<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the 52 weeks ended January 30, 1999 Commission file number 1-777
J. C. PENNEY COMPANY, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-5583779
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(State of incorporation) (I.R.S. Employer ID No.)
6501 LEGACY DRIVE, PLANO, TEXAS 75024-3698
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 431-1000
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Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on
Title of each class which registered
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Common Stock of 50c par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___.
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
<PAGE>
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant: $10,486,998,096 as of March 22, 1999.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 252,834,719 shares
of Common Stock of 50c par value, as of March 22, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Documents from which portions Parts of the Form 10-K
are incorporated by reference into which incorporated
----------------------------- -----------------------
1. J. C. Penney Company, Inc. Part I, Part II, and
1998 Annual Report to Stockholders Part IV
2. J. C. Penney Company, Inc. Part III
1999 Proxy Statement
3. J. C. Penney Funding Corporation Part I and Part IV
Form 10-K for fiscal year 1998
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PART I
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1. BUSINESS.
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J. C. Penney Company, Inc. ("Company") was founded by James Cash Penney in
1902. Incorporated in Delaware in 1924, the Company has grown to be a major
retailer, operating approximately 1,150 JCPenney department stores in all 50
states, Puerto Rico, Mexico and Chile. In addition, in January 1999, the
Company completed the acquisition of the majority interest in a Brazilian
department store chain that operates 21 stores under the Renner name. The major
portion of the Company's business consists of providing merchandise and services
to consumers through department stores that include catalog departments. The
Company markets predominantly family apparel, jewelry, shoes, accessories, and
home furnishings. In addition, the Company, through its wholly-owned
subsidiary, Eckerd Corporation ("Eckerd"), operates a chain of approximately
2,900 drugstores located throughout the northeast, southeast, and Sunbelt
regions of the United States, including the Company's March 1999 acquisition of
the New York-based Genovese drugstore chain. The Company also has several
direct marketing subsidiaries, the principal of which is J. C. Penney Life
Insurance Company, which market life, health, accident and credit insurance as
well as a growing portfolio of membership services to both domestic and
international customers.
The business of marketing merchandise and services is highly competitive.
Although the Company is one of the largest department store and drugstore
retailers in the United States, it has numerous competitors. Many factors enter
into the competition for the consumer's patronage, including price, quality,
style, service, product mix, convenience, and credit availability. The
Company's annual earnings depend to a significant extent on the results of
operations for the last quarter of its fiscal year. Sales for that period
average approximately 31 per cent of annual sales.
In the normal course of its business, the Company accepts merchandise
returns from customers. This policy, which has been in place for many years, is
designed to enhance the customer's shopping experience and build customer
loyalty. From time to time, the Company has analyzed the effects of its sales
returns policy on its operations. Historically, sales return rates have been
consistent from year to year for the Company's retail stores and catalog
operations and have not had a material impact on its results of operations or
financial condition. Based on its analysis, the Company does not believe that
merchandise returns present material operational or financial risks.
Accordingly, the Company has not established a reserve for sales returns and
does not believe that any such reserve is required.
On April 15, 1999, Moody's Investors Service and Fitch IBCA lowered their
respective ratings of the Company's long-term debt from A2 to A3 and from A to
A-, and commercial paper from P1 to P2
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and