Comp-U-Care System performs contraindication analysis
and performs on-line adjudication of customer and claim eligibility and
reimbursement for virtually every private managed care plan in which the
Eckerd Group participates. On-line adjudication permits the Eckerd Group and
the managed care payor to determine electronically, at the time of sale,
eligibility of the customer, coverage of the prescription and pricing and co-
payment requirement, if any, and automatically bills the respective plan. On-
line adjudication reduces losses from rejected claims and eliminates a portion
of the Eckerd Group's paperwork for billing and collection of receivables and
costs associated therewith. The Eckerd Group believes that such systems are
essential to service the increasing volume of managed care sales.

As a supplement and upgrade to the Comp-U-Care system, the Eckerd Group is
in the process of completing a pharmacy systems enhancement plan designed to
provide additional support to pharmacists, meet the increasing complexity of
third-party payor programs and enhance the Eckerd Group's competitive position
through advanced technology. As part of this plan, the Eckerd Group is
currently completing the implementation of the Comp-U-Care 2000 System, which
began to be introduced in Eckerd drugstores in the second half of fiscal 1998.
The Comp-U-Care 2000 System offers improved speed and productivity in the
pharmacy and enhanced functionality, including expanded drug utilization
reviews. The Comp-U-Care 2000 system allows the transfer of information, such
as prescription files, directly from one drugstore to another thereby further
improving customer service by enabling customers to fill and refill
prescriptions at any Eckerd drugstore.

As of May 1, 1999, the Eckerd Group drugstores all have point-of-sale
product scanning equipment and all are linked to the group's main data
warehouse, with the exception of the 141 recently acquired Genovese stores
which are not expected to be centrally linked to the data warehouse until the
third quarter of 1999. Scanning is a system which inputs point-of-sale
information by reading the SKU of merchandise sold with either a hand held or
slot scanner to capture information on each specific item of product,
including variations in size and color, sales data and pricing information.
The Eckerd Group brings such information into the central data warehouse and
uses it to analyze sales, gross profit, inventory levels and direct product
profitability by category, department and operating region and, in certain
instances, SKU. Such information identifies early trends in sales by SKU,
gross profit performance and inventory position and is also a source for
measuring inventory shrinkage performance. Scanning systems provide more and
better merchant and store level information to facilitate inventory
management, automatic re-ordering, product sales and gross profit analysis and
inventory shrinkage control.

IV-11
<PAGE>

The Eckerd Group makes extensive use of electronic data interchange systems
with certain of its major suppliers. Electronic data interchange allows for
the paperless ordering of products with immediate confirmation from the vendor
on price, delivery terms and amount of goods ordered. The Eckerd Group has
also implemented automatic replenishment buying in connection with its
warehouse and distribution systems, which includes the computer generation of
purchase orders for certain vendors. The Eckerd Group has installed the
merchandise receiving component of its warehouse management system in all of
its distribution facilities except Philadelphia and is currently in the
process of installing the shipping component. The Eckerd Group expects the
entire system to be installed in all of its distribution facilities by the
middle of fiscal 2000. These systems should also allow the Eckerd Group to
reduce lead time on orders and improve cash flow by reducing the amount of
inventory required to be kept on hand.

In 1998, the Eckerd Group and IBM Global Services, a division of
International Business Machines, entered into a Systems Operations Service
Agreement which amended and restated a previously existing agreement between
Eckerd and a wholly owned subsidiary of IBM. Under the Eckerd Group's
supervision, IBM Global Services manages the entire information systems
operation and is responsible for providing technology services to the Eckerd
Group. The Systems Operations Services Agreement has a remaining term of four
years. The Eckerd Group believes that this arrangement has enabled and will
continue to enable the Eckerd Group to further improve customer service,
replace and upgrade the Eckerd Group's existing systems, reduce operating
costs and capital expenditures for hardware, obtain information needed to
support management decisions on an improved basis and increase the Eckerd
Group's focus on its core business.

Purchasing and Distribution

Merchandising, buying and supplier payments are generally centralized at
Eckerd Group headquarters to assure consistency of marketing approach and
efficiency in supplier relations. The Eckerd Group has implemented an enhanced
electronic buying system to improve inventory management and gross profit by
enabling the Eckerd Group to take better advantage of volume discounts and
forward buying opportunities, which the Eckerd Group believes will lower the
average cost of inventory. Additionally, it is anticipated that this buying
system and its improved forecasting ability will improve service levels to the
stores and will reduce average inventory required in the Eckerd Group's
distribution centers. The Eckerd Group recently began implementing a supply
chain improvement initiative that involves a significant upgrade of the
group's merchandising and distribution management information system packages.
This initiative, which management intends to implement over the next two
years, is expected to provide greater inventory efficiencies and improved in-
stock conditions.

Approximately 80 percent to 85 percent of store merchandise is purchased
centrally and distributed, principally by Eckerd Group-operated trucks,
through the group's nine centrally located distribution facilities located in
or near Orlando, Florida; Atlanta, Georgia; Charlotte, North Carolina; Houston
and Dallas, Texas; Pittsburgh and Philadelphia, Pennsylvania; Syracuse and
Long Island, New York. Each distribution center supplies from 300 to 500
stores. The remainder of store merchandise, some of which is purchased at the
store level, is distributed directly to the stores.

Advertising and Marketing

A combination of newspaper advertising, TV and radio spot commercials and
targeted mailings is carried on throughout the year to promote sales. The
Eckerd Group's concentration of stores within its markets enables it to
achieve economies of scale in its advertising and marketing expenditures and
also enables the Eckerd Group to negotiate favorable rates for advertising
time and print production. The Eckerd Group believes that its current level of
advertising expenditures is appropriate to support its existing marketing
strategies.

The Eckerd Group's communications and marketing programs are based upon an
ongoing commitment to consumer research. Through regular telephone surveys in
all major markets, exit interviews in its stores, and studies of various
consumer groups, the Eckerd Group is able to monitor changes in customer
attitudes and shopping habits and adjust its marketing strategies accordingly.

IV-12
<PAGE>

Competition

The Eckerd Group's retail drugstores operate in a highly competitive
industry. The Eckerd Group's drugstores compete primarily on the basis of
customer service, convenience of location and store design, price and product
mix and selection.

In addition to traditional competition from independent drugstores and other
drugstore chains, the Eckerd Group faces increasing competition from mass
merchants (including discounters), supermarkets, combination food and
drugstores, mail order distributors, hospitals, HMOs and Internet-based
retailers. These other formats have experienced growth in their prescription
and over-the-counter drug business. According to industry estimates, in 1998,
the percentage of retail prescription sales not accounted for by drugstores
was 34.2 percent, comprised of mail order ($13.4 billion), food/drug
combination stores ($11.4 billion) and mass merchandisers ($10.4 billion).

The Eckerd Group's Express Photo centers compete with a variety of photo
processors including other mini-labs, retail stores and photo specialty
stores, primarily on the basis of quality of processing, quality and speed of
service, and value.

Employees

As of January 31, 1999 the Eckerd Group had approximately 84,000 employees,
of which 43,000 were full-time employees. The Eckerd Group believes that
overall employee relations are good. None of the Eckerd Group's employees are
represented by unions.

Patents, Trademarks and Tradenames

No patent, trademark, license, franchise or concession is considered to be
of material importance to the business of the Eckerd Group other than the
trade names under which the Eckerd Group operates its retail businesses,
including the Eckerd name. The Eckerd Group also holds servicemarks for its
photo finishing products, private label products and management information
systems.

IV-13
<PAGE>

Properties

The Eckerd Group conducts substantially all of its retail businesses from
stores located in leased premises. Substantially all of these leases will
expire within the next twenty-five years. In the normal course of business,
however, it is expected that leases will be renewed or replaced by leases on
other properties. Most of the Eckerd Group's store leases provide for a fixed
minimum rental together with a percentage rental based on sales.

The material office and distribution center properties owned or leased by
the Eckerd Group at May 1, 1999 are as follows:

<TABLE>
<CAPTION>
Approximate Approximate
Location Square Feet Owned Square Feet Leased
- -------- ----------------- ------------------
<S> <C> <C>
Largo, Florida(1).......................... 488,000 0
Charlotte, North Carolina.................. 731,000 408,000
Dallas, Texas.............................. 234,000 228,000
Houston, Texas............................. 287,000 113,000
Orlando, Florida........................... 0 827,000
Atlanta, Georgia........................... 225,000 240,000
Pittsburgh, Pennsylvania................... 285,000 284,000
Philadelphia, Pennsylvania................. 220,000 375,000
Syracuse, New York......................... 736,000 0
Long Island, New York...................... 255,000 95,000
Kansas City, Missouri...................... 0 35,000
Hammond, Louisiana(2)...................... 185,000 0
</TABLE>
- --------
(1) Eckerd Group headquarters.
(2) The Hammond, Louisiana property is subject to a contract of sale and has
not been used as a distribution center in ten years.

The Eckerd Group considers that all property owned or leased is well
maintained and in good condition.

Regulation

All of the Eckerd Group pharmacists and its stores are required to be
licensed by the appropriate state boards of pharmacy. The Eckerd Group
drugstores and its distribution centers are also registered with the Federal
Drug Enforcement Administration. Most of the stores sell beer and wine and are
subject to various state and local liquor licensing requirements. By virtue of
these license and registration requirements, the Eckerd Group is obligated to
observe various rules and regulations, and a violation of such rules and
regulations could result in a suspension or revocation of such licenses or
registrations.

In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the provision of health care services. In addition the
Clinton administration has indicated that it wishes to expand the Medicare
program to cover the costs of recipients' prescription pharmaceutical
purchases. The Eckerd Group cannot predict whether any federal or state health
care reform legislation will eventually be passed, and if so, the impact
thereof on the Eckerd Group's financial position or results of operations.
Health care reform, if implemented, could (1) adversely affect the pricing of
prescription drugs, (2) reduce the volume of the Eckerd Group's higher margin
cash prescription sales or (3) adversely affect the amount of reimbursement
from governmental agencies and third-party payors, and consequently could be
adverse to the Eckerd Group. However, to the extent health care reform expands
the number of persons receiving health care benefits covering the purchase of
prescription drugs, it may also result in increased purchases of such drugs
and could thereby have a favorable impact on both the Eckerd Group and the
retail drug industry in general. Nevertheless, there can be no assurance that
any future federal or state health care reform legislation will not adversely
affect the Eckerd Group or the retail drugstore industry generally.

IV-14
<PAGE>

Legal Proceedings

On February 4, 1998, the Eckerd Group was served with a civil complaint
which was filed jointly in federal court in Tampa, Florida by the Florida
Attorney General, the U.S. Department of Justice, and the U.S. Attorney's
Office for the Middle District of Florida. The complaint relates to a
practice, which is not limited to Eckerd, known in the drugstore industry as
"partial filling" of prescriptions and how they are billed in those relatively
limited situations when a customer fails to pick up the balance of a partially
filled prescription. The complaint brought four different claims against the
Eckerd Group: (1) a breach of contract claim, (2) a claim under the Federal
False Claims Statute and the Florida False Claims Statute, which sought triple
the amount of monetary damages and penalties up to $10,000 for each billing
for a partially-filled prescription, (3) an equitable claim for unjust
enrichment and (4) an equitable claim for payment by mistake of fact. A Motion
to Dismiss and to Strike was filed by the Eckerd Group and the judge granted
the motion with respect to the equitable claims. The Eckerd Group then filed
an answer to the two remaining claims in the complaint and at the same time
filed a counterclaim against the government. The judge dismissed the
counterclaim for failure by the Eckerd Group to exhaust administrative
remedies. This lawsuit is currently in the discovery phase.

Additionally, the Eckerd Group and certain current and former employees have
been served with subpoenas issued by a federal grand jury in the Middle
District of Florida, at the direction of the U.S. Attorney's Office,
requesting records and documents pertaining to the partial fill litigation and
related matters. The Eckerd Group also received a Civil Investigative Demand
from the Tennessee Attorney General requesting records and documents
pertaining to the partial filling of prescriptions in that state. The Eckerd
Group 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'
customers and their family members, alleges certain violations of the
Racketeering Influenced and Corrupt Organizations Act and the Employment
Retirement Income Security Act in connection with the partial filling of
prescriptions. The complaint seeks triple the amount of monetary damages, as
well as punitive damages, attorneys' fees, and other equitable relief. The
Eckerd Group filed a motion to dismiss the plaintiffs' complaint and such
motion is pending.

The Eckerd Group 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 Eckerd Group's financial position or
results of operations.

In addition to the matters discussed above, in the ordinary course of its
business, the members of the Eckerd Group are parties to various legal actions
which it believes are routine in nature and incidental to the operation of the
business of the Eckerd Group. Management believes that the outcome of the
proceedings to which the members of the Eckerd Group currently are parties
will not have a material adverse effect on the Eckerd Group's financial
condition or results of operations.

IV-15
<PAGE>

ANNEX V

FINANCIAL INFORMATION OF

J. C. PENNEY COMPANY, INC.

<PAGE>

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

INDEX TO FINANCIAL INFORMATION

<TABLE>
<CAPTION>
Page
----
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... V-1
Audited Financial Statements
Independent Auditors' Report............................................ V-15
Consolidated Statements of Income--Three Years Ended January 30, 1999... V-16
Consolidated Balance Sheets--January 30, 1999 and January 31, 1998...... V-17
Consolidated Statements of Stockholders' Equity--Three Years Ended
January 30, 1999....................................................... V-18
Consolidated Statements of Cash Flows--Three Years Ended January 30,
1999................................................................... V-19
Notes to the Consolidated Financial Statements.......................... V-20
Interim Financial Statements
Consolidated Statements of Income--13 Weeks Ended May 1, 1999 and May 2,
1998 (unaudited)....................................................... V-37
Consolidated Balance Sheets--May 1, 1999 (unaudited) and
January 30, 1999....................................................... V-38
Consolidated Statements of Cash Flows--13 Weeks Ended May 1, 1999 and
May 2, 1998 (unaudited)................................................ V-39
Note to Consolidated Interim Financial Information (unaudited).......... V-40
Pro Forma Financial Data
Consolidated Pro Forma Statement of Income--52 Weeks Ended January 30,
1999 (unaudited)....................................................... V-44
Consolidated Pro Forma Statement of Income--13 Weeks Ended May 1, 1999
(unaudited)............................................................ V-45
Consolidated Pro Forma Balance Sheet--May 1, 1999 (unaudited)........... V-46
Note to the Consolidated Pro Forma Financial Data (unaudited)........... V-47
</TABLE>
<PAGE>

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Fiscal Years 1998, 1997 and 1996

<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
1998 1997 1996
-------- -------- --------
($ in millions)
<S> <C> <C> <C>
Segment Operating Profit
Department stores and catalog...................... $1,013 $1,368 $1,183
Eckerd drugstores.................................. 254 347 99
Direct Marketing................................... 233 214 186
------ ------ ------
Total segments................................... 1,500 1,929 1,468
Real estate and other................................ 26 39 45
Net interest expense and credit operations........... (480) (547) (278)
Acquisition amortization............................. (113) (117) (23)
Other charges, net................................... 22 (379) (303)
------ ------ ------
Income before income taxes........................... 955 925 909
Income taxes......................................... (361) (359) (344)
------ ------ ------
Net income........................................... $ 594 $ 566 $ 565
====== ====== ======
</TABLE>

Results of Operations

Net income in 1998 totaled $594 million, or $2.19 per share, compared with
$566 million, or $2.10 per share, in 1997 and $565 million, or $2.25 per
share, in 1996. Operating results for 1998 include credits of $13 million, net
of tax, or five cents per share, related to the reversal of reserves
established in 1997. Operating results for 1997 include $231 million in other
charges, net of tax, or 86 cents per share, related principally to an early
retirement program, closing of underperforming department stores, and
drugstore integration activities. Operating results for 1996 include $196
million in other charges, net of tax, or 79 cents per share, related primarily
to drugstore integration activities (see Note 13 to the consolidated financial
statements for further discussion of the 1997 and 1996 charges). Excluding
these items, earnings per share totaled $2.14 in 1998 compared with $2.96 in
1997 and $3.04 in 1996. All references to earnings per share are on a diluted
basis.

V-1
<PAGE>

The following discussion addresses results of operations on a segment basis.
The discussion addresses changes in comparable store sales (those open for
more than a year) where appropriate, and changes in costs and expenses as a
percent of sales.

Department Stores and Catalog

<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
1998 1997 1996
-------- -------- --------
($ in millions)
<S> <C> <C> <C>
Retail Sales, Net
Department stores............................. $15,402 $16,047 $15,734
Catalog....................................... 3,929 3,908 3,772
------- ------- -------
Total retail sales, net..................... 19,331 19,955 19,506
------- ------- -------
FIFO gross margin............................... 5,697 6,152 5,872
LIFO credit..................................... 35 20 20
------- ------- -------
Total gross margin.............................. 5,732 6,172 5,892
SG&A expenses................................... (4,719) (4,804) (4,709)
------- ------- -------
Operating profit................................ $ 1,013 $ 1,368 $ 1,183
Sales percent increase/(decrease)
Department stores(1).......................... (2.8)% 0.7 % 5.1%
Comparable stores............................. (1.9)% (0.3)% 3.4%
Catalog(1).................................... 1.5 % 2.7 % 0.9%
Ratios as a percent of sales
FIFO gross margin............................... 29.5 % 30.8 % 30.1%
LIFO gross margin............................... 29.7 % 30.9 % 30.2%
SG&A expenses................................... 24.4 % 24.1 % 24.1%
Operating profit................................ 5.3 % 6.8 % 6.1%
EBITDA(2)....................................... 8.0 % 9.1 % 8.5%
</TABLE>
- --------
(1) Sales comparisons are shown on a 52-week basis for all periods presented.
Including 1997's 53rd week, department stores sales declined by 3.9
percent in 1998 and increased 2.0 percent in 1997, while catalog sales
increased by 0.6 percent and 3.6 percent for 1998 and 1997, respectively.
(2) Earnings before interest, income taxes, depreciation, amortization, and
other charges, net. EBITDA includes finance charge revenue net of credit
operating costs and bad debt. EBITDA is provided as an alternative
assessment of operating performance and is not intended to be a substitute
for GAAP measurements. Calculations may vary for other companies.

V-2
<PAGE>

1998 compared with 1997. Operating profit totaled $1,013 million in 1998
compared with $1,368 million in 1997. The decline for the year was primarily
attributable to lower sales coupled with lower gross margins. Sales in
comparable department stores declined by 1.9 percent and were especially soft
in the fourth quarter. Department store sales were strongest in women's
apparel, while athletic apparel and footwear were particularly hard hit by
softening sales throughout 1998. Sales were weak across all regions of the
country. Catalog sales increased by 1.5 percent on a 52-week basis and were
strongest in the third quarter when they increased by 8.0 percent. Third
quarter catalog sales benefited from participation in department store
promotional programs which may have shifted buying patterns for catalog
shoppers from the fourth quarter to third quarter. Both department stores and
catalog results, although not readily quantifiable, were impacted by
disruptions caused by the many organizational and process changes initiated in
1997 and completed in 1998. These changes impacted both the flow of
merchandise and store personnel serving customers.

LIFO gross margin as a percent of sales for department stores and catalog
declined by 120 basis points compared with 1997, principally as a result of
aggressive promotional programs during the fourth quarter. As the fourth
quarter progressed, the Company increased promotions to stimulate sales. While
this generated unit sales and helped manage inventory levels, it had a
negative impact on gross margin as a percent of sales. Markup improved in 1998
as the Company continued to drive down its merchandise sourcing costs and
improved efficiencies with its supplier base. The improvement in markup
partially offset the effects of the higher markdowns. Gross margin includes a
LIFO credit of $35 million in 1998 and $20 million in 1997. The LIFO credits
for both years are generally the result of a combination of flat to declining
retail prices as measured by the Company's internally developed inflation
index, and improving markup. The Company continued to control its SG&A expense
levels throughout 1998. However, they were not leveraged as a percent of sales
due to sales declines, increasing by 30 basis points from prior year levels.
In 1998 the Company realized savings of approximately $95 million related to
the early retirement and reduction in force programs as well as other cost-
saving initiatives. These savings were reinvested in programs designed to
enhance customer service in the stores and into advertising and promotional
programs.

1997 compared with 1996. Operating profit for department stores and catalog
was $1,368 million in 1997, an increase of $185 million, or 15.6 percent,
compared with 1996. The increase in operating profit was principally related
to improvements in gross margin and well-managed expense levels. Comparable
store sales declined 0.3 percent for the year compared with 1996. Department
store sales were strongest in the first half of the year as the Company
emphasized promotional programs designed to reduce its inventory levels. Sales
performance in department stores was led by the women's apparel division,
particularly dresses and career and casual wear, and the children's and shoe
division. Catalog sales for the year increased by 2.7 percent compared with
1996 on a 52-week basis, and were led by women's and men's apparel as well as
the home division.

Gross margin for department stores and catalog increased by 70 basis points
in 1997 compared with 1996, and included a LIFO credit of $20 million in both
1997 and 1996. SG&A expenses were well managed across all areas, particularly
advertising, and were flat as a percentage of sales as compared with 1996.

V-3
<PAGE>

Eckerd Drugstores

<TABLE>
<CAPTION>
52 Weeks
1996
52 Weeks 53 Weeks -------------------------
1998 1997 As Adjusted(1) Historical
-------- -------- -------------- ----------
($ in millions)
<S> <C> <C> <C> <C>
Retail sales, net......... $10,325 $ 9,663 $ 8,526 $3,147
------- ------- ------- ------
FIFO gross margin......... 2,208 2,093 1,870 708
LIFO charge............... (45) (32) (23) (5)
Inventory integration
losses................... (98) (45) (31) (31)
------- ------- ------- ------
Total gross margin........ 2,065 2,016 1,816 672
SG&A expenses............. (1,811) (1,669) (1,510) (573)
------- ------- ------- ------
Operating profit.......... $ 254 $ 347 $ 306 $ 99
Sales percent increase
Total sales(2).......... 8.9% 11.2%(3) 10.3% 100.0+%
Comparable stores....... 9.2% 7.4% 7.8% 7.7%
Ratios as a percent of
sales
FIFO gross margin....... 20.4% 21.2% 21.6% 21.5%
LIFO gross margin....... 20.0% 20.9% 21.3% 21.3%
SG&A expenses........... 17.5% 17.3% 17.7% 18.2%
Operating profit........ 2.5% 3.6% 3.6% 3.1%
EBITDA(4)............... 4.9% 5.2% 5.1% 5.4%
</TABLE>
- --------
(1) Reflects the 1996 drugstore acquisitions as if they had occurred at the
beginning of the year.
(2) Sales comparisons are shown on a 52-week basis for all periods presented.
Including 1997's 53rd week, drugstore sales increased by 6.9 percent and
13.3 percent for 1998 and 1997, respectively.
(3) 1997 sales increase is calculated based upon 1996 pro forma sales.
(4) Earnings before interest, income taxes, depreciation, amortization, other
charges, net, and integration related charges of $114 million in 1998, $45
million in 1997, and $31 million in 1996. EBITDA is provided as an
alternative assessment of operating performance and is not intended to be
a substitute for GAAP measurements. Calculations may vary for other
companies.

1998 compared with 1997. Operating profit for the Company's drugstore
segment totaled $254 million in 1998 compared with $347 million for the prior
year. Sales grew at a strong pace throughout the year, increasing by 9.2
percent for comparable stores. Sales growth was fueled by a 15.0 percent gain
in comparable pharmacy sales, which account for approximately 60 percent of
total store sales. Non-pharmacy merchandise sales (referred to in the industry
as "front-end" sales) increased 1.5 percent for the year, and strengthened as
the year progressed. Sales also benefited from the relocation of 175 stores to
larger free-standing locations. Free-standing locations typically experience
sales growth of more than 30 percent on average versus the one year period
prior to the relocation.

Both 1998 and 1997 included charges related to the liquidation of
nonconforming merchandise resulting from the conversion of the former Thrift,
Fay's, Kerr, and certain acquired Rite Aid and Revco drugstores into the
Eckerd name and format. These charges totaled $98 million in 1998 and $45
million in 1997. Excluding these charges, gross margin declined by 40 basis
points in 1998. Gross margin declines were principally attributable to a
higher percentage of pharmacy sales, especially managed care sales, which
carry lower margins. Approximately 85 percent of pharmacy sales are processed
through managed care providers. Gross margin for non-pharmacy merchandise
improved for the year. Gross margin includes a LIFO charge of $45 million in
1998 compared with a $32 million charge last year as a result of continuing
inflation in drugstore merchandise, particularly pharmaceuticals. SG&A
expenses as a percent of sales increased by 20 basis points for the year, and
were negatively impacted by additional staffing costs in connection with the
integration of the various drugstore formats during the first half of the
year. In the second half, as a result of increased sales, expenses were
leveraged.

V-4
<PAGE>

1997 compared with 1996. The acquisition of Eckerd Corporation (Eckerd),
which was completed in February 1997, transformed the Company's drugstores
from a $3 billion to a $9 billion operation. Due to the dramatic increase in
the size of the combined operation, management believes that it is more
meaningful to compare 1997 operating results to 1996 pro forma operating
results, assuming the acquisitions had occurred at the beginning of 1996. The
following comments are based upon such a comparison. Historical information is
provided in the table on the previous page for reference purposes only.

During 1997, Eckerd was heavily involved in the integration of the Company's
former drugstore operations into the Eckerd organization. Despite the
significant integration activities that were occurring throughout 1997,
operating profit increased to $347 million from $306 million in 1996, an
increase of $41 million. The improvement was principally related to increased
sales volumes and reduced SG&A expenses from the combined operations. Sales
growth was strong the entire year, increasing by 11.2 percent on a 52-week
basis and 7.4 percent on a comparable store basis. Sales improvement was
driven by increases in pharmacy sales. Pharmacy sales continue to be
positively impacted by growth in managed care sales, which account for
approximately 80 percent of the prescription business.

Both 1997 and 1996 included charges related to the liquidation of
nonconforming merchandise resulting from the conversion of drugstores to the
Eckerd name and format. These charges totaled $45 million in 1997 and $31
million in 1996. Excluding these charges, gross margin declined by 40 basis
points as a percent of sales. The decline in gross margin percent was
primarily attributable to grand reopening promotional activities for the
converted regions and growth in the managed care prescription business, which
carries lower margins. Gross margin included a $32 million LIFO charge
compared with a $23 million charge 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 percent of sales.

Direct Marketing

<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
($ in millions)
<S> <C> <C> <C>
Operating revenue
Insurance premiums, net................................. $ 872 $ 800 $ 711
Membership fees......................................... 65 50 37
Investment income....................................... 85 78 70
------ ----- -----
Total revenue............................................. 1,022 928 818
Claims and benefits....................................... (340) (332) (298)
Other operating expenses(1)............................... (449) (382) (334)
------ ----- -----
Operating profit.......................................... $ 233 $ 214 $ 186
Revenue increase.......................................... 10.1% 13.4% 20.3%
Operating profit increase................................. 8.9% 15.1% 18.5%
Operating profit as a percent of revenue.................. 22.8% 23.1% 22.7%
</TABLE>
- --------
(1) Includes amortization of deferred acquisition costs of $195 million, $170
million, and $149 million, respectively.

In 1998, JCPenney Insurance Group changed its name to J. C. Penney Direct
Marketing Services, Inc. (Direct Marketing) to more properly reflect the
nature of its business--marketing both insurance and membership services.

V-5
<PAGE>

Total revenue exceeded $1 billion for the first time in 1998, increasing from
$928 million in 1997 and $818 million in 1996. The increase during both 1998
and 1997 was principally related to health insurance premiums, which account
for approximately 70 percent of total premiums, and which increased by 11.7
percent and 17.6 percent, respectively. Revenue growth for the three-year
period is attributable to successfully maintaining and enhancing marketing
relationships with businesses for the sale of insurance products throughout
the United States and Canada, principally banks, oil companies, and retailers.
In 1998, Direct Marketing expanded its international operations when it began
marketing through business relationships in the United Kingdom and initiated
activity in Australia.

Membership services, which consist principally of benefits for dental,
pharmacy, vision and hearing, as well as services for travelers and motorists
represent a small but growing component of the Direct Marketing business.

Net Interest Expense and Credit Operations

<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
($ in millions)
<S> <C> <C> <C>
Revenue................................................... $(702) $(675) $(650)
Bad debt expense.......................................... 229 307 238
Operating expenses........................................ 342 334 331
Interest expense, net..................................... 611 581 359
----- ----- -----
Net interest expense and credit operations................ $ 480 $ 547 $ 278
90-day delinquency rate................................... 3.0% 3.9% 3.7%
</TABLE>

Includes amounts related to the Company's retained interest in JCP Master
Credit Card Trust.

Net interest expense and credit operations improved by $67 million in 1998
compared with 1997, principally as a result of declines in bad debt expenses.
Bad debt expense declined by $78 million for the year as a result of favorable
credit industry trends as well as the Company's efforts to tighten credit
underwriting standards to improve portfolio performance and reduce risk. At
the end of fiscal 1998, 90-day delinquencies were 3.0 percent of receivables
compared with 3.9 percent at the end of 1997. Higher revenues in 1998 reflect
the increase in owned customer receivables from $2,956 million to $3,406
million. Interest expense, net, including financing costs for receivables,
inventory, and capital, increased to $611 million from $581 million last year
due to higher borrowing levels.

Net interest expense and credit operations increased in 1997 compared to
1996, principally as a result of rising bad debt on customer receivables and
interest expense on debt related to the drugstore acquisitions. While revenue
increased in 1997, primarily as a result of modifications that were made to
credit terms in selected states, it was more than offset by an increase of $69
million in bad debt expense. Bad debt expense in both 1997 and 1996 was
negatively impacted by high delinquency rates and high levels of personal
bankruptcies that were affecting the entire credit industry. The 90-day
delinquency rate was 3.9 percent at the end of 1997 compared with 3.7 percent
at the end of 1996. Interest expense increased in 1997 primarily as a result
of $3.0 billion of debt that was issued in connection with the Eckerd
acquisition.

The Company has experienced a migration of credit sales from its proprietary
credit card to third-party cards over the past several years. The Company has
not experienced any significant adverse effects on total combined credit sales
from the decline in proprietary card usage and continues to successfully
manage both its proprietary card levels and its relationships with bankcard
providers. The decline in receivable balances, however, has had a positive
impact on the Company's cash flow.

Income Taxes

The effective income tax rate in 1998 decreased to 37.8 percent compared
with 38.8 percent in 1997 and 37.9 percent in 1996.

V-6
<PAGE>

Financial Condition

Cash flow from operating activities was $1,021 million in 1998 compared with
$1,218 million in 1997 and $382 million in 1996. Declines in receivable and
inventory levels had a positive impact on cash flow for the year. While net
income has remained relatively flat in recent years, cash flow has remained
strong as a result of the increases in non-cash charges, primarily related to
the Eckerd acquisition. 1998 cash flow from operations, adjusted for the
effects of receivables financing, was sufficient to fund substantially all of
the Company's operating needs--working capital, capital expenditures, and
dividends. Management expects cash flow to cover the Company's operating needs
for the foreseeable future.

Merchandise inventory. Total LIFO inventory was $6,031 million in 1998
compared with $6,162 million in 1997 and $5,722 million in 1996. The increase
in 1997 was related to growth within Eckerd drugstores. FIFO merchandise
inventory for department stores and catalog was $4,081 million, a decrease of
3.7 percent on an overall basis and approximately two percent for comparable
stores compared with 1997 levels as the Company continued to focus on
improving its merchandise procurement processes and increasing inventory
turnover. Eckerd FIFO merchandise inventory was $2,177 million, an increase of
1.3 percent compared with the prior year. It is anticipated that Eckerd
inventories will grow as a result of its store expansion plans and its
strategy to relocate older strip center stores to free-standing locations.

Properties. Property, plant, and equipment, net of accumulated depreciation,
totaled $5,458 million at January 30, 1999, compared with $5,329 million and
$5,014 million at the ends of fiscal 1997 and 1996, respectively.

At the end of 1998, the Company operated 1,148 JCPenney department stores,
comprising 115.3 million gross square feet. The decline in the store count
over the past two years was principally related to the closing of
underperforming stores that was a component of the Company's 1997 other
charges. All stores slated for closing had closed by the end of fiscal 1998.
In addition, the Company operated 2,756 Eckerd drugstores as of the end of
fiscal 1998, comprising 27.6 million square feet. Eckerd store counts have
declined as a result of closing underperforming and overlapping stores during
the conversion of former drugstore formats to Eckerd.

Capital Expenditures

<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
($ in millions)
<S> <C> <C> <C>
Department stores and catalog................................ $ 420 $ 443 $ 636
Eckerd drugstores............................................ 256 341 103
Other corporate.............................................. 20 26 51
----- ----- -----
Total.................................................... $ 696 $ 810 $ 790
</TABLE>

1998 capital spending levels for property, plant, and equipment declined for
both department stores and catalog and Eckerd drugstores. In 1998, the Company
spent approximately $150 million on existing department store locations
compared with approximately $200 million in both 1997 and 1996. It is expected
that capital spending for department stores and catalog will total
approximately $300 million in 1999.

Capital spending for drugstores declined in 1998 by $85 million. Capital
spending levels in 1997 included additional capital requirements needed to
support the conversion of drugstores to the Eckerd name and format. During
1998, Eckerd added 256 new, relocated, and acquired stores and expects to add
an additional 275 in 1999, excluding the Genovese acquisition. Capital
spending in 1999 is projected at approximately $300 million, with the majority
of the spending related to the new and relocated stores.

Total capital spending for 1999 is currently projected at approximately $650
million.

V-7
<PAGE>

Acquisitions. The Company completed the acquisition of a majority interest
in Lojas Renner S.A. (Renner), a 21-store Brazilian department store chain, in
January 1999. The acquisition is being accounted for under the purchase
method. The total purchase price of $139 million is being allocated to assets
acquired and liabilities assumed based on their estimated fair values. The
excess of the purchase price over fair value was approximately $58 million and
is recorded as goodwill in the consolidated balance sheets and will be
amortized over 40 years. Renner is a calendar year company, and therefore
their results will be included with Company results of operations beginning in
fiscal 1999.

During fiscal 1998, Direct Marketing formed Quest Membership Services, Inc.
and acquired certain assets to expand its membership services operation to
include travel services. In addition, Direct Marketing acquired Insurance
Consultants, Inc. which strengthens its access to other business
relationships. The total purchase price for the two acquisitions was
approximately $72 million.

Intangible Assets. At the end of 1998, goodwill and other intangible assets,
net, totaled $2,857 million compared with $2,903 million in 1997 and $1,691
million in 1996. 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 in 1997 was related to the
completion of the Eckerd acquisition in February 1997.

Reserves. The 1998 consolidated balance sheet includes reserves totaling
$110 million which are included as a component of accounts payable and accrued
expenses and $25 million in other assets. These reserves were established in
connection with 1996 and 1997 other charges, net, and principally relate to
drugstore integration activities and the closing of underperforming department
stores. The reserves consisted principally of the present value of future
lease obligations for closed stores and for severance and outplacement costs
related to a reduction in force program. Reserve balances were calculated
based upon estimated costs to complete the various programs. Actual costs were
below the original estimates for the reduction in force program and closing of
underperforming stores. Consequently, reserves were adjusted in the fourth
quarter of 1998, resulting in a pre-tax credit of $22 million that is reported
as other charges, net. Reserve balances were reduced by $84 million in 1998
for cash payments made during the year. Also, in connection with the Company's
early retirement program, reserves were established for the periodic future
payments to be made under the Company's pension plans. These reserves are
included in pension liabilities which are discussed in Note 12 to the
consolidated financial statements. Payments for both lease obligations and
pension benefits will be paid out over an extended period of time. See Note 13
to the consolidated financial statements for additional information.

Debt to Capital.

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Debt to capital percent.................................... 56.6%* 55.0% 60.2%**
</TABLE>
- --------
* Upon completion of the Genovese Drug Stores, Inc. acquisition, the debt to
capital percent declined to 55.5.
** Upon completion of the Eckerd acquisition, the debt to capital ratio
declined to 55.6 percent.

The Company's debt to capital percent, net of short-term investments,
assuming completion of the drugstore acquisitions, has increased over the past
three years. The Company expects the debt to capital ratio to improve over the
next several years.

During the fourth quarter of 1998, JCP Receivables, Inc., an indirect wholly
owned special purpose subsidiary of the Company, completed a public offering
of $650 million aggregate principal amount of 5.5 percent Series E asset-
backed securities of the JCP Master Credit Card Trust. In addition, the
Company retired $449 million of debt at the normal maturity date during the
year, including the debt associated with the Company's ESOP. In 1997's first
quarter, the Company issued $3.0 billion of long-term debt, which principally
represented a conversion of short-term debt that had been issued in 1996 in
connection with the initial phase of

V-8
<PAGE>

the Eckerd acquisition. The average effective interest rate on the debt issued
in 1997 was 7.5 percent and the average maturity was 30 years. Total debt,
both on and off-balance-sheet, was $12,044 million at the end of 1998 compared
with $11,237 million in 1997 and $10,807 million in 1996.

During the past three years, the Company has issued 28.4 million shares of
common stock related to its drugstore acquisitions. The Company repurchased
5.0 million shares of its common stock in the fourth quarter of 1998 for $270
million and 7.5 million shares in 1996 for $366 million as part of previously
approved share repurchase programs. The Company has the authority to
repurchase an additional 5.0 million shares under these programs.

Year 2000 Readiness

The Year 2000 issue exists because many computer systems store and process
dates using only the last two digits of the year. Such systems, if not
changed, may interpret "00" as "1900" instead of the year "2000." The Company
has been working to identify and address Year 2000 issues since January 1995.
The scope of this effort includes internally developed information technology
systems, purchased and leased software, embedded systems, and electronic data
interchange transaction processing.

In October 1996, a companywide task force was formed to provide guidance to
the Company's operating and support departments and to monitor the progress of
efforts to address Year 2000 issues. The Company has also consulted with
various third parties, including, but not limited to, outside consultants,
outside service providers, infrastructure suppliers, industry groups, and
other retail companies and associations to develop industrywide approaches to
the Year 2000 issue, to gain insights to problems, and to provide additional
perspectives on solutions. Year 2000 readiness work was more than 90 percent
complete as of January 30, 1999. Since January 1999, the Company has been
retesting all systems critical to the Company's core businesses. The Company
has also focused on the Year 2000 readiness of its suppliers and service
providers, both independently and in conjunction with the National Retail
Federation.

Despite the significant efforts to address Year 2000 concerns, the Company
could potentially experience disruptions to some of its operations, including
those resulting from noncompliant systems used by third-party business and
governmental entities. The Company has developed contingency plans to address
potential Year 2000 disruptions. These plans include business continuity plans
that address accessibility and functionality of Company facilities as well as
steps to be taken if an event causes failure of a system critical to the
Company's core business activities.

Through the end of fiscal 1998, the Company had incurred approximately $32
million to achieve Year 2000 compliance, including approximately $9 million
related to capital projects. The Company's projected cost for Year 2000
remediation is currently estimated to be $46 million. Total costs 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.

Subsequent Events

In February 1999, the Company redeemed approximately $199 million principal
amount of 9.25 percent Notes that had an original maturity date in 2004.

On March 1, 1999, the Company completed the acquisition of Genovese Drug
Stores, Inc. (Genovese), a 141-drugstore chain with locations in New York, New
Jersey, and Connecticut, with 1998 sales of approximately $800 million. The
acquisition was accomplished through an exchange of approximately 9.6 million
shares of JCPenney common stock for the outstanding shares of Genovese, and
the conversion of outstanding Genovese stock options into approximately 550
thousand common stock options of the Company. The total value of the
transaction, including the assumption of approximately $60 million of debt,
was approximately $414 million. The acquisition is being accounted for under
the purchase method. The purchase price will be allocated to assets acquired
and liabilities assumed based on their estimated fair values, as well as
intangible assets acquired, primarily prescription files and favorable lease
rights. The excess purchase price over the fair value of assets acquired and
liabilities assumed is classified as goodwill and will be amortized over 40
years.

V-9
<PAGE>

Thirteen Weeks Ended May 1, 1999 and May 2, 1998

Results of Operations

Consolidated Operating Results

<TABLE>
<CAPTION>
13 Weeks Ended
-----------------------
May 1, 1999 May 2, 1998
----------- -----------
($ in millions)
<S> <C> <C>
Operating profit by segment:
Department stores and catalog......................... $ 167 $ 234
Eckerd drugstores..................................... 129 119
Direct Marketing...................................... 54 53
------- -------
Total operating segments............................ 350 406
Real estate and other................................... 9 6
Net interest and credit operations...................... (55) (93)
Acquisition amortization................................ (37) (35)
------- -------
Income before income taxes.............................. 267 284
Income taxes............................................ (100) (110)
------- -------
Net income.............................................. $ 167 $ 174
======= =======

Operating profit (income before net interest and credit operations,
acquisition amortization, real estate and other, and taxes) totaled $350
million compared with $406 million in last year's first quarter. The decline
was attributable to stores and catalog. The Company results reflect
significant improvement in net interest and credit operations which were
impacted by lower bad debt expense. Income before income taxes for the 13
weeks ended May 1, 1999 was $267 million, compared with $284 million in the
first quarter of 1998. Net income totaled $167 million, or 61 cents per
diluted share, as compared with $174 million, or 64 cents per diluted share in
last year's first quarter.

Segment Operating Results

Department Stores and Catalog

<CAPTION>
13 Weeks Ended
-----------------------
May 1, 1999 May 2, 1998
----------- -----------
($ in millions)
<S> <C> <C>
Retail sales, net....................................... $ 4,248 $ 4,242
Gross margin............................................ 1,325 1,343
Selling, general and administrative expenses............ (1,158) (1,109)
------- -------
Operating profit........................................ $ 167 $ 234
Sales percent increase
Total department stores............................... (1.7)% 2.3%
Comparable stores..................................... (0.5)% 1.9%
Catalog............................................... 7.9 % 2.8%
Ratios as a percent of sales
FIFO gross margin....................................... 31.2 % 31.7%
LIFO gross margin....................................... 31.2 % 31.7%
SG&A expenses........................................... 27.3 % 26.2%
Operating profit........................................ 3.9 % 5.5%
EBITDA(1)............................................... 8.7 % 9.4%
</TABLE>
- --------
(1) Earnings before interest, income taxes, depreciation, and amortization.
EBITDA includes finance charge revenue net of credit operating costs and
bad debt. EBITDA is provided as an alternative assessment of operating
performance and is not intended to be a substitute for GAAP measurements.
Calculations may vary for other companies.

V-10
<PAGE>

Operating profit for department stores and catalog was $167 million in this
year's first quarter compared with $234 million last year. The decline was
principally related to more promotional activity combined with flat overall
sales. Sales in department stores declined by 0.5 percent for comparable
stores, those stores open at least 12 months, compared with first quarter
1998. Department stores experienced positive sales results in its private
brand merchandise in the first quarter, particularly Arizona Jean Co., St.
John's Bay, and Worthington. The Company has completed the installation of
private brand shops in all of its larger stores. The increases in private
brands were offset by continued weakness in national brands, particularly in
athletic apparel and footwear. Catalog sales were strong in the first quarter
and benefited from participation in companywide promotional events, as well as
the addition of three new specialty catalogs. Also during the quarter, the
Company accelerated its investment in E-commerce; although Internet sales
represent a small component of catalog results, sales in the quarter increased
substantially from last year. Gross margin as a percent of sales was 50 basis
points below 1998 first quarter levels. Gross margin ratios for the quarter
were impacted by increased levels of promotional activities that were geared
toward stimulating sales and reducing inventory levels. Expense levels
increased by 4.4 percent compared with last year's first quarter and increased
by 110 basis points as a percent of sales due to the flat sales volumes. The
increase in expense levels is principally related to additional spending on E-
commerce and catalog support facilities as well as the addition of expenses
for the recently acquired Brazilian department store operation.

Eckerd Drugstores

<TABLE>
<CAPTION>
13 Weeks Ended
-----------------------
May 1, 1999 May 2, 1998
----------- -----------
($ in millions)
<S> <C> <C> <C>
Retail sales, net................................... $3,047 $2,564
Cost of goods sold
FIFO gross margin................................... 653 570
LIFO charge......................................... (12) (9)
------ ------
Total gross margin.................................. 641 561
SG&A expenses....................................... (512) (442)
------ ------
Operating profit.................................... 129 119
Sales percent increase
Total sales....................................... 18.8% 9.6%
Comparable stores................................. 12.3% 8.0%
Ratios as a percent of sales
FIFO gross margin................................. 21.4% 22.2%
LIFO gross margin................................. 21.0% 21.8%
SG&A expenses..................................... 16.8% 17.2%
Operating profit.................................. 4.2% 4.6%
EBITDA (1)........................................ 5.5% 5.7%
</TABLE>
- --------
(1) Earnings before interest, income taxes, depreciation, and amortization.
EBITDA is provided as an alternative assessment of operating performance
and is not intended to be a substitute for GAAP measurements. Calculations
may vary for other companies.

Operating profit in 1999's first quarter increased to $129 million, 8.4
percent higher than last year. As a percent of sales, operating profit
declined 40 basis points as a result of lower gross margins which were
partially offset by improved SG&A expense leverage. Eckerd experienced
continued strong sales growth in the first quarter, increasing by 12.3 percent
for comparable stores (including the pro forma results of Genovese drug stores
acquired on March 1, 1999) in addition to an 8.0 percent increase in the first
quarter of 1998. Comparable store sales were led by a 17.7 percent increase in
pharmacy sales which were particularly strong in the managed care segment.
Managed care sales accounted for approximately 86 percent of pharmacy sales in
the first quarter, up from 83 percent last year. Non-pharmacy sales, which
increased by 4.5 percent on a comparable store basis,

V-11
<PAGE>

benefited from strong results in both over-the-counter drugs due to a late
cold and flu season this year and one-hour photo processing. Total sales in
1999 include approximately $150 million for Genovese drugstores. LIFO gross
margin totaled $641 million in the first quarter compared with $561 million
last year, an increase of 14.3 percent. As a percent of sales, however, margin
declined by 80 basis points, as the mix of sales was more heavily weighted
toward pharmacy sales, especially managed care sales, which carry lower
margins. Eckerd recorded a $12 million LIFO charge in 1999 compared with a $9
million charge last year. SG&A expenses were leveraged during the quarter,
improving by 40 basis points as a percent of sales, with improvement
principally related to payroll costs.

Direct Marketing

<TABLE>
<CAPTION>
13 Weeks Ended
-----------------------
May 1, 1999 May 2, 1998
----------- -----------
($ in millions)
<S> <C> <C> <C>
Revenue............................................. $ 274 $ 246
Costs and expenses(1)............................... (220) (193)
------ ------
Operating profit.................................... $ 54 $ 53
Revenue, percent increase........................... 11.4 9.8
Operating profit as a percent of revenue............ 19.7 21.5
- --------
(1) Includes amortization of deferred acquisition costs of $53 and $46 million
for 1999 and 1998, respectively.

Revenue totaled $274 million in the first quarter, an increase of 11.4
percent compared with a year ago, with the increase principally related to
health insurance premiums which account for approximately 60 percent of total
revenues. Revenue generated from membership services and other non-insurance
products increased by 55.5 percent compared with last year's first quarter.
These products represent a growing business for Direct Marketing and now
account for approximately 7.5 percent of total revenues. Operating profit
totaled $54 million for the quarter, up slightly from first quarter 1998.
Current year operating profit is being impacted by expenditures for planned
new product development and international expansion activities, particularly
in the United Kingdom and Australia.

Net Interest Expense and Credit Operations

<CAPTION>
13 Weeks Ended
-----------------------
May 1, 1999 May 2, 1998
----------- -----------
($ in millions)
<S> <C> <C> <C>
Revenue............................................. $ (192) $ (183)
Bad debt expense.................................... 13 41
Operating expenses.................................. 84 87
Interest expense, net............................... 150 148
------ ------
Net interest expense and credit operations.......... $ 55 $ 93
====== ======
</TABLE>

Net interest expense and credit operations totaled $55 million in the first
quarter compared with $93 million in the comparable period last year. The
improvement from last year is primarily related to increased revenue and the
continuing improvement in bad debt trends. Revenues increased $9 million to
$192 million in the first quarter principally as a result of modifications to
late fee terms. Bad debt expense was $28 million below last year's level
principally as a result of continuing improvement in delinquency trends, due
in part to the Company's previous efforts to tighten credit underwriting
standards to improve portfolio performance. As of the end of the quarter, the
90-day delinquency rate was 2.9 percent of customer receivables, down from 4.2
percent at the end of first quarter 1998. As of the end of the quarter,
customer receivables serviced totaled $3,714 million, a decrease of $422
million, or 10.2 percent, compared with a year ago.

V-12
<PAGE>

Income Taxes

The Company's effective income tax rate was 37.5 percent in the first
quarter compared with 38.7 percent last year.

Financial Condition

On March 1, 1999, the Company completed the acquisition of Genovese, a 141-
drugstore chain with locations in New York, New Jersey, and Connecticut, with
1998 sales of approximately $800 million. The acquisition was accomplished
through an exchange of approximately 9.6 million shares of JCPenney common
stock for the outstanding shares of Genovese and the conversion of outstanding
Genovese stock options into approximately 550 thousand common stock options of
the Company. The total value of the transaction, including the assumption of
approximately $60 million of debt was approximately $414 million. The
acquisition is being accounted for under the purchase method. The purchase
price is being allocated to assets acquired and liabilities assumed based on
their estimated fair values, as well as intangible assets acquired, primarily
prescription files and favorable lease rights. The excess purchase price over
the fair value of assets acquired and liabilities assumed is being classified
as goodwill and will be amortized over 40 years. Pro forma results, assuming
the Genovese acquisition occurred at the beginning of the quarters ended May
1, 1999 and May 2, 1998, would not differ materially from reported results.

Merchandise Inventories. Merchandise inventories on a FIFO basis totaled
$6,288 million at the end of the first quarter compared with $6,155 million at
the end of last year's first quarter. Current year totals include
approximately $140 million of inventory acquired in the Genovese ($127
million) and Lojas Renner ($13 million) transactions. Inventories for
department stores and catalog were down slightly from the prior year and
totaled $3,987 million at May 1, 1999 as compared with $4,029 million at the
end of last year's first quarter. Eckerd drugstore inventories totaled $2,301
million compared with $2,126 million last year. The increase is principally
related to the acquisition of Genovese. The current cost of inventories
exceeded the LIFO basis amount carried on the balance sheet by approximately
$239 million at May 1, 1999, $227 million at January 30, 1999, and $234
million at May 2, 1998.

Properties. Properties, net of accumulated depreciation, totaled $5,462
million at May 1, 1999 compared with $5,344 million at the end of last year's
first quarter.

Goodwill and Intangible Assets. Goodwill and other intangible assets, net,
totaled $3,144 million compared with $2,868 million as of May 2, 1998.
Approximately $295 million in intangible assets and goodwill associated with
the Genovese acquisition was recorded in the first quarter of 1999.

Reserves. At May 1, 1999, the consolidated balance sheet included reserves
totaling $107 million which are included as a component of accounts payable
and accrued expenses and $25 million which is reflected as a reduction to
other assets. These reserves were established in connection with the Company's
1996 and 1997 other charges, net, and relate to future lease obligations on
stores and other support facilities closed in connection with those charges,
and a note receivable related to the divestiture of certain drugstores,
respectively. These reserves were reduced by $3 million and $4 million in the
first quarter of 1999 and 1998, respectively, as a result of lease payments.
See Note to Interim Financial Information.

Debt to Capital. During the first quarter of 1999, the Company redeemed
approximately $199 million principal amount of 9.25 percent Notes that had an
original maturity of 2004. The Company recorded a pre-tax gain of
approximately $5 million on the early extinguishment of the Notes. There was
no significant activity related to debt in the first quarter of 1998. The
Company's current long-term debt ratings for Moody's Investors Service, Fitch
Investors Service, Inc., and Standard and Poor's Corporation are A3, A-, and
BBB+, respectively, and for commercial paper are P2, F2, and A2, respectively.

On February 11, 1999, the Board of Directors announced that it would
maintain the quarterly dividend at 54 1/2 cents per share, or an indicated
annual rate of $2.18 per share. The regular quarterly dividend of 54 1/2 cents
per share on the Company's outstanding common stock was paid on May 1, 1999,
to stockholders of record on April 9, 1999.

V-13
<PAGE>

Year 2000 Readiness

Through May 1, 1999, the Company had incurred approximately $40 million to
achieve Year 2000 compliance, including approximately $10 million related to
capital projects. The Company's remaining cost for Year 2000 remediation is
currently estimated to be $7 million. Total costs have not had, and are not
expected to have, a material impact on the Company's financial results.

New Accounting Rules

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which is effective for quarters beginning after June 15,
2000. The Company has a limited exposure to derivative products and does not
expect these new rules to have a material impact on reported results.

Subsequent Events

On May 18, 1999, the Company announced two major strategic initiatives:

. the outsourcing of the management of its proprietary credit card
business and related sale of the underlying receivables, and

. the restructuring of the existing common stock of the Company into
two classes, intended to track the separate performances of the
department store, catalog and direct marketing businesses of the
Company (the Penney Group) and the drugstore business of the Company
(the Eckerd Group). The Company currently plans to offer shares of
Eckerd Group Common Stock representing approximately 20 percent of
the equity value of the Eckerd Group to the public for cash, subject
to market and other conditions. In addition, the Company currently
intends to distribute (via a dividend) the remaining equity value of
the Eckerd Group to holders of Penney Group Common Stock
approximately six to twelve months after the offering of Eckerd Group
Common Stock, subject to market and other conditions. This proposal
will require stockholder approval.

The Company currently intends to close both the outsourcing of the
management of the Penney Group's proprietary credit card business and the
related sale of the underlying receivables and related assets and the initial
public offering of Eckerd Group Common Stock by the end of the fourth quarter
of 1999.

V-14
<PAGE>

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 30, 1999 and January 31, 1998,
and the related consolidated statements of income, stockholders' equity and
cash flows for each of the years in the three-year period ended January 30,
1999. 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 30, 1999 and January 31,
1998, and the results of their operations and their cash flows for each of the
years in the three-year period ended January 30, 1999, in conformity with
generally accepted accounting principles.

/s/ KPMG LLP

Dallas, Texas
February 25, 1999

V-15
<PAGE>

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
1998 1997 1996
-------- -------- --------
($ in millions)
<S> <C> <C> <C>
Revenue
Retail sales, net................................ $29,656 $29,618 $22,653
Direct marketing revenue......................... 1,022 928 818
------- ------- -------
Total revenue.................................... 30,678 30,546 23,471
Costs and expenses
Cost of goods sold............................... 21,761 21,385 16,058
Drugstore inventory integration losses........... 98 45 31
------- ------- -------
Total cost of goods sold......................... 21,859 21,430 16,089
Selling, general, and administrative expenses.... 6,530 6,473 5,282
Costs and expenses of Direct Marketing........... 789 714 632
Real estate and other............................ (26) (39) (45)
Net interest expense and credit operations....... 480 547 278
Acquisition amortization......................... 113 117 23
Other charges, net............................... (22) 379 303
------- ------- -------
Total costs and expenses......................... 29,723 29,621 22,562
------- ------- -------
Income before income taxes....................... 955 925 909
Income taxes..................................... 361 359 344
------- ------- -------
Net income....................................... $ 594 $ 566 $ 565
======= ======= =======
</TABLE>

Earnings per common share
<TABLE>
<CAPTION>
Average
Income Shares EPS
------ ------- -----
($ in millions
except per share
data)
<S> <C> <C> <C>
1998
Net income................................................ $594
Less preferred stock dividends............................ (38)
---- --- -----
Basic EPS................................................. 556 253 $2.20
Stock options and convertible preferred stock............. 37 18
---- --- -----
Diluted EPS............................................... $593 271 $2.19
==== === =====
1997
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
==== === =====
</TABLE>

See Notes to the Consolidated Financial Statements.

V-16
<PAGE>

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
Jan.
30, Jan. 31,
1999 1998
------- --------
($ in millions)
<S> <C> <C>
Assets
Current assets
Cash (including short-term investments of $95 and $208).... $ 96 $ 287
Retained interest in JCP Master Credit Card Trust.......... 415 1,073
Receivables, net (bad debt reserve of $124 and $110)....... 4,415 3,819
Merchandise inventory (including LIFO reserves of $227 and
$225)..................................................... 6,031 6,162
Prepaid expenses........................................... 168 143
------- -------
Total current assets..................................... 11,125 11,484
Property, plant, and equipment
Land and buildings......................................... 3,109 2,993
Furniture and fixtures..................................... 4,045 4,089
Leasehold improvements..................................... 1,179 1,192
Accumulated depreciation................................... (2,875) (2,945)
------- -------
Property, plant, and equipment, net.......................... 5,458 5,329
Investments, principally held by Direct Marketing............ 1,961 1,774
Deferred policy acquisition costs............................ 847 752
Goodwill and intangible assets, net (accumulated amortization
of $221 and $108)........................................... 2,857 2,903
Other assets................................................. 1,390 1,251
------- -------
Total Assets............................................. $23,638 $23,493
======= =======
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses...................... $ 3,465 $ 4,059
Short-term debt............................................ 1,924 1,417
Current maturities of long-term debt....................... 438 449
Deferred taxes............................................. 143 116
------- -------
Total current liabilities................................ 5,970 6,041
Long-term debt............................................... 7,143 6,986
Deferred taxes............................................... 1,517 1,325
Insurance policy and claims reserves......................... 946 872
Other liabilities........................................ 893 912
------- -------
Total Liabilities........................................ 16,469 16,136
Stockholders' Equity
Preferred stock: authorized, 25 million shares; issued and
outstanding, 0.8 million and 0.9 million shares Series B
ESOP Convertible Preferred................................ 475 526
Guaranteed LESOP obligation................................ -- (49)
Common stock, par value 50 cents: authorized, 1,250 million
shares; issued and outstanding 250 million and 251 million
shares.................................................... 2,850 2,766
Reinvested earnings........................................ 3,858 4,066
Accumulated other comprehensive income/(loss).............. (14) 48
------- -------
Total Stockholders' Equity............................... 7,169 7,357
------- -------
Total Liabilities and Stockholders' Equity............... $23,638 $23,493
======= =======
</TABLE>

See Notes to the Consolidated Financial Statements.

V-17
<PAGE>

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Accumulated
Other
Guaranteed Comprehensive Total
Common Preferred LESOP Reinvested Income/ Stockholders
Stock Stock Obligation Earnings (Loss)(1) Equity
------ --------- ---------- ---------- ------------- ------------
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
January 27, 1996........ $1,112 $603 $(228) $4,339 $ 58 $5,884
------ ---- ----- ------ ---- ------
Net income.............. 565 565
Net unrealized change in
investments............ (18) (18)
Currency translation
adjustments............ (3) (3)
------ ---- ------
Total comprehensive
income............... 565 (21) 544
Dividends 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) 4,073 37 5,952
------ ---- ----- ------ ---- ------
Net income.............. 566 566
Net unrealized change in
investments............ 14 14
Currency translation
adjustments............ (3) (3)
------ ---- ------
Total comprehensive
income............... 566 11 577
Dividends 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) 4,066 48 7,357
------ ---- ----- ------ ---- ------
Net income.............. 594 594
Net unrealized change in
investments............ (1) (1)
Currency translation
adjustments(2)......... (61) (61)
------ ---- ------
Total comprehensive
income............... 594 (62) 532
Dividends declared...... (588) (588)
Common stock issued..... 140 140
Common stock retired.... (56) (214) (270)
Preferred stock
retired................ (51) (51)
LESOP payment........... 49 49
------ ---- ----- ------ ---- ------
January 30, 1999........ $2,850 $475 $ -- $3,858 $(14) $7,169
====== ==== ===== ====== ==== ======
</TABLE>
- --------
(1) Net unrealized changes in investment securities are shown net of deferred
taxes of $36 million, $39 million, and $30 million, respectively. A
deferred tax asset has not been established for currency translation
adjustments.
(2) 1998 currency translation adjustments include $(49) million associated
with assets acquired and liabilities assumed in the purchase of Renner.

See Notes to the Consolidated Financial Statements.

V-18
<PAGE>

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
1998 1997 1996
-------- -------- --------
($ in millions)
<S> <C> <C> <C>
Operating Activities:
Net income.................................... $ 594 $ 566 $ 565
Gain on the sale of banking assets............ -- (52) --
Other charges, net............................ (22) 371 310
Depreciation and amortization, including in-
tangible assets.............................. 637 584 381
Deferred taxes................................ 219 1 (18)
Change in cash from:
Customer receivables........................ 258 215 (172)
Other receivables........................... (158) (75) (77)
Inventory, net of trade payables............ 64 (395) (521)
Current taxes payable....................... (171) 116 31
Other assets and liabilities, net........... (400)(1) (113) (117)
------- ------- -------
1,021 1,218 382
------- ------- -------
Investing Activities:
Capital expenditures.......................... (744) (824) (704)
Proceeds from the sale of banking assets,
net.......................................... -- 276 --
Acquisitions(2)............................... (210) -- (1,776)
Purchase of investment securities............. (611) (401) (471)
Proceeds from the sale of investment securi-
ties......................................... 447 252 493
------- ------- -------
(1,118) (697) (2,458)
------- ------- -------
Financing Activities:
Change in short-term debt..................... 507 (2,533) 2,401
Proceeds from the issuance of long-term debt.. 644 2,990 596
Payment of long-term debt..................... (478) (343) (133)
Common stock issued, net...................... 89 79 33
Common stock purchased and retired............ (270) -- (366)
Dividends paid, preferred and common.......... (586) (558) (497)
------- ------- -------
(94) (365) 2,034
------- ------- -------
Net Increase/(Decrease) in Cash and Short-Term
Investments.................................. (191) 156 (42)
Cash and Short-Term Investments at Beginning
of Year...................................... 287 131 173
------- ------- -------
Cash and Short-Term Investments at End of
Year......................................... $ 96 $ 287 $ 131
======= ======= =======
Supplemental Cash Flow Information:
Interest paid................................. $ 649 $ 571 $ 390
Interest received............................. 45 71 60
Income taxes paid............................. 307 225 356
</TABLE>
- --------
(1) Results principally from payments related to reserves established in 1997.
(2) Reflects total cash changes related to acquisitions.

Non-cash transactions: In 1997, the Company issued 23.2 million shares of
common stock having a value of $1.3 billion to complete the acquisition of
Eckerd. In 1996, the Company issued 5.2 million shares of common stock having
a value of $278 million for the acquisition of Fay's Incorporated.

See Notes to the Consolidated Financial Statements.

V-19
<PAGE>

J. C. PENNEY COMPANY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 Summary of Accounting Policies

Basis of presentation. Certain prior year amounts have been reclassified to
conform to the Company's current year presentation and those of the Penney
Group and the Eckerd Group.

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 1998 ended January 30, 1999; fiscal 1997 ended
January 31, 1998; and fiscal 1996 ended January 25, 1997. Fiscal 1997 was a
53-week year; fiscal 1998 and 1996 were 52-week years. The accounts of Direct
Marketing and Renner are on a calendar-year basis.

Retail sales, net. Retail sales include merchandise and services, net of
returns, and exclude all taxes.

Direct marketing revenue. Premium income for life insurance contracts is
recognized as income when due. Premium income for accident and health, and
credit insurance and membership services income is reported as earned over the
coverage period. Premiums and fees paid in advance are deferred and recognized
as income over the coverage period.

Earnings per common share. Basic earnings per share is computed by dividing
net income less dividend requirements on the Series B ESOP convertible
preferred stock, net of tax, by the weighted average common stock outstanding.
Diluted earnings per share assumes the exercise of stock options and the
conversion of the Series B ESOP 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 ESOP debt service
resulting from the assumed replacement of the preferred dividends with common
stock dividends.

Cash and short-term investments. The Company's short-term investments are
comprised principally of commercial paper which has a maturity at the
acquisition date of less than three months. All other securities are
classified as investments on the consolidated balance sheets.

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 determines the lower of cost or market on an aggregated
basis for similar types of merchandise. The Company applies internally
developed indices to measure increases and decreases in its own retail prices.

Depreciation and amortization. All long-lived assets are amortized on a
straight-line basis over their respective useful lives. The primary useful
life for buildings is 50 years, and ranges from three to 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. Trade name and goodwill are generally amortized over 40 years. Other
intangible assets, whose fair value is determined at the date of acquisition,
are amortized over periods ranging from five to seven years.

V-20
<PAGE>

J. C. PENNEY COMPANY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Impairment of assets. The Company assesses the recoverability of asset
values, including goodwill and other intangible assets, on a periodic basis by
comparing expected cash flows to net book value. Impaired assets are written
down to estimated fair value.

Deferred charges. Deferred policy acquisition and advertising costs,
principally solicitation and marketing costs and commissions, incurred by
Direct Marketing to secure new business are amortized over the expected
premium-paying period of the related policies and over the expected period of
benefits for memberships.

Capitalized software costs. Costs associated with the acquisition or
development of software for internal use are capitalized and amortized over
the expected useful life of the software. The amortization period generally
ranges from three to 10 years.

Investments. The Company's investments are classified as available-for-sale
and are carried at fair value. Changes in unrealized gains and losses are
included in other comprehensive income, net of applicable income taxes.

Insurance policy reserves. Liabilities established by Direct Marketing 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.

Pre-opening expenses. Costs associated with the opening of new stores are
expensed in the period incurred.

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. The current derivative position consists of a non-leveraged, off-
balance-sheet interest rate swap which is 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. Certain amounts included in the Company's consolidated
financial statements are based upon estimates. Actual results may differ from
these estimates.

New accounting rules. The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (FAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, in June 1998. The new rules are
effective for quarters beginning after June 15, 2000. The Company has a
limited exposure to derivative products and does not expect these new rules to
have a material impact on reported results.

The American Institute of Certified Public Accountants (AICPA) issued
Statement of Position (SOP) No. 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, in March 1998. The Company
adopted the new rules in 1998 and capitalized approximately $20 million of
software development costs during the year. Due to the significance of systems
development costs, it is expected that capitalized software costs will
increase over the next several years.

The AICPA also issued SOP No. 98-5, Reporting on the Costs of Start-Up
Activities, in April 1998. The Company adopted the new accounting rules in
1998. The new rules require that start-up costs, including store pre-opening
expenses, be expensed as incurred. The Company's existing accounting policy
conforms with the new rules; accordingly, there was no impact on the Company's
results of operation.

V-21
<PAGE>

J. C. PENNEY COMPANY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

2 Retained Interest in JCP Master Credit Card Trust

The Company has transferred portions of its customer receivables to a trust
which, in turn, has sold certificates in public offerings representing
undivided interests in the trust. As of January 30, 1999, $1,143 million of
the certificates were outstanding and the balance of the receivables in the
trust was $1,578 million. The Company owns the remaining undivided interest in
the trust not represented by the certificates.

The retained interest in the trust is accounted for as an investment in
accordance with FAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. The carrying value of $415 million in 1998 and $1,073
million in 1997 includes a valuation reserve of $15 million and $40 million,
respectively. Due to the short-term nature of this investment, the carrying
value approximates fair value.

3 Investments and Fair Value of Financial Instruments

<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------ --------- ------
($ in millions)
<S> <C> <C> <C> <C>
Fixed Income Securities...................... $1,269 $1,322 $1,126 $1,167
Asset-Backed Certificates.................... 431 449 431 459
Equity Securities............................ 159 190 113 148
------ ------ ------ ------
Total...................................... $1,859 $1,961 $1,670 $1,774
====== ====== ====== ======
</TABLE>

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 Direct Marketing, 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 other
comprehensive income.

Financial liabilities. Financial liabilities are recorded in the
consolidated balance sheets at historical cost, which approximates fair value.
Such fair 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. All long-term debt
is fixed rate and therefore the Company is not exposed to fluctuations in
market rates except to the extent described in the following paragraph.

Derivative financial instruments. The Company's current derivative position
consists of one interest rate swap which was entered into in connection with
the issuance of asset-backed certificates in 1990. This swap helps to protect
certificate holders by reducing the effects of an early amortization of the
principal. According to the terms of the swap, the Company pays fixed interest
at 9.625 percent and receives variable interest based on floating commercial
paper rates. The Company's total exposure resulting from the swap is not
material. As discussed in Note 1, the net amount paid or received is included
in interest expense.

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.

V-22
<PAGE>

J. C. PENNEY COMPANY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

4 Accounts Payable and Accrued Expenses

<TABLE>
<CAPTION>
1998 1997
------ ------
($ in
millions)
<S> <C> <C>
Trade payables................................................... $1,496 $1,551
Accrued salaries, vacation, and bonus............................ 444 487
Taxes payable.................................................... 232 486
Interest payable................................................. 165 165
Common dividends payable......................................... 140 136
Other(1)......................................................... 988 1,234
------ ------
Total.......................................................... $3,465 $4,059
====== ======
</TABLE>
- --------
(1) Includes $110 million and $216 million for 1998 and 1997, respectively,
related to other charges, principally future lease obligations.

5 Short-term Debt

<TABLE>
<CAPTION>
1998 1997
------ ------
($ in
millions)
<S> <C> <C>
Commercial paper................................................ $1,924 $1,417
Average interest rate at year-end............................... 5.1% 5.6%
</TABLE>

Committed bank credit facilities available to the Company as of January 30,
1999 totaled $3.0 billion. The facilities, as amended and restated in 1998,
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 30,
1999.

The Company also 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 30, 1999, $280 million of letters of credit issued by
the Company were outstanding.

V-23
<PAGE>

J. C. PENNEY COMPANY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

6 Long-term Debt

<TABLE>
<CAPTION>
Jan. 30, 1999 Jan. 31, 1998
---------------- ----------------
Avg. Avg.
Rate Balance Rate Balance
----- -------- ----- --------
($ in millions)
<S> <C> <C> <C> <C>
Notes and debentures
Due Year 1.............................. 8.0% $ 424 5.4% $ 400
Due Year 2.............................. 6.7% 625 6.9% 225
Due Year 3.............................. 9.1% 250 6.7% 625
Due Year 4.............................. 7.5% 1,100 9.1% 250
Due Year 5.............................. 5.8% 1,000 7.5% 1,100
Due 6-10 years.......................... 8.0% 1,441 7.8% 1,760
Due 11-15 years......................... 9.0% 125 8.0% 325
Due 16-20 years......................... 7.6% 767 7.7% 780
Due 21-30 years......................... 7.5% 875 7.5% 887
Due thereafter.......................... 7.5% 900 7.5% 900
----- -------- ----- --------
Total notes and Debentures................ 7.4% 7,507 7.5% 7,252
Guaranteed LESOP notes, due 1998.......... -- 49
Capital lease obligations and other....... 74 134
Less current maturities................... (438) (449)
-------- --------
Total long-term debt...................... $ 7,143 $ 6,986
======== ========
</TABLE>

During 1998, JCP Receivables, Inc., an indirect wholly owned special purpose
subsidiary of the Company, completed a public offering of $650 million
aggregate principal amount of Series E asset-backed certificates of JCPenney
Master Credit Card Trust. The certificates have a maturity of five years and
an interest rate of 5.5 percent. This transaction did not meet the criteria
for sale accounting under FAS No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities, and accordingly it was
recorded as a secured borrowing by the Company. Proceeds from the offering
were used for general corporate purposes. In 1997, the Company issued $3.0
billion of debt in connection with its acquisitions. These notes and
debentures had an average maturity of 30 years and an average interest rate of
7.5 percent. All notes and debentures have similar characteristics regardless
of due date and therefore are grouped by maturity date.

7 Capital Stock

At January 30, 1999, there were approximately 56 thousand stockholders of
record. On a combined basis, the Company's savings plans, including the
Company's employee stock ownership plan (ESOP), held 43.4 million shares of
common stock, or 16.3 percent of the Company's common shares after giving
effect to the conversion of preferred stock.

Common stock. The Company has authorized 1,250 million shares, par value
$.50; 250 million shares were issued and outstanding as of January 30, 1999,
and 251 million shares were issued and outstanding as of January 31, 1998.

Preferred stock. The Company has authorized 25 million shares; 792 thousand
shares of Series B ESOP Convertible Preferred Stock were issued and
outstanding as of January 30, 1999, and 876 thousand shares were issued and
outstanding as of January 31, 1998. Each share is convertible into 20 shares
of the Company's common stock at $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 percent. Shares may be redeemed at the option of
the

V-24
<PAGE>

J. C. PENNEY COMPANY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company or the ESOP 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 March 1999, 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, 1/1000 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. The rights agreement contains a three-year independent
director evaluation provision. This "TIDE" feature provides that a committee
of the Company's independent directors will review the rights agreement at
least every three years and, if they deem it appropriate, may recommend to the
board of directors a modification or termination of the rights agreement.

8 Stock-Based Compensation

The Company has a stock-based compensation plan which was approved by
stockholders in 1997. The plan reserved 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 employees, comprised principally of
selected management employees, are eligible to participate. 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 outside members of
the board of directors. Shares acquired by such directors are not transferable
until a director terminates service.

The Company accounts for stock-based compensation under the provisions of
APB Opinion 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 V-16 do not reflect any compensation cost for the Company's
fixed stock options. In accordance with FAS 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, as follows:

Option Assumptions

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Dividend yield....................................... 3.8% 4.0% 3.9%
Expected volatility.................................. 20.5% 21.3% 22.3%
Risk-free interest rate.............................. 5.7% 6.3% 5.6%
Expected option term................................. 6 years 6 years 5 years
Fair value per share of options granted.............. $13.66 $9.76 $8.88
</TABLE>

V-25
<PAGE>

J. C. PENNEY COMPANY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Compensation expense recorded under FAS No. 123 would have been
approximately $21 million in 1998 and $11 million in 1997 and 1996, reducing
earnings per share by eight cents in 1998, and approximately four cents in the
other two years. The following table summarizes the status of the Company's
fixed stock option plans for the years ended January 30, 1999, January 31,
1998, and January 25, 1997:

Options

<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
Shares Price Shares Price Shares Price
--------- ------- --------- ------- --------- -------
(shares in thousands; price is weighted average)
<S> <C> <C> <C> <C> <C> <C>
Beginning of year....... 7,583 $ 40 8,633 $ 36 8,867 $ 33
Granted................. 1,643 71 1,413 45 1,266 48
Exercised............... (2,100) (36) (2,347) (30) (1,427) (27)
Expired and cancelled... (154) (61) (116) (48) (73) (42)
--------- ------- --------- ------- --------- -------
Outstanding at end of
year................... 6,972 48 7,583 40 8,633 36
Exercisable at end of
year................... 5,418 41 6,428 38 7,419 35
</TABLE>

Options as of January 30, 1999

<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------- ------------
Remaining
Term
Shares Price (Yrs.) Shares Price
------ ----- --------- ------ -----
(shares in thousands; price and
remaining term are weighted
averages)
<S> <C> <C> <C> <C> <C>
Under $25................................... 83 $ 9 4.6 83 $ 9
$25-$35..................................... 1,761 28 2.3 1,761 28
$35-$45..................................... 998 42 5.7 980 42
$45-$55..................................... 1,842 48 7.6 1,842 48
Over $55.................................... 2,288 66 8.2 752 55
----- --- --- ----- ---
Total..................................... 6,972 $48 6.0 5,418 $41
===== === === ===== ===
</TABLE>

9 Interest Expense, Net

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
($ in
millions)
<S> <C> <C> <C>
Short-term debt............................................... $106 $121 $102
Long-term debt................................................ 557 527 312
Other, net*................................................... (52) (67) (55)
---- ---- ----
Interest expense, net......................................... $611 $581 $359
==== ==== ====
</TABLE>
- --------
* Includes $39 million in 1998 and $34 million in 1997 and 1996 for interest
income from the Company's investment in asset-backed certificates.

10 Lease Commitments

The Company conducts the major part of its operations from leased premises
that include retail stores, 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 $585 million in 1998, $541 million in 1997,
and $333 million in 1996, including contingent rent based on sales of $66
million, $72 million, and $48 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 $123 million in 1998, $126 million in 1997,
and $106 million in 1996.

V-26
<PAGE>

J. C. PENNEY COMPANY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Future minimum lease payments for noncancelable operating and capital
leases, net of subleases, as of January 30, 1999 were:

<TABLE>
<CAPTION>
Operating Capital
--------- -------
($ in millions)
<S> <C> <C>
1999.......................................................... $ 565 $ 11
2000.......................................................... 510 11
2001.......................................................... 440 11
2002.......................................................... 408 6
2003.......................................................... 384 1
Thereafter.................................................... 2,841 --
------ ----
Total minimum lease payments.................................. $5,148 $ 40
Present value................................................. $2,715 $ 35
Weighted average interest rate................................ 10% 10%
====== ====
</TABLE>

Minimum lease payments are shown net of estimated executory costs,
principally real estate taxes, maintenance, and insurance.

11 Advertising Costs

Advertising costs consist principally of newspaper, television, radio, and
catalog book costs. In 1998, the total cost of advertising was $1,077 million
compared with $977 million in 1997, and $988 million in 1996. The "other
assets" section of the consolidated balance sheets includes deferred catalog
book costs of $87 million as of January 30, 1999, and $89 million as of
January 31, 1998.

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. In
addition, in 1998, the Company adopted two nonqualified savings plans. Pension
plan assets are invested in a balanced portfolio of equity and debt securities
managed by third-party investment managers. In addition, Eckerd has a
noncontributory pension plan. As of January 1, 1999, all Eckerd retirement
benefit plans were frozen and all employees began to accrue benefits under the
Company's retirement plans. The following tables include the benefit
obligation related to the Company's early retirement program (see Note 13,
page V-30, for additional information). The cost of these programs and the
December 31 balances of plan assets and obligations are shown below:

Expense

<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
($ in millions)
<S> <C> <C> <C>
Pension and health care
Service cost............................................ $ 76 $ 68 $ 73
Interest cost........................................... 221 200 186
Projected return on Assets.............................. (283) (488) (386)
Net amortization........................................ 14 248 174
----- ----- -----
28 28 47
Savings plan expense.................................... 76 71 56
----- ----- -----
Total retirement plans................................ $ 104 $ 99 $ 103
===== ===== =====
</TABLE>

V-27
<PAGE>

J. C. PENNEY COMPANY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Assumptions

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rate................................................. 6.75% 7.25% 8.0%
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% 7.0%
</TABLE>

Assets and Obligations

Pension plans*

<TABLE>
<CAPTION>
1998 1997
------ ------
($ in
millions)
<S> <C> <C>
Projected Benefit Obligation
Beginning of year............................................... $2,749 $2,187
Service and interest cost....................................... 273 243
Actuarial (gain)/loss........................................... 184 400
Benefits paid................................................... (200) (210)
Amendments and other............................................ -- 129
------ ------
End of year..................................................... 3,006 2,749
Fair value of plan assets
Beginning of year............................................... 3,064 2,735
Company contributions........................................... 32 29
Net gains/(losses).............................................. 497 510
Benefits paid................................................... (200) (210)
------ ------
End of year..................................................... 3,393 3,064
Excess of fair value over projected benefits.................... 387 315
Unrecognized gains and prior service cost....................... 75 125
------ ------
Prepaid pension cost............................................ $ 462 $ 440
====== ======
</TABLE>
- --------
* Includes supplemental retirement plan.

Medical and Dental

<TABLE>
<CAPTION>
1998 1997
---- ----
($ in
millions)
<S> <C> <C>
Accumulated benefit obligation....................................... $334 $335
Net unrecognized losses.............................................. 10 13
---- ----
Net medical and dental liability..................................... $344 $348
==== ====
</TABLE>

A one percent change in the health care trend rate would change the
accumulated benefit obligation and expense by approximately $24 million and $2
million, respectively.

V-28
<PAGE>

J. C. PENNEY COMPANY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

13 Other Charges, Net

During 1996 and 1997, the Company recorded other charges principally related
to drugstore integration activities, department store closings and FAS No.
121, Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of, impairments, and early retirement and reduction in
force programs. The following tables provide a summary by year and by category
as well as a rollforward of reserves that were established for certain of the
charges.

1996 Charges

<TABLE>
<CAPTION>
1996
-------------------------------
Cash Other Y/E
Expense Outlays Charges Reserve
------- ------- ------- -------
($ in millions)
<S> <C> <C> <C> <C>
Department stores and catalog
Reduction in force............................ $ 11 $(11) $ -- $--
---- ---- ----- ----
Eckerd drugstores
FAS 121 impairments and loss on the
divestiture of drugstore assets(1)........... 174 -- (174) --
Future lease obligations and severance(2)..... 69 -- -- 69
Allowance for notes receivable(3)............. -- -- 25 25
Headquarters severance(2)..................... 17 -- -- 17
Other(2)...................................... 32 (12) (16) 4
---- ---- ----- ----
292 (12) (165) 115
---- ---- ----- ----
Total....................................... $303 $(23) $(165) $115
==== ==== ===== ====
</TABLE>

<TABLE>
<CAPTION>
1996 1997 1998
------- ----------------------- -----------------------
Y/E Cash Other Y/E Cash Other Y/E
Reserve Outlays Charges Reserve Outlays Charges Reserve
------- ------- ------- ------- ------- ------- -------
($ in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Eckerd drugstores
Future lease obligations
and severance(2)....... $ 69 $ (3) $-- $66 $(7) $-- $59
Allowance for notes
receivable(3).......... 25 -- -- 25 -- -- 25
Headquarters
severance(2)........... 17 (16) -- 1 (1) -- --
Other(2)................ 4 -- -- 4 -- -- 4
---- ---- ---- --- --- ---- ---
Total................. $115 $(19) $-- $96 $(8) $-- $88
==== ==== ==== === === ==== ===
</TABLE>
- --------
(1) Charges related to FAS 121 impairments were recorded as a reduction of
property, plant, and equipment balances.
(2) Reserve balances are included as a component of accounts payable and
accrued expenses.
(3) The allowance for notes receivable is included as a reduction of other
assets.

Department Stores and Catalog

Reduction in force. As part of the Company's ongoing program to reduce the
cost structure for stores and catalog and improve the Company's competitive
position and future performance, it announced the elimination of 119 store and
field support positions in September 1996, all of which were subsequently
eliminated. Subsequent periods benefited from the elimination of related
salary costs. The charges, which were expensed and paid in the fourth quarter
of 1996, related to severance and outplacement.

V-29
<PAGE>

J. C. PENNEY COMPANY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Eckerd Drugstores

FAS 121 impairments and loss on the divestiture of drugstore assets. In the
fourth quarter of 1996, the Company recorded $174 million of charges
associated with the Eckerd acquisition. This amount was comprised of the
following components: 1) $53 million related to the closing of certain
underperforming and/or overlapping drugstores; 2) $96 million related to the
divestiture of certain Rite Aid and Kerr drugstores; and 3) $25 million
related principally to the write-off of goodwill associated with previous
acquisitions. Each of these items is discussed in more detail below:

1) In October 1996, the Company acquired Fay's Incorporated (Fay's), a chain
of approximately 270 drugstores. Also in October 1996, Thrift Drug, Inc., a
wholly owned subsidiary of the Company, entered into an agreement to acquire
substantially all of the assets of approximately 190 Rite Aid drugstores in
North and South Carolina. At the time of the acquisition, no significant
changes to the operations of these stores were expected. In November 1996, the
Company entered into an agreement to acquire Eckerd, a chain of 1,748
drugstores. Upon entering into the agreement to acquire Eckerd, the Company
began to plan for the integration of its approximately 1,100 existing
drugstores into the Eckerd name and format. The integration plan provided for,
among other things, the closing of 86 overlapping and/or under-performing
Thrift and Fay's drugstores, all of which were leased facilities. These stores
had a sales base of approximately $130 million and operating losses of
approximately $9 million before non-cash operating expenses, such as
depreciation. During 1997, 64 stores were closed. The remaining store closings
were delayed into fiscal 1998 to facilitate a timely and orderly transition
between the operations of the stores to be closed and the surrounding stores
that were to remain open and operating. All stores were closed as of the end
of fiscal 1998.

A FAS 121 impairment charge of $53 million related to these stores was
recorded by the Company in 1996. Impaired assets consisted primarily of store
fixtures and leasehold improvements. Since these assets could not readily be
used at other store locations and no ready market existed outside the Company,
they were discarded at the time of closing. Accordingly, the impairment charge
recorded for these assets represented their carrying value as of the end of
fiscal 1996. Asset values were reduced to zero and as a result, depreciation
was discontinued. The stores were operating at a loss and continued to do so
subsequent to the FAS 121 impairment charge. Operating results for the
individual stores were included in operations through the date of closing.
There were no significant changes to the Company's initial estimate of
impairment.

2) As a condition of its approval of the Eckerd acquisition, the Federal
Trade Commission (FTC) required that the Company divest itself of 164 stores
(divested stores) in North and South Carolina (consisting of both Rite Aid and
Kerr drugstores) to a single buyer to maintain adequate competition in the two
states. Pursuant to the FTC agreement, the consummation of the acquisition of
the Rite Aid stores was delayed until the Company entered into an agreement to
sell the divested stores. Ultimately, the Company entered into an agreement
with a former member of Thrift management and other parties to sell the
divested stores for $75 million ($42 million in cash and $33 million in notes
receivable). The Company recognized a FAS 121 impairment charge of $75 million
related to the Rite Aid stores. The impairment charge was necessary as the
undiscounted cash flows for these units were not sufficient to support
recorded asset values, including furniture and fixtures and other intangibles.
The amount of the impairment charge was determined based on the difference
between the fair value of the assets, as calculated through discounted
expected cash flows, and the carrying amount for those assets. In addition,
the Company recorded a loss of $21 million related to the divestiture of the
Kerr stores. These 34 Kerr stores had a sales base of approximately $59
million and operating income of approximately $3 million before non-cash
operating expenses.

V-30
<PAGE>

J. C. PENNEY COMPANY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

accounting to the Fay's trade name, was determined to have no value. In
addition, the Company recorded an impairment charge of $15 million related to
goodwill associated with unprofitable business units operated by the former
drugstore operations.

Future lease obligations and severance. In connection with these drugstore
closings and the sale of divested stores, the Company established a $69
million reserve for the present value of future lease obligations. The store
closing plan anticipated that Eckerd would remain liable for all future lease
payments. The present value of future lease obligations was calculated using a
6.7 percent discount rate and anticipated no subleasing activity or lease
buyouts. Costs are being charged against the reserve as incurred; the interest
component related to lease payments is recorded as rent expense with no
corresponding increase in the reserve. Payments during the next five years are
expected to be approximately $2 million per year. These reserves will be
assessed periodically to determine their adequacy. No changes have been deemed
necessary through the end of 1998.

Approximately 1,150 store employees, including store managers as well as
salaried and non-salaried personnel, were terminated as a result of store
closings.

Allowance for notes receivable. A portion of the proceeds related to the
sale of the divested stores was financed by the Company through a note
receivable of $33 million. The FTC agreement provided that the Company could
not maintain a continuing interest in the divested stores. This placed
significant constraints on the Company's ability to collect on the note which
remains uncertain. Consequently, a reserve for 75 percent ($25 million) of the
face value of the note receivable was established. This reserve is reviewed
for adequacy on a periodic basis. No adjustments have been deemed necessary
through the end of 1998.

Headquarters severance. A reserve of $17 million was established for
termination benefits related to the elimination of the Thrift headquarters and
certain support facilities upon the acquisition of Eckerd. Approximately 400
employees were affected by the plan to eliminate these functions, which
included all levels of Thrift management and administrative staff. Ultimately,
436 employees were terminated under this program, with the majority of the
employees being terminated during 1997. Actual termination costs were charged
against the reserve as incurred with $16 million being incurred and charged
against the reserve in 1997. The program has been completed and no adjustments
were required to the reserve.

Other. The principal component of other integration charges was $15 million
related to the change of the Thrift accounting policy for certain contractual
vendor payments to a more preferable accounting method. This item was
established as unearned income on the consolidated balance sheet as of year-
end 1996 and is being recognized over the contract terms through the year
2002. The remaining $17 million, the majority of which was expensed as
incurred, was related to integration activities for the Fay's stores and other
activities such as contract terminations.

V-31
<PAGE>

J. C. PENNEY COMPANY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

1997 Charges
<TABLE>
<CAPTION>
1997
--------------------------------
Cash Other Y/E
Expense Outlays Changes Reserve
-------- ------- ------- -------
($ in millions)
<S> <C> <C> <C> <C>
Department stores and catalog
Early retirement(1)........................... $151 $ (1) $(150) $--
Reduction in force(2)......................... 55 -- -- 55
FAS 121 impairments(3)........................ 72 -- (72) --
Future lease obligations and severance(2)..... 61 (6) -- 55
---- ---- ----- ----
339 (7) (222) 110
---- ---- ----- ----
Sale of business units........................ (63) 63 -- --
==== ==== ===== ====
Eckerd drugstores
Store integration............................. 61 (61) -- --
Systems integration........................... 26 (26) -- --
Advertising/grand reopening................... 26 (26) -- --
Future obligations, primarily leases(2)....... 37 (2) -- 35
Gain on the sale of institutional pharmacy.... (47) 47 -- --
---- ---- ----- ----
103 (68) -- 35
---- ---- ----- ----
Total....................................... $379 $(12) $(222) $145
==== ==== ===== ====
<CAPTION>
1997 1998
-------- -----------------------
Y/E Cash Other Y/E
Reserves Outlays Charges Reserve
-------- ------- ------- -------
($ in millions)
<S> <C> <C> <C> <C>
Department stores and catalog
Reduction in force(2)......................... $ 55 $(44) $ (11) $--
Future obligations and severance(2)........... 55 (24) (11) 20
---- ---- ----- ----
110 (68) (22) 20
==== ==== ===== ====
Eckerd drugstores
Future obligations, primarily leases(2)....... 35 (8) -- 27
---- ---- ----- ----
Total....................................... $145 $(76) $ (22) $ 47
==== ==== ===== ====
</TABLE>
- --------
(1) The early retirement program was reflected in the 1997 year end balance
sheet as follows: $58 million in enhanced pension benefits was credited
against prepaid pension assets which are included in other assets; $5
million of retiree medical liability and $85 million for the new non-
qualified retirement plan are included in other liabilities; and such
amounts are included in retirement plan disclosures in Note 12. In
addition, $2 million of plan administration costs was included in accounts
payable and accrued expenses in 1997.
(2) Reserve balances are included as a component of accounts payable and
accrued expenses.
(3) Charges related to FAS 121 impairments were recorded as a reduction of
property, plant, and equipment balances.

Department Stores and Catalog

As part of the Company's initiatives to reduce the cost structure for
department stores and catalog and improve the Company's competitive position
and future performance, the following actions were taken in the third and
fourth quarters of 1997:

V-32
<PAGE>

J. C. PENNEY COMPANY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Early retirement. In August 1997 the Company announced a voluntary early
retirement program (Program) to all department stores, catalog, and corporate
support management employees who were age 55 or older and had at least 10
years of service. Approximately 1,600 employees were eligible to participate
in the program, and approximately 1,245, or 78 percent, elected to retire
under the Program. The charge of $151 million includes $158 million of
termination benefits that were actuarially calculated based on the employees
electing to retire under the Program (representing lump-sum payments as well
as the present value of periodic future payments determined at a discount rate
of 7.5 percent), $5 million of actuarially calculated post retirement welfare
benefits, and $3 million of outside consulting and administration costs. These
costs were offset by a $15 million pension curtailment gain which was the
result of a decrease in the projected benefit obligation (PBO) of the
Company's qualified pension plan. The PBO was reduced due to the elimination
of the liability for future salary increases resulting from the early
termination of employees who elected to retire under the Program. Of the $3
million of outside consulting and administrative costs, approximately $2
million represented cash outlays, and the remainder was reversed in the fourth
quarter of 1998. All other amounts recorded under this program are included in
Retirement Plans disclosure in Note 12 on page V-27.

Reduction in force. In the fourth quarter of 1997, the Company announced a
restructuring plan to eliminate approximately 1,700 management employees. The
$55 million charge represents severance, outplacement, and other termination
benefits offered to all affected associates. There was no cash outlay in 1997
because, while employees were notified of the restructuring plan in the fourth
quarter of 1997, they did not leave the Company until 1998. Cash outlays of
$44 million in 1998 represent termination benefits paid to the approximately
1,550 employees terminated. The plan was completed in the fourth quarter of
1998 at less cost than originally estimated due in part to employee
resignations prior to being involuntarily terminated and employees obtaining
positions elsewhere in the Company. Consequently, approximately $11 million
was reversed in the fourth quarter of 1998.

FAS 121 impairments. The Company identified 97 underperforming stores that
did not meet the Company's profit objectives and several support units (credit
service centers and warehouses) which were no longer needed. This unit closing
plan (Plan) represents unit closings over and above the normal course of store
closures within a given year, which are typically relocations. All units were
closed by the end of fiscal 1998. The major actions comprising the Plan
consisted of the identification of a closing date (to coincide with
termination rights and/or other trigger dates contained in the lease, if
applicable), and the notification of affected parties (e.g., employees,
landlords, and community representatives) in accordance with the Company's
store closing procedures. Substantially all of the stores and support units
included in the portfolio were leased, and as such, the Company was not
responsible for the disposal of property, other than fixtures, which for the
most part were discarded. Unit closing costs include future lease obligations
and termination benefits, and FAS 121 impairments.

Impaired assets resulting from the store closings consist primarily of store
furniture and fixtures, and leasehold improvements. The majority of the stores
identified for closure were older stores in small markets and the associated
furniture and fixtures were outdated. Therefore, these items could not be
readily used at another location, and there was not a ready market for these
items to determine a fair value. Accordingly, the impairment charge recorded
for these assets represents the carrying value of the assets as of the end of
fiscal 1997. Depreciation of these assets was discontinued as the impairment
charges reduced the asset balances to zero. The stores were operating at a
loss and continued to do so subsequent to the FAS 121 impairment charge. There
were no significant changes to the Company's initial estimate of impairment.

Future lease obligations and severance. In connection with the above store
closings, the Company established a $61 million reserve for the present value
of future lease obligations ($31 million) and other store closing costs ($30
million), principally severance and outplacement. The store closing plan
anticipated that the Company would remain liable for all future lease
payments. Present values were calculated assuming a ten per

V-33
<PAGE>

J. C. PENNEY COMPANY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

cent discount rate and anticipated no subleasing activity or lease buyouts.
Costs are being charged against the reserve as incurred. The cash outlays in
1997 and 1998 represent severance benefits paid for approximately 1,550
employees terminated under the program, and lease payments for closed stores.
The interest component of lease payments of approximately $2 million in 1998
was recorded as interest expense, with a corresponding increase in the
reserve, in the fourth quarter of 1998 and future years. The remaining reserve
as of the end of 1998 represents future lease obligations for all closed
stores. The actual timing of store closings did not differ significantly from
the estimate upon which the liability for future lease obligations was based.
On average, the remaining lease term for closed stores was seven years, and
payments during the next five years are expected to be approximately $4
million per year. Adjustments to the reserves in 1998 included reversals of
approximately $5 million due to reduced lease obligations stemming from
subleased facilities, and $6 million for employment-related costs. Employment-
related costs were less than original estimates as a result of several
factors, including voluntary resignations, a higher rate of employee
transfers, and the termination of a higher proportion of employees with less
tenure with the Company. These reserves will continue to be assessed
periodically.

The stores identified for closure were generally those with a poor
performance history, and to a large extent, declining sales. The short-term
effect of the closings was the net loss of approximately $225 million in sales
and the elimination of approximately $15 million in operating losses before
non-cash operating charges such as depreciation. The Company expects to
realize benefits of approximately $32 million per year as a result of
eliminating operating losses associated with the closed stores and the
redeployment of working capital.

Sale of Business Units

A gain on the sale of business units of $63 million was included in the 1997
other charges. JCPenney National Bank (JCPNB), a consumer bank which issued
VISA and MasterCard credit cards, was sold in 1997 at a gain of $49 million.
In addition, the Company recorded a $14 million gain representing a
supplemental, contingent payment related to the 1995 sale of JCPenney Business
Services, Inc. (BSI). BSI provided credit-related services to third party
credit-card issuers. JCPNB 1996 revenues and operating income were $129
million and $2 million, respectively. The sale of JCPNB did not have a
negative impact on the Company's results of operations or financial position
in 1997, and it is not expected to have a material impact in future periods.

Eckerd Drugstores

The majority of drugstore charges recorded as other charges in 1997 relate
to integration activities that were expensed as incurred in accordance with
EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business
Combination. Such costs were comprised of the following:

Store integration--charges totaling $61 million related to the conversion of
the former Thrift, Fay's, and Kerr stores and certain warehouse facilities to
the Eckerd name and format, including training, overhead redundancies during
the transition period, and other similar integration-related costs.

Systems integration--costs associated with the conversion of the previously
owned drugstores to the Eckerd systems platform totaled $26 million.

Advertising and grand re-opening--costs associated with introducing the
Eckerd name in converted regions as well as costs related to the grand re-
opening of converted drugstores totaled $26 million.

In addition, the Company recorded the following drugstore related items as
other charges in 1997:

Future obligations, primarily leases. In the second quarter of 1997, as part
of the ongoing drugstore integration process, the Company closed 26 additional
drugstores. These stores were part of the portfolio of retained Rite Aid
stores (see previous discussion). The Company recorded a FAS 121 impairment
charge for the

V-34
<PAGE>

J. C. PENNEY COMPANY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

store assets in 1996. These closings did not involve any termination benefits.
The liability in 1997 was limited to future lease obligations on these stores.
The reserve for future lease obligations for these stores is based on the
present value of lease obligations through the year 2017. Additionally, in the
fourth quarter of 1997, the Company became obligated to make future lease
payments for 27 stores that Fay's had sold prior to being acquired by the
Company on which the buyer had defaulted and failed to make lease payments.
Fay's, and therefore the Company, was contractually obligated to make the
lease payments. Accordingly, the Company recorded a charge for future lease
obligations on these stores at the time the liability became known. The
reserve for future lease obligations on these stores is based on lease
payments through the year 2009. A charge of $25 million related to all of
these lease obligations was recorded. These events are not expected to have an
effect on future sales, and other than future lease obligations, there will be
no impact on future operating results as none of the stores operated as part
of Thrift drugstores. In addition, an $8 million charge was recorded for
liabilities established for pending litigation, and the remaining $4 million
relates to other miscellaneous charges, each individually insignificant. As of
the end of 1998, these combined reserves totaled $27 million. There have been
no adjustments to these liabilities as of the end of 1998.

Gain on the sale of institutional pharmacy. As part of the integration plan,
the Company sold its underperforming institutional pharmacy operation in the
fourth quarter of 1997 and recorded a gain of $47 million. This operation
generated sales of $80 million in 1997.

14 Taxes

Deferred tax assets and liabilities reflected on the Company's consolidated
balance sheets 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 30, 1999 and January 31, 1998 were as
follows:

Temporary Differences

<TABLE>
<CAPTION>
1998 1997
------- -------
($ in millions)
<S> <C> <C>
Depreciation and amortization................................. $ 1,084 $ 977
Leases........................................................ 312 339
Other charges, net............................................ (46) (139)
Deferred acquisition costs.................................... 233 211
Other, including comprehensive income......................... 77 53
------- -------
Total....................................................... $ 1,660 $ 1,441
======= =======
</TABLE>

Income Tax Expense

<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
($ in millions)
<S> <C> <C> <C>
Current
Federal and foreign...................................... $ 111 $ 319 $ 321
State and local.......................................... 31 39 43
----- ----- -----
142 358 364
----- ----- -----
Deferred
Federal and foreign...................................... 219 3 (19)
State and local.......................................... -- (2) (1)
----- ----- -----
219 1 (20)
----- ----- -----
Total.................................................. $ 361 $ 359 $ 344
----- ----- -----
Effective tax rate......................................... 37.8% 38.8% 37.9%
===== ===== =====
</TABLE>

V-35
<PAGE>

J. C. PENNEY COMPANY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Reconciliation of Tax Rates
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(Percent of pre-
tax income)
<S> <C> <C> <C>
Federal income tax at statutory rate..................... 35.0 35.0 35.0
State and local income taxes, less federal income tax
benefit................................................. 2.2 2.8 3.0
Tax effect of dividends on allocated ESOP shares......... (1.4) (1.3) (1.3)
Tax credits and other.................................... 2.0 2.3 1.2
----- ----- -----
Total.................................................. 37.8 38.8 37.9
===== ===== =====
</TABLE>

15 Segment Reporting

The Company operates in three business segments: department stores and
catalog, Eckerd drugstores, and Direct Marketing. The results of department
stores and catalog are combined because they generally serve the same
customer, have virtually the same mix of merchandise, and the majority of
catalog sales are completed in department 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
Year Revenue Profit Assets Expenditures Amortization
---- ------- --------- ------- ------------ ------------
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
Department stores and
catalog................ 1998 $19,331 $1,013 $14,446 $439 $380
1997 19,955 1,368 14,863 464 365
1996 19,506 1,183 14,756 680 328
Eckerd drugstores....... 1998 10,325 254 6,478 256 251
1997 9,663 347 6,181 341 214
1996 3,147 99 4,387 103 47
Direct Marketing........ 1998 1,022 233 2,603 1 6
1997 928 214 2,283 5 5
1996 818 186 1,986 7 6
Total segments........ 1998 30,678 1,500 23,527 696 637
1997 30,546 1,929 23,327 810 584
1996 23,471 1,468 21,129 790 381
Net interest expense and
credit operations...... 1998 (480)
1997 (547)
1996 (278)
Real estate and other
and acquisition
amortization........... 1998 (87) 111
1997 (78) 166
1996 22 959
Other charges, net...... 1998 22
1997 (379)
1996 (303)
Total Company......... 1998 30,678 955(1) 23,638 696 637
1997 30,546 925(1) 23,493 810 584
1996 23,471 909(1) 22,088 790 381
</TABLE>
- --------
(1) Represents income before income taxes as shown on the Company's
consolidated statements of income.

Total assets of department stores and catalog excludes the retained interest
in the Eckerd Group of $3,517 million in 1998, $3,268 million in 1997, and
$1,394 million in 1996.

V-36
<PAGE>

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

The following interim financial information is unaudited but, in the opinion
of the Company, includes all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation. Certain prior amounts have been
reclassified to conform with the Company's current year presentation and those
of the Penney Group and the Eckerd Group. The financial information should be
read in conjunction with the Company's audited consolidated financial
statements included herein. Operating results for the interim period are not
necessarily indicative of the results that may be expected for a full year.

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

<TABLE>
<CAPTION>
13 Weeks Ended
----------------
May 1, May 2,
1999 1998
------- -------
($ in millions
except per
share data)
<S> <C> <C>
Retail sales, net............................................ $ 7,295 $ 6,806
Direct Marketing revenue..................................... 274 246
------- -------
Total revenue.............................................. 7,569 7,052
------- -------
Costs and expenses
Cost of goods sold, occupancy, buying, and warehousing
costs..................................................... 5,329 4,902
Selling, general, and administrative expenses.............. 1,670 1,551
Costs and expenses of Direct Marketing..................... 220 193
Real estate and other...................................... (9) (6)
Net interest expense and credit operations (1)............. 55 93
Acquisition amortization................................... 37 35
------- -------
Total costs and expenses..................................... 7,302 6,768
------- -------
Income before income taxes................................... 267 284
Income taxes................................................. 100 110
------- -------
Net income................................................. $ 167 $ 174
======= =======
Earnings per common share:
Net income................................................... $ 167 $ 174
Less: preferred stock dividends.............................. (9) (10)
------- -------
Earnings for basic EPS....................................... 158 164
Stock options and convertible preferred stock................ 9 9
------- -------
Earnings for diluted EPS..................................... $ 167 $ 173
Shares:
Average shares outstanding (used for Basic EPS).............. 256 252
Common stock equivalents..................................... 16 20
------- -------
Average diluted shares outstanding........................... 272 272
Earnings per share:
Basic...................................................... $ 0.62 $ 0.65
Diluted.................................................... 0.61 0.64
</TABLE>
- --------
(1) 1999 includes a $5 million pre-tax gain, or 1 cent per share after tax, on
the early extinguishment of 9.25 percent Notes.

See Note to Interim Financial Information.

V-37
<PAGE>

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Unaudited)

<TABLE>
<CAPTION>
May 1, Jan. 30,
1999 1999
------- --------
($ in millions)
<S> <C> <C>
Assets
Current assets
Cash and short-term investments of $168 and $95............ $ 168 $ 96
Retained interest in JCP Master Credit Card Trust.......... 250 415
Receivables, net........................................... 4,312 4,415
Merchandise inventories.................................... 6,049 6,031
Prepaid expenses........................................... 180 168
------- -------
Total current assets..................................... 10,959 11,125
Property, plant, and equipment
Land and buildings......................................... 3,123 3,109
Furniture and fixtures..................................... 4,010 4,045
Leasehold improvements..................................... 1,218 1,179
Accumulated depreciation................................... (2,889) (2,875)
------- -------
Property, plant, and equipment, net.......................... 5,462 5,458
Investments, principally held by Direct Marketing............ 2,010 1,961
Deferred policy acquisition costs............................ 871 847
Goodwill and intangible assets net of accumulated
amortization of $258 and $221............................... 3,144 2,857
Other assets................................................. 1,342 1,390
------- -------
Total Assets............................................. $23,788 $23,638
======= =======
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses...................... $ 3,281 $ 3,465
Short-term debt............................................ 1,995 1,924
Current maturities of long-term debt....................... 550 438
Deferred taxes............................................. 156 143
------- -------
Total current liabilities................................ 5,982 5,970
Long-term debt............................................... 6,821 7,143
Deferred taxes............................................... 1,557 1,517
Insurance policy and claims reserves......................... 967 946
Other liabilities.......................................... 912 893
------- -------
Total Liabilities........................................ 16,239 16,469
------- -------
Stockholders' Equity
Preferred stock, without par value: authorized, 25 million
shares--issued, 0.8 and 0.8 million shares of Series B
ESOP convertible preferred................................ 464 475
Guaranteed LESOP obligation................................ -- --
Common stock, par value 50 cents: authorized, 1,250 million
shares--issued, 260 and
250 million shares........................................ 3,219 2,850
------- -------
Total capital stock...................................... 3,683 3,325
------- -------
Reinvested earnings
At beginning of year....................................... 3,858 4,066
Net income................................................. 167 594
Common stock dividends declared............................ (143) (549)
Preferred stock dividends declared, net of tax............. -- (39)
Common stock retired....................................... -- (214)
------- -------
Reinvested earnings at end of period....................... 3,882 3,858
Accumulated other comprehensive income/(loss).............. (16) (14)
------- -------
Total Stockholders' Equity................................. 7,549 7,169
------- -------
Total Liabilities and Stockholders' Equity............... $23,788 $23,638
======= =======
</TABLE>

The accumulated balances for net unrealized gains in debt and equity
securities were $51 million and $65 million, and for currency translation
adjustments were ($67) million and ($79) million as of the respective dates
shown. Net unrealized gains in investment securities are shown net of deferred
taxes of $29 million and $36 million, respectively. A deferred tax asset has
not been established for currency translation adjustments. Total comprehensive
income was $165 million and $532 million for the periods ended May 1, 1999 and
January 30, 1999, respectively.

See Note to Interim Financial Information.

V-38
<PAGE>

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

<TABLE>
<CAPTION>
13 Weeks Ended
-----------------
May 1, May 2,
1999 1998
------- -------
($ in millions)
<S> <C> <C>
Operating Activities:
Net income................................................. $ 167 $ 174
Depreciation and amortization, including intangible
assets.................................................... 177 167
Deferred taxes............................................. 49 34
Change in cash from:
Customer receivables..................................... 413 430
Other receivables........................................ (123) (12)
Inventories, net of trade payables....................... 1 (71)
Current taxes payable.................................... 38 --
Other assets and liabilities, net........................ (120) (463)
------- -------
602 259
------- -------
Investing Activities:
Capital expenditures....................................... (146) (160)
Purchases of investment securities......................... (307) (83)
Proceeds from sales of investment securities............... 229 76
Proceeds from the sale of bank receivables................. 22 --
------- -------
(202) (167)
------- -------
Financing Activities:
Change in short-term debt.................................. 15 83
Payments of long-term debt................................. (210) --
Common stock issued, net................................... 3 50
Dividends paid, preferred and common....................... (136) (260)
------- -------
(328) (127)
------- -------
Net Increase/(Decrease) in Cash and Short-Term
Investments............................................... 72 (35)
Cash and Short-Term Investments at Beginning of Year....... 96 287
------- -------
Cash and Short-Term Investments at End of First Quarter.... $ 168 $ 252
======= =======
</TABLE>

Non-cash transactions: On March 1, 1999, the Company issued 9.6 million
shares of common stock to complete the acquisition of Genovese Drug Stores,
Inc. The total value of the transaction, including debt assumed and conversion
of options for Genovese common stock to options for JCPenney common stock, was
approximately $414 million.

See Note to Interim Financial Information.

V-39
<PAGE>

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

NOTE TO CONSOLIDATED INTERIM FINANCIAL INFORMATION
(Unaudited)

Other Charges, Net

During 1996 and 1997, the Company recorded other charges principally related
to drugstore integration activities, department store closings and FAS 121
impairments, and early retirement and reduction in force programs
(collectively other charges, net). The following tables provide a roll forward
of reserves that were established for certain categories of these charges. The
schedules, and the accompanying discussion, provide the status of the reserves
as of May 1, 1999.

1996 Charges

<TABLE>
<CAPTION>
1st Qtr 1999
1997 1998 YTD
------- --------------- ---------------
Y/E Cash Y/E Cash Ending
Reserve Outlays Reserve Outlays Reserve
------- ------- ------- ------- -------
($ in millions)
<S> <C> <C> <C> <C> <C>
Eckerd Group
Future lease obligations(1)............ $66 $(7) $59 $ (1) $58
Allowance for notes receivable(2)...... 25 -- 25 -- 25
Headquarters severance(1).............. 1 (1) -- -- --
Other(1)............................... 4 -- 4 -- 4
--- --- --- ---- ---
Total................................ $96 $(8) $88 $ (1) $87
=== === === ==== ===
</TABLE>
- --------
Amounts are reflected on the consolidated balance sheets as follows:

(1) Reserve balances are included as a component of accounts payable and
accrued expenses.

(2) The allowance for notes receivable, which was established in connection
with the drugstore divestiture discussed below, is included as a reduction
of other assets.

Background. In October 1996, the Company acquired Fay's Incorporated
(Fay's), a chain of 270 drugstores, and entered into an agreement to acquire
substantially all of the assets of approximately 190 Rite Aid drugstores in
North and South Carolina. In November 1996, the Company entered into an
agreement to acquire Eckerd Corporation (Eckerd), a chain of 1,748 drugstores.
Upon entering into the agreement to acquire Eckerd, the Company began to plan
for the integration of its approximately 1,100 existing drugstores into the
Eckerd name and format. The integration plan provided for, among other things,
the closing of 86 overlap and/or underperforming Thrift and Fay's drugstores,
all of which were leased facilities, having a sales base of approximately $130
million and operating losses of approximately $9 million before non-cash
operating expenses such as depreciation. All stores were closed by the end of
fiscal 1998.

As a condition of the Eckerd acquisition, the Federal Trade Commission (FTC)
required that the Company divest itself of 164 stores (divested stores) in the
Carolinas (consisting of both Rite Aid and Kerr drugstores) to a single buyer
to maintain adequate competition in the two states. Pursuant to the FTC
agreement, the consummation of the acquisition of the Rite Aid stores was
delayed until the Company entered into an agreement to sell the divested
stores. Ultimately, the Company entered into an agreement with a former member
of Thrift management and other parties to sell the divested stores for $75
million ($42 million in cash and $33 million in notes receivable).

As of May 1, 1999, $87 million in reserves associated with the store
closings and divestiture remained. The majority of the reserves, $58 million,
were related to future lease obligations, and $25 million was related to the
note receivable.

V-40
<PAGE>

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

NOTE TO CONSOLIDATED INTERIM FINANCIAL INFORMATION--(Continued)
(Unaudited)

Future lease obligations. In connection with the above store closings, the
Company established a reserve for the present value of future lease
obligations. The store closing plan anticipated that Eckerd would remain
liable for all future lease payments. The present value of future lease
obligations was calculated using a 6.7 percent discount rate and anticipated
no subleasing activity or lease buyouts. Costs are being charged against the
reserve as incurred; the interest component related to lease payments is
recorded as rent expense in the period incurred with no corresponding increase
in the reserve. During both the first quarter of 1999 and 1998, approximately
$1 million in lease payments were charged against the reserve. Payments during
the next five years are expected to be approximately $2 million per year.
Given the extended lease terms, the reserves will be assessed periodically to
determine their adequacy. No changes have been deemed necessary through the
first quarter of 1999.

Allowance for notes receivable. As noted above, a portion of the proceeds
related to the sale of the divested stores was financed by the Company through
a note receivable of $33 million. The FTC agreement provided that the Company
could not maintain a continuing interest in the divested stores. This placed
significant constraints on the Company's ability to collect on the note which
remains uncertain. Consequently, a reserve for 75 percent of the face value of
the note receivable was established. This reserve is reviewed for adequacy on
a periodic basis. No adjustments have been deemed necessary through the first
quarter of 1999.

Other--The remaining charges, the majority of which have been expensed as
incurred, were related to integration activities for the Fay's stores, and
other activities such as contract terminations. There were no payments or
other changes to these reserves in either the first quarter of 1999 or 1998.

1997 Charges

<TABLE>
<CAPTION>
1st Qtr 1999
1997 1998 YTD
------- --------------- ---------------
Y/E Cash Y/E Cash Ending
Reserve Outlays Reserve Outlays Reserve
------- ------- ------- ------- -------
($ in millions)
<S> <C> <C> <C> <C> <C>
Department stores and catalog
Reduction in force(1)................. $ 55 $(55) $-- $-- $--
Future lease obligations(1)........... 55 (35) 20 (1) 19
---- ---- ---- ---- ----
Subtotal............................ 110 (90) 20 (1) 19
Eckerd drugstores
Future obligations primarily
leases(1)............................ 35 (8) 27 (1) 26
---- ---- ---- ---- ----
Total............................... $145 $(98) $ 47 $ (2) $ 45
==== ==== ==== ==== ====
</TABLE>
- --------
(1) Reserve balances are included as a component of accounts payable and
accrued expenses.

Background. In 1997, the Company recorded $379 million of net charges
related to early retirement and reduction in force programs ($206 million),
the closing of underperforming department stores and support facilities ($133
million), additional drugstore integration activities ($103 million), and
gains on the sale of certain business units ($63 million). As of the end of
the first quarter of 1999, reserves totaling $45 million remained related to
these charges. A description of the charges and a roll forward of the reserves
by major category are provided below:

Department Stores and Catalog

V-41
<PAGE>

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

NOTE TO CONSOLIDATED INTERIM FINANCIAL INFORMATION--(Continued)
(Unaudited)

other termination benefits offered to all affected associates. There was no
cash outlay in 1997, because although
employees were notified of the restructuring plan in the fourth quarter of
1997, they did not leave the Company until 1998. Cash outlays totaled $18
million in the first quarter of 1998, and all payments were made by the end of
the year. The plan was completed in the fourth quarter of 1998 at less cost
than originally estimated due in part to employee resignations prior to being
involuntarily terminated and employees posting for positions elsewhere in the
Company. Consequently, approximately $11 million was reversed in the fourth
quarter of 1998.

Future lease obligations. The Company identified 97 underperforming stores
that did not meet the Company's profit objectives and several support units
(credit service centers and warehouses) which were no longer needed. The store
closing plan anticipated that the Company would remain liable for all future
lease payments. Present values were calculated assuming a ten per cent
discount rate and anticipated no subleasing activity or lease buyouts. The
interest component of lease payments is recorded as interest expense with a
corresponding increase in the reserve. All stores had been closed by the end
of 1998 and the actual timing of store closings did not differ significantly
from the initial estimate. The remaining reserve as of the end of the first
quarter of 1999 represents future lease obligations for closed stores, and
costs are being charged against the reserve as incurred. During the first
quarter of 1999, $1 million in payments were charged against the reserve
compared with $4 million in last year's period. On average, the remaining
lease term for closed stores was seven years, and payments during the next
five years are expected to be approximately $4 million per year. Given the
extended lease terms, the reserves will be assessed periodically to determine
their adequacy. No changes have been deemed necessary through the first
quarter of 1999.

Eckerd Drugstores

Future obligations, primarily leases. In the second quarter of 1997 as part
of the on-going drugstore integration process, the Company closed 26
additional drugstores. The Company recorded a FAS 121 impairment charge for
the store assets in 1996. The liability in 1997 related to future lease
obligations on these stores. The reserve for future lease obligations for
these stores is based on the present value of lease obligations through the
year 2017. Additionally, in the fourth quarter of 1997, the Company became
obligated to make future lease payments for 27 stores that Fay's had sold
prior to being acquired by the Company on which the buyer had defaulted and
failed to make lease payments. Fay's, and therefore the Company, was
contractually obligated to make the lease payments. Accordingly, the Company
recorded a charge for future lease obligations on these stores at the time the
liability became known. The reserve for future lease obligations on these
stores is based on lease payments through the year 2009. These events are not
expected to have an effect on future sales, and other than future lease
obligations, there will be no impact on future operating results as none of
the stores operated as part of Thrift drugstores. In addition, reserves were
established for pending litigation and other miscellaneous charges, each
individually insignificant. During the first quarter of 1999, $1 million in
payments were charged against the reserve compared with $2 million in last
year's period. As of the end of the first quarter of 1999, these combined
reserves totaled $26 million. There have been no adjustments to these
liabilities as of the end of the first quarter of 1999.

V-42
<PAGE>

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED PRO FORMA FINANCIAL DATA

(Unaudited)

The pro forma consolidated financial data presented below for the 52 weeks
ended January 30, 1999 was derived from the Company's consolidated financial
statements set forth herein. The pro forma consolidated financial data
presented below as of May 1, 1999, and for the 13 weeks ended May 1, 1999 were
derived from the Company's unaudited interim consolidated financial statements
set forth herein, which include all adjustments, consisting only of normal
recurring accruals, that the Company considers necessary to present such data
fairly for an interim period. Interim operating results are not necessarily
indicative of the results that may be expected for a full year.

In May 1999, the Company announced its intention to outsource the management
of the Penney Group's proprietary credit card business and sell the underlying
receivables and related assets. The Company has obtained bids from several
interested parties and is evaluating the merits of each of the bids. The
Company expects to complete the sale of these assets in the fourth quarter of
1999. For pro forma purposes, it is assumed that these assets will be sold at
book value and no gain or loss is reflected in the pro forma financial
statements.

The unaudited pro forma balance sheet as of May 1, 1999 gives effect to: 1)
the outsourcing of the management of the Penney Group's proprietary credit
card business, the related sale of the underlying receivables and related
assets and the assumed use of the proceeds to retire a portion of the
Company's debt and 2) the implementation of the tracking stock proposal and
the initial public offering of million shares of Eckerd Group Common Stock
at an assumed initial public offering price of $ per share, representing
approximately 20 percent of the equity value of Eckerd Group and the assumed
investment of the proceeds in short-term investments. In presenting this pro
forma information these transactions were assumed to have occurred on May 1,
1999.

The unaudited pro forma statements of income for the 52 weeks ended January
30, 1999 and the 13 weeks ended May 1, 1999 give effect to the assumed sale
and outsourcing of the Penney Group's credit operations. In presenting this
pro forma information this transaction was assumed to have occurred on
February 1, 1998. The unaudited pro forma balance sheet and statements of
income are not necessarily indicative of the consolidated financial position
or results of operations as they might have been had the transactions actually
occurred on the dates indicated.

Additionally, under the tracking stock proposal, six to twelve months after
the initial public offering of the Eckerd Group Common Stock the Company
currently intends to distribute, in the form of a dividend, the remaining
approximately 80 percent of the equity value of Eckerd Group to the holders of
Penney Group Common Stock, subject to market and other conditions. Following
the dividend distribution, the Company intends to use the proceeds from the
initial public offering of the Eckerd Group Common Stock, which will be
allocated to the Penney Group, primarily to purchase shares of the Penney
Group Common Stock in the open market. The effects of these assumed
transactions on the balance sheet and computation of earnings per share are
presented on the following pages under the caption labeled "fully
distributed." In presenting the fully distributed information, these
additional transactions as well as the previously described transactions, were
assumed to have occurred on the same dates as noted above for the presentation
of the pro forma information.

The pro forma consolidated financial data should be read in conjunction with
the Company's consolidated financial statements, the Company's unaudited
interim consolidated financial statements and the information in "Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations" set forth in this Annex V.

V-43
<PAGE>

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED PRO FORMA STATEMENT OF INCOME
52 Weeks Ended January 30, 1999
(Unaudited)

<TABLE>
<CAPTION>
Pro Fully
Historical Adjustments Forma Distributed
---------- ----------- ------- -----------
($ in millions except per share data)
<S> <C> <C> <C> <C>
Revenue
Retail sales, net................. $29,656 -- $29,656
Direct marketing revenue.......... 1,022 -- 1,022
------- --- -------
Total revenue..................... 30,678 -- 30,678
Costs and expenses
Cost of goods sold................ 21,761 -- 21,761
Drugstore inventory integration
losses........................... 98 -- 98
------- --- -------
Total cost of goods sold.......... 21,859 -- 21,859
Selling, general, and
administrative expenses.......... 6,530 10 6,540
Costs and expenses of Direct
Marketing........................ 789 -- 789
Real estate and other............. (26) -- (26)
Net interest expense and credit
operations....................... 480 7 487
Acquisition amortization.......... 113 -- 113
Other charges, net................ (22) -- (22)
------- --- -------
Total costs and expenses.......... 29,723 17 29,740
------- --- -------
Income before income taxes........ 955 (17) 938
Income taxes...................... 361 (6) 355
------- --- -------
Net income........................ $ 594 (11) $ 583
======= === =======
Weighted average common shares:
Basic ............................ 253
=======
Diluted........................... 271
=======
Net income per share:
Basic ............................ $ 2.20
=======
Diluted........................... $ 2.19
=======
Pro Forma
Net income (loss) attributable to:
Penney Group...................... 584
Eckerd Group...................... (1)
-------
583
=======
Group net income (loss) per share
Penney Group
Basic............................ $
=======
Diluted.......................... $
=======
Eckerd Group
Basic............................ $
=======
Diluted.......................... $
=======
Fully Distributed
Net income (loss) attributable to:
Penney Group...................... 586
Eckerd Group...................... (3)
---
583
===
Group net income (loss) per share
Penney Group
Basic............................ $
===
Diluted.......................... $
===
Eckerd Group
Basic............................ $
===
Diluted.......................... $
===
</TABLE>

See Note to Unaudited Consolidated Pro Forma Financial Data.

V-44
<PAGE>

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED PRO FORMA STATEMENT OF INCOME
13 Weeks Ended May 1, 1999
(Unaudited)
<TABLE>
<CAPTION>
Fully
Historical Adjustments Pro Forma Distributed
---------- ----------- --------- -----------
($ in million except per share data)
<S> <C> <C> <C> <C>
Revenue
Retail sales, net................ $7,295 -- $7,295
Direct marketing revenue......... 274 -- 274
------ ---- ------
Total revenue.................... 7,569 -- 7,569
Costs and expenses
Cost of goods sold............... 5,329 -- 5,329
Drugstore inventory integration
losses.......................... -- -- --
------ ---- ------
Total cost of goods sold......... 5,329 -- 5,329
Selling, general, and
administrative expenses ........ 1,670 3 1,673
Costs and expenses of Direct
Marketing....................... 220 -- 220
Real estate and other............ (9) -- (9)
Net interest expense and credit
operations...................... 55 73 128
Acquisition amortization ........ 37 -- 37
Other charges, net............... -- -- --
------ ---- ------
Total costs and expenses......... 7,302 76 7,378
------ ---- ------
Income before income taxes....... 267 (76) 191
Income taxes..................... 100 (30) 70
------ ---- ------
Net income....................... $ 167 (46) $ 121
====== ==== ======
Weighted average common shares:
Basic............................ 256
======
Diluted.......................... 272
======
Net income per share:
Basic............................ $ 0.62
======
Diluted.......................... $ 0.61
======
Pro forma
Net income (loss) attributable
to:
Penney Group.................... 115
Eckerd Group.................... 6
------
121
======
Group net income (loss) per share
Penney Group
Basic........................... $
======
Diluted......................... $
======
Eckerd Group
Basic........................... $
======
Diluted......................... $
======
Fully distributed
Net income (loss) attributable
to:
Penney Group.................... 90
Eckerd Group.................... 31
---
121
===
Group net income (loss) per share
Penney Group
Basic........................... $
===
Diluted......................... $
===
Eckerd Group
Basic........................... $
===
Diluted......................... $
===
</TABLE>

See Note to Unaudited Consolidated Pro Forma Financial Data.

V-45
<PAGE>

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED PRO FORMA BALANCE SHEET
May 1, 1999
(Unaudited)
<TABLE>
<CAPTION>
Fully
Historical Adjustments Pro Forma Distributed
---------- ----------- --------- -----------
($ in millions)
<S> <C> <C> <C> <C>
Assets
Current Assets
Cash and short-term
investments................... $ 168 -- (B) $ 168 $ 168
Retained interest in JCP Master
Credit Card Trust............. 250 (250)(A) -- --
Receivables, net............... 4,312 (3,008)(A) 1,304 1,304
Merchandise inventory.......... 6,049 -- 6,049 6,049
Prepaid expenses............... 180 -- 180 180
------- ------- -------
Total current assets......... 10,959 7,701 7,701
Properties, net.................. 5,462 (20)(A) 5,442 5,442
Investments, primarily insurance
operations...................... 2,010 -- 2,010 2,010
Deferred insurance policy
acquisition costs............... 871 -- 871 871
Goodwill and intangible assets... 3,144 -- 3,144 3,144
Other assets..................... 1,342 -- 1,342 1,342
------- ------- -------
Total Assets................. $23,788 $20,510 $20,510
======= ======= =======
Liabilities and Stockholders'
Equity
Current Liabilities
Accounts payable and accrued
expenses...................... $ 3,281 -- $ 3,281 $ 3,281
Short-term debt................ 1,995 (1,995)(A) -- --
Current maturities of long-term
debt.......................... 550 -- 550 550
Deferred taxes................. 156 -- 156 156
------- ------- -------
Total current liabilities.... 5,982 3,987 3,987
Long-term debt................... 6,821 (1,283)(A) 5,538 5,538
Deferred taxes................... 1,557 -- 1,557 1,557
Insurance policy and claims
reserves........................ 967 -- 967 967
Other liabilities............ 912 -- 912 912
------- ------- -------
Total Liabilities............ 16,239 12,961 12,961
Stockholders' Equity
Preferred stock: authorized, 25
million shares; issued and
outstanding, 0.8 million
shares Series B ESOP
Convertible Preferred......... 464 -- 464 464
Common stock, par value 50
cents: authorized, 1,250
million shares; issued and
outstanding, 260 million...... 3,219 (3,219)(B) -- --
Penney Group Common stock, par
value 50 cents: issued and
outstanding, 260 million...... -- 130 (B) 130 130
Eckerd Group Common stock, par
value 50 cents: issued and
outstanding, million....... -- 26 (B) 26 26
Capital in excess of par....... -- 3,063 (B) 3,063 3,063
Reinvested earnings............ 3,882 -- 3,882 3,882
Accumulated other comprehensive
income/(loss)................. (16) -- (16) (16)
------- ------- -------
Total Stockholders' Equity... 7,549 7,549 7,549
------- ------- -------
Total Liabilities and
Stockholders' Equity........ $23,788 $20,510 $20,510
======= ======= =======
</TABLE>

See Note to Unaudited Consolidated Pro Forma Financial Data.

V-46
<PAGE>

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

NOTE TO THE CONSOLIDATED PRO FORMA FINANCIAL DATA
(Unaudited)

Unaudited Pro Forma Statements of Income for the 52 weeks ended January 30,
1999 and the 13 weeks ended May 1, 1999

Reflects the assumed income statement effects of the sale and outsourcing of
the Penney Group's credit operations. The assumed income statement effects
result primarily from the elimination of finance charge revenue and credit
operating costs, including bad debt expense, and reduced interest expense
resulting from the repayment of short-term and long-term debt with the
proceeds from the sale of Penney Group proprietary receivables and the related
assets. Also selling, general and administrative expenses are increased as a
result of fixed costs previously borne by Penney Group's credit operations.
All income statement effects, with the exception of assumed increases in the
selling, general and administrative expenses of $10 million and $3 million,
respectively, are included in the "net interest expense and credit operations"
line.

Unaudited Pro Forma Balance Sheet as of May 1, 1999

(A) Reflects the assumed outsourcing of the management of the Penney Group's
proprietary credit card business, the related sale of the underlying
receivables and related assets of $3,258 million and $20 million,
respectively. For pro forma purposes, it is assumed that these assets will be
sold at book value and no gain or loss is reflected in the pro forma financial
statements. The adjustment also reflects the use of the proceeds from the sale
to retire debt of $3,278 million.

(B) Reflects the amendments to the Restated Certificate of Incorporation, as
amended, to provide for two classes of common stock of the Company (Penney
Group Common Stock and Eckerd Group Common Stock) and the reclassification of
260 million shares outstanding on May 1, 1999 of existing common stock to
Penney Group Common Stock. The adjustment also reflects the initial public
offering of million shares of Eckerd Group Common Stock at an assumed
initial public offering price of $ per share representing approximately
20 percent of the equity value of Eckerd Group. Proceeds, net of fees and
other transaction costs are assumed to be $ million and invested in short-
term investments.

Fully Distributed Presentation

Under the tracking stock proposal, six to twelve months after the initial
public offering of the Eckerd Group Common Stock the Company currently intends
to distribute, in the form of a dividend, the remaining approximately
80 percent of the equity value of Eckerd Group to holders of Penney Group
Common Stock, subject to market and other conditions. Following the dividend
distribution the Company intends to use the proceeds from the initial public
offering of the Eckerd Group Common Stock, which will be allocated to the
Penney Group, primarily to repurchase shares of the Penney Group Common Stock
in the open market. The effects of these transactions on the May 1, 1999
balance sheet and the computation of earnings per share for the 52 weeks ended
January 30, 1999 and the 13 weeks ended May 1, 1999 are presented under the
caption labeled "fully distributed".

The "fully distributed" presentation for the 52 weeks ended January 30, 1999
reflects:

. A decrease of million shares of Penney Group Common Stock resulting
from the use of proceeds of the initial public offering of Eckerd Group
Common Stock to repurchase Penney Group Common Stock at a price of $
per share.

. An increase of million shares of Eckerd Group Common Stock
distributed, in the form of a dividend, to holders of the Penney Group
Common Stock. Accordingly, the loss per share calculation for the Eckerd
Group is based on 100 percent of the Eckerd Group net losses and the
earnings per share calculation for the Penney Group has been adjusted to
reflect the distribution of the remaining approximately 80 percent
equity value of Eckerd Group.

V-47
<PAGE>

The "fully distributed" presentation at May 1, 1999 and for the 13 weeks
ended May 1, 1999 reflect:

. A reduction of $ million of Penney Group Common Stock and $ of
capital in excess of par for Penney Group Common Stock repurchased.

. An increase of $ million of Eckerd Group Common Stock for the
million shares distributed, in the form of a dividend, to holders of the
Penney Group Common Stock and a reduction of $ million of capital in
excess of par. Accordingly, the earnings per share calculation for
Eckerd Group is based on 100 percent of the Eckerd Group net income and
the earnings per share calculation for Penney Group has been adjusted to
reflect the distribution of the remaining approximately 80 percent
equity value of Eckerd Group.

V-48
<PAGE>

ANNEX VI

FINANCIAL INFORMATION OF

THE PENNEY GROUP

<PAGE>

PENNEY GROUP

INDEX TO FINANCIAL INFORMATION

<TABLE>
<CAPTION>
Page
-----
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... VI-1
Audited Financial Statements
Independent Auditors' Report.......................................... VI-13
Statements of Income--Three Years Ended January 30, 1999.............. VI-14
Balance Sheets--January 30, 1999 and January 31, 1998................. VI-15
Statements of Group Equity--Three Years Ended January 30, 1999........ VI-16
Statements of Cash Flows--Three Years Ended January 30, 1999.......... VI-17
Notes to the Penney Group Financial Statements........................ VI-18
Interim Financial Statements
Statements of Income--13 Weeks Ended May 1, 1999 and May 2, 1998
(unaudited).......................................................... VI-32
Balance Sheets--May 1, 1999 (unaudited) and January 30, 1999.......... VI-33
Statements of Cash Flows--13 Weeks Ended May 1, 1999 and May 2, 1998
(unaudited).......................................................... VI-34
Note to Interim Financial Information (unaudited)..................... VI-35
Pro Forma Financial Information
Pro Forma Statement of Income--52 Weeks Ended January 30, 1999
(unaudited).......................................................... VI-37
Pro Forma Statement of Income--13 Weeks Ended May 1, 1999
(unaudited).......................................................... VI-38
Pro Forma Balance Sheet--May 1, 1999 (unaudited)...................... VI-39
Note to the Pro Forma Financial Data (unaudited)...................... VI-40
</TABLE>
<PAGE>

PENNEY GROUP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The financial statements of the Penney Group include the balance sheets,
statements of income, cash flows, and Group equity of department stores and
catalog operations, J. C. Penney Direct Marketing Services, Inc. (Direct
Marketing), and all other non-drugstore related operations of the Company. The
Penney Group financial statements also include the retained interest in the
Eckerd Group, currently 100 percent.

The stockholders of J. C. Penney Company, Inc. are being asked to consider
and vote in favor of the tracking stock proposal, which would authorize
amendments to the Restated Certificate of Incorporation, as amended, of the
Company. The amendments would among other things:

. provide for two classes of common stock of the Company, the Penney Group
Common Stock and the Eckerd Group Common Stock; and

. reclassify each share of existing common stock of the Company as one
share of Penney Group Common Stock.

If the tracking stock proposal is approved, each holder of one share of the
existing common stock would become the holder of one share of Penney Group
Common Stock. Subject to the approval of the above proposal, the Company
currently plans to offer shares of the Eckerd Group Common Stock representing
approximately 20 percent of the equity value of the Eckerd Group to the public
for cash, subject to market and other conditions. The Company may offer a
greater of lesser percentage of the equity value of the Eckerd Group to the
public, depending on market conditions and other circumstances.

The net proceeds of the initial public offering of the Eckerd Group Common
Stock will be allocated to the Penney Group. The Company currently plans to
use the net proceeds of the initial public offering primarily to buy back
shares of Penney Group Common Stock in the open market, after the distribution
of the remaining 80 percent of the equity value of the Eckerd Group to the
holders of Penney Group Common Stock, as described below. Any remaining
proceeds would be used for general corporate purposes. Pending any specific
application of such proceeds, the Penney Group intends to invest the net
proceeds in short-term, investment-grade securities.

The Penney Group will initially hold the remaining 80 percent of the equity
value of the Eckerd Group. The shares held by the Penney Group cannot be voted
by the Penney Group. The Penney Group currently intends to distribute (via a
dividend) the remaining equity value of the Eckerd Group to the holders of
Penney Group Common Stock approximately six to twelve months after the initial
public offering of the Eckerd Group Common Stock, subject to market and other
conditions.

The Penney Group and the Eckerd Group financial statements comprise all of
the accounts included in the consolidated financial statements of J. C. Penney
Company, Inc. The separate group financial statements give effect to all
allocation and related party transaction policies as adopted by the board of
directors, of which all material policies are described in Note 3 to the
Penney Group financial statements. The Penney Group financial statements have
been prepared in a manner which management believes is reasonable and
appropriate. Such financial statements include (i) the historical financial
position, results of operations, and cash flows of the Penney Group, (ii) an
allocated portion of the Company's debt and the effects that such debt had on
the related statements of operations and cash flows, and (iii) the effects of
a 100 percent retained interest in the Eckerd Group on the statements of
income and balance sheets.

If the tracking stock proposal is approved, the Company will provide to
holders of Penney Group Common Stock separate financial statements, financial
reviews, descriptions of the business, and other relevant information for the
Penney Group and the Eckerd Group as well as consolidated financial
information for the Company. Notwithstanding the allocation of assets and
liabilities, including contingent liabilities, between the Penney

VI-1
<PAGE>

Group and the Eckerd Group for purposes of preparing their respective
financial statements, this allocation and the change in the capital structure
of the Company as a result of the approval of the proposal will not result in
the distribution or spin-off to stockholders of any of our assets and
liabilities and will not affect ownership of our assets or responsibility for
our liabilities or those of our subsidiaries. Holders of Penney Group Common
Stock will remain common stockholders of the Company. The assets we attribute
to one group will be subject to the liabilities of the other group, whether
such liabilities arise from lawsuits, contracts or indebtedness that we
attribute to the other group. If we are unable to satisfy one group's
liabilities out of the assets we attribute to it, we may be required to
satisfy those liabilities with assets we have attributed to the other group.
Further, holders of Penney Group Common Stock and Eckerd Group Common Stock
will not have any legal rights related to specific assets of either group and
in any liquidation will receive a fixed share of the net assets of the Company
which may not reflect the actual trading prices of the respective groups at
such time.

Financial effects from one group that affect our consolidated results of
operations or financial condition could, if significant, affect the results of
operations or financial condition of the other group and the market price of
the tracking stock relating to the other group. In addition, net losses of
either group and dividends and distributions on, or repurchases of, either
class of tracking stock or repurchases of preferred stock at a price per share
greater than par value will reduce the funds we can pay on each class of
tracking stock under Delaware law. Accordingly, the Penney Group financial
statements should be read in conjunction with the Company's consolidated
financial information, and that of the Eckerd Group.

VI-2
<PAGE>

Fiscal Years 1998, 1997 and 1996

Results of Operations
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
1998 1997 1996
-------- -------- --------
($ in millions)
<S> <C> <C> <C>
Operating profit by segment
Department stores and catalog.................... $1,013 $1,368 $1,183
Direct marketing................................. 233 214 186
------ ------ ------
Total operating profit......................... 1,246 1,582 1,369
Real estate and other.............................. 26 39 45
Net interest and credit operations................. (370) (438) (266)
Other charges, net................................. 22 (276) (11)
------ ------ ------
Income before income taxes and retained interest in
Eckerd Group...................................... 924 907 1,137
Income taxes....................................... (327) (331) (427)
------ ------ ------
Income before retained interest in Eckerd Group.... 597 576 710
Retained interest in Eckerd Group.................. (3) (10) (145)
------ ------ ------
Net income......................................... $ 594 $ 566 $ 565
====== ====== ======
Income before the retained interest in Eckerd Group in 1998 totaled $597
million compared with $576 million in 1997 and $710 million in 1996. Results
for 1998 include a $22 million pre-tax credit related to the reversal of
certain reserves that were established in 1997. 1997 results include $276
million in pre-tax charges related principally to early retirement and
reduction in force programs and the closing of underperforming department
stores which were partially offset by gains on the sale of business units.
Results for 1996 include $11 million in pre-tax, other charges, net, related
to a reduction in force program within department stores (see Note 13 to the
Penney Group financial statements for further discussion).
</TABLE>

Segment Operating Results

Department Stores and Catalog
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
1998 1997 1996
-------- -------- --------
($ in millions)
<S> <C> <C> <C>
Retail sales, net
Department stores.............................. $15,402 $16,047 $15,734
Catalog........................................ 3,929 3,908 3,772
------- ------- -------
Total retail sales, net...................... 19,331 19,955 19,506
FIFO gross margin................................ 5,697 6,152 5,872
LIFO credit...................................... 35 20 20
------- ------- -------
Total gross margin............................... 5,732 6,172 5,892
Selling, general & administrative expenses....... (4,719) (4,804) (4,709)
------- ------- -------
Operating profit................................. $ 1,013 $ 1,368 $ 1,183
------- ------- -------
Sales percent increase/(decrease)
Total department stores(1)..................... (2.8)% 0.7% 5.1%
Comparable stores.............................. (1.9)% (0.3)% 3.4%
Catalog(1)..................................... 1.5% 2.7% 0.9%
Ratios as a percent of sales
FIFO gross margin................................ 29.5% 30.8% 30.1%
LIFO gross margin................................ 29.7% 30.9% 30.2%
SG&A expenses.................................... 24.4% 24.1% 24.1%
Operating profit................................. 5.3% 6.8% 6.1%
EBITDA(2)........................................ 8.0% 9.1% 8.5%
</TABLE>
- --------
(1) Sales comparisons are shown on a 52-week basis for all periods presented.
Including 1997's 53rd week, department store sales declined 3.9 percent in
1998 and increased 2.0 percent in 1997, while catalog sales increased 0.6
percent and 3.6 percent for 1998 and 1997, respectively.
(2) Earnings before interest, income taxes, depreciation, amortization, and
other charges, net. EBITDA includes finance charge revenue net of credit
operating costs and bad debt. EBITDA is provided as an alternative
assessment of operating performance and is not intended to be a substitute
for GAAP measurements. Calculations may vary for other companies. The
EBITDA per cents shown represent department stores and catalog only. Total
Penney Group EBITDA, excluding any retained interest in the Eckerd Group,
was 8.8 percent, 9.7 percent, and 9.1 percent for 1998, 1997, and 1996,
respectively.

VI-3
<PAGE>

1998 compared with 1997. Operating profit totaled $1,013 million in 1998
compared with $1,368 million in 1997. The decline for the year was primarily
attributable to lower sales coupled with lower gross profit margins. Sales in
comparable department stores declined by 1.9 percent, and were particularly
soft in the fourth quarter. Department store sales were strongest in women's
apparel while athletic apparel and footwear were particularly hard hit by
softening sales throughout 1998. Sales were weak across all regions of the
country. Catalog sales increased by 1.5 percent on a 52-week basis and were
strongest in the third quarter when they increased by 8.0 percent. Third
quarter catalog sales benefited from participation in department store
promotional programs which may have shifted buying patterns for catalog
shoppers from the fourth quarter to third quarter. Although not readily
quantifiable, the disruptions caused by the many organizational and process
changes initiated in 1997 and completed in 1998 contributed to the overall
sales decline in 1998. These changes impacted both the flow of merchandise and
store personnel serving customers.

LIFO gross margin as a percent of sales for department stores and catalog
declined by 120 basis points compared with 1997, principally as a result of
aggressive promotional programs during the fourth quarter. As the fourth
quarter progressed, the Penney Group marked down retail prices to stimulate
sales. While this generated unit sales and helped manage inventory levels, it
had a negative impact on gross margin as a per cent of sales. Markup improved
in 1998 as the Penney Group continued to drive down its merchandise sourcing
costs and improved efficiencies with its supplier base. The improvement in
markup partially offset the effects of the higher markdowns. Gross margin
includes LIFO credits of $35 million in 1998 and $20 million in 1997. The LIFO
credits for both years are generally the result of a combination of flat to
declining retail prices as measured by the Penney Group's internally developed
inflation index and improving markup. The Penney Group continued to control
its SG&A expense levels throughout 1998, however, due to the decline in sales
they were not leveraged, and increased by 30 basis points from prior year
levels, expressed as a percent of sales. In 1998 the Penney Group realized
savings of approximately $95 million related to the early retirement and
reduction in force programs as well as other cost-saving initiatives. However,
these savings were redeployed into programs designed to enhance customer
service in the stores and into advertising and promotional programs.

1997 compared with 1996. Operating profit for department stores and catalog
was $1,368 million in 1997, an increase of $185 million, or 15.6 percent,
compared with 1996. The increase in operating profit was principally related
to improvements in gross margin and expense levels. Comparable store sales
declined 0.3 percent for the year compared with 1996. Department store sales
were strongest in the first half of the year as the Penney Group emphasized
promotional programs designed to reduce its inventory levels. Sales
performance in department stores were led by the women's apparel division,
particularly dresses and career and casual wear, and the children's and shoe
division. Catalog sales for the year increased by 2.7 percent compared with
1996 on a 52-week basis, and were led by women's and men's apparel as well as
the home division.

LIFO gross margin for department stores and catalog increased by 70 basis
points in 1997 compared with 1996. The LIFO credit totaled $20 million in both
1997 and 1996. SG&A expenses were well managed across all areas, particularly
advertising, and were flat as a percentage of sales as compared with 1996.

VI-4
<PAGE>

Direct Marketing

<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
($ in millions)
<S> <C> <C> <C>
Operating revenue
Insurance premiums, net................................. $ 872 $ 800 $ 711
Membership fees......................................... 65 50 37
Investment income....................................... 85 78 70
------ ----- -----
Total revenue......................................... 1,022 928 818
Claims and benefits....................................... (340) (332) (298)
Other operating expenses(1)............................... (449) (382) (334)
------ ----- -----
Operating profit.......................................... $ 233 $ 214 $ 186
------ ----- -----
Revenue increase.......................................... 10.1% 13.4% 20.3%
Operating profit increase................................. 8.9% 15.1% 18.5%
Operating profit as a percent of revenue.................. 22.8% 23.1% 22.7%
</TABLE>
- --------
(1) Includes amortization of deferred acquisition costs of $195 million, $170
million, and $149 million, respectively.

Direct Marketing's operating profit has been consistently strong, totaling
$233 million in 1998 compared with $214 million in 1997 and $186 million in
1996, representing approximately 23 percent of revenues in each year. Both
revenue and operating profit for Direct Marketing improved in 1998 for the
eleventh consecutive year. Total revenue exceeded $1 billion for the first
time in 1998, increasing from $928 million in 1997 and $818 million in 1996.
The increase during both 1998 and 1997 was principally related to health
insurance premiums, which account for approximately 70 percent of total
premiums, and which increased by 11.7 percent and 17.6 percent, respectively.
Revenue growth for the three-year period is attributable to successfully
maintaining and enhancing marketing relationships with businesses for the sale
of insurance products throughout the United States and Canada, principally
banks, oil companies, and retailers. In 1998, Direct Marketing expanded its
international operations when it began marketing through business
relationships in the United Kingdom, and initiated activity in Australia.

Membership services, which consist principally of benefits for dental,
pharmacy, vision and hearing services, as well as services for travelers and
motorists, represent a small, but growing component of the direct marketing
business.

Net Interest Expense and Credit Operations

<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
($ in millions)
<S> <C> <C> <C>
Revenue(1)................................................ $(702) $(675) $(650)
Bad debt expense.......................................... 229 307 238
Operating expenses........................................ 342 334 331
Interest expense, net..................................... 501 472 347
----- ----- -----
Net interest expense and credit operations................ $ 370 $ 438 $ 266
----- ----- -----
90-day delinquency rate................................... 3.0% 3.9% 3.7%
</TABLE>
- --------
(1) Includes amounts related to the Penney Group's retained interest in JCP
Master Credit Card Trust.

VI-5
<PAGE>

Net interest expense and credit costs declined by $68 million in 1998
compared with 1997 principally as a result of improvements in bad debt
expense. Bad debt expense declined by $78 million for the year as a result of
favorable credit industry trends as well as the Penney Group's efforts to
tighten credit underwriting standards to improve portfolio performance and
reduce risk. At the end of fiscal 1998, 90-day delinquencies were 3.0 percent
of receivables compared with 3.9 percent at the end of 1997. Higher revenues
in 1998 reflect the increase in owned customer receivables from $2,956 million
to $3,406 million.

Net interest expense and credit costs increased in 1997 compared to 1996
principally as a result of rising bad debt on customer receivables and higher
interest expense. While revenue increased in 1997, primarily as a result of
modifications that were made to credit terms in selected states, it was more
than offset by an increase of $69 million in bad debt expense. Bad debt
expense in both 1997 and 1996 was negatively impacted by high delinquency
rates and high levels of personal bankruptcies that were affecting the entire
credit industry. The 90-day delinquency rate was 3.9 percent at the end of
1997 compared with 3.7 percent at the end of 1996.

The Penney Group has experienced a migration of credit sales from its
proprietary credit card to third-party cards over the past several years. The
group has not experienced any significant adverse effect on total combined
credit sales from the decline in proprietary card usage and continues to
successfully manage both its proprietary card levels and its relationships
with bankcard providers. The decline in receivable balances, however, has had
a positive impact on the Penney Group's cash flow.

Interest expense represents the portion of the interest on the Company's
pooled debt that has been allocated to the Penney Group. Interest expense was
$501 million in 1998 compared with $472 million in 1997 and $347 million in
1996. The increase is related to higher corporate borrowing levels.

Income Taxes

The effective income tax rate in 1998 decreased to 35.3 percent compared
with 36.5 percent in 1997 and 37.6 percent in 1996.

Financial Condition

Cash flow from operations was $964 million in 1998 compared with $1,525
million in 1997 and $398 million in 1996. Cash flow was sufficient to cover
capital expenditures, dividend, and working capital requirements for all years
and it is expected to remain so for the foreseeable future.

The Company manages most financial activities on a centralized basis. Such
financial activities include the investment of surplus cash and the issuance
and repayment of short-term and long-term debt. Debt reflected on the Penney
Group financial statements for the periods covered consists entirely of a
portion of the Company's debt that is allocated between the groups (pooled
debt). The Penney Group is reliant on the Company to provide its financing
needs. For purposes of the Penney Group financial statements, pooled debt
allocated to the Penney Group represents the remaining portion of pooled debt
that has not been allocated to the Eckerd Group. The Company may, if it so
determines, allocate specific debt issuances to a particular group, for
example in the case of specific acquisition financing. Interest expense
related to the pooled debt that has been allocated to the Penney Group
represents total Company interest less the amount allocated to the Eckerd
Group. Interest expense allocated to the Eckerd Group for any period is based
on the weighted average interest rate of the prior period applied to the
balance of the Eckerd Group pooled debt allocation as of the beginning of the
period. Interest expense includes amortization of debt issuance costs for
pooled debt and the effects, if any, related to derivative financial
instruments. If the Company allocates debt for a particular financing in its
entirety to one group, the debt will bear interest for group financial
statement purposes at the rate applicable to such debt.

VI-6
<PAGE>

Merchandise Inventory. Total LIFO inventory was $4,034 million at the end of
1998 compared with $4,157 million and $4,209 million at the end of 1997 and
1996, respectively. 1998 FIFO merchandise inventory for department stores and
catalog was $4,081 million, a decrease of 3.7 percent on an overall basis and
approximately 2.0 percent for comparable stores compared with 1997 levels as
the Penney Group continued to focus on improving its merchandise procurement
processes and increasing inventory turnover. 1997 FIFO merchandise inventory
levels declined 1.7 percent from 1996 primarily as a result of better
management of the merchandise procurement process.

Properties. Property, plant and equipment, net of accumulated depreciation,
totaled $4,476 million at January 30, 1999 compared with $4,499 million and
$4,430 million at the ends of fiscal 1997 and 1996, respectively. At the end
of fiscal 1998, the Penney Group operated 1,148 JCPenney department stores
(115.3 million gross square feet) compared with 1,203 stores (118.4 million
gross square feet) and 1,228 stores (117.2 million gross square feet) at the
end of 1997 and 1996, respectively. The decline in the store count over the
past two years was principally related to the closing of underperforming
stores that was a component of the Penney Group's 1997 other charges. All
stores slated for closing had closed by the end of fiscal 1998. In addition,
at the end of 1998, the Penney Group operated six catalog fulfillment centers
comprising 11.4 million square feet, and catalog sales centers in virtually
all department stores and in 139 Eckerd Group drugstore locations.

Capital Expenditures. 1998 capital spending levels for property, plant and
equipment declined for department stores and catalog. In 1998, the Penney
Group spent approximately $150 million on existing department store locations
compared with approximately $200 million in both 1997 and 1996. It is expected
that capital spending for department stores and catalog will total
approximately $300 million in 1999.

Acquisitions. The Company completed the acquisition of a majority interest
in Lojas Renner S.A. (Renner), a 21-store Brazilian department store chain, in
January 1999. The total purchase price of $139 million is being allocated to
assets acquired and liabilities assumed based on their estimated fair values.
The excess of the purchase price over fair value, the majority of which is
classified as goodwill and will be amortized over 40 years, was approximately
$58 million and is included in intangible assets in the consolidated balance
sheets. The acquisition is being accounted for under the purchase method.
Renner is a calendar year company, and therefore their results will be
included with Company results of operations beginning in fiscal 1999.

Reserves. At the end of 1998, the Penney Group balance sheet included
reserves totaling $20 million which are included as a component of accounts
payable and accrued expenses. These reserves were established in connection
with 1997 other charges, net, principally those related to future lease
obligations on underperforming stores. The initial reserves consisted
principally of the present value of future lease obligations for closed stores
and for severance and outplacement costs related to a reduction in force
program. Reserve balances were calculated based upon estimated costs to
complete the various programs. Actual costs were below the original estimates
for the reduction in force program and closing of underperforming stores.
Accordingly, reserves were adjusted in the fourth quarter of 1998, resulting
in a pre-tax credit of $22 million that is reported as other charges, net.
Reserve balances were reduced by $68 million in 1998 for cash payments made
during the year. Also, in connection with the Penney Group's early retirement
program, reserves were established for the periodic future payments to be made
under the Company's pension plan. These reserves are included in pension
liabilities, which are discussed in Note 12 to the Penney Group financial
statements. Payments for both lease obligations and pension benefits will be
paid out over an extended period of time. See Note 13 to the Penney Group
financial statements for additional information.

VI-7
<PAGE>

Debt to Capital. The debt reflected in the Penney Group financial statements
consists of the Company's short-term debt and current maturities, which are
allocated in their entirety to the Penney Group, and a portion of the
Company's long-term debt that is allocated between the Groups (collectively,
pooled debt). Total debt allocated to the Penney Group was $7,980 million at
the end of 1998 compared with $7,327 million in 1997 and $7,240 in 1996. The
group's debt to capital percent, excluding the present value of operating
leases, was 52.1 percent, 50.1 percent and 55.5 percent at the ends of 1998,
1997, and 1996, respectively.

Year 2000 Readiness

The Year 2000 issue exists because many computer systems store and process
dates using only the last two digits of the year. Such systems, if not
changed, may interpret "00" as "1900" instead of the year "2000." The Penney
Group has been working to identify and address Year 2000 issues since January
1995. The scope of this effort includes internally developed information
technology systems, purchased and leased software, embedded systems, and
electronic data interchange transaction processing.

In October 1996, a companywide task force was formed to provide guidance to
the group's operating and support departments and to monitor the progress of
efforts to address Year 2000 issues. The group has also consulted with various
third parties, including, but not limited to, outside consultants, outside
service providers, infrastructure suppliers, industry groups, and other retail
companies and associations to develop industrywide approaches to the Year 2000
issue, to gain insights to problems, and to provide additional perspectives on
solutions. Year 2000 readiness work was more than 90 percent complete as of
January 30, 1999. Since January 1999, the group has been retesting all systems
critical to the group's core businesses. The group has also focused on the
Year 2000 readiness of its suppliers and service providers, both independently
and in conjunction with the National Retail Federation.

Despite the significant efforts to address Year 2000 concerns, the group
could potentially experience disruptions to some of its operations, including
those resulting from noncompliant systems used by third-party business and
governmental entities. The group has developed contingency plans to address
potential Year 2000 disruptions. These plans include business continuity plans
that address accessibility and functionality of group facilities as well as
steps to be taken if an event causes failure of a system critical to the
group's core business activities.

Through the end of fiscal 1998, the Penney Group had incurred approximately
$11 million to achieve Year 2000 compliance. The group's projected cost for
Year 2000 remediation is currently estimated to be $20 million. Total costs
have not had, and are not expected to have, a material impact on the group's
financial results.

Thirteen Weeks Ended May 1, 1999 and May 2, 1998

Results of Operations

Consolidated Operating Results
<TABLE>
<CAPTION>
13 Weeks Ended
-----------------------
May 1, 1999 May 2, 1998
----------- -----------
($ in millions)
<S> <C> <C>
Operating profit by segment:
Department stores and catalog....................... $167 $234
Direct Marketing.................................... 54 53
---- ----
Total operating profit............................ 221 287
Real estate and other................................. 9 6
Net interest expense and credit operations............ (27) (65)
---- ----
Income before income taxes and retained interest in
Eckerd Group......................................... 203 228
Income taxes.......................................... (67) (80)
---- ----
Income before retained interest in Eckerd Group....... 136 148
Retained interest in Eckerd Group..................... 31 26
---- ----
Net income............................................ $167 $174
==== ====
</TABLE>

VI-8
<PAGE>

Total segment operating profit was $221 million compared with $287 million
in last year's first quarter. The decline was primarily attributable to
weakness in department store sales and lower operating margin ratios.

The Penney Group's results reflect significant improvement in net interest
and credit operations which were impacted by lower bad debt expense. Income
before the retained interest in Eckerd Group for the 13 weeks ended May 1,
1999 was $136 million, compared with $148 million in the first quarter of
1998. Net income totaled $167 million as compared with $174 million in last
year's first quarter.

Segment Operating Results

Department Stores and Catalog
<TABLE>
<CAPTION>
13 Weeks Ended
-----------------------
May 1, 1999 May 2, 1998
----------- -----------
($ in millions)
<S> <C> <C>
Retail sales, net
Department stores..................................... $ 3,349 $ 3,409
Catalog............................................... 899 833
------- -------
4,248 4,242
Gross margin............................................ 1,325 1,343
Selling, general and administrative expenses............ (1,158) (1,109)
------- -------
Operating profit........................................ $ 167 $ 234
Sales percent increase/(decrease)
Total department stores............................... (1.7)% 2.3%
Comparable stores..................................... (0.5)% 1.9%
Catalog............................................... 7.9% 2.8%
Ratios as a percent of sales
FIFO gross margin....................................... 31.2% 31.7%
LIFO gross margin....................................... 31.2% 31.7%
SG&A expenses........................................... 27.3% 26.2%
Operating profit........................................ 3.9% 5.5%
EBITDA(1)............................................... 8.7% 9.4%
</TABLE>
- --------
(1) Earnings before interest, income taxes, depreciation, and amortization.
EBITDA includes finance charged revenue net of credit operating costs and
bad debt. EBITDA is provided as an alternative assessment of operating
performance and is not intended to be a substitute for GAAP measurements.
Calculations may vary for other companies. The EBITDA percents shown
represent department stores and catalog only. Total Penney Group EBITDA,
excluding any retained interest in the Eckerd Group, was 9.4 percent and
10.1 percent for the 13 weeks ended May 1, 1999 and May 2, 1998,
respectively.

VI-9
<PAGE>

Operating profit for department stores and catalog was $167 million in this
year's first quarter compared with $234 million last year. The decline was
principally related to more promotional activity combined with flat overall
sales. Sales in department stores declined by 0.5 percent for comparable
stores, those stores open at least 12 months, compared with first quarter
1998. Department stores experienced positive sales results in private brand
merchandise in the first quarter, particularly Original Arizona Jean Co., St.
John's Bay, and Worthington. The Penney Group has completed the installation
of private brand shops in all of its larger stores. The increases in private
brands were offset by continued weakness in national brands, particularly in
athletic apparel and footwear. Catalog sales were strong in the first quarter
and benefited from participation in companywide promotional events, as well as
the addition of three new specialty catalogs. Also during the quarter, the
Penney Group accelerated its investment in E-commerce; while internet sales
represent a small component of catalog results, sales in the quarter increased
substantially from last year. Gross margin as a percent of sales was 50 basis
points below 1998 first quarter levels. Gross margin ratios for the quarter
were impacted by increased levels of promotional activities that were geared
toward stimulating sales and reducing inventory levels. Expense levels
increased by 4.4 percent compared with last year's first quarter and increased
by 110 basis points as a percent of sales due to the flat sales volumes. The
increase in expense levels is principally related to additional spending on E-
commerce and catalog support facilities as well as the addition of expenses
for the recently acquired Brazilian department store operation.

Direct Marketing

<TABLE>
<CAPTION>
13 weeks ended
-----------------------
May 1, 1999 May 2, 1998
----------- -----------
($ in millions)
<S> <C> <C>
Revenue................................................. $ 274 $ 246
Costs and expenses(1)................................... (220) (193)
----- -----
Operating profit........................................ $ 54 $ 53
Revenue, percent increase............................... 11.4 9.8
Operating profit as a percent of revenue................ 19.7 21.5
</TABLE>
- --------
(1) Includes amortization of deferred acquisition costs of $53 and $46 million
for 1999 and 1998, respectively.

VI-10
<PAGE>

Net Interest Expense and Credit Operations

<TABLE>
<CAPTION>
13 weeks ended
-----------------------
May 1, 1999 May 2, 1998
----------- -----------
($ in millions)
<S> <C> <C>
Revenue................................................. $ (192) $ (183)
Bad debt expense........................................ 13 41
Operating expenses...................................... 84 87
Interest expense, net................................... 122 120
------ ------
Net interest expense and credit operations.............. $ 27 $ 65
====== ======
</TABLE>

Net interest expense and credit operations totaled $27 million in the first
quarter compared with $65 million in the comparable period last year. The
improvement from last year is primarily related to increased revenue and the
continuing improvement in bad debt trends. Revenues increased $9 million to
$192 million in the first quarter principally as a result of modifications to
late fee terms. Bad debt expense was $28 million below last year's level
principally as a result of continuing improvement in delinquency trends, due
in part to the Penney Group's previous efforts to tighten credit underwriting
standards to improve portfolio performance. As of the end of the quarter, the
90-day delinquency rate was 2.9 percent of customer receivables, down from 4.2
percent at the end of first quarter 1998. As of the end of the quarter,
customer receivables serviced totaled $3,714 million, a decrease of $422
million, or 10.2 percent, compared with a year ago.

Interest expense for both periods is associated with debt that has been
allocated to the Penney Group. Such charges represent the remaining portion of
total Company interest expense, including the amortization of debt issuance
costs, that has not been allocated to the Eckerd Group. Interest expense was
$122 million in 1999's first quarter compared with $120 million last year.

Income Taxes. The group's effective income tax rate was 33.0 percent in the
first quarter compared with 35.1 percent last year.

Financial Condition

Merchandise Inventory. Merchandise inventories on a FIFO basis declined
slightly to $3,986 million at the end of the first quarter compared with
$4,029 million at the end of last year's first quarter. 1999 reflects $13
million of inventory acquired in the purchase of Lojas Renner. The current
cost of inventories exceeded the LIFO basis amount carried on the balance
sheet by approximately $47 million at both May 1, 1999 and January 30, 1999,
and $82 million at May 2, 1998.

Properties. Properties, net of accumulated depreciation, totaled $4,399
million at May 1, 1999 compared with $4,455 million at the end of last year's
first quarter. At the end of the first quarter, the Penney Group operated
1,152 department stores comprising 115.5 million gross square feet compared
with 1,185 stores comprising 118.1 million gross square feet at the end of
last year's first quarter.

Reserves. Reserves related to the 1997 other charges, net, totaled $19
million at the end of the first quarter which were included in accounts
payable and accrued expenses. During the quarter, $1 million of lease payments
on closed stores were charged against the reserves.

Debt to Capital. The debt reflected in the Penney Group financial statements
consists of the Company's short-term debt and current maturities, which are
allocated in their entirety to the Penney Group, and a portion of the
Company's long-term debt that is allocated between the groups (collectively,
pooled debt). Total debt allocated to the Penney Group was $7,781 million at
the end of the first quarter of 1999 compared with $7,407 million in 1998's
comparable period.

Year 2000 Readiness

Through May 1, 1999, the Penney Group has spent approximately $15 million on
a cumulative basis to achieve Year 2000 compliance. The Penney Group's
remaining cost for Year 2000 remediation is currently estimated to be $5.4
million. Total costs have not had, and are not expected to have, a material
impact on the Group's financial results.

VI-11
<PAGE>

Subsequent Events

On May 18, 1999, the Company announced two major strategic initiatives:

. the outsourcing of the management of its proprietary credit card
business and related sale of the underlying receivables, and

The Company currently intends to close both the outsourcing of management of
the Penney Group's proprietary credit card business and the related sale of
the underlying receivables and related assets and the initial public offering
of Eckerd Group Common Stock by the end of the fourth quarter of 1999.

VI-12
<PAGE>

Independent Auditors' Report

To the Stockholders and Board of Directors
of J. C. Penney Company, Inc.

We have audited the accompanying balance sheets of the Penney Group (as
defined in Note 1) as of January 30, 1999, and January 31, 1998, and the
related statements of income, group equity, and cash flows for each of the
years in the three-year period ended January 30, 1999. These financial
statements are the responsibility of J. C. Penney Company, Inc.'s management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

As more fully discussed in Note 1, the financial statements of the Penney
Group should be read in conjunction with the consolidated financial statements
of J. C. Penney Company, Inc. and subsidiaries and the financial statements of
the Eckerd Group.

The Penney Group has accounted for its interest in the Eckerd Group in a
manner similar to the equity method of accounting. Generally accepted
accounting principles require that the Eckerd Group be consolidated with the
Penney Group.

In our opinion, except for the effects of not consolidating the Penney Group
and the Eckerd Group as discussed in the preceding paragraph, the financial
statements referred to above present fairly, in all material respects, the
financial position of the Penney Group as of January 30, 1999 and January 31,
1998, and the results of its operations and its cash flows for each of the
years in the three-year period ended January 30, 1999, in conformity with
generally accepted accounting principles.

/s/ KPMG LLP
Dallas, Texas
February 25, 1999

VI-13
<PAGE>

PENNEY GROUP

STATEMENTS OF INCOME

<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
1998 1997 1996
-------- -------- --------
($ in millions)
<S> <C> <C> <C>
Revenue
Retail sales, net................................ $19,331 $19,955 $19,506
Direct Marketing revenue......................... 1,022 928 818
------- ------- -------
Total revenue.................................... 20,353 20,883 20,324
Costs and expenses
Cost of goods sold............................... 13,634 13,803 13,634
LIFO credit...................................... (35) (20) (20)
------- ------- -------
Total cost of goods sold......................... 13,599 13,783 13,614
Selling, general, and administrative expenses.... 4,719 4,804 4,709
Costs and expenses of Direct Marketing........... 789 714 632
Real estate and other............................ (26) (39) (45)
Net interest expense and credit operations....... 370 438 266
Other charges, net............................... (22) 276 11
------- ------- -------
Total costs and expenses......................... 19,429 19,976 19,187
------- ------- -------
Income before income taxes and retained Eckerd
Group interest.................................. 924 907 1,137
Income taxes..................................... 327 331 427
------- ------- -------
Income before retained Eckerd Group interest..... 597 576 710
Net loss of Eckerd Group......................... (3) (10) (145)
------- ------- -------
Net Income....................................... $ 594 $ 566 $ 565
======= ======= =======
</TABLE>

See Notes to the Penney Group Financial Statements.

VI-14
<PAGE>

PENNEY GROUP

BALANCE SHEETS

<TABLE>
<CAPTION>
Jan. 30, Jan. 31,
1999 1998
-------- --------
($ in millions)
<S> <C> <C>
Assets
Current assets
Cash and short term investments............................ $ 32 $ 276
Retained interest in JCP Master Credit Card Trust.......... 415 1,073
Receivables, net (bad debt reserves of $118 and $105)...... 3,949 3,465
Merchandise inventory (including LIFO reserves of $47 and
$82)...................................................... 4,034 4,157
Prepaid expenses........................................... 151 134
------- -------
Total current assets..................................... 8,581 9,105
Property, plant, and equipment
Land and buildings......................................... 2,913 2,808
Furniture and fixtures..................................... 2,927 3,194
Leasehold improvements..................................... 800 832
Accumulated depreciation................................... (2,164) (2,335)
------- -------
Property, plant and equipment, net........................... 4,476 4,499
Retained interest in Eckerd Group............................ 3,517 3,268
Investments, principally held by Direct Marketing............ 1,961 1,774
Deferred insurance policy acquisition costs.................. 847 752
Goodwill and intangible assets............................... 67 --
Other assets................................................. 1,228 1,182
------- -------
Total Assets............................................. $20,677 $20,580
======= =======
Liabilities and Group Equity
Current liabilities
Accounts payable and accrued expenses...................... $ 2,368 $ 2,959
Short-term debt............................................ 1,924 1,417
Current maturities of long-term debt....................... 438 449
Deferred taxes............................................. 129 96
------- -------
Total current liabilities................................ 4,859 4,921
Long-term debt............................................... 5,618 5,461
Deferred taxes............................................... 1,375 1,245
Insurance policy and claims reserves......................... 946 872
Other liabilities............................................ 710 724
------- -------
Total Liabilities........................................ 13,508 13,223
Group Equity............................................. 7,169 7,357
------- -------
Total Liabilities and Group Equity....................... $20,677 $20,580
======= =======
</TABLE>

See Notes to the Penney Group Financial Statements.

VI-15
<PAGE>

PENNEY GROUP

STATEMENTS OF GROUP EQUITY

<TABLE>
<CAPTION>
Group Equity
------------
($
in millions)
<S> <C>
Balance at January 27, 1996........................................ $5,884
Net income....................................................... 565
Other comprehensive income....................................... (21)
Dividends........................................................ (511)
Other equity changes, net........................................ 35
------
Balance at January 25, 1997........................................ 5,952
Net income....................................................... 566
Other comprehensive income....................................... 11
Dividends........................................................ (573)
Other equity changes, net........................................ 1,401
------
Balance at January 31, 1998........................................ 7,357
Net income....................................................... 594
Other comprehensive income....................................... (62)
Dividends........................................................ (588)
Other equity changes, net........................................ (132)
------
Balance at January 30, 1999........................................ $7,169
======
</TABLE>

ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)

<TABLE>
<CAPTION>
Net unrealized
change in Currency Total accumulated
investment translation other comprehensive
securities adjustments income/(loss)
-------------- ----------- -------------------
($ in millions)
<S> <C> <C> <C>
January 27, 1996................. $70 $(12) $ 58
Annual change.................... (18) (3) (21)
--- ---- ----
January 25, 1997................. 52 (15) 37
Annual change.................... 14 (3) 11
--- ---- ----
January 31, 1998................. 66 (18) 48
Annual change.................... (1) (61) (62)
--- ---- ----
January 31, 1998................. $65 $(79) $(14)
=== ==== ====
</TABLE>
- --------
Net unrealized changes in investment securities are shown net of deferred
taxes of $36 million, $39 million, and $30 million at the ends of fiscal 1998,
1997, and 1996, respectively. A deferred tax asset has not been established
for currency translation adjustments. Total comprehensive income was $532
million, $577 million and $544 million for 1998, 1997, and 1996, respectively.

See Notes to the Penney Group Financial Statements.

VI-16
<PAGE>

PENNEY GROUP

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
1998 1997 1996
-------- -------- --------
($ in millions)
<S> <C> <C> <C>
Operating Activities:
Net income......................................... $594 $ 566 $ 565
Retained interest in the losses of Eckerd Group.... 3 10 145
Gain on sale of banking assets..................... -- (52) --
Other charges, net................................. (22) 371 --
Depreciation and amortization, including intangible
assets............................................ 386 370 334
Deferred taxes..................................... 163 (113) (25)
Change in cash from:
Customer receivables............................. 258 215 (172)
Other receivables................................ (45) (34) 9
Inventory, net of trade payables................. (46) 178 (536)
Current taxes payable............................ (174) 114 108
Other assets and liabilities, net................ (153) (100) (30)
---- ------ ------
964 1,525 398
Investing Activities:
Capital expenditures............................... (488) (483) (601)
Proceeds from the sale of banking assets........... -- 276 --
Acquisitions....................................... (210) -- --
Purchase of investment securities.................. (611) (401) (471)
Proceeds from the sale of investment securities.... 447 252 493
---- ------ ------
(862) (356) (579)
Financing Activities:
Change in short-term debt.......................... 507 (2,533) 2,401
Changes in allocated debt, including current
maturities........................................ 166 2,647 (1,062)
Capital contributions to Eckerd Group.............. (252) (608) (399)
Other equity changes, net.......................... (767) (479) (830)
---- ------ ------
(346) (973) 110
Net Increase/(Decrease) in Cash.................... (244) 196 (71)
Cash and Short-Term Investments at Beginning of
Year.............................................. 276 80 151
---- ------ ------
Cash and Short-Term Investments at End of Year..... $ 32 $ 276 $ 80
==== ====== ======
</TABLE>

See Notes to the Penney Group Financial Statements.

VI-17
<PAGE>

PENNEY GROUP

NOTES TO THE PENNEY GROUP FINANCIAL STATEMENTS

1) Basis of Presentation

The board of directors of J. C. Penney Company, Inc. (the Company) has
adopted a proposal which would provide for the restructuring of the existing
common stock of the Company into two classes of common stock, of which
shares initially would be designated as ["J. C. Penney Company, Inc.-Penney
Group Common Stock,"] par value $.50 per share, and shares initially would
be designated as ["J. C. Penney Company, Inc.-Eckerd Group Common Stock,"] par
value per share. This proposal is referred to herein as the "tracking
stock proposal." Under the tracking stock proposal, each share of existing
common stock would be reclassified as one share of Penney Group Common Stock.
Penney Group Common Stock is intended to track separately the performance of
the Penney Group which is generally comprised of: i) the Company's department
stores and catalog operation, ii) an interest in the Eckerd Group, which
excludes the interest represented by any outstanding shares of the Eckerd
Group, as described below, iii) Direct Marketing Services, and iv) all other
businesses in which the Company or any of its subsidiaries may be engaged,
excluding those comprising the Eckerd Group. The accompanying group financial
statements reflect the accounts of the Penney Group.

Subject to the approval of the above proposal, the Company currently plans
to offer shares of Eckerd Group Common Stock representing approximately 20
percent of the equity value of the Eckerd Group to the public for cash,
subject to market and other conditions. The net proceeds of the initial public
offering of the Eckerd Group Common Stock will be allocated to the Penney
Group. The Company currently plans to use the net proceeds of the initial
public offering primarily to buy back shares of Penney Group Common Stock in
the open market, after the distribution of the remaining 80 percent of the
equity value of the Eckerd Group to the holders of Penney Group Common Stock,
as described below. Any remaining proceeds would be used for general corporate
purposes. Pending any specific application of such proceeds, the Penney Group
intends to invest the net proceeds in short-term, investment-grade securities.

The Penney Group will initially hold the remaining 80 percent of the equity
value of the Eckerd Group. The interest held by the Penney Group cannot be
voted by the Penney Group. The Penney Group currently intends to distribute
(via a dividend) the remaining 80 percent of the equity value of the Eckerd
Group to the holders of Penney Group Common Stock approximately six to twelve
months after the initial public offering of the Eckerd Group Common Stock,
subject to market and other conditions.

The Penney Group and the Eckerd Group financial statements comprise all of
the accounts included in the consolidated financial statements of J. C. Penney
Company, Inc. The separate group financial statements give effect to all
allocation and related party transaction policies as adopted by the board of
directors, of which all material policies are described below in Note 3 to the
Penney Group financial statements. The Penney Group financial statements have
been prepared in a manner which management believes is reasonable and
appropriate. Such financial statements include (i) the historical financial
position, results of operations, and cash flows of the Penney Group, (ii) an
allocated portion of the Company's debt and the effects that such debt had on
the related statements of operations and cash flows, and (iii) the effects of
a 100 percent retained interest in the Eckerd Group on the statements of
income and balance sheets.

Allocation and related party transaction policies adopted by the board of
directors can be rescinded or amended at the sole discretion of the board of
directors without approval by stockholders, although no such changes are
currently contemplated. Any such changes adopted by the board of directors
would be made in its good faith business judgment of the Company's best
interest, taking into consideration the interests of all stockholders.

If the tracking stock proposal is approved by stockholders and implemented
by the board of directors, the Company will provide to the holders of both
Penney Group Common Stock and Eckerd Group Common Stock separate financial
statements, management's discussion and analysis of results of operations and
financial condition, and other relevant information for the Penney Group and
the Eckerd Group, as well as consolidated

VI-18
<PAGE>

PENNEY GROUP

NOTES TO THE PENNEY GROUP FINANCIAL STATEMENTS--(Continued)

financial information for the Company. Although the Company's assets,
liabilities, and stockholders' equity have been attributed to the separate
groups for purposes of presenting group financial statements, holders of
Penney Group and Eckerd Group Common Stock will be stockholders of the
Company, and will continue to be subject to all of the risks and uncertainties
associated with an investment in the Company. Assets attributed to one group
are subject to the liabilities of the other group, whether such liabilities
arise from lawsuits, contracts or indebtedness attributed to the other group.
Holders of Penney Group Common Stock and Eckerd Group Common Stock will not
have any legal rights related to specific assets of either group and in any
liquidation will receive a fixed share of the net assets of the Company which
may not reflect the actual trading prices of the respective groups at such
time.

Financial effects from one group that affect consolidated results of
operations or financial condition could, if significant, affect the results of
operations or financial condition of the other group and the market price of
the tracking stock relating to the other group. In addition, net losses of
either group and dividends and distributions on, or repurchases of, either
class of tracking stock or repurchases of preferred stock at a price per share
greater than par value will reduce the funds payable on each class of tracking
stock under Delaware law. Accordingly, the Penney Group financial statements
should be read in conjunction with the Company's consolidated financial
information, and that of the Eckerd Group.

2) Summary of Significant Accounting Policies

Definition of fiscal year. The Penney Group's fiscal year ends on the last
Saturday in January. Fiscal 1998 ended January 30, 1999; fiscal 1997 ended
January 31, 1998; and fiscal 1996 ended January 25, 1997. Fiscal 1997 was a
53-week year; fiscal 1998 and 1996 were 52-week years.

Retail sales, net. Retail sales include merchandise and services, net of
returns, and exclude all taxes.

Earnings per common share. Historical earnings per share is omitted from the
statements of operations since the Penney Group Common Stock was not part of
the capital structure of the Company for the periods presented. Following
implementation of the tracking stock proposal, basic earnings per share for
the Penney Group would be computed by dividing the earnings or losses of the
Penney Group, including the Penney Group's retained interest in the earnings
or losses of the Eckerd Group, less dividend requirements on the Series B ESOP
convertible preferred stock, net of tax, by the weighted average number of
shares of Penney Group Common Stock. Diluted earnings per share assumes the
exercise of stock options and the conversion of the Series B ESOP convertible
preferred stock into Penney Group Common Stock.

Cash and short-term investments. The Penney Group's short-term investments
are comprised principally of commercial paper, which has a maturity at the
acquisition date of less than three months. All other securities are
classified as investments on the balance sheets.

Accounts receivable. The Penney Group'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. All merchandise inventory is valued at the lower of
cost (last-in, first-out) or market, determined by the retail method. The
Penney Group determines the lower of cost or market on an

VI-19
<PAGE>

PENNEY GROUP

NOTES TO THE PENNEY GROUP FINANCIAL STATEMENTS--(Continued)

aggregated basis for similar types of merchandise. The Penney Group applies
internally developed indices to measure increases and decreases in its own
retail prices.

Depreciation and amortization. All long-lived assets are amortized on a
straight-line basis over their respective useful lives. The primary useful
life is 50 years for buildings and ranges from three to 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. Trade
name and goodwill are generally amortized over 40 years. Other intangible
assets, whose fair values are determined at their dates of acquisition, are
amortized over periods ranging from five to seven years.

Impairment of assets. The Penney Group assesses the recoverability of asset
values, including goodwill and other intangibles, on a periodic basis by
comparing expected cashflows to net book value. Impaired assets are written
down to estimated fair value.

Investments. The Penney Group's investments are classified as available-for-
sale and are carried at fair value. Changes in unrealized gains and losses are
included in other comprehensive income, net of applicable income taxes.

Retained Interest in Eckerd Group. Under the tracking stock proposal, prior
to the proposed initial public offering of Eckerd Group Common Stock, or any
other issuance of Eckerd Group Common Stock, the Penney Group would have a 100
percent retained interest in the Eckerd Group. Subsequent to the planned
public offering of approximately 20 percent of the equity value of the Eckerd
Group Common Stock, Penney Group's retained interest in Eckerd Group would be
reduced to approximately 80 percent. Subsequent to the planned distribution of
the remaining 80 percent of the equity value of the Eckerd Group to the
holders of Penney Group Common Stock, the Penney Group would no longer hold an
interest in the Eckerd Group. For purposes of these separate group financial
statements, the Penney Group's interest in the equity and net income or loss
of Eckerd Group has been included in the Penney Group balance sheets and
statements of income as "Retained interest in Eckerd Group." The amount
included in the balance sheets and statements of income as retained interest
in Eckerd Group represents Penney Group's proportional interest in the assets
and liabilities and revenue and expenses of the Eckerd Group. The carrying
value of the Penney Group's retained interest in Eckerd Group is increased or
decreased by Penney Group's proportional interest in the net income or loss,
respectively, of the Eckerd Group. Additionally, if dividends or other
distributions are made on the Eckerd Group Common Stock, including deemed
dividends in respect of the Penney Group's retained interest in the Eckerd
Group, an amount representing Penney Group's proportional interest in such
distributions would be transferred to the Penney Group from the Eckerd Group
and would reduce the book value of Penney Group's retained interest in the
Eckerd Group.

Advertising. Costs for newspaper, television, radio, and other media
advertising are expensed as incurred and were $1,023 million, $926 million,
and $960 million for the years ended January 30, 1999, January 31, 1998 and
January 25, 1997. 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. The "other assets"

VI-20
<PAGE>

PENNEY GROUP

NOTES TO THE PENNEY GROUP FINANCIAL STATEMENTS--(Continued)

section of the balance sheets includes deferred catalog book costs of $87
million as of January 30, 1999 and $89 million as of January 31, 1998.

Pre-opening expenses. Costs associated with the opening of new stores are
expensed in the period incurred.

Use of estimates. Certain amounts included in the Penney Group's financial
statements are based on estimates. Actual results may differ from these
estimates.

New accounting rules. See the Note 1 to the consolidated financial
statements for discussion of new accounting rules.

3) Corporate Activities

The Penney Group's financial statements reflect the application of the
management and allocation policies adopted by the board of directors to
various corporate activities, as described below:

A) Financing Activities: The Company manages most financial activities on a
centralized basis. Such financial activities include the investment of surplus
cash and the issuance and repayment of short-term and long-term debt. Debt
reflected on the Penney Group financial statements for the periods covered
consists entirely of a portion of the Company's total debt that is allocated
between the groups (pooled debt). For purposes of the Penney Group financial
statements, debt allocated to the Penney Group represents the remaining
portion of pooled debt that has not been allocated to the Eckerd Group. The
Company may, if it so determines, allocate specific debt issuances to a
particular group, for example in the case of specific acquisition financing.
Interest expense allocated to the Penney Group represents the remaining
portion of pooled debt interest expense, including the amortization of debt
issuance costs and the effects, if any, related to derivative financial
instruments, that has not been allocated to the Eckerd Group. Interest expense
allocated to the Eckerd Group for any period is based on the weighted average
interest rate of the prior period applied to the balance of the Eckerd Group
pooled debt allocation as of the beginning of the period. If the Company
allocates debt for a particular financing in its entirety to one group, the
debt will bear interest for group financial statement purposes at the rate
applicable to such debt. Cash advances made by the Penney Group to the Eckerd
Group on a historical basis are reflected as capital contributions in the
accompanying financial statements.

B) Shared Services and Support Activities: A portion of the cost of the
Company's shared services including general and administrative expenses has
been allocated to the Penney Group based upon the use of such services and
activities and the good faith judgment of our board of directors or
management. Where determinations based on use alone were not practical, other
methods and criteria were used to provide a reasonable allocation of the cost
of shared services, including support activities attributable to the Penney
Group. Such allocated shared services, including support activities,
represent, among other things, financial and accounting services, information
systems services, certain selling and marketing activities, executive
management, human resources, corporate finance and auditing services, legal
and corporate planning activities.

C) Income Taxes: Income tax provisions of JCPenney and its subsidiaries
which own assets allocated between the groups were determined on a
consolidated basis. Consolidated income tax provisions and related tax
payments or refunds between the groups were based principally on reported
income, taxable income, and tax credits directly attributable to each group.
These allocations reflect each group's contribution, whether positive or
negative, to JCPenney's consolidated taxable income and the consolidated tax
liability and tax credit position. Credit for tax benefits that could not be
used by the group generating those benefits but could be used on a
consolidated basis were allocated to the group that generated such benefits.
Inter-group transactions were treated and taxed as if each group were a stand-
alone company.

VI-21
<PAGE>

PENNEY GROUP

NOTES TO THE PENNEY GROUP FINANCIAL STATEMENTS--(Continued)

Current and deferred taxes and taxes payable or refundable allocated to each
group in historical financial statements differ from those that would have
been allocated to each group had they filed separate income tax returns.

D) Retirement Plans: The Penney Group participates in the following
Company's retirement plans: a noncontributory Pension Plan, a noncontributory
Supplemental Retirement Program and Benefit Restoration Plan for certain
management employees, a contributory Medical and Dental Plan, a Savings Plan
including a 401(k) Plan, Employee Stock Ownership Plan, and a nonqualified
Mirror Savings Plan. The costs of retirement benefits allocated to the Penney
Group are determined actuarially for certain of the Plans in accordance with
the requirements of Statements of Financial Accounting Standards Nos. 87 and
106. For the other Plans the allocation is based on benefits received under
the Plans by the employees comprising the Penney Group or other basis as
management believes to be an equitable and reasonable estimate of such costs.

4) Inter-Group Transactions

The Penney Group currently engages in the following significant inter-group
transactions:

A) JCPenney Catalog Desks in Eckerd Drugstores: The Eckerd Group operates
JCPenney catalog desks in selected drugstores under an existing Catalog
Merchant Program. Catalog desks in drugstores, similar to catalog desks in
independent merchant facilities, provide catalog merchandise delivery and
other customer services to their customers who shop JCPenney catalog.

At the end of fiscal year 1998, the Company had catalog desks in 139 Eckerd
drugstore locations, up from 110 at the end of 1997 and 107 at the end of
1996. The Penney Group pays a commission on net sales generated from these
locations at a rate commensurate with those paid to third-party merchants that
have catalog locations. Commissions paid to the Eckerd Group totaled $8.4
million, $8.7 million, and $9.1 million for 1998, 1997, and 1996,
respectively.

Additionally, in 1997 the Penney Group began selling JCPenney catalogs in
Eckerd drugstores that do not operate a catalog desk. Under this arrangement,
the Eckerd Group purchases catalogs from the Penney Group for resale in its
drugstores. The cost per catalog purchased by the Eckerd Group is based on a
negotiated cost that is below the retail selling price of the catalog.
Catalogs sold to the Eckerd Group totaled $0.5 million and $0.3 million for
1998 and 1997, respectively. Revenues generated from the sale of the catalogs
in these stores are retained by the Eckerd Group. The sale of catalogs in
Eckerd stores that have a catalog desk are covered under the Catalog Merchant
Program, therefore proceeds from such sales are remitted to the Penney Group.

B) Telemarketing Services: The Penney Group provides telemarketing services
to Eckerd Health Services/Express Pharmacy Services to support the mail order
pharmacy business of the Eckerd Group. The rates charged to the Eckerd Group
are updated annually and are based on usage. The amounts charged to the Eckerd
Group totaled $5.2 million, $5.9 million, and $4.5 million for 1998, 1997, and
1996, respectively.

C) Proprietary Credit Card: In 1998 the Eckerd Group expanded the acceptance
of the JCPenney proprietary credit card to all Eckerd stores as a payment
alternative and convenience to its customers in making purchases. Under this
arrangement, the Penney Group pays the Eckerd Group an amount equal to net
customer charges less a discount fee. The amount of discount totaled $1.8
million, $1.4 million, and $2.0 million in 1998, 1997, and 1996, respectively.
Settlements are generally made monthly.

5) Retained Interest in JCP Master Credit Card Trust

The Penney Group has transferred portions of its customer receivables to a
trust which, in turn, has sold certificates in public offerings representing
undivided interests in the trust. As of January 30, 1999, $1,143 million of
the certificates were outstanding and the balance of the receivables in the
trust was $1,578 million. The Penney Group owns the remaining undivided
interest in the trust not represented by the certificates.

VI-22
<PAGE>

PENNEY GROUP

NOTES TO THE PENNEY GROUP FINANCIAL STATEMENTS--(Continued)

6) Investments and Fair Value of Financial Instruments

<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
($ in millions)
<S> <C> <C> <C> <C>
Fixed income securities............ $1,269 $1,322 $1,126 $1,167
Asset-backed certificates.......... 431 449 431 459
Equity securities.................. 159 190 113 148
------ ------ ------ ------
Total............................ $1,859 $1,961 $1,670 $1,774
====== ====== ====== ======
</TABLE>

Investments. The Penney Group'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 Direct Marketing, 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 Instruments. The Penney Group's financial instruments consist
primarily of accounts receivable, accounts payable, short-term debt and long-
term pooled debt. The carrying amount of accounts receivable and accounts
payable approximates fair value because of the short maturity of the
instruments. The fair value of pooled debt both short-term and long-term is
based on the interest rate environment and the Company's credit rating and
approximates the carrying value. All Company long-term debt is fixed rate and
therefore is not exposed to fluctuations in market rates except to the extent
described in the following paragraph.

The Company enters into non-leveraged, off-balance sheet derivative
instruments on a selective basis in order to manage its market and interest
rate risk, and does not hold derivative positions for trading purposes. The
Penney Group is not a party to any derivative instruments. The net amount paid
or received by the Company is included in interest expense and accordingly a
portion is allocated to the Penney Group as a component of the average
interest rate.

The Penney Group has no significant concentrations of credit risk.
Individual accounts comprising accounts receivable are widely dispersed and
investments are well diversified.

7) Accounts Payable and Accrued Expenses

<TABLE>
<CAPTION>
1998 1997
------ ------
($
in millions)
<S> <C> <C>
Trade payables................................................ $ 863 $1,015
Accrued salaries, vacation, and bonus......................... 334 378
Taxes payable................................................. 201 458
Interest payable.............................................. 165 165
Common dividends payable...................................... 140 136
Other(1)...................................................... 665 807
------ ------
Total....................................................... $2,368 $2,959
====== ======
</TABLE>
- --------
(1) Includes $20 million and $110 million for 1998 and 1997, respectively,
related to other charges, principally future lease obligations.

VI-23
<PAGE>

PENNEY GROUP

NOTES TO THE PENNEY GROUP FINANCIAL STATEMENTS--(Continued)

8) Pooled Debt

The Company manages most financial activities on a centralized basis. Such
financial activities include the issuance and repayment of short-term and
long-term debt. Debt reflected on the Penney Group and Eckerd Group financial
statements consists entirely of the portion of total consolidated debt (pooled
debt) that has been allocated to the respective group. The following table
reflects the allocation of the Company's pooled debt between the Penney Group
and the Eckerd Group by debt component (see Notes 5 and 6 to the consolidated
financial statements for additional information regarding the Company's short-
term and long-term debt):

<TABLE>
<CAPTION>
Allocation to
-------------
Total Penney Eckerd
Consolidated Group Group
------------ ------ ------
($ in millions)
<S> <C> <C> <C>
1998
Short-term obligations:
Commercial paper............................... $1,924 $1,924 $ --
Current maturities of long-term debt........... 438 438 --
Long-term debt................................... 7,143 5,618 1,525
------ ------ ------
Total pooled debt............................ $9,505 $7,980 $1,525
====== ====== ======
1997
Short-term obligations:
Commercial paper............................... $1,417 $1,417 $ --
Current maturities of long-term debt........... 449 449 --
Long-term debt................................... 6,986 5,461 1,525
------ ------ ------
Total pooled debt............................ $8,852 $7,327 $1,525
====== ====== ======
</TABLE>

Committed bank credit facilities available to the Company and allocated to
the Penney Group as of January 30, 1999 totaled $3.0 billion. The facilities,
as amended and restated in 1998, support the Penney Group'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 Penney
Group to match its seasonal borrowing requirements. None of the borrowing
facilities was in use as of January 30, 1999.

The Company also has $910 million of uncommitted credit lines in the form of
letters of credit with seven banks to support its direct import merchandise
program that have also been allocated to the Penney Group. As of January 30,
1999, $280 million of letters of credit issued by the Penney Group were
outstanding.

Interest expense allocated to the Penney Group for its portion of pooled
debt was $501 million in 1998, $472 million in 1997, and $347 million in 1996.

9) Stock-Based Compensation

The Company has a stock-based compensation plan, which was approved by
stockholders in 1997. The plan reserved 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 employees, comprised principally of
selected management employees, are eligible to participate. 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 outside members of
the board of directors. Shares acquired by such directors are not transferable
until a director terminates service. See Note 8 to the consolidated financial
statements for more information regarding stock options.

VI-24
<PAGE>

PENNEY GROUP

NOTES TO THE PENNEY GROUP FINANCIAL STATEMENTS--(Continued)

If the tracking stock proposal is approved by the stockholders and
implemented by the board of directors, outstanding awards under the 1997
Equity Compensation Plan, and all prior plans, will be adjusted to reflect the
tracking stock proposal in accordance with adjustment provisions of such plans
and in a manner that preserves the aggregate intrinsic value of the option to
the holder in accordance with criteria prescribed by EITF 90-9 Changes to
Fixed Employee Stock Option Plans as a Result of Equity Restructuring. In
addition, the vesting provisions and terms of the adjusted stock options will
remain the same as the existing stock options.

10) Lease Commitments

The Penney Group conducts the major part of its operations from leased
premises that include retail stores, 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 $235 million in 1998, $242
million in 1997 and $250 million in 1996, including contingent rent based on
sales of $31 million, $35 million and $36 million for the three years,
respectively.

The Penney Group 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 $116 million in 1998, $119 million in 1997,
and $99 million in 1996.

Future minimum lease payments for noncancelable operating and capital
leases, net of subleases, as of January 30, 1999 were:

<TABLE>
<CAPTION>
Operating Capital
--------- -------
($ in millions)
<S> <C> <C>
1999.................................................... $ 283 11
2000.................................................... 247 11
2001.................................................... 193 11
2002.................................................... 175 6
2003.................................................... 164 1
Thereafter............................................ 763 --
------ ----
Total minimum lease payments.......................... $1,825 40
Present value......................................... $1,003 35
Weighted average interest rate........................ 10.0% 10.0%
</TABLE>

The minimum lease payments for operating leases are shown net of estimated
executory costs, principally real estate taxes, maintenance, and insurance.

11) Income Taxes

The major components of deferred tax (assets)/liabilities as of January 30,
1999 and January 31, 1998 were as follows:

Temporary Differences and Carryforwards

<TABLE>
<CAPTION>
1998 1997
------- -------
($ in millions)
<S> <C> <C>
Depreciation and amortization.............................. $ 905 $ 827
Leases..................................................... 312 339
Other charges, net......................................... (46) (139)
Deferred acquisition costs................................. 233 211
Other, including comprehensive income...................... 100 103
------- -------
Total.................................................... $ 1,504 $ 1,341
======= =======
</TABLE>

VI-25
<PAGE>

PENNEY GROUP

NOTES TO THE PENNEY GROUP FINANCIAL STATEMENTS--(Continued)

Income Tax Expense

<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
($ in millions)
<S> <C> <C> <C>
Current:
Federal and foreign................................... $ 128 $ 301 $ 296
State and local....................................... 36 36 41
----- ----- -----
164 337 337
Deferred:
Federal and foreign................................... 173 (3) 82
State and local....................................... (10) (3) 8
----- ----- -----
163 (6) 90
----- ----- -----
Total............................................... $ 327 $ 331 $ 427
===== ===== =====
Effective tax rate...................................... 35.4% 36.5% 37.6%
</TABLE>

Reconciliation of Tax Rates

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Percent of
pre-tax
income)
<S> <C> <C> <C>
Federal income tax at
statutory rate............. 35.0 % 35.0 % 35.0 %
State taxes, net of federal
income tax benefit......... 2.0 % 2.5 % 2.9 %
Tax effect of dividends on
allocated ESOP shares...... (1.4)% (1.3)% (1.1)%
Tax credits and other....... (0.2)% 0.3 % 0.8 %
---- ---- ----
Total................... 35.4 % 36.5 % 37.6 %
==== ==== ====
</TABLE>

12) Retirement Plans

The Company's retirement plans available to the Penney Group consist
principally of a noncontributory Pension Plan, a noncontributory Supplemental
Retirement Program and Benefit Restoration Plan for certain management
associates, a contributory Medical and Dental Plan, a Savings Plan including a
401(k) Plan, Employee Stock Ownership Plan, and a nonqualified Mirror Savings
Plan. Pension plan assets are invested in a balanced portfolio of equity,
including international equities, and debt securities managed by third party
investment managers. For purposes of the Penney Group financial statements,
pension plan assets were allocated pro-rata to the Penney Group based on the
Projected Benefit Obligation (PBO) attributable to Penney Group employees.

Retirement plan costs are allocated to the Penney Group based on actuarial
determinations or other basis as management believes to be an equitable and
reasonable estimate of retirement benefits provided to the Penney Group
employees.

VI-26
<PAGE>

PENNEY GROUP

NOTES TO THE PENNEY GROUP FINANCIAL STATEMENTS--(Continued)

The cost of these programs and the December 31 balances of plan assets and
obligations allocated to the Penney Group are shown below:

Expense

<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
($ in millions)
<S> <C> <C> <C>
Pension and health care:
Service cost.......................................... $ 66 $ 59 $ 69
Interest cost......................................... 210 190 182
Projected return on assets............................ (270) (477) (382)
Net amortization and other............................ 15 247 174
----- ----- -----
21 19 43
Savings plan expense.................................... 61 55 51
----- ----- -----
Total retirement plans.............................. $ 82 $ 74 $ 94
===== ===== =====
</TABLE>

Assumptions

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rate.............................................. 6.75% 7.25% 8.0%
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% 7.0%
</TABLE>

Assets and Obligations

Pension Plans*

<TABLE>
<CAPTION>
1998 1997
------ ------
($
in millions)
<S> <C> <C>
Projected benefit obligation
Beginning of year.......................................... $2,606 $2,059
Service and interest cost.................................. 253 225
Actuarial (gain)/ loss..................................... 170 398
Benefits paid.............................................. (195) (205)
Amendments and other....................................... 7 129
End of year................................................ 2,841 2,606
------ ------
Fair value of plan assets
Beginning of year.......................................... 2,916 2,612
Company contributions...................................... 30 23
Net gains/ (losses)........................................ 471 486
Benefits paid.............................................. (196) (205)
End of year................................................ 3,221 2,916
------ ------
Excess fair value over projected benefits.................... 380 310
Unrecognized net losses and prior service cost............... 84 128
Prepaid pension cost......................................... $ 464 $ 438
====== ======
</TABLE>
- --------
* Includes supplemental retirement plan.

VI-27
<PAGE>

PENNEY GROUP

NOTES TO THE PENNEY GROUP FINANCIAL STATEMENTS--(Continued)

Medical and Dental

<TABLE>
<CAPTION>
1998 1997
------ ------
($
in millions)
<S> <C> <C>
Accumulated benefit obligation................................ $ 325 $ 326
Net unrecognized losses....................................... 10 13
------ ------
Net medical and dental liability.............................. $ 335 $ 339
====== ======
</TABLE>

A one percent change in the health care trend rate would change the
accumulated benefit obligation and expense by approximately $23.2 million and
$1.9 million, respectively.

13) Other Charges, Net

During 1996 and 1997, the Company recorded other charges principally related
to drugstore integration activities, department store closings and FAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of (FAS 121), impairments, and early retirements and
reduction in force programs. All charges related to department stores and
catalog were recorded by the Penney Group and are reflected as other charges,
net in the group's financial statements. The following tables provide a
summary of the charges by year and by category as well as a rollforward of
reserves that were established for certain of the charges.

1996 Charges

<TABLE>
<CAPTION>
1996
-------------------------------
Cash Other Y/E
Expense Outlays Changes Reserve
------- ------- ------- -------
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
Reduction in force................... $11 $(11) $-- $--
=== ==== ==== ====
</TABLE>

Reduction in Force. As part of the Penney Group's ongoing program to reduce
the cost structure for stores and catalog and improve the Penney Group's
competitive position and future performance, it announced the elimination of
119 store and field support positions in September 1996, all of which were
subsequently eliminated. Subsequent periods benefited from the elimination of
related salary costs. The charges, which were expensed and paid in the fourth
quarter of 1996, related to severance and outplacement.

1997 Charges

<TABLE>
<CAPTION>
1997
-------------------------------
Cash Other Y/E
Expense Outlays Changes Reserve
------- ------- ------- -------
($ in millions)
<S> <C> <C> <C> <C>
Early retirement(1)......................... $151 $(1) $(150) $--
Reduction in force(2)....................... 55 -- -- 55
FAS 121 impairments(3)...................... 72 -- (72) --
Future lease obligations and severance(2)... 61 (6) -- 55
---- --- ----- ----
339 (7) (222) 110
Sale of business units...................... (63) 63 -- --
---- --- ----- ----
Total..................................... $276 $56 $(222) $110
==== === ===== ====
</TABLE>

VI-28
<PAGE>

PENNEY GROUP

NOTES TO THE PENNEY GROUP FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
1998
--------------------------------
1997 Y/E Cash Other Y/E
Reserves Outlays Changes Reserve
-------- ------- ------- -------
($ in millions)
<S> <C> <C> <C> <C>
Reduction in force(2)..... $ 55 $(44) $(11) $--
Future lease obligations
and severance(2)......... 55 (24) (11) 20
---- ---- ---- ----
Total................... $110 $(68) $(22) $ 20
==== ==== ==== ====
</TABLE>
- --------
(1) The early retirement program was reflected in the 1997 year end balance
sheet as follows: $58 million in enhanced pension benefits was credited
against prepaid pension assets which are included in other assets; $5
million of retiree medical liability and $85 million for the new non-
qualified retirement plan are included in other liabilities; such amounts
are included in retirement plan disclosures in Note 12 to the Penney Group
financial statements. In addition, $2 million of plan administration costs
was included in accounts payable and accrued expenses in 1997.
(2) Reserve balances are included as a component of accounts payable and
accrued expenses.
(3) Charges related to FAS 121 impairments were recorded as a reduction of
property, plant, and equipment balances.

As part of the Penney Group's initiatives to reduce the cost structure for
department stores and catalog and improve the Penney Group's competitive
position and future performance, the following actions were taken in the third
and fourth quarters of 1997:

Early Retirement. In August 1997 the Penney Group announced a voluntary
early retirement program (Program) to all department stores, catalog, and
corporate support management employees who were age 55 or older and had at
least 10 years of service. Approximately 1,600 employees were eligible to
participate in the program, and approximately 1,245, or 78 percent, elected to
retire under the Program. The charge of $151 million includes $158 million of
termination benefits that were actuarially calculated based on the employees
electing to retire under the Program (representing lump-sum payments as well
as the present value of periodic future payments determined at a discount rate
of 7.5 percent), $5 million of actuarially calculated post retirement welfare
benefits, and $3 million of outside consulting and administration costs. These
costs were offset by a $15 million pension curtailment gain, which was the
result of a decrease in the projected benefit obligation (PBO) of the Penney
Group's qualified pension plan. The PBO was reduced due to the elimination of
the liability for future salary increases resulting from the early termination
of employees who elected to retire under the Program. Of the $3 million of
outside consulting and administrative costs, approximately $2 million
represented cash outlays, and the remainder was reversed in the fourth quarter
of 1998. All other amounts recorded under this program are included in
retirement plan disclosure in Note 12 to the Penney Group financial
statements.

Reduction in Force. In the fourth quarter of 1997, the Penney Group
announced a restructuring plan to eliminate approximately 1,700 management
employees. The $55 million charge represents severance, outplacement, and
other termination benefits offered to all affected associates. There was no
cash outlay in 1997 because, while employees were notified of the
restructuring plan in the fourth quarter of 1997, they did not leave the
Penney Group until 1998. Cash outlays of $44 million in 1998 represent
termination benefits paid to the approximately 1,550 employees terminated. The
plan was completed in the fourth quarter of 1998 at less cost than originally
estimated due in part to employee resignations prior to being involuntarily
terminated and employees obtaining positions elsewhere in the Penney Group.
Consequently, approximately $11 million was reversed in the fourth quarter of
1998.

FAS 121 Impairments. The Penney Group identified 97 underperforming stores
that did not meet the Penney Group's profit objectives and several support
units (credit service centers and warehouses) which were no longer needed.
This unit closing plan (Plan) represents unit closings over and above the
normal course of

VI-29
<PAGE>

PENNEY GROUP

NOTES TO THE PENNEY GROUP FINANCIAL STATEMENTS--(Continued)

store closures within a given year, which are typically relocations. All units
were closed by the end of fiscal 1998. The major actions comprising the Plan
consisted of the identification of a closing date (to coincide with
termination rights and/or other trigger dates contained in the lease, if
applicable), and the notification of affected parties (e.g., employees,
landlords, and community representatives) in accordance with the Penney
Group's store closing procedures. Substantially all of the stores and support
units included in the portfolio were leased, and as such, the Penney Group was
not responsible for the disposal of property, other than fixtures, which for
the most part were discarded. Unit closing costs include future lease
obligations and termination benefits, and FAS 121 impairments.

Future Lease Obligations and Severance. In connection with the above store
closings, the Penney Group established a $61 million reserve for the present
value of future lease obligations ($31 million) and other store closing costs
($30 million), principally severance and outplacement. The store closing plan
anticipated that the Penney Group would remain liable for all future lease
payments. Present values were calculated assuming a ten per cent discount rate
and anticipated no subleasing activity or lease buyouts. Costs are being
charged against the reserve as incurred. The cash outlays in 1997 and 1998
represent severance benefits paid for approximately 1,550 employees terminated
under the program, and lease payments for closed stores. The interest
component of lease payments of approximately $2 million in 1998 was recorded
as interest expense, with a corresponding increase in the reserve, in the
fourth quarter of 1998 and future years. The remaining reserve as of the end
of 1998 represents future lease obligations for all closed stores. The actual
timing of store closings did not differ significantly from the estimate upon
which the liability for future lease obligations was based. On average, the
remaining lease term for closed stores was seven years, and payments during
the next five years are expected to be approximately $4 million per year.
Adjustments to the reserves in 1998 included reversals of approximately $5
million due to reduced lease obligations stemming from subleased facilities,
and $6 million for employment-related costs. Employment-related costs were
less than original estimates as a result of several factors, including
voluntary resignations, a higher rate of employee transfers, and the
termination of a higher proportion of employees with less tenure with the
Penney Group. These reserves will continue to be assessed periodically.

The stores identified for closure were generally those with a poor
performance history, and to a large extent, declining sales. The short-term
effect of the closings was the net loss of approximately $225 million in sales
and the elimination of approximately $15 million in operating losses before
non-cash operating charges such as depreciation. The Penney Group expects to
realize benefits of approximately $32 million per year as a result of
eliminating operating losses associated with the closed stores and the
redeployment of working capital.

Sale of Business Units. A gain on the sale of business units of $63 million
was included in the 1997 other charges. JCPenney National Bank (JCPNB), a
consumer bank which issued VISA and MasterCard credit cards, was sold in 1997
at a gain of $49 million. In addition, the Penney Group recorded a $14 million
gain representing a supplemental, contingent payment related to the 1995 sale
of JCPenney Business Services, Inc. (BSI). BSI provided credit-related
services to third party credit-card issuers. JCPNB 1996 revenues and operating
income were $129 million and $2 million, respectively. The sale of JCPNB did
not have a negative impact on the Penney Group's results of operations or
financial position in 1997, and it is not expected to have a material impact
in future periods.

VI-30
<PAGE>

PENNEY GROUP

NOTES TO THE PENNEY GROUP FINANCIAL STATEMENTS--(Continued)

14) Segment Reporting

The Penney Group operates in two business segments: department stores and
catalog and Direct Marketing. The results of department stores and catalog are
combined because they generally serve the same customer, have virtually the
same mix of merchandise, and the majority of catalog sales are completed in
department 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
Year Revenue Profit Assets Expenditures Amortization
---- ------- --------- ------- ------------ ------------
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
Department stores and
catalog................ 1998 $19,331 $1,013 $17,963 $439 $380
1997 19,955 1,368 18,131 464 365
1996 19,506 1,183 16,150 680 328
Direct Marketing........ 1998 1,022 233 2,603 1 6
1997 928 214 2,283 5 5
1996 818 186 1,986 7 6
Total segments.......... 1998 20,353 1,246 20,566 440 386
1997 20,883 1,582 20,414 469 370
1996 20,324 1,369 18,136 687 334
Net interest expense and
credit operations...... 1998 (370)
1997 (438)
1996 (266)
Real estate and other... 1998 26 111
1997 39 166
1996 45 959
Other charges, net...... 1998 22
1997 (276)
1996 (11)
Total Penney Group...... 1998 20,353 924 (1) 20,677 440 386
1997 20,883 907 (1) 20,580 469 370
1996 20,324 1,137 (1) 19,095 687 334
</TABLE>

- --------
(1) Represents income before income taxes and retained interest in Eckerd Group
as shown on the Penney Group's statements of income.

VI-31
<PAGE>

PENNEY GROUP

The following interim financial information is unaudited but, in the opinion
of the Company, includes all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation. Operating results for the interim
period are not necessarily indicative of the results that may be expected for
the full year. The financial information should be read in conjunction with
the Penney Group's audited consolidated financial statements included herein.

STATEMENTS OF INCOME

(Unaudited)

<TABLE>
<CAPTION>
13 Weeks Ended
----------------
May 1, May 2,
1999 1998
------- -------
($ in millions)
<S> <C> <C>
Revenue
Retail sales, net......................................... $ 4,248 $ 4,242
Direct Marketing revenue.................................. 274 246
------- -------
Total revenue........................................... 4,522 4,488
Costs and expenses
Cost of goods sold........................................ 2,923 2,899
Selling, general, and administrative expenses............. 1,158 1,109
Costs and expenses of Direct Marketing.................... 220 193
Real estate and other..................................... (9) (6)
Net interest expense and credit operations................ 27 65
------- -------
Total costs and expenses................................ 4,319 4,260
------- -------
Income before income taxes and retained Eckerd Group
interest................................................... 203 228
Income taxes................................................ 67 80
------- -------
Income before retained interest in Eckerd Group............. 136 148
Retained interest in Eckerd Group........................... 31 26
------- -------
Net income.................................................. $ 167 $ 174
======= =======
</TABLE>

See Note to Interim Financial Information.

VI-32
<PAGE>

PENNEY GROUP

BALANCE SHEETS
(Unaudited)

<TABLE>
<CAPTION>
May 1, Jan. 30,
1999 1999
------- --------
($ in millions)
<S> <C> <C>
Assets
Current assets
Cash and short-term investments............................ $ 48 $ 32
Retained interest in JCP Master Credit Card Trust.......... 250 415
Receivables, net (bad debt reserve of $103 and $118)....... 3,719 3,949
Merchandise inventory (LIFO reserve of $47 and $47)........ 3,939 4,034
Prepaid expenses........................................... 162 151
------- -------
Total current assets..................................... 8,118 8,581
Property, plant, and equipment
Land and buildings......................................... 2,932 2,913
Furniture and fixtures..................................... 2,974 2,927
Leasehold improvements..................................... 785 800
Accumulated depreciation................................... (2,292) (2,164)
------- -------
Property, plant, and equipment, net.......................... 4,399 4,476
Retained interest in Eckerd Group............................ 3,963 3,517
Investments, principally held by Direct Marketing............ 2,010 1,961
Deferred insurance policy acquisition costs.................. 871 847
Goodwill and intangible assets, net.......................... 74 67
Other assets................................................. 1,163 1,228
------- -------
Total Assets............................................. $20,598 $20,677
======= =======
Liabilities and Group Equity
Current liabilities
Accounts payable and accrued expenses...................... $ 2,059 $ 2,368
Short-term debt............................................ 1,995 1,924
Current maturities of long-term debt....................... 550 438
Deferred taxes............................................. 159 129
------- -------
Total current liabilities................................ 4,763 4,859
Long-term debt............................................... 5,236 5,618
Deferred taxes............................................... 1,383 1,375
Insurance policy and claims reserves......................... 967 946
Other liabilities............................................ 700 710
------- -------
Total Liabilities........................................ 13,049 13,508
Group equity
Balance at beginning of period............................. 7,169 7,357
Net income................................................. 167 594
Other comprehensive income................................. (2) (62)
Dividends.................................................. (143) (588)
Other equity changes, net.................................. 358 (132)
------- -------
Balance at end of period................................... 7,549 7,169
------- -------
Total Liabilities and Group Equity....................... $20,598 $20,677
======= =======
</TABLE>

See Note to Interim Financial Information.

VI-33
<PAGE>

PENNEY GROUP

STATEMENTS OF CASH FLOWS

(Unaudited)

<TABLE>
<CAPTION>
13 Weeks Ended
-----------------------
May 1, 1999 May 2, 1998
----------- -----------
($ in millions)
<S> <C> <C>
Operating Activities:
Net Income............................................ $167 $ 174
Retained interest in income of the Eckerd Group....... (31) (26)
Depreciation and amortization, including intangible
assets............................................... 100 102
Deferred taxes........................................ 34 38
Change in cash from:
Customer receivables................................ 413 430
Other receivables................................... (18) 2
Inventory, net of trade payables.................... (85) (12)
Current taxes payable............................... 38 --
Other assets and liabilities, net................... (68) (308)
---- -----
550 400
Investing Activities:
Capital expenditures.................................. (89) (100)
Purchase of investment securities..................... (307) (83)
Proceeds from the sale of investment securities....... 229 76
Proceeds from the sale of bank receivables............ 22 --
---- -----
(145) (107)
Financing Activities:
Change in short-term debt............................. 15 83
Change in allocated debt, including current
maturities........................................... (270) --
Capital contributions to Eckerd Group................. (1) (259)
Other equity changes, net............................. (133) (210)
---- -----
(389) (386)
Net Increase/(Decrease) in Cash....................... 16 (93)
Cash and Short-Term Investments at Beginning of Year.. 32 276
---- -----
Cash and Short-Term Investments at End of Year........ $ 48 $ 183
==== =====
</TABLE>

See Note to Interim Financial Information.

VI-34
<PAGE>

PENNEY GROUP

NOTE TO INTERIM FINANCIAL INFORMATION

1997 Charges

<TABLE>
<CAPTION>
1998 1st Qtr 1999 YTD
1997 --------------- -------------------
Y/E Cash Y/E Cash Ending
Reserve Outlays Reserve Outlays Reserve
------- ------- ------- -------- --------
($ in millions)
<S> <C> <C> <C> <C> <C>
Reduction in force(1)............. $ 55 $(55) $ -- $ -- $ --
Future lease obligations(1)....... 55 (35) 20 (1) 19
---- ---- ----- -------- --------
Total........................... $110 $(90) $ 20 $ (1) $ 19
==== ==== ===== ======== ========
</TABLE>
- --------
(1) Reserve balances are included as a component of accounts payable and
accrued expenses.

Background. In 1997, the Penney Group recorded $276 million of net charges
related to early retirement and reduction in force programs ($206 million),
the closing of underperforming department stores and support facilities ($133
million), and gains on the sale of certain business units ($63 million). As of
the end of the first quarter of 1999, reserves totaling $19 million remained
related to these charges. A description of the charges and a rollforward of
the reserves by major category are provided below:

Reduction in Force. In the fourth quarter of 1997, the Penney Group
announced a restructuring plan to eliminate approximately 1,700 management
employees. The $55 million charge represented severance, outplacement, and
other termination benefits offered to all affected associates. There was no
cash outlay in 1997, because although employees were notified of the
restructuring plan in the fourth quarter of 1997, they did not leave the
Penney Group until 1998. Cash outlays totaled $18 million in the first quarter
of 1998, and all payments were made by the end of the year. The plan was
completed in the fourth quarter of 1998 at less cost than originally estimated
due in part to employee resignations prior to being involuntarily terminated
and employees posting for positions elsewhere in the Penney Group.
Consequently, approximately $11 million was reversed in the fourth quarter of
1998.

Future Lease Obligations. The Penney Group identified 97 underperforming
stores that did not meet the Group's profit objectives and several support
units (credit service centers and warehouses) which were no longer needed. The
store closing plan anticipated that the Penney Group would remain liable for
all future lease payments. Present values were calculated assuming a ten per
cent discount rate and anticipated no subleasing activity or lease buyouts.
The interest component of lease payments is recorded as interest expense with
a corresponding increase in the reserve. All such stores had been closed by
the end of 1998 and the actual timing of store closings did not differ
significantly from the initial estimate. The remaining reserve as of the end
of the first quarter of 1999 represents future lease obligations for closed
stores, and costs are being charged against the reserve as incurred. During
the first quarter of 1999, $1 million in payments were charged against the
reserve compared with $4 million in last year's period. On average, the
remaining lease term for closed stores was seven years, and payments during
the next five years are expected to be approximately $4 million per year.
Given the extended lease terms, the reserves will be assessed periodically to
determine their adequacy. No changes have been deemed necessary through the
first quarter of 1999.

VI-35
<PAGE>

PENNEY GROUP

PRO FORMA FINANCIAL DATA

(Unaudited)

The pro forma financial data presented below for the 52 weeks ended January
30, 1999 was derived from the Penney Group's financial statements set forth
herein. The pro forma financial data presented below as of May 1, 1999, and
for the 13 weeks ended May 1, 1999 were derived from the Penney Group's
unaudited interim financial statements set forth herein, which include all
adjustments, consisting only of normal recurring accruals, that the Penney
Group considers necessary to present such data fairly for an interim period.
Interim operating results are not necessarily indicative of the results that
may be expected for a full year.

In May 1999, the Company announced its intention to outsource the management
of the Penney Group's proprietary credit card business and sell the underlying
receivables and the related assets. The Company has obtained bids from several
interested parties and is evaluating the merits of each of the bids. The
Company expects to complete the sale of these assets in the fourth quarter.
For pro forma purposes, it is assumed that these assets will be sold at book
value and no gain or loss is reflected in the pro forma financial statements.

The unaudited pro forma balance sheet as of May 1, 1999 gives effect to: 1)
outsourcing of the management of the Penney Group's proprietary credit card
business, the related sale of the underlying receivables and the related
assets and the assumed use of the proceeds to retire a portion of the
Company's debt and 2) the implementation of the tracking stock proposal and
the initial public offering of million shares of Eckerd Group Common Stock
at an assumed initial public offering price of $ per share representing
approximately 20 percent of the equity value of Eckerd Group and the assumed
investment of the proceeds in short-term investments. In presenting this pro
forma information these transactions were assumed to have occurred on May 1,
1999.

The unaudited pro forma statements of income for the 52 weeks ended January
30, 1999 and the 13 weeks ended May 1, 1999 give effect to the assumed sale
and outsourcing of the Penney Group's credit operations. In presenting this
pro forma information this transaction was assumed to have occurred on
February 1, 1998. The unaudited pro forma balance sheet and statements of
income are not necessarily indicative of the financial position or results of
operations as they might have been had the transactions actually occurred on
the dates indicated.

Additionally, under the tracking stock proposal, six to twelve months after
the initial public offering of the Eckerd Group Common Stock, the Company
currently intends to distribute, in the form of a dividend, the remaining
approximately 80 percent of the equity value of Eckerd Group to the holders of
Penney Group Common Stock, subject to market and other conditions. Following
the dividend distribution the Company intends to use the proceeds from the
initial public offering of the Eckerd Group Common Stock, which will be
allocated to the Penney Group, primarily to purchase shares of the Penney
Group Common Stock in the open market. The effects of these assumed
transactions on the balance sheet and computation of earnings per share are
presented on the following pages under the caption labeled "fully
distributed." In presenting the fully distributed information, these
additional transactions as well as the previously described transactions, were
assumed to have occurred on the same dates as noted above for the presentation
of the pro forma information.

The pro forma financial data should be read in conjunction with the Penney
Group's financial statements, the Penney Group's unaudited interim financial
statements, and the information in "Penney Group Management's Discussion and
Analysis of Financial Condition and Results of Operations" set forth herein,
as well as the Company's consolidated financial statements, the Company's
unaudited interim consolidated financial statements, and the information in
"J. C. Penney Company, Inc. and Subsidiaries Management's Discussion and
Analysis of Financial Condition and Results of Operations" set forth herein.

VI-36
<PAGE>

PENNEY GROUP PRO FORMA STATEMENT OF INCOME
52 Weeks Ended January 30, 1999

(Unaudited)

<TABLE>
<CAPTION>
Pro Fully
Historical Adjustments Forma Distributed
---------- ----------- ------- -----------
($ in millions except per share data)
<S> <C> <C> <C> <C>
Revenue
Retail sales, net................. $19,331 -- $19,331 $19,331
Direct Marketing revenue.......... 1,022 -- 1,022 1,022
------- --- ------- -------
Total revenue..................... 20,353 -- 20,353 20,353
Costs and expenses
Cost of goods sold................ 13,599 -- 13,599 13,599
Selling, general, and
administrative expenses.......... 4,719 10 (A) 4,729 4,729
Costs and expense of Direct
Marketing........................ 789 -- 789 789
Real estate and other ............ (26) -- (26) (26)
Net interest expense and credit
operations....................... 370 7 (A) 377 377
Other charges, net................ (22) -- (22) (22)
------- --- ------- -------
Total costs and expenses.......... 19,429 17 19,446 19,446
------- --- ------- -------
Income before income taxes and
retained interest in Eckerd
Group............................ 924 (17) 907 907
Income taxes...................... 327 (6)(A) 321 321
------- --- ------- -------
Income before retained interest in
Eckerd Group..................... 597 (11) 586 586
Net loss of Eckerd Group.......... (3) 1 (B) (2) --
------- --- ------- -------
Net income........................ $ 594 (12) $ 584 $ 586
======= === ======= =======
Weighted average common shares:
Basic............................. 253
======= =======
Diluted........................... 271
======= =======
Net income per share:
Basic............................. $ 2.16 $
======= =======
Diluted........................... $ 2.15 $
======= =======
</TABLE>

See Note to Pro Forma Financial Data (Unaudited).

VI-37
<PAGE>

PENNEY GROUP PRO FORMA STATEMENT OF INCOME
13 Weeks Ended May 1, 1999

(Unaudited)

<TABLE>
<CAPTION>
Fully
Historical Adjustments Pro Forma Distributed
---------- ----------- --------- -----------
($ in millions except per share data)
<S> <C> <C> <C> <C>
Revenue
Retail sales, net............... $4,248 -- $4,248 $4,248
Direct marketing revenue........ 274 -- 274 274
------ ---- ------ ------
Total revenue................... 4,522 -- 4,522 4,522
Costs and expenses
Cost of goods sold.............. 2,923 -- 2,923 2,923
Selling, general, and
administrative expenses........ 1,158 3 (A) 1,161 1,161
Costs and expenses of Direct
Marketing...................... 220 -- 220 220
Real estate and other........... (9) -- (9) (9)
Net interest expense and credit
operations..................... 27 73 (A) 100 100
------ ---- ------ ------
Total costs and expenses........ 4,319 76 4,395 4,395
------ ---- ------ ------
Income before income taxes and
retained interest in Eckerd
Group.......................... 203 (76) 127 127
Income taxes.................... 67 (30)(A) 37 37
------ ---- ------ ------
Income before retained interest
in Eckerd Group................ 136 (46) 90 90
Net income of Eckerd Group...... 31 (6)(B) 25 --
------ ---- ------ ------
Net income...................... $ 167 (40) $ 115 $ 90
====== ==== ====== ======
Weighted average common shares:
Basic........................... 256
====== ======
Diluted......................... 272
====== ======
Net income per share:
Basic .......................... $ 0.41 $
====== ======
Diluted......................... $ 0.41 $
====== ======
</TABLE>

See Note to Pro Forma Financial Data (Unaudited).

VI-38
<PAGE>

PENNEY GROUP PRO FORMA BALANCE SHEET
May 1, 1999

(Unaudited)

<TABLE>
<CAPTION>
Fully
Historical Adjustments Pro Forma Distributed
---------- ----------- --------- -----------
($ in millions)
<S> <C> <C> <C> <C>
Assets
Current Assets
Cash and short-term
investments................... $ 48 -- (B) $ 48 $ 48
Retained interest in JCP Master
Credit Card Trust............. 250 (250)(A) -- --
Receivables, net............... 3,719 (3,008)(A) 711 711
Merchandise inventory.......... 3,939 -- 3,939 3,939
Prepaid expenses............... 162 -- 162 162
------- ------- -------
Total current assets....... 8,118 4,860 4,860
Property, plant and equipment,
net............................. 4,399 (20)(A) 4,379 4,379
Retained interest in Eckerd
Group........................... 3,963 (792)(B) 3,171 --
Investments, principally held by
Direct Marketing................ 2,010 -- 2,010 2,010
Deferred insurance policy
acquisition costs............... 871 -- 871 871
Goodwill and intangible assets,
net............................. 74 -- 74 74
Other assets..................... 1,163 -- 1,163 1,163
------- ------- -------
Total Assets............... $20,598 $16,528 $13,357
======= ======= =======
Liabilities and Group Equity
Current liabilities
Accounts payable and accrued
expenses...................... $ 2,059 -- $ 2,059 $ 2,059
Short-term debt................ 1,995 (1,995)(A) -- --
Current maturities of long-term
debt.......................... 550 -- 550 550
Deferred taxes................. 159 -- 159 159
------- ------- -------
Total current liabilities.. 4,763 -- 2,768 2,768
Long-term debt................... 5,236 (1,283)(A) 3,953 3,953
Deferred taxes................... 1,383 -- 1,383 1,383
Insurance policy and claims
reserves........................ 967 -- 967 967
Other liabilities.......... 700 -- 700 700
------- ------- -------
Total Liabilities.......... 13,049 -- 9,771 9,771
Group Equity..................... 7,549 (792)(B) 6,757 3,586
------- ------- -------
Total Liabilities and Group
Equity.................... $20,598 $16,528 $13,357
======= ======= =======
</TABLE>

See Note to Pro Forma Financial Data (Unaudited).

VI-39
<PAGE>

PENNEY GROUP

NOTE TO THE PRO FORMA FINANCIAL DATA

(Unaudited)

Unaudited Pro Forma Statements of Income for the 52 weeks ended January 30,
1999 and the 13 weeks ended May 1, 1999

(A) Reflects the assumed income statement effects of the sale and
outsourcing of the Penney Group's credit operations. The assumed income
statement effects result primarily from the elimination of finance charge
revenue and credit operating costs, including bad debt expense, and reduced
interest expense resulting from the repayment of short-term and long-term debt
with the proceeds from the sale of Penney Group proprietary receivables and
the related assets. Also selling, general and administrative expenses are
increased as a result of fixed costs previously borne by Penney Group's credit
operations. All income statement effects, with the exception of assumed
increases in selling, general and administrative expenses of $10 million and
$3 million, respectively, are included in the "net interest expense and credit
operations" line.

(B) Assumes approximately 20 percent of Eckerd Group Common Stock is issued
and outstanding; accordingly, approximately 20 percent of net income
applicable to the retained interest in the Eckerd Group is removed from the
statement of income of the Penney Group.

Unaudited Pro Forma Balance Sheet as of May 1, 1999

(A) Reflects the assumed outsourcing of the management of the Penney Group's
proprietary credit card business, the related sale of the underlying
receivables and the related assets of $3,258 million and $20 million,
respectively. For pro forma purposes, it is assumed that these assets will be
sold at book value and accordingly no gain or loss is reflected in the pro
forma financial statements. The adjustment also reflects the use of the
proceeds from the sale to retire debt of $3,278 million.

(B) Reflects the amendments to the Restated Certificate of Incorporation, as
amended, to provide for two classes of common stock of the Company (Penney
Group Common Stock and Eckerd Group Common Stock) and the redesignation of 260
million shares of existing common stock outstanding on May 1, 1999 to Penney
Group Common Stock. The adjustment also reflects the assumed public offering
of million shares of Eckerd Group Common Stock at an assumed initial
public offering price of $ per share representing approximately 20 percent
of the equity value of the Eckerd Group and accordingly approximately 20
percent of the Penney Group retained interest in the Eckerd Group is removed
with an offsetting entry to Penney Group equity. Proceeds, net of fees and
other transaction costs are assumed to be $ million and invested in short-
term investments.

Fully Distributed Presentation

Under the tracking stock proposal, six to twelve months after the initial
public offering of the Eckerd Group Common Stock the Company currently intends
to distribute, in the form of a dividend, the remaining approximately 80
percent of the equity value of Eckerd Group to holders of Penney Group Common
Stock, subject to market and other conditions. Following the distribution the
Company intends to use the proceeds from the initial public offering of the
Eckerd Group Common Stock, which will be allocated to the Penney Group,
primarily to repurchase shares of the Penney Group Common Stock in the open
market. The effects of these transactions on the May 1, 1999 balance sheet and
the computation of earnings per share for the 52 weeks ended January 30, 1999
and the 13 weeks ended May 1, 1999 are presented under the caption labeled
"fully distributed."

The "fully distributed" presentation for the 52 weeks ended January 30, 1999
reflects:

. A decrease of million shares of Penney Group Common Stock resulting
from the use of proceeds from the initial public offering of Eckerd
Group Common Stock to repurchase Penney Group Common Stock at a price of
$ per share. Accordingly, the earnings per share calculation for
Penney Group reflects the repurchase of the shares.

VI-40
<PAGE>

. An increase of $2 million to Penney Group net income to reflect the
elimination of the Eckerd Group's net loss. Accordingly, the earnings
per share calculation for Penney Group reflects the increase in net
income of Penney Group.

The "fully distributed" presentation at May 1, 1999 and for the 13 weeks
ended May 1, 1999 reflects:

. A reduction in cash of $ million for use of proceeds from the initial
public offering of the Eckerd Group Common Stock to repurchase
million shares of Penney Group Common Stock at a price of $ per share.
Accordingly, the earnings per share calculation for Penney Group
reflects the repurchase of the shares.

. A reduction of $ million of Penney Group Common Stock and $ of
capital in excess of par for Penney Group Common Stock repurchased.

. A reduction of $3,188 million of Penney Group retained interest in
Eckerd Group to reflect the distribution of the remaining approximately
80 percent of the equity value of Eckerd Group.

. A reduction of $25 million of Penney Group net income to reflect the
distribution of the remaining approximately 80 percent of the equity
value of the Eckerd Group. Accordingly, the earnings per share
calculation for Penney Group reflects the decrease in net income of
Penney Group.

VI-41
<PAGE>

ANNEX VII

FINANCIAL INFORMATION OF

THE ECKERD GROUP

<PAGE>

ECKERD GROUP

INDEX TO FINANCIAL INFORMATION

<TABLE>
<CAPTION>
Page
------
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... VII-1
Audited Financial Statements
Independent Auditors' Report......................................... VII-11
Statements of Operations--Three Years Ended January 30, 1999......... VII-12
Balance Sheets--January 30, 1999 and January 31, 1998................ VII-13
Statements of Group Equity--Three Years Ended January 30, 1999....... VII-14
Statements of Cash Flows--Three Years Ended January 30, 1999......... VII-15
Notes to Eckerd Group Financial Statements........................... VII-16
Interim Financial Statements
Statements of Income--13 Weeks Ended May 1, 1999 and May 2, 1998
(unaudited)......................................................... VII-30
Balance Sheets--May 1, 1999 (unaudited) and January 30, 1999......... VII-31
Statements of Cash Flows--13 Weeks Ended May 1, 1999 and May 2, 1998
(unaudited)......................................................... VII-32
Note to Interim Financial Information (unaudited).................... VII-33
</TABLE>
<PAGE>

ECKERD GROUP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The financial statements of the Eckerd Group include the balance sheets,
statements of operations, cash flows, and Group equity of the Company's
drugstore operations.

The stockholders of J. C. Penney Company, Inc. are being asked to consider
and vote in favor of the tracking stock proposal, which would authorize the
amendments to the Restated Certificate of Incorporation, as amended, of the
Company. The amendments would among other things:

. provide for two classes of common stock of the Company, the Penney Group
Common Stock and the Eckerd Group Common Stock; and

. reclassify each share of existing common stock of the Company as one
share of Penney Group Common Stock.

If the tracking stock proposal is approved, each holder of one share of the
existing common stock would become the holder of one share of Penney Group
Common Stock. Subject to the approval of the above proposal, the Company
currently intends to offer shares of Eckerd Group Common Stock representing
approximately 20 percent of the equity value of the Eckerd Group to the public
for cash, subject to market and other conditions. The Company may offer a
greater or lesser percentage of the equity value of the Eckerd Group to the
public, depending on market conditions and other circumstances.

The net proceeds of the initial public offering of the Eckerd Group Common
Stock will be allocated to the Penney Group. The Company currently plans to
use the net proceeds of the initial public offering primarily to buy back
shares of Penney Group Common Stock in the open market, after the distribution
of the remaining 80 percent of the equity value of the Eckerd Group to the
holders of Penney Group Common Stock, as described below. Any remaining
proceeds would be used for general corporate purposes. Pending any specific
allocation of such proceeds, the Penney Group intends to invest the net
proceeds in short-term, investment-grade securities.

The Penney Group will initially hold the remaining 80 percent of the equity
value of the Eckerd Group. The interest held by the Penney Group cannot be
voted by the Penney Group. The Penney Group currently intends to distribute
(via a dividend) the remaining equity value of the Eckerd Group to the holders
of Penney Group Common Stock approximately six to twelve months after the
initial public offering of the Eckerd Group Common Stock, subject to market
and other conditions.

The Penney Group and the Eckerd Group financial statements comprise all of
the accounts included in the consolidated financial statements of J. C. Penney
Company, Inc. The separate group financial statements give effect to all
allocation and related party transaction policies as adopted by the board of
directors, of which all material policies are described in Note 3 to the
Eckerd Group financial statements. The Eckerd Group financial statements have
been prepared in accordance with generally accepted accounting principles and
in a manner which management believes is reasonable and appropriate. Such
financial statements include i) the historical financial position, results of
operations, and cash flows of the Eckerd Group and ii) an allocated portion of
the Company's debt and the effects that such debt had on the related
statements of operations and cash flows.

If the tracking stock proposal is approved, the Company will provide to
holders of Eckerd Group Common Stock separate financial statements, financial
reviews, descriptions of the business, and other relevant information for the
Penney Group and the Eckerd Group as well as consolidated financial
information for the Company. Notwithstanding the allocation of assets and
liabilities, including contingent liabilities, between the Penney Group and
the Eckerd Group for purposes of preparing their respective financial
statements, this allocation and the change in the capital structure of the
Company as a result of the approval of the tracking stock proposal will not
result in the distribution or spin-off to stockholders of any of our assets
and liabilities and will not affect ownership of our assets or responsibility
for our liabilities or those of our subsidiaries. Holders of

VII-1
<PAGE>

Eckerd Group Common Stock will be common stockholders of the Company. The
assets we attribute to one group will be subject to the liabilities of the
other group, whether such liabilities arise from lawsuits, contracts or
indebtedness that we attribute to the other group. If we are unable to satisfy
one group's liabilities out of the assets we attribute to it, we may be
required to satisfy those liabilities with assets we have attributed to the
other group. Further, holders of Penney Group Common Stock and Eckerd Group
Common Stock will not have any legal rights related to specific assets of
either group and in any liquidation will receive a fixed share of the net
assets of the Company which may not reflect the actual trading prices of the
respective groups at such time.

Financial effects from one group that affect our consolidated results of
operations or financial condition could, if significant, affect the results of
operations or financial condition of the other group and the market price of
the tracking stock relating to the other group. In addition, net losses of
either group and dividends and distributions on, or repurchases of, either
class of tracking stock or repurchases of preferred stock at a price per share
greater than par value will reduce the funds we can pay on each class of
tracking stock under Delaware law. Accordingly, the Eckerd Group financial
statements should be read in conjunction with the Company's consolidated
financial information, and that of the Penney Group.

VII-2
<PAGE>

Fiscal Years 1998, 1997 and 1996

Results of Operations

<TABLE>
<CAPTION>
52 Weeks
1996
----------------------
52 Weeks 53 Weeks As
1998 1997 Adjusted(1) Historical
-------- -------- ----------- ----------
($ in millions)
<S> <C> <C> <C> <C>
Retail sales, net................ $10,325 $9,663 $8,526 $3,147
FIFO gross margin................ 2,208 2,093 1,870 708
LIFO charge...................... (45) (32) (23) (5)
Inventory integration losses..... (98) (45) (31) (31)
------- ------ ------ ------
Total gross margin............... 2,065 2,016 1,816 672
SG&A expenses.................... (1,811) (1,669) (1,510) (573)
------- ------ ------ ------
Operating profit................. 254 347 306 99
Other charges, net(2)............ -- (103) (292) (292)
Interest expense................. (110) (109) (108) (12)
Acquisition amortization and
minority interest............... (113) (117) (113) (23)
------- ------ ------ ------
Income/(loss) before income
taxes........................... 31 18 (207) (228)
Income taxes..................... (34) (28) 56 83
------- ------ ------ ------
Net loss......................... $ (3) $ (10) $ (151) $ (145)
------- ------ ------ ------
Sales percent increase
Total sales(3)................. 8.9% 11.2%(4) 10.3% 100+%
Comparable stores.............. 9.2% 7.4% 7.8% 7.7%
Ratios as a percent of sales
FIFO gross margin................ 20.4% 21.2% 21.6% 21.5%
LIFO gross margin................ 20.0% 20.9% 21.3% 21.3%
SG&A expenses.................... 17.5% 17.3% 17.7% 18.2%
Operating profit................. 2.5% 3.6% 3.6% 3.1%
EBITDA(5)........................ 4.9% 5.2% 5.1% 5.4%
</TABLE>
- --------
(1) Reflects the 1996 drugstore acquisitions as if they had occurred at the
beginning of the year.
(2) Other charges, net, consist principally of business acquisition and
integration costs associated with the Eckerd acquisition and include FAS
121 impairment write-downs, the present value of future lease obligations
for closed stores, systems and store integration costs, and severance and
outplacement costs for certain facilities, offset by gain on the sale of
the institutional drugstore business.
(3) Sales comparisons are shown on a 52-week basis for all periods presented.
Including 1997's 53rd week, drugstore sales increased by 6.9 percent and
13.3 percent for 1998 and 1997, respectively.
(4) 1997 sales increase is calculated based upon 1996 adjusted sales.
(5) Earnings before interest, income taxes, depreciation and amortization,
other charges, net, and other integration related charges of $114 million
in 1998, $45 million in 1997 and $31 million in 1996. EBITDA is provided
as an alternative assessment of operating performance and is not intended
to be a substitute for GAAP measurements. Calculations may vary for other
companies.

Operating Profit

1998 Compared with 1997. Operating profit totaled $254 million in 1998
compared to $347 million in 1997. The decline reflects the impact of the
drugstore integration charges of $98 million to gross profit and $16 million
to SG&A expenses in 1998. 1997 operating profit includes $45 million in gross
profit adjustments. Sales in 1998 were $10,325 million, an 8.9 percent
increase over 1997. Including 1997's 53rd week, sales increased 6.9 percent.
Sales grew at a strong pace throughout the year, increasing 9.2 percent for
comparable stores. Pharmacy sales, which accounted for approximately 60
percent of drugstore sales, grew 15.0 percent on a

VII-3
<PAGE>

comparable basis. Pharmacy sales growth was fueled by managed care sales which
continued to grow at a robust pace. Managed care sales totaled approximately
85 percent of drugstore pharmacy sales in 1998 compared to approximately 80
percent in 1997. Non-pharmacy merchandise sales increased 1.5 percent on a
comparable basis and strengthened as the year progressed. Sales also benefited
from the relocation of 175 stores from strip centers to larger free-standing
locations. Free-standing locations typically experience annual sales increases
of more than 30 percent on average versus the one year period prior to the
relocation.

LIFO gross margin declined 90 basis points in 1998 to 20.0 percent. Both
1998 and 1997 included charges related to the liquidation of nonconforming
merchandise resulting from the conversion of the former Thrift, Fay's, Kerr
and certain acquired Rite Aid and Revco drugstores into the Eckerd name and
format. The charges totaled $98 million in 1998 and $45 million in 1997.
Excluding these charges the gross margin declined by 40 basis points to 20.9
percent in 1998. The decline was principally due to the continued increase in
pharmacy sales, especially lower margin managed care sales. Managed care
payors typically negotiate lower prescription prices than those on non-managed
care prescriptions, resulting in decreasing gross profit margins on
prescription sales. However, contracts with managed care payors generally
increase the volume of prescription sales and gross profit dollars. Gross
margin for non-pharmacy merchandise improved for the year. Gross margin
includes a LIFO charge of $45 million in 1998 compared with a $32 million
charge last year reflecting inflation in drugstore merchandise, particularly
pharmaceuticals.

Selling, general and administrative expenses as a percent of sales increased
by 20 basis points to 17.5 percent in 1998. 1998 SG&A expenses include $16
million of charges related to integration and conversion activities. Excluding
these charges, SG&A expenses as a percentage of sales increased by 10 basis
points over 1997 expense levels. SG&A expenses in 1998 were negatively
impacted by additional staffing costs in connection with the integration of
the various drugstore formats during the first half of the year. Expenses were
leveraged during the second half of the year.

1997 Compared with 1996. The acquisition of Eckerd by JCPenney, which was
completed in February 1997, increased the Company's drugstores from a $3
billion to a $9 billion operation. Due to the dramatic increase in the size of
the combined operation, management believes that it is more meaningful to
compare 1997 operating results to 1996 adjusted results, assuming the
acquisitions had occurred at the beginning of 1996. All comparisons to 1996
are based upon such adjusted results. Historical information is provided for
reference purposes only.

Operating profit increased $41 million to $347 million in 1997 from $306
million in 1996. Sales in 1997 were $9,663 million, increasing 11.2 percent on
a 52-week basis over 1996. Including 1997's 53rd week, sales increased 13.3
percent over 1996 levels. Comparable store sales growth was strong, increasing
7.4 percent in 1997 despite the Eckerd Group's heavy involvement in
integration activities throughout the year. Sales growth was driven by
increases in pharmacy comparable store sales, which increased by approximately
12.5 percent. Pharmacy sales continue to be positively impacted by the growth
in managed care sales, which represented approximately 80 percent of pharmacy
sales in 1997 compared to approximately 77 percent in 1996.

LIFO gross margin declined 40 basis points in 1997. Both 1997 and 1996
included charges related to the liquidation of nonconforming merchandise
resulting from the conversion of drugstores to the Eckerd name and format.
These charges totaled $45 million in 1997 and $31 million in 1996. The decline
in gross margin as a percent of sales was primarily attributable to grand re-
opening promotional activities for the converted regions and growth in the
managed care prescription business, which carries lower margins. Gross margin
included a $32 million LIFO charge compared with a $23 million charge in 1996,
reflecting continued inflation in prescription drug prices.

Selling, general and administrative expenses as a percent of sales decreased
40 basis points to 17.3 percent in 1997. The elimination of duplicate support
functions and leverage achieved with higher sales contributed to the
improvement.

VII-4
<PAGE>

Other Charges, Net. During both 1997 and 1996, the Eckerd Group recorded
charges related to acquisition activities and the integration of its former
Thrift, Fay's, Kerr, and certain acquired Rite Aid drugstores into the Eckerd
name and format. Results reflect other charges, net, totaling $103 million in
1997 and $292 million in 1996. The majority of the 1997 charges represented
store and systems integration costs, advertising and grand re-opening costs
for converted drugstore regions, and future lease obligations on closed
stores. The majority of the 1996 charges related to FAS No. 121 impairment
write-downs for underperforming and overlap stores identified during the
conversion process, and for future lease obligations related to those stores.

Interest Expense. Interest expense represents an allocation of interest on
the portion of the Company's pooled debt that has been allocated to the Eckerd
Group. Interest expense for 1998 was $110 million compared to $109 million in
1997 and $108 million in 1996. Pooled debt allocated to the Eckerd Group
totaled $1,525 million in all years.

Acquisition Amortization. Amortization of goodwill and other intangible
assets associated with the Group's acquisitions totaled $113 million in 1998
compared with $117 million in 1997 (including minority interest) and $113
million in 1996. The acquisition of Eckerd, which represents the majority of
the intangible asset balances, was completed in February 1997.

Income Taxes

Income tax expense in 1998 was $34 million compared to $28 million in 1997
and a tax credit of $56 million in 1996 that resulted principally from charges
associated with the group's integration activities. The rates for all periods
reflect both federal and state taxes and are higher than statutory rates due
to the non-deductibility of amortization of goodwill which represents
approximately 50 percent of acquisition amortization expense.

Financial Condition

Cash flow from operating activities was $57 million in 1998 compared to cash
uses from operating activities of $307 million in 1997 and $16 million in
1996. Cash flow in 1998 was substantially stronger than the net loss of three
million due to non-cash charges of $251 million primarily related to the
amortization of acquisition intangibles and depreciation. Significant
drugstore integration activities in 1997 resulted in increased store
merchandise inventories and lower accounts payable leverage which were the
primary use of cash in operating activities for 1997. Cash flow required to
fund capital expenditures and other activities in excess of cash generated
from operations was provided by the Company as a capital contribution from the
Penney Group.

The Company manages most financial activities on a centralized basis. Such
financial activities include the investment of surplus cash and the issuance
and repayment of short-term and long-term debt. Debt reflected on the Eckerd
Group financial statements for the periods covered consists entirely of a
portion of the Company's total debt that is allocated between the groups
(pooled debt). The Eckerd Group is reliant on the Company to provide its
financing needs. The Company may, if it so determines, allocate specific debt
issuances to a particular group, for example in the case of specific
acquisition financing. Pooled debt allocated to the Eckerd Group bears
interest at a rate based on the weighted average interest rate of such debt
calculated on a monthly basis, one month in arrears, and applied to the Eckerd
portion of the pooled debt balance at the beginning of each period for which
interest expense is calculated. Interest expense includes amortization of debt
issuance costs for pooled debt and the effects, if any, related to derivative
financial instruments. If the Company allocates debt for a particular
financing in its entirety to one group, the debt will bear interest for group
financial statement purposes at the rate applicable to such debt. Subsequent
to the proposed initial public offering of Eckerd Group Common Stock, working
capital needs of the Eckerd Group will be funded through either internal or
external borrowing programs.

Receivables. Receivables, net, totaled $466 million in 1998 compared with
$354 million in 1997 and $312 million in 1996. 1998 included an increase of
$78 million from 1997 related to the repurchase of receivables under a
previous receivables sale agreement. The remainder of the increase in 1998 and
1997 is related to receivables on increased levels of managed care sales.

VII-5
<PAGE>

Merchandise Inventory. Total LIFO inventory was $1,997 million in 1998
compared with $2,005 million in 1997 and $1,513 million in 1996. The increase
in 1997 was due principally to the combination of additional stores and higher
comparable sales levels. Total FIFO merchandise inventory was $2,177 million
in 1998, an increase of 1.3 percent compared with the prior year. It is
anticipated that inventories will rise over the forseeable future as a result
of the Eckerd Group's store expansion plans and its strategy to relocate older
strip center stores to larger, free-standing locations.

Properties. Property, plant, and equipment, net of accumulated depreciation,
totaled $982 million at January 30, 1999, compared to $830 million and $584
million at the end of fiscal 1997 and 1996, respectively. The increases are
due primarily to the relocation of drugstores to larger, free-standing
locations and the addition of new and acquired drugstores. At the end of 1998,
Eckerd operated 2,756 drugstores, comprising 27.6 million square feet compared
with 2,778 stores (27.4 million square feet) and 2,699 stores (26.4 million
square feet) at the end of 1997 and 1996, respectively.

Capital Expenditures. Capital spending declined in 1998 by $85 million to
$256 million. Capital spending levels in 1997 included additional capital
requirements needed to support the conversion of drugstores to the Eckerd name
and format. During 1998, Eckerd added 256 new, relocated or acquired
drugstores and expects to add 275 stores in 1999 through the opening of new
and relocated stores and the acquisition of small, independent drugstore
chains, excluding the Genovese acquisition (see Subsequent Events).

Eckerd continues to expand its business through both internal expansion and
the acquisition of smaller drug chains and independent drugstores. During
1997, Eckerd acquired 113 former Revco drugstores in Virginia. In addition,
Eckerd pursues the acquisition of prescription files from other pharmacies in
Eckerd's existing markets. Once acquired, the prescription files are
transferred to an existing Eckerd drugstore. Capital spending in 1999 is
projected at approximately $300 million, with the majority of the spending
related to new and relocated stores.

Intangible Assets. At the end of 1998, goodwill and other intangible assets
related to chain drugstore acquisitions, net of accumulated amortization,
totaled $2,790 million compared with $2,903 million in 1997 and $1,691 million
in 1996. Intangible assets consist of tradename, favorable lease rights,
prescription files, and software, which are all recorded at fair value, and
goodwill, which represents the excess of the purchase price over the fair
value of assets received in the Company's drugstore acquisitions. The increase
in 1997 was related to the completion of the Eckerd acquisition in February
1997.

Reserves. At the end of 1998, the Eckerd Group balance sheet included
reserves totaling $115 million that are included as components of accounts
payable and accrued expenses ($90 million) and receivables, net ($25 million).
These reserves were established in connection with the 1997 and 1996 other
charges, net, for i) future expenditures, principally lease obligations, and
ii) an allowance for bad debts associated with a note receivable connected to
the sale of certain drugstore assets. The initial reserves consisted
principally of the present value of future lease obligations for closed stores
and for severance and outplacement costs. Reserve balances were calculated
based upon estimated costs to complete the various programs. Payments of $16
million and $19 million were charged against these reserves in 1998 and 1997
respectively. Such payments related to Home Office severance and store lease
payments.

Debt to Capital. The debt reflected on Eckerd's financial statements for
1998, 1997, and 1996 consists entirely of a portion of the Company's debt that
is allocated between the groups (pooled debt). Pooled debt allocated to the
Eckerd Group totaled $1,525 million for all years. The Group's debt to capital
percent, excluding the present value of operating leases, was 30.2 percent,
32.9 percent, and 53.2 percent for 1998, 1997, and 1996, respectively. The
decrease from 1996 to 1997 reflects the increase in equity related to the
completion of the Eckerd acquisition.

VII-6
<PAGE>

Year 2000 Readiness

The Year 2000 issue exists because many computer systems store and process
dates using only the last two digits of the year. Such systems, if not
changed, may interpret "00" as "1900" instead of the year "2000." The Eckerd
Group has been working to identify and address Year 2000 issues since mid-year
1997. The scope of this effort includes internally developed information
technology systems, purchased and leased software, embedded systems, and
electronic data interchange transaction processing.

During the fourth quarter of 1997, a task force was formed to provide
guidance to the Eckerd Group's operating and support departments and to
monitor the progress of efforts to address Year 2000 issues. The Eckerd Group
has also consulted with various third parties, including, but not limited to,
outside consultants, outside service providers, infrastructure suppliers,
industry groups, managed care organizations, pharmacy benefit managers, third
party insurance programs, government agencies, and other retail companies and
associations to develop industrywide approaches to the Year 2000 issue, to
gain insights to problems, and to provide additional perspectives on
solutions. In addition, Eckerd is participating in an industry-wide consortium
of retail pharmacy third party payors, including government agencies, to test
Year 2000 readiness for processes ranging from billing prescriptions to final
reimbursement.Year 2000 readiness work for Eckerd systems was more than 90
percent complete as of January 30, 1999. Since January 1999, the Eckerd Group
has been retesting all systems critical to its core businesses. The Eckerd
Group has also focused on the Year 2000 readiness of its suppliers and service
providers, both independently and in conjunction with the National Retail
Federation.

Despite the significant efforts to address Year 2000 concerns, the Eckerd
Group could potentially experience disruptions to some of its operations,
including those resulting from noncompliant systems used by third-party
business and governmental entities. Such issues include temporary disruptions
in the billing and collecting of accounts receivable and the ordering,
shipping, and receiving of pharmaceuticals. The Eckerd Group has developed
contingency plans to address potential Year 2000 disruptions. These plans
include business continuity plans that address accessibility and functionality
of Group facilities as well as steps to be taken if an event causes failure of
a system critical to its core business activities.

Through January 30, 1999, the Eckerd Group had spent approximately $21
million on a cumulative basis, including approximately $9 million related to
capital projects, to achieve Year 2000 compliance. Total projected costs for
Year 2000 remediation are currently estimated to be $26 million. Total costs
have not had, and are not expected to have, a material impact on the Group's
financial results.

Subsequent Events

On March 1, 1999, the Company completed the acquisition of Genovese Drug
Stores, Inc. (Genovese), a 141-drugstore chain with locations in New York, New
Jersey, and Connecticut, with 1998 sales of approximately $800 million. The
acquisition was accomplished through an exchange of approximately 9.6 million
shares of existing common stock for the outstanding shares of Genovese, and
the conversion of outstanding Genovese stock options into approximately 550
thousand common stock options of the Company. The total value of the
transaction, including the assumption of approximately $60 million of debt,
was approximately $414 million. The acquisition is being accounted for under
the purchase method. The purchase price will be allocated to assets acquired
and liabilities assumed based on their estimated fair values, as well as
intangible assets acquired, primarily prescription files and favorable lease
rights. The excess purchase price over the fair value of assets acquired and
liabilities assumed was recorded as goodwill and will be amortized over 40
years.

VII-7
<PAGE>

Thirteen Weeks Ended May 1, 1999 and May 2, 1998

Results of Operations

<TABLE>
<CAPTION>
13 Weeks
Ended
--------------
May 1, May 2,
1999 1998
------ ------
($ in
millions)
<S> <C> <C>
Retail sales, net............................................... $3,047 $2,564
FIFO gross margin............................................... 653 570
LIFO charge..................................................... (12) (9)
------ ------
Total gross margin.............................................. 641 561
SG&A expenses................................................... (512) (442)
------ ------
Operating profit................................................ 129 119
Interest expense................................................ (28) (28)
Acquisition amortization........................................ (37) (35)
------ ------
Income before income taxes...................................... 64 56
Income taxes.................................................... (33) (30)
------ ------
Net income...................................................... $ 31 $ 26
------ ------
Sales percent increase
Total sales................................................... 18.8% 9.6%
Comparable stores............................................. 12.3% 8.0%
Ratios as a percent of sales
FIFO gross margin............................................... 21.4% 22.2%
LIFO gross margin............................................... 21.0% 21.8%
SG&A expenses................................................... 16.8% 17.2%
Operating profit................................................ 4.2% 4.6%
EBITDA(1)....................................................... 5.6% 5.8%
</TABLE>
- --------
(1) Earnings before interest, income taxes, depreciation and amortization.
EBITDA is provided as an alternative assessment of operating performance
and is not intended to be a substitute for GAAP measurements. Calculations
may vary for other companies.

Operating profit was $129 million for the quarter, an 8.4 percent increase
over $119 million in 1998. As a percentage of sales, operating profit
decreased 40 basis points in 1998 as a result of lower gross margins which
were partially offset by improved SG&A expense leverage. Sales were $3,047
million for the thirteen weeks ended May 1, 1999, an 18.8 percent increase
over the first quarter in 1998. The acquisition of Genovese included in
operations for the last five weeks of the quarter represented approximately
$150 million of the quarter's total sales increase. Comparable drugstore sales
increased 12.3 percent (including the pro forma results of Genovese
drugstores) in addition to an 8.0 percent increase in 1998. Sales benefited
from continued strong pharmacy sales, which increased 17.7 percent on a
comparable basis, and improved non-pharmacy merchandise sales, which increased
4.5 percent on a comparable store basis.

Pharmacy sales increased to approximately 62 percent of drugstore sales
during the quarter, compared to approximately 60 percent in 1998. The growth
in prescription sales was primarily the result of increased managed care
prescription sales which increased to approximately 86 percent of drugstore
sales compared to approximately 83 percent in 1998. Non-pharmacy merchandise
sales benefited from strong results in both the over-the-counter drugs due to
a late cold and flu season this year and one hour photo processing.

LIFO gross margin totaled $641 million in the first quarter compared with
$561 million last year, an increase of 14.3 percent. As a percent of sales,
however, margin declined by 80 basis points to 21.0 percent as the mix of
sales was more heavily weighted toward pharmacy sales, especially managed care
sales, which carry lower margins. Non-pharmacy merchandise gross margins
improved during the quarter, particularly in the health

VII-8
<PAGE>

and beauty categories. Gross margin includes a LIFO charge of $12 million
during the quarter compared to $9 million last year.

Selling, general and administrative expenses as a percentage of sales
improved 40 basis points to 16.8 percent. SG&A expense control and the strong
sales performance combined to improve expense leverage during the period, with
improvement principally related to payroll costs.

Financial Condition

On March 1, 1999, the Eckerd Group completed the acquisition of Genovese
Drug Stores, Inc., a 141-drugstore chain with locations in New York, New
Jersey, and Connecticut. The acquisition was accomplished through an exchange
of approximately 9.6 million shares of existing common stock for the
outstanding shares of Genovese, and the conversion of outstanding Genovese
stock options into approximately 550 thousand common stock options of the
Company. The total value of the transaction, including the assumption of
approximately $60 million of debt and the conversion of outstanding Genovese
stock options for options for existing common stock, was approximately $414
million. The acquisition is being accounted for under the purchase method. The
purchase price is being allocated to assets acquired and liabilities assumed
based on their estimated fair values, as well as intangible assets acquired,
primarily prescription files and favorable lease rights. The excess purchase
price over the fair value of assets and liabilities acquired is being
classified as goodwill and will be amortized over 40 years. Pro forma results,
assuming the Genovese acquisition occurred at the beginning of the quarters
ended May 1, 1999 and May 2, 1998, would not differ materially from reported
results.

Cash flow generated by operating activities was $52 million for the first
quarter in 1999 compared to cash used of $141 million in 1998. The improved
cash flow results primarily from improved accounts payable leverage and less
of an increase in other assets in 1999, partially offset by increased accounts
receivable. Cash flow required to fund capital expenditures and other
activities in excess of cash generated from operations was provided by the
Company as a capital contribution from the Penney Group.

Merchandise Inventory. Total LIFO inventory was $2,110 million at the end of
the first quarter compared with $1,974 million at the end of last year's
comparable period. FIFO merchandise inventory totaled $2,302 million and
increased approximately 8.2 percent compared with the prior year. 1999
reflects approximately $127 million of inventory for the acquired Genovese
drugstores.

Properties. Property, plant and equipment, net of accumulated depreciation,
increased $81 million during the quarter to $1,063 million compared to an
increase of $59 million in 1998's first quarter. At the end of the quarter
Eckerd operated 2,889 drugstores compared to 2,750 drugstores at the end of
the first quarter last year. During the quarter Eckerd added 47 new, relocated
or acquired drugstores in addition to the 141 Genovese drugstores acquired on
March 1, 1999, compared to 58 for the same period last year. Capital spending
for 1999 is projected at $300 million, with the majority related to new and
relocated drugstores.

Intangible Assets. Goodwill and other intangible assets, net of accumulated
amortization, totaled $3,070 million compared with $2,868 million as of May 2,
1998. Approximately $317 million in intangible assets and goodwill associated
with the Genovese acquisition was recorded in the first quarter of 1999.

Reserves. Reserves related to the 1996 and 1997 other charges, net totaled
$113 million at the end of the first quarter. During the quarter, $2 million
of lease payments on closed stores were charged against the reserves.

Debt to Capital. The debt reflected on Eckerd's financial statements as of
the end of the first quarter of 1999 and 1998 consist entirely of a portion of
the Company's debt that is allocated between the groups (pooled debt). Pooled
debt allocated to the Eckerd Group totaled $1,585 million at the end of first
quarter 1999 compared with $1,525 million in 1998's comparable period. Debt at
the end of the first quarter of 1999 reflects the addition of approximately
$60 million of debt assumed in the acquisition of Genovese.

VII-9
<PAGE>

Year 2000 Readiness

Through May 1, 1999, the Eckerd Group had spent approximately $25 million on
a cumulative basis, including approximately $9 million related to capital
projects, to achieve Year 2000 compliance. The Eckerd Group's remaining cost
for Year 2000 remediation is currently estimated to be $1.6 million. Total
costs have not had, and are not expected to have, a material impact on the
Group's financial results.

Subsequent Events

On May 18, 1999, the Company announced two major strategic initiatives:

. the outsourcing of the management of its proprietary credit card
business and related sale of the underlying receivables, and

. the restructuring of the existing common stock of the Company into two
classes, intended to track the separate performances of the department
store, catalog and direct marketing businesses of the Company (the
Penney Group) and the drugstore business of the Company (the Eckerd
Group). The Company currently plans to offer shares of Eckerd Group
Common Stock representing approximately 20 percent of the equity value
of the Eckerd Group to the public for cash, subject to market and other
conditions. In addition, the Company currently intends to distribute
(via a dividend) the remaining equity value of the Eckerd Group to
holders of Penney Group Common Stock approximately six to twelve months
after the offering of Eckerd Group Common Stock, subject to market and
other conditions. This proposal will require stockholder approval.

VII-10
<PAGE>

Independent Auditors' Report

To the Stockholders and Board of Directors
of J. C. Penney Company, Inc.

We have audited the accompanying balance sheets of the Eckerd Group (as
defined in Note 1) as of January 30, 1999 and January 31, 1998, and the
related statements of operations, group equity and cash flows for each of the
years in the three-year period ended January 30, 1999. These financial
statements are the responsibility of J. C. Penney Company, Inc.'s management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

As more fully discussed in Note 1, the financial statements of the Eckerd
Group should be read in conjunction with the consolidated financial statements
of J. C. Penney Company, Inc. and subsidiaries and the financial statements of
the Penney Group.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Eckerd Group as of
January 30, 1999 and January 31, 1998, and the results of its operations and
its cash flows for each of the years in the three-year period ended January
30, 1999, in conformity with generally accepted accounting principles.

/s/ KPMG LLP

Dallas, Texas
February 25, 1999

VII-11
<PAGE>

ECKERD GROUP

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
1998 1997 1996
-------- --------- ---------
($ in millions)
<S> <C> <C> <C>
Revenue
Retail sales, net................................ $10,325 $9,663 $3,147
Costs and expenses
Cost of goods sold............................... 8,117 7,570 2,439
LIFO charge...................................... 45 32 5
Inventory integration losses..................... 98 45 31
------- ------ ------
Total cost of goods sold......................... 8,260 7,647 2,475
Selling, general, and administrative expenses.... 1,811 1,669 573
Interest expense................................. 110 109 12
Acquisition amortization(1)...................... 113 117 23
Other charges, net............................... -- 103 292
------- ------ ------
Total costs and expenses......................... 10,294 9,645 3,375
------- ------ ------
Income/(loss) before income taxes................ 31 18 (228)
Income taxes..................................... 34 28 (83)
------- ------ ------
Net loss......................................... $ (3) $ (10) $ (145)
======= ====== ======
</TABLE>
- --------
(1) Includes minority interest of $15 million in 1997 and $17 million in 1996.

See Notes to Eckerd Group Financial Statements.

VII-12
<PAGE>

ECKERD GROUP

BALANCE SHEETS

<TABLE>
<CAPTION>
Jan. Jan.
30, 31,
1999 1998
------ ------
($ in
millions)
<S> <C> <C>
Assets
Current assets
Cash and short-term investments............................. $ 64 $ 11
Receivables, net (bad debt reserves of $6 and $5)........... 466 354
Merchandise inventory (including LIFO reserves of $180 and
$143)...................................................... 1,997 2,005
Prepaid expenses............................................ 17 9
------ ------
Total current assets...................................... 2,544 2,379
Property, plant, and equipment
Land and buildings.......................................... 196 185
Furniture and fixtures...................................... 1,118 895
Leasehold improvements...................................... 379 360
Accumulated depreciation.................................... (711) (610)
------ ------
Property, plant, and equipment, net........................... 982 830
Goodwill and intangible assets, net of accumulated
amortization of $221 and $108................................ 2,790 2,903
Other assets.................................................. 162 69
------ ------
Total Assets.............................................. $6,478 $6,181
====== ======
Liabilities and Group Equity
Current liabilities
Accounts payable and accrued expenses....................... $1,097 $1,100
Deferred taxes.............................................. 14 20
------ ------
Total current liabilities................................. 1,111 1,120
Long-term debt................................................ 1,525 1,525
Deferred taxes................................................ 142 80
Other liabilities............................................. 183 188
------ ------
Total Liabilities......................................... 2,961 2,913
Group Equity.................................................. 3,517 3,268
------ ------
Total Liabilities and Group Equity........................ $6,478 $6,181
====== ======
</TABLE>

See Notes to Eckerd Group Financial Statements.

VII-13
<PAGE>

ECKERD GROUP

STATEMENTS OF GROUP EQUITY

<TABLE>
<CAPTION>
Group Equity
---------------
($ in millions)
<S> <C>
Balance at January 27, 1996..................................... $ 440
Net loss...................................................... (145)
Cash contribution by Penney Group............................. 399
Other equity contribution..................................... 700
------
Balance at January 25, 1997..................................... 1,394
Net loss...................................................... (10)
Cash contribution by Penney Group............................. 608
Other equity contribution..................................... 1,276
------
Balance at January 31, 1998..................................... 3,268
Net loss...................................................... (3)
Cash contribution by Penney Group............................. 252
------
Balance at January 30, 1999..................................... $3,517
======
</TABLE>

See Notes to Eckerd Group Financial Statements.

VII-14
<PAGE>

ECKERD GROUP

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
1998 1997 1996
-------- -------- --------
($ in millions)
<S> <C> <C> <C>
Operating Activities:
Net losses.................................... $ (3) $(10) $ (145)
Other charges, net............................ -- -- 310 (/1/)
Depreciation and amortization, including
intangible assets............................ 251 214 47
Deferred taxes................................ 56 114 7
Change in cash from:
Receivables................................. (113) (41) (86)
Inventory, net of trade payables............ 110 (573) 15
Current taxes payable....................... 3 2 (77)
Other assets and liabilities, net........... (247) (13) (87)
---- ---- ------
57 (307) (16)
Investing Activities:
Capital expenditures.......................... (256) (341) (103)
Acquisitions.................................. -- -- (1,776)
---- ---- ------
(256) (341) (1,879)
Financing Activities:
Changes in allocated debt..................... -- -- 1,525
Capital contributions from Penney Group....... 252 608 399
---- ---- ------
252 608 1,924
Net Increase/(Decrease) in Cash and Short-Term
Investments.................................. 53 (40) 29
Cash and Short-Term Investments at Beginning
of Year...................................... 11 51 22
---- ---- ------
Cash and Short-Term Investments at End of
Year......................................... $ 64 $ 11 $ 51
==== ==== ======
</TABLE>
- --------
(1) Includes a reserve of $31 million for inventory integration losses.

Non-cash transactions: In 1997, the Company issued 23.2 million shares of
existing common stock having a value of $1.3 billion to complete the
acquisition of Eckerd. In 1996, the Company issued 5.2 million shares of
existing common stock having a value of $278 million for the acquisition of
Fay's Incorporated. The net assets acquired in these transactions, including
intangible assets and goodwill, have been allocated to Eckerd Group.

See Notes to Eckerd Group Financial Statements.

VII-15
<PAGE>

ECKERD GROUP

NOTES TO THE ECKERD GROUP FINANCIAL STATEMENTS

1) Basis of Presentation

The board of directors of J. C. Penney Company, Inc. (the Company) has
adopted a proposal which would provide for the restructuring of the existing
common stock of the Company into two classes of common stock, of which
shares initially would be designated as ["J. C. Penney Company, Inc.-Penney
Group Common Stock"], par value $.50 per share, and shares initially would
be designated as ["J. C. Penney Company, Inc.-Eckerd Group Common Stock"] par
value per share. This proposal is referred to herein as the "tracking stock
proposal." Under the tracking stock proposal, each share of existing common
stock would be reclassified as one share of Penney Group Common Stock. Penney
Group Common Stock is intended to track separately the performance of the
Penney Group which is generally comprised of: i) the Company's department
stores and catalog operations, ii) an interest in the Eckerd Group, which
excludes the interest represented by any outstanding shares of the Eckerd
Group, as described below, and iii) Direct Marketing Services, and iv) all
other businesses in which the Company or any of its subsidiaries may be
engaged, excluding those comprising the Eckerd Group. The Eckerd Group Common
Stock is intended to track separately the performance of the Eckerd Group,
which is comprised of the Company's drugstore business. The accompanying group
financial statements reflect the accounts of the Eckerd Group.

The Penney Group will initially hold the remaining 80 percent of the equity
value of the Eckerd Group. The interest held by the Penney Group cannot be
voted by the Penney Group. The Penney Group currently intends to distribute
(via a dividend) the remaining equity value of the Eckerd Group to the holders
of Penney Group Common Stock approximately six to twelve months after the
initial public offering of the Eckerd Group Common Stock, subject to market
and other conditions.

The Penney Group and the Eckerd Group financial statements comprise all of
the accounts included in the consolidated financial statements of J. C. Penney
Company, Inc. The separate group financial statements give effect to all
allocation and related party transaction policies as adopted by the board of
directors, of which all material policies are described in Note 3 to the
Eckerd Group financial statements. The Eckerd Group financial statements have
been prepared in a manner which management believes is reasonable and
appropriate. Such financial statements include i) the historical financial
position, results of operations, and cash flows of the Eckerd Group and ii) an
allocated portion of the Company's debt and the effects that such debt had on
the related statements of operations and cash flows.

VII-16
<PAGE>

ECKERD GROUP

NOTES TO THE ECKERD GROUP FINANCIAL STATEMENTS--(Continued)

condition, and other relevant information for the Penney Group and the Eckerd
Group, as well as consolidated financial information for the Company. Although
the Company's assets, liabilities, and stockholders' equity have been
attributed to the separate groups for purposes of presenting group financial
statements, holders of Penney Group and Eckerd Group Stock will be
shareholders of the Company, and will continue to be subject to all of the
risks and uncertainties associated with an investment in the Company. Assets
attributed to one group are subject to the liabilities of the other group,
whether such liabilities arise from lawsuits, contracts or indebtedness
attributed to the other group. Holders of Penney Group Common Stock and Eckerd
Group Common Stock will not have any legal rights related to specific assets
of either group and in any liquidation will receive a fixed share of the net
assets of the Company which may not reflect the actual trading prices of the
respective groups at such time.

Financial effects from one group that affect consolidated results of
operations or financial condition could, if significant, affect the results of
operations or financial condition of the other group and the market price of
the tracking stock relating to the other group. In addition, net losses of
either group and dividends and distributions on, or repurchases of, either
class of tracking stock or repurchases of preferred stock at a price per share
greater than par value will reduce the funds payable on each class of tracking
stock under Delaware law. Accordingly, the Eckerd Group financial statements
should be read in conjunction with the Company's consolidated financial
information, and that of the Penney Group.

2) Summary of Significant Accounting Policies

Definition of fiscal year. The Eckerd Group's fiscal year ends on the last
Saturday in January. Fiscal 1998 ended January 30, 1999; fiscal 1997 ended
January 31, 1998; and fiscal 1996 ended January 25, 1997. Fiscal 1997 was a
53-week year; fiscal 1998 and 1996 were 52-week years.

Retail Sales, net. Retail sales include merchandise and services, net of
returns, and exclude all taxes.

Earnings per common share. Historical earnings per share is omitted from the
statements of operations since the Eckerd Group Common Stock was not part of
the capital structure of the Company for the periods presented. Following
implementation of the tracking stock proposal, the method of calculating
earnings per share for the Eckerd Group will computed by dividing (i) the
product of earnings of the Eckerd Group multiplied by the "Outstanding Eckerd
Fraction" by (ii) the weighted average number of shares of Eckerd Group Common
Stock and dilutive Eckerd Group Common Stock equivalents outstanding during
the applicable period. The "Outstanding Eckerd Fraction" is a fraction, the
numerator of which is such number of shares of Eckerd Group Common Stock
outstanding and the denominator of which is the number of shares of Eckerd
Group Common Stock that, if issued, would represent 100 percent of the equity
of the Eckerd Group.

Merchandise inventory. Inventories consist principally of merchandise held
for resale and are based on physical inventories taken throughout the year.
Inventories are stated at the lower of cost (last-in, first-out) or market.

Depreciation and amortization. All long-lived assets are amortized on a
straight-line basis over their respective useful lives. The primary useful
lives are 30 and 40 years for store and warehouse facilities, respectively, up
to 10 years for furniture and equipment, and up to eight years for
transportation equipment. Improvements to leased premises are amortized over
the expected term of the lease or their estimated useful lives ranging from
two and 20 years, whichever is shorter. Goodwill is amortized over 40 years.
Other intangible assets, whose fair value is determined at the date of
acquisition, are amortized over periods ranging from five to seven years.
Maintenance and repairs are charged to expense as incurred. Major renewals or
replacements that substantially extend the useful life of an asset are
capitalized and depreciated.

VII-17
<PAGE>

ECKERD GROUP

NOTES TO THE ECKERD GROUP FINANCIAL STATEMENTS--(Continued)

Impairment of assets. The Eckerd Group assesses the recoverability of asset
values, including goodwill and other intangibles, on a periodic basis by
comparing expected cash flows to net book value. Impaired assets are written
down to estimated fair value.

Advertising. Net advertising costs are expensed as incurred and were $54
million, $51 million, and $28 million in 1998, 1997, and 1996 respectively.

Pre-opening expenses. Costs associated with the opening of new stores are
expensed in the period incurred.

Use of estimates. Certain amounts included in the Eckerd Group's financial
statements are based on estimates. Actual results may differ from these
estimates.

New accounting rules. See Note 1, Summary of Accounting Policies, in the
Notes to the Consolidated Financial Statements.

3) Corporate Activities

The Eckerd Group financial statements reflect the application of the
management and allocation policies adopted by the board of directors to
various corporate activities, as described below:

A) Financing Activities: The Company manages most financial activities on
a centralized basis. Such financial activities include the investment of
surplus cash and the issuance and repayment of short-term and long-term
debt. Debt reflected on the Eckerd Group financial statements for the
periods covered consists entirely of a portion of the Company's debt that
is allocated between the groups (pooled debt). The Company may, if it so
determines, allocate specific debt issuances to a particular group, for
example in the case of specific acquisition financing. Interest expense
allocated to the Eckerd Group for any period is based on the weighted
average interest rate of the prior period applied to the balance of the
Eckerd Group pooled debt allocation as of the beginning of the period.
Amortization of debt issuance costs and the effects, if any, related to
derivative financial instruments for pooled debt is reflected in the
weighted average interest rate of such pooled debt as a whole. If the
Company allocates debt for a particular financing in its entirety to one
group, the debt will bear interest for group financial statement purposes
at the rate applicable to such debt. Cash advances made by the Penney Group
to the Eckerd Group on a historical basis are reflected as capital
contributions in the accompanying financial statements.

B) Shared Services and Support Activities: A portion of the cost of the
Company's shared services including administrative expenses has been
allocated to the Eckerd Group based upon the use of such services and
activities and the good faith judgment of the board of directors or
management. Where determinations based on use alone were not practical,
other methods and criteria were used to provide a reasonable allocation of
the cost of shared services, including support activities attributable to
the Eckerd Group. Such allocated shared services, including support
activities, represent, among other things, financial and accounting
services, information systems services, auditing and tax services, benefits
administration and corporate finance. Costs charged to the Eckerd Group for
shared services totaled approximately $18.2 million for fiscal 1998, $5.6
million for fiscal 1997 and $0.4 million for fiscal 1996.

VII-18
<PAGE>

ECKERD GROUP

NOTES TO THE ECKERD GROUP FINANCIAL STATEMENTS--(Continued)

contribution, whether positive or negative, to JCPenney's consolidated
taxable income and the consolidated tax liability and tax credit position.
Credit for tax benefits that could not be used by the group generating
those benefits but could be used on a consolidated basis were allocated to
the group that generated such benefits. Inter-group transactions were
treated and taxed as if each group were a stand-alone company.

Current and deferred taxes and taxes payable or refundable allocated to
each group in historical financial statements will differ from those that
would have been allocated to each group they filed separate income tax
returns.

D) Retirement Plans: Prior to January 1, 1999 only Eckerd Group employees
who had been employees of the Company's former Thrift Drug operation were
participants in the Company's retirement plans. Beginning January 1, 1999
all former Eckerd retirement benefit plans were frozen and all Eckerd Group
employees began to accrue benefits under the Company's retirement plans.
The Company's retirement plans in which Eckerd Group employees participate
are as follows: a noncontributory defined benefit Pension Plan, a
noncontributory Supplemental Retirement Plan Program and a Benefits
Restoration Plan for certain management employees, a Savings Plan including
a 401K Plan and an Employee Stock Ownership Plan, and a nonqualified Mirror
Savings Plan. Retirement plan costs allocated to the Eckerd Group are
actuarially determined for certain plans in accordance with the
requirements of Financial Accounting Standards Nos. 87 and 106. For the
other plans, the allocation is based on benefits received under the plans
by the employees comprising the Eckerd Group or other basis, as management
believes to be an equitable and reasonable estimate of such costs.

4) Inter-Group Transactions

The Eckerd Group currently engages in the following significant inter-group
transactions:

A) JCPenney Catalog Desks in Eckerd Drugstores: The Eckerd Group operates
catalog desks in selected drugstores under an existing Catalog Merchant
Program. Catalog desks in drugstores, similar to catalog desks in
independent merchant facilities, provide catalog merchandise delivery and
other customer services to their customers who shop JCPenney catalog.

At the end of fiscal year 1998, the Penney Group had catalog desks in 139
Eckerd drugstore locations, up from 110 at the end of 1997 and 107 at the
end of 1996. The Eckerd Group receives a commission on net sales generated
from these locations at a rate commensurate with those paid to third-party
merchants that have catalog locations. Commissions received from the Penney
Group totaled $8.4 million, $8.7 million, and $9.1 million for 1998, 1997,
and 1996, respectively.

Additionally, in 1997 the Penney Group began selling catalogs in Eckerd
drugstores that do not operate a catalog desk. Under this arrangement, the
Eckerd Group purchases catalogs from the Penney Group for resale in its
drugstores. The cost per catalog purchased by the Eckerd Group is based on
a negotiated cost that is below the retail selling price of the catalog.
Catalogs purchased by the Eckerd Group totaled $0.5 million and $0.3
million for 1998 and 1997, respectively. Revenues generated from the sale
of catalogs in these stores is retained by the Eckerd Group. The sale of
catalogs in Eckerd stores that have a catalog desk are covered under the
Catalog Merchant Program, therefore, proceeds from such sales are remitted
to the Penney Group.

B) Telemarketing Services: The Penney Group provides telemarketing
services to Eckerd Health Services/Express Pharmacy Services to support the
mail order pharmacy business of the Eckerd Group. The rates charged to the
Eckerd Group are updated annually and are based on usage. The amounts
charged to the Eckerd Group for telemarketing services totaled $5.2
million, $5.9 million, and $4.5 million for 1998, 1997, and 1996,
respectively.

C) Proprietary Credit Card: In 1998 the Eckerd Group expanded the
acceptance of the Company's proprietary credit card to all Eckerd stores as
a payment alternative and convenience to its customers in making purchases.
Under this arrangement, the Eckerd Group receives from the Penney Group an
amount

VII-19
<PAGE>

ECKERD GROUP

NOTES TO THE ECKERD GROUP FINANCIAL STATEMENTS--(Continued)

equal to net customer charges less a discount fee. The amount of discount
totaled $1.8 million, $1.4 million, and $2.0 million in 1998, 1997 and
1996, respectively. Settlements are generally made monthly.

5) Fair Value of Financial Instruments

The Eckerd Group's financial instruments consist primarily of accounts
receivable, accounts payable and long-term pooled debt. The carrying amount of
accounts receivable and accounts payable approximates fair value because of
the short maturity of the instruments. The fair value of long-term pooled debt
is based on the interest rate environment and the Company's credit rating and
approximates the carrying value. All Company long-term debt is fixed rate and
therefore is not exposed to fluctuations in market rates except to the extent
described in the following paragraph.

The Company enters into non-leveraged, off-balance sheet derivative
instruments on a selective basis in order to manage its market and interest
rate risk, and does not hold derivative positions for trading purposes. The
Eckerd Group is not a party to any derivative instruments. The net amount paid
or received by the Company is included in interest expense and accordingly a
portion is allocated to the Eckerd Group as a component of the average
interest rate.

The Eckerd Group has no significant concentrations of credit risk.
Individual accounts comprising accounts receivable are widely dispersed.

6) Receivables, Net

<TABLE>
<CAPTION>
1998 1997
---- ----
($ in
millions)
<S> <C> <C>
Customer receivables............................................... $378 $238
Other.............................................................. 88 116
---- ----
Total............................................................ $466 $354
==== ====
</TABLE>

7) Goodwill and Intangible Assets

Goodwill and intangible assets are comprised of tradenames ($369 million),
favorable lease rights ($188 million), prescription files ($86 million),
software and other ($20 million), all of which are recorded at fair value, and
goodwill ($2,348 million) which represents the excess of the purchase price
over the fair value of assets received in the Eckerd Group's chain drugstore
acquisitions.

Accumulated acquisition amortization was $221 million at the end of fiscal
1998 and $108 million at the end of fiscal 1997.

VII-20
<PAGE>

ECKERD GROUP

NOTES TO THE ECKERD GROUP FINANCIAL STATEMENTS--(Continued)

8) Accounts Payable and Accrued Expenses

<TABLE>
<CAPTION>
1998 1997
------ ------
($ in
millions)
<S> <C> <C>
Trade payables................................................ $ 633 $ 536
Accrued salaries, vacation and bonus.......................... 110 109
Taxes payable................................................. 31 28
Accrued rent.................................................. 55 72
Other(1)...................................................... 268 355
------ ------
Total....................................................... $1,097 $1,100
====== ======
</TABLE>
- --------
(1) Includes $90 million and $106 million for 1998 and 1997, respectively,
related to other charges, net, principally future lease obligation.

9) Pooled Debt

The Company manages most financial activities on a centralized basis. Such
financial activities include the issuance and repayment of short-term and
long-term debt. Debt reflected on the Penney and Eckerd Group financial
statements consists entirely of the portion of total consolidated debt (pooled
debt) that has been allocated to the respective group. The following table
reflects the allocation of the Company's pooled debt between the Penney Group
and the Eckerd Group by debt component (see Notes 5 and 6 to the Consolidated
financial statements for additional information regarding the Company's short-
term and long-term debt):

<TABLE>
<CAPTION>
Allocation to
-------------
Total Penney Eckerd
Consolidated Group Group
------------ ------ ------
($ in millions)
<S> <C> <C> <C>
1998
Short-term obligations:
Commercial paper.................................... $1,924 $1,924 $ --
Current maturities of long-term debt................ 438 438 --
Long-term debt...................................... 7,143 5,618 1,525
------ ------ ------
Total pooled debt................................. $9,505 $7,980 $1,525
====== ====== ======
1997
Short-term obligations:
Commercial paper.................................... $1,417 $1,417 $ --
Current maturities of long-term debt................ 449 449 --
Long-term debt...................................... 6,986 5,461 1,525
------ ------ ------
Total pooled debt................................. $8,852 $7,327 $1,525
====== ====== ======
</TABLE>

Interest expense allocated by the Company to the Eckerd Group was $110
million in fiscal 1998, $109 million in fiscal 1997 and $12 million in fiscal
1996.

10) Equity Compensation

The Company has an Equity Compensation Plan (1997 Equity Compensation Plan)
which provides for grants of stock options and stock awards to approximately
2,000 selected management employees. Stock options

VII-21
<PAGE>

ECKERD GROUP

NOTES TO THE ECKERD GROUP FINANCIAL STATEMENTS--(Continued)

are generally granted for a maximum term of 10 years with the exercise price
set at the market price of the stock at the date of grant. See Note 8 to the
Consolidated Financial Statements.

If the tracking stock proposal is approved by the stockholders and
implemented by the board of directors, outstanding awards under the 1997
Equity Compensation Plan, and all prior plans, will be adjusted to reflect the
tracking stock proposal in accordance with adjustment provisions of such plans
and in a manner that preserves the aggregate intrinsic value of the options to
the holder in accordance with criteria prescribed by EITF 90-9. In addition,
the vesting provisions and terms of the adjusted stock options will remain the
same as the existing stock options.

11) Commitments

Leases. The Eckerd Group conducts the major part of its retail operations
from leased premises. 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 operating leases totaled $350 million in 1998, $299 million
in 1997 and $83 million in 1996, including contingent rent based on sales of
$35 million, $37 million and $12 million for the three years, respectively.

Future minimum lease payments for noncancelable operating leases as of
January 30, 1999 were:

<TABLE>
<CAPTION>
($ in
millions)
<S> <C>
1999............................................................... $ 282
2000............................................................... 263
2001............................................................... 247
2002............................................................... 233
2003............................................................... 220
Thereafter......................................................... 2,078
------
Total minimum lease payments....................................... $3,323
======
Present value...................................................... $1,712
Weighted average interest rate..................................... 10.0%
</TABLE>

The minimum lease payments are shown net of estimated executory costs,
principally real estate taxes, maintenance, and insurance.

Other Commitments. In 1998, the Eckerd Group and IBM Global Services, a
division of International Business Machines, entered into a Systems Operations
Service Agreement which amended and restated a previously existing agreement
between Eckerd and a wholly owned subsidiary of IBM. Under the Eckerd Group's
supervision, IBM Global Services manages the entire information systems
operation and is responsible for providing technology services to the Eckerd
Group. The Systems Operations Services Agreement has a remaining term of four
years. Total payments expected to be made under the service agreement are $485
million based on currently anticipated services.

VII-22
<PAGE>

ECKERD GROUP

NOTES TO THE ECKERD GROUP FINANCIAL STATEMENTS--(Continued)

12) Income Taxes

The major components of deferred tax (assets)/liabilities as of January 30,
1999 and January 31, 1998 were as follows:

Temporary Differences and Carryforwards

<TABLE>
<CAPTION>
1998 1997
---- ----
($ in
millions)
<S> <C> <C>
Depreciation and amortization.................................... $179 $150
Reserves and other liabilities................................... (50) (48)
Prepaid expenses................................................. 53 24
Accrued vacation................................................. (19) (16)
Other............................................................ (7) (10)
---- ----
Total.......................................................... $156 $100
==== ====
</TABLE>

Income Tax Expense

<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
($ in millions)
<S> <C> <C> <C>
Current:
Federal and Foreign................................ $ (17) $ 18 $ 25
State.............................................. (5) 3 2
----- ----- -----
(22) 21 27
Deferred:
Federal and Foreign................................ 46 6 (101)
State.............................................. 10 1 (9)
----- ----- -----
56 7 (110)
----- ----- -----
Total............................................ $ 34 $ 28 $ (83)
===== ===== =====
Effective Tax Rate................................... 100+% 100+% 36.4%

Reconciliation of Tax Rates

<CAPTION>
1998 1997 1996
----- ----- -----
(Percent of pre-
tax income)
<S> <C> <C> <C>
Federal income tax at statutory rate................. 35.0 35.0 35.0
State taxes, net of federal income tax benefit....... 10.5 14.4 2.0
Goodwill............................................. 64.2 100+ (.6)
----- ----- -----
Total.............................................. 100+% 100+% 36.4%
===== ===== =====
</TABLE>

13) Retirement Plans

The Company's retirement plans available to the Eckerd Group consist
principally of a noncontributory Pension Plan, a noncontributory Supplemental
Retirement Program and Benefit Restoration Plan for certain management
associates, a contributory Medical and Dental Plan, a Savings Plan including a
401(k) Plan, Employee Stock Ownership Plan, and a nonqualified Mirror Savings
Plan. Pension plan assets are invested in a balanced portfolio of equity,
including international equities, and debt securities managed by third party
investment managers.

As of December 31, 1998, all former Eckerd retirement benefit plans were
frozen and beginning January 1, 1999 all Eckerd Group employees began to
accrue benefits under the Company's retirement plans. Prior to January 1, 1999
only Eckerd Group employees who had been employed by the Company's former
Thrift Drug operation participated in the Company's retirement plans. Eckerd
Group Pension Plan assets consist of the actual

VII-23
<PAGE>

ECKERD GROUP

NOTES TO THE ECKERD GROUP FINANCIAL STATEMENTS--(Continued)

assets of all former Eckerd plans that have been frozen and a pro-rata portion
of the Company's Pension Plan assets based on the projected benefit obligation
attributable to Eckerd Group employees. Retirement plan costs are allocated to
the Eckerd Group based on actuarial determinations or other basis that
management believes to be an equitable and reasonable estimate of the cost of
retirement benefits provided to the Eckerd Group employees.

The cost of these programs and the December 31 balances of plan assets and
obligations allocated to the Eckerd Group are shown below:

Expense

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
($ in
millions)
<S> <C> <C> <C>
Pension and health care:
Service cost................................................ $ 10 $ 9 $ 4
Interest cost............................................... 11 10 4
Projected return on assets.................................. (13) (11) (4)
Net amortization and other.................................. (1) 1 --
---- ---- ---
7 9 4
Savings plan expense.......................................... 15 16 5
---- ---- ---
Total retirement plans........................................ $ 22 $ 25 $ 9
==== ==== ===

Assumptions

<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rate................................................. 6.75% 7.25% 8.0%
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% 7.0%
</TABLE>

Assets and Obligations

Pension Plans*

<TABLE>
<CAPTION>
1998 1997
---- ----
($ in
millions)
<S> <C> <C>
Projected benefit obligation
Beginning of year.............................................. $143 $128
Service and interest cost...................................... 20 18
Actuarial (gain)/loss.......................................... 14 2
Benefits paid.................................................. (5) (5)
Amendments and other........................................... (7) --
---- ----
End of year.................................................. 165 143
---- ----
Fair value of plan assets
Beginning of year.............................................. 148 123
Company contributions.......................................... 2 6
Net gains/(losses)............................................. 26 24
Benefits paid.................................................. (4) (5)
---- ----
End of year.................................................. 172 148
---- ----
Excess fair value over projected benefits........................ 7 5
Unrecognized gains and prior service cost........................ (9) (3)
---- ----
(Accrued)/prepaid pension cost................................... $ (2) $ 2
==== ====
</TABLE>
- --------
* Includes supplemental retirement plan.

VII-24
<PAGE>

ECKERD GROUP

NOTES TO THE ECKERD GROUP FINANCIAL STATEMENTS--(Continued)

Medical and Dental

<TABLE>
<CAPTION>
1998 1997
---- ----
($ in
millions)
<S> <C> <C>
Accumulated benefit obligation.................................... $ 9 $ 9
Net unrecognized losses........................................... -- --
---- ----
Net medical and dental liability.................................. $ 9 $ 9
==== ====
</TABLE>

A one percent change in the health care trend rate would change the
accumulated benefit obligation and expense by approximately $0.8 million and
$0.1 million, respectively.

14) Other Charges, Net

During 1996 and 1997, the Company recorded other charges principally related
to drugstore integration activities, department store closings, FAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of (FAS 121), impairments, and early retirement and reduction
in force programs. All charges that were related to the drugstore operation
were recorded by the Eckerd Group and are reflected as other charges, net in
the Group's financial statements. The following tables provide a summary of
the drugstore charges by year and by category as well as a rollforward of
reserves that were established for certain of the charges.

1996 Charges

<TABLE>
<CAPTION>
1996
-------------------------------
Cash Other Y/E
Expense Outlays Changes Reserve
------- ------- ------- -------
($ in millions)
<S> <C> <C> <C> <C>
FAS No. 121 impairments and loss on the
divestiture of drugstore assets(1)....... $174 $ -- $(174) $ --
Future lease obligations and
severance(2)............................. 69 -- -- 69
Allowance for notes receivable(3)......... -- -- 25 25
Headquarters severance(2)................. 17 -- -- 17
Other(2).................................. 32 (12) (16) 4
---- ----- ----- -----
Total................................... $292 $ (12) $(165) $ 115
==== ===== ===== =====
</TABLE>

<TABLE>
<CAPTION>
1996 1997 1998
------- ----------------------- -----------------------
Y/E Cash Other Y/E Cash Other Y/E
Reserve Outlays Changes Reserve Outlays Changes Reserve
------- ------- ------- ------- ------- ------- -------
($ in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Future lease obligations
and severance(2)....... $ 69 $ (3) $ -- $66 $ (7) $ -- $59
Allowance for notes
receivable(3).......... 25 -- -- 25 -- -- 25
Headquarters
severance(2)........... 17 (16) -- 1 (1) -- --
Other(2)................ 4 -- -- 4 -- -- 4
---- ---- ----- --- ---- ----- ---
Total................. $115 $(19) $ -- $96 $ (8) $ -- $88
==== ==== ===== === ==== ===== ===
</TABLE>
- --------
(1) Charges related to FAS No. 121 impairments were recorded as a reduction of
property, plant, and equipment balances.
(2) Reserve balances are included as a component of accounts payable and
accrued expenses.
(3) The allowance for notes receivable is included as a reduction of other
assets.

VII-25
<PAGE>

ECKERD GROUP

NOTES TO THE ECKERD GROUP FINANCIAL STATEMENTS--(Continued)

FAS 121 impairments. In the fourth quarter of 1996, the Eckerd Group
recorded $174 million of charges associated with the Eckerd acquisition. This
amount was comprised of the following components: 1) $53 million related to
the closing of certain underperforming and/or overlapping drugstores; 2) $96
million related to the divestiture of certain Rite Aid and Kerr drugstores;
and 3) $25 million related principally to the write-off of goodwill associated
with previous acquisitions. Each of these items is discussed in more detail
below:

1) In October 1996, the Company acquired Fay's Incorporated (Fay's), a chain
of approximately 270 drugstores. Also in October 1996, Thrift entered into an
agreement to acquire substantially all of the assets of approximately 190 Rite
Aid drugstores in North and South Carolina on behalf of the Eckerd Group. At
the time of the acquisition, no significant changes to the operations of these
stores were expected. In November 1996, the Company entered into an agreement
to acquire Eckerd, a chain of 1,748 drugstores. Upon entering into the
agreement to acquire Eckerd, the Eckerd Group began to plan for the
integration of its approximately 1,100 existing drugstores into the Eckerd
name and format. The integration plan provided for, among other things, the
closing of 86 overlapping and/or under-performing Thrift and Fay's drugstores,
all of which were leased facilities. These stores had a sales base of
approximately $130 million and operating losses of approximately $9 million
before non-cash operating expenses, such as depreciation. During 1997, 64
stores were closed. The remaining store closings were delayed into fiscal 1998
to facilitate a timely and orderly transition between the operations of the
stores to be closed and the surrounding stores that were to remain open and
operating. All stores were closed as of the end of fiscal 1998.

A FAS 121 impairment charge of $53 million related to these stores was
recorded by the Eckerd Group in 1996. Impaired assets consisted primarily of
store fixtures and leasehold improvements. Since these assets could not
readily be used at other store locations and no ready market existed outside
the Eckerd Group, they were discarded at the time of closing. Accordingly, the
impairment charge recorded for these assets represented their carrying value
as of the end of fiscal 1996. Asset values were reduced to zero and as a
result, depreciation was discontinued. The stores were operating at a loss and
continued to do so subsequent to the FAS 121 impairment charge. Operating
results for the individual stores were included in operations through the date
of closing. There were no significant changes to the Eckerd Group's initial
estimate of impairment.

2) As a condition of its approval of the Eckerd acquisition, the Federal
Trade Commission (FTC) required that the Company to divest itself of 164
stores (divested stores) in North and South Carolina (consisting of both Rite
Aid and Kerr drugstores) to a single buyer to maintain adequate competition in
the two states. Pursuant to the FTC agreement, the consummation of the
acquisition of the Rite Aid stores was delayed until the Company entered into
an agreement to sell the divested stores. Ultimately, the Company entered into
an agreement with a former member of Thrift management and other parties to
sell the divested stores for $75 million ($42 million in cash and $33 million
in notes receivable). The Eckerd Group recognized a FAS 121 impairment charge
of $75 million related to the Rite Aid stores. The impairment charge was
necessary as the undiscounted cash flows for these units were not sufficient
to support recorded asset values, including furniture and fixtures and other
intangibles. The amount of the impairment charge was determined based on the
difference between the fair value of the assets, as calculated through
discounted expected cash flows, and the carrying amount for those assets. In
addition, the Eckerd Group recorded a loss of $21 million related to the
divestiture of the Kerr stores. These 34 Kerr stores had a sales base of
approximately $59 million and operating income of approximately $3 million
before non-cash operating expenses.

3) As part of the acquisition of Eckerd, the decision was made to operate
all drugstores under the Eckerd name and format. Consequently, goodwill in the
amount of $10 million, which had been allocated under purchase accounting to
the Fay's trade name, was determined to have no value. In addition, the Eckerd
Group recorded an impairment charge of $15 million related to goodwill
associated with unprofitable business units operated by the former drugstore
operations.

VII-26
<PAGE>

ECKERD GROUP

NOTES TO THE ECKERD GROUP FINANCIAL STATEMENTS--(Continued)

Future lease obligations and severance. In connection with these drugstore
closings and the sale of divested stores, the Eckerd Group established a $69
million reserve for the present value of future lease obligations. The store
closing plan anticipated that the Eckerd Group would remain liable for all
future lease payments. The present value of future lease obligations was
calculated using a 6.7 per cent discount rate and anticipated no subleasing
activity or lease buyouts. Costs are being charged against the reserve as
incurred; the interest component related to lease payments is recorded as rent
expense with no corresponding increase in the reserve. Payments during the
next five years are expected to be approximately $2 million per year. These
reserves will be assessed periodically to determine their adequacy. No changes
have been deemed necessary through the end of 1998.

Approximately 1,150 store employees, including store managers as well as
salaried and non-salaried personnel, were terminated as a result of store
closings.

Allowance for notes receivable. A portion of the proceeds related to the
sale of the divested stores was financed by the Eckerd Group through a note
receivable of $33 million. The FTC agreement provided that the Company could
not maintain a continuing interest in the divested stores. This placed
significant constraints on the Eckerd Group's ability to collect on the note
which remains uncertain. Consequently, a reserve for 75 per cent ($25 million)
of the face value of the note receivable was established. This reserve is
reviewed for adequacy on a periodic basis. No adjustments have been deemed
necessary through the end of 1998.

Other. The principal component of other integration charges was $15 million
related to the change of the Thrift accounting policy for certain contractual
vendor payments to a more preferable accounting method. This item was
established as unearned income on the balance sheet as of year-end 1996 and is
being recognized over the contract terms through the year 2002. The remaining
$17 million, the majority of which was expensed as incurred, was related to
integration activities for the Fay's stores and other activities such as
contract terminations.

VII-27
<PAGE>

ECKERD GROUP

NOTES TO THE ECKERD GROUP FINANCIAL STATEMENTS--(Continued)

1997 Charges

<TABLE>
<CAPTION>
1997
-------------------------------
Cash Other Y/E
Expense Outlays Changes Reserve
------- ------- ------- -------
($ in millions)
<S> <C> <C> <C> <C>
Store integration......... 61 (61) -- --
Systems integration....... 26 (26) -- --
Advertising/grand
reopening................ 26 (26) -- --
Future obligations,
primarily leases (1)..... 37 (2) -- 35
Gain on the sale of
institutional pharmacy... (47) 47 -- --
---- ---- ---- ---
Total................... $103 $(68) $-- $35
==== ==== ==== ===
</TABLE>

<TABLE>
<CAPTION>
1997 1998
-------- -----------------------
Y/E Cash Other Y/E
Reserves Outlays Changes Reserve
-------- ------- ------- -------
($ in millions)
<S> <C> <C> <C> <C>
Future obligations,
primarily leases (1)... $35 $(8) $-- $27
=== === ==== ===
</TABLE>
- --------
(1) Reserve balances are included as a component of accounts payable and
accrued expenses.

The majority of charges recorded as other charges in 1997 relate to
integration activities that were expensed as incurred in accordance with EITF
95-3. Such costs were comprised of the following:

Store integration. Charges totaling $61 million related to the conversion of
the former Thrift, Fay's, and Kerr stores and certain warehouse facilities to
the Eckerd name and format, including training, overhead redundancies during
the transition period, and other similar integration-related costs.

Systems integration. Costs associated with the conversion of the previously
owned drugstores to the Eckerd systems platform totaled $26 million.

Advertising and grand re-opening. Costs associated with introducing the
Eckerd name in converted regions as well as costs related to the grand re-
opening of converted drugstores totaled $26 million.

In addition, the Eckerd Group recorded the following drugstore items as
other charges in 1997:

Future obligations, primarily leases. In the second quarter of 1997, as part
of the ongoing integration process, the Eckerd Group closed 26 additional
drugstores. These stores were part of the portfolio of retained Rite Aid
stores (see previous discussion). The Eckerd Group recorded a FAS 121
impairment charge for the store assets in 1996. These closings did not involve
any termination benefits. The liability in 1997 was limited to future lease
obligations on these stores. The reserve for future lease obligations for
these stores is based on the present value of lease obligations through the
year 2017. Additionally, in the fourth quarter of 1997, the Eckerd Group
became obligated to make future lease payments for 27 stores that Fay's had
sold prior to being acquired by the Company on which the buyer had defaulted
and failed to make lease payments. Fay's, and therefore the Eckerd Group, was
contractually obligated to make the lease payments. Accordingly, the Eckerd
Group recorded a charge for future lease obligations on these stores at the
time the liability became known. The reserve for future lease obligations on
these stores is based on lease payments through the year 2009. A charge of $25
million related to all of these lease obligations was recorded. These events
are not expected to have an effect on future sales, and other than future
lease obligations, there will be no impact on future operating results as none
of the stores operated as part of Thrift drugstores. In addition, an $8
million charge was recorded for liabilities established for pending
litigation, and the remaining $4 million relates to other miscellaneous
charges, each

VII-28
<PAGE>

ECKERD GROUP

NOTES TO THE ECKERD GROUP FINANCIAL STATEMENTS--(Concluded)

individually insignificant. As of the end of 1998, these combined reserves
totaled $27 million. There have been no adjustments to these liabilities as of
the end of 1998.

Gain on the sale of institutional pharmacy. As part of the integration plan,
the under performing institutional pharmacy operation was sold in the fourth
quarter of 1997 and a gain of $47 million was recorded. This operation
generated sales of $80 million in 1997.

VII-29
<PAGE>

ECKERD GROUP

The followin interim financial information is unaudited but, in the opinion
of the Company, includes all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation. Operating results for the interim
period are not necessarily indicative of the results that may be expected for
a full year. The financial information should be read in conjunction with the
Eckerd Group's audited consolidated financial statements included herein.

STATEMENTS OF INCOME
(Unaudited)

<TABLE>
<CAPTION>
13 Weeks Ended
----------------
May 1, May 2,
1999 1998
------- -------
($ in millions)
<S> <C> <C>
Retail sales, net............................................. 3,047 2,564
Costs and expenses
Cost of goods sold............................................ 2,394 1,994
LIFO charge................................................... 12 9
------- -------
Total cost of goods sold.................................... 2,406 2,003
Selling, general and administrative expenses................ 512 442
Interest expense............................................ 28 28
Acquisition amortization.................................... 37 35
------- -------
Total costs and expenses.................................. 2,983 2,508
------- -------
Income before income taxes.................................... 64 56
Income taxes.................................................. 33 30
------- -------
Net income.................................................... $ 31 $ 26
======= =======
</TABLE>

See Note to Interim Financial Information (Unaudited).

VII-30
<PAGE>

ECKERD GROUP

BALANCE SHEETS
(Unaudited)

<TABLE>
<CAPTION>
May 1, Jan. 30,
1999 1999
------ --------
($ in millions)
<S> <C> <C>
Assets
Current assets
Cash and short-term investments............................ $ 120 $ 64
Receivables, net (bad debt of $7 and $6)................... 593 466
Merchandise inventory (including LIFO reserves of $192 and
$180)..................................................... 2,110 1,997
Prepaid expenses........................................... 18 17
------ ------
Total current assets..................................... 2,841 2,544
Property, plant, and equipment
Land and buildings......................................... 191 196
Furniture and fixtures..................................... 1,036 1,118
Leasehold improvements..................................... 433 379
Accumulated depreciation................................... (597) (711)
------ ------
Property, plant, and equipment, net.......................... 1,063 982
Goodwill and intangible assets, net of accumulated
amortization of $258 and $221............................... 3,070 2,790
Other assets................................................. 179 162
------ ------
Total Assets............................................. $7,153 $6,478
====== ======
Liabilities and Group Equity
Current liabilities
Accounts payable and accrued expenses...................... $1,222 $1,097
Deferred taxes............................................. (3) 14
------ ------
Total current liabilities................................ 1,219 1,111
Long-term debt............................................... 1,585 1,525
Deferred taxes............................................... 174 142
Other liabilities............................................ 212 183
------ ------
Total Liabilities........................................ 3,190 2,961
Group Equity
Balance at beginning of period............................. 3,517 3,268
Net income/(loss).......................................... 31 (3)
Cash contributions by Penney Group......................... 1 252
Other equity contributions................................. 414 --
------ ------
Balance at end of period................................... 3,963 3,517
------ ------
Total Liabilities and Group Equity....................... $7,153 $6,478
====== ======
</TABLE>

See Note to Interim Financial Information (Unaudited).

VII-31
<PAGE>

ECKERD GROUP

STATEMENTS OF CASH FLOWS

(Unaudited)

<TABLE>
<CAPTION>
13 Weeks Ended
-----------------
May 1, May 2,
1999 1998
------- -------
($ in millions)
<S> <C> <C>
Operating Activities:
Net income................................................ $ 31 $ 26
Depreciation and amortization, including intangible
assets................................................... 77 65
Deferred taxes............................................ 15 (4)
Change in cash from:
Receivables............................................. (105) (14)
Inventory, net of trade payables........................ 86 (59)
Current taxes payable................................... -- --
Other assets and liabilities, net....................... (52) (155)
------- -------
52 (141)
Investing Activities:
Capital expenditures...................................... (57) (60)
------- -------
(57) (60)
Financing Activities:
Change in allocated debt.................................. 60 --
Capital contributions from Penney Group................... 1 259
------- -------
61 259
Net Increase/(Decrease) in Cash and Short-Term
Investments.............................................. 56 58
Cash and Short-Term Investments at Beginning of Year...... 64 11
------- -------
Cash and Short-Term Investments at End of Year............ $ 120 $ 69
======= =======
</TABLE>

Non-cash transaction: On March 1, 1999, the Company issued 9.6 million
shares of common stock to complete the acquisition of Genovese Drugstores,
Inc. The total value of the transaction, including debt assumed, was
approximately $414 million. The net assets of Genovese acquired, including
intangible assets and goodwill, have been allocated to the Eckerd Group.

See Note to Interim Financial Information (Unaudited).

VII-32
<PAGE>

ECKERD GROUP

NOTE TO INTERIM FINANCIAL INFORMATION

Other Charges, Net

During 1996 and 1997, the Eckerd Group recorded other charges principally
related to drugstore integration activities and FAS 121 impairments
(collectively other charges, net). The following tables provide a rollforward
of reserves that were established for certain categories of these charges. The
schedules, and the accompanying discussion, provide the status of the reserves
as of May 1, 1999.

1996 Charges

<TABLE>
<CAPTION>
1st Qtr 1999
1998 YTD
1997 --------------- ---------------
Y/E Cash Y/E Cash Ending
Reserve Outlays Reserve Outlays Reserve
------- ------- ------- ------- -------
($ in millions)
<S> <C> <C> <C> <C> <C>
Future lease obligations (1)........... $66 $(7) $59 $(1) $58
Allowance for notes receivable (2)..... 25 -- 25 -- 25
Headquarters severance (1)............. 1 (1) -- -- --
Other (1).............................. 4 -- 4 -- 4
--- --- --- --- ---
Total................................ $96 $(8) $88 $(1) $87
=== === === === ===
</TABLE>
- --------
Amounts are reflected on the consolidated balance sheets as follows:

(1) Reserve balances are included as a component of accounts payable and
accrued expenses.

(2) The allowance for notes receivable, which was established in connection
with the drugstore divestiture discussed below, is included as a reduction
of other assets.

Background. In October 1996, the Eckerd Group acquired Fay's Incorporated
(Fay's), a chain of 270 drugstores, and entered into an agreement to acquire
substantially all of the assets of approximately 190 Rite Aid drugstores in
North and South Carolina. In November 1996, the Eckerd Group entered into an
agreement to acquire Eckerd Corporation (Eckerd), a chain of 1,748 drugstores.
Upon entering into the agreement to acquire Eckerd, the group began to plan
for the integration of its approximately 1,100 existing drugstores into the
Eckerd name and format. The integration plan provided for, among other things,
the closing of 86 overlap and/or underperforming Thrift and Fay's drugstores,
all of which were leased facilities, having a sales base of approximately $130
million and operating losses of approximately $9 million before non-cash
operating expenses such as depreciation. All such stores were closed by the
end of fiscal 1998.

As a condition of the Eckerd acquisition, the Federal Trade Commission (FTC)
required that the Eckerd Group divest itself of 164 stores (divested stores)
in the Carolinas (consisting of both Rite Aid and Kerr drugstores) to a single
buyer to maintain adequate competition in the two states. Pursuant to the FTC
agreement, the consummation of the acquisition of the Rite Aid stores was
delayed until the Eckerd Group entered into an agreement to sell the divested
stores. Ultimately, the group entered into an agreement with a former member
of Thrift management and other parties to sell the divested stores for $75
million ($42 million in cash and $33 million in notes receivable).

Future lease obligations. In connection with the above store closings, the
Eckerd Group established a reserve for the present value of future lease
obligations. The store closing plan anticipated that Eckerd would

VII-33
<PAGE>

ECKERD GROUP

NOTES TO INTERIM FINANCIAL INFORMATION--(Concluded)

remain liable for all future lease payments. The present value of future lease
obligations was calculated using a 6.7 per cent discount rate and anticipated
no subleasing activity or lease buyouts. Costs are being charged against the
reserve as incurred; the interest component related to lease payments is
recorded as rent expense in the period incurred with no corresponding increase
in the reserve. During both the first quarter of 1999 and 1998, approximately
$0.5 million in lease payments were charged against the reserve. Payments
during the next five years are expected to be approximately $2 million per
year. Given the extended lease terms, the reserves will be assessed
periodically to determine their adequacy. No changes have been deemed
necessary through the first quarter of 1999.

Allowance for notes receivable. As noted above, a portion of the proceeds
related to the sale of the divested stores was financed by the Eckerd Group
through a note receivable of $33 million. The FTC agreement provided that the
Eckerd Group could not maintain a continuing interest in the divested stores.
This placed significant constraints on the Eckerd Group's ability to collect
on the note which remains uncertain. Consequently, a reserve for 75 percent of
the face value of the note receivable was established. This reserve is
reviewed for adequacy on a periodic basis. No adjustments have been deemed
necessary through the first quarter of 1999.

Other. The remaining charges, the majority of which have been expensed as
incurred, were related to integration activities for the Fay's stores, and
other activities such as contract terminations. There were no payments or
other changes to these reserves in either the first quarter of 1999 or 1998.

1997 Charges

<TABLE>
<CAPTION>
1st Qtr 1999
1998 YTD
1997 --------------- ---------------
Y/E Cash Y/E Cash Ending
Reserve Outlays Reserve Outlays Reserve
------- ------- ------- ------- -------
($ in millions)
<S> <C> <C> <C> <C> <C>
Future obligations primarily leases
(1).................................. $35 $(8) $27 $(1) $26
=== === === === ===
</TABLE>
- --------
(1) Reserve balances are included as a component of accounts payable and
accrued expenses.

Background. In 1997, the Eckerd Group recorded $103 million of net charges
related to additional drugstore integration activities ($103 million). As of
the end of the first quarter of 1999, reserves totaling $26 million remained
related to these charges. A description of the charges and a rollforward of
the reserves by major category are provided below:

Future obligations, primarily leases. In the second quarter of 1997 as part
of the on-going drugstore integration process, the Eckerd Group closed 26
additional drugstores. The Eckerd Group recorded a FAS 121 impairment charge
for the store assets in 1996. The liability in 1997 related to future lease
obligations on these stores. The reserve for future lease obligations for
these stores is based on the present value of lease obligations through the
year 2017. Additionally, in the fourth quarter of 1997, the Eckerd Group
became obligated to make future lease payments for 27 stores that Fay's had
sold prior to being acquired by the Eckerd Group on which the buyer had
defaulted and failed to make lease payments. Fay's, and therefore the Eckerd
Group, was contractually obligated to make the lease payments. Accordingly,
the Eckerd Group recorded a charge for future lease obligations on these
stores at the time the liability became known. The reserve for future lease
obligations on these stores is based on lease payments through the year 2009.
These events are not expected to have an effect on future sales, and other
than future lease obligations, there will be no impact on future operating
results as none of the stores operated as part of Thrift drugstores. In
addition, reserves were established for pending litigation and other
miscellaneous charges, each individually insignificant. During the first
quarter of 1999, $1 million in payments were charged against the reserve
compared with $2 million in last year's period. As of the end of the first
quarter of 1999, these combined reserves totaled $26 million. There have been
no adjustments to these liabilities as of the end of the first quarter of
1999.

VII-34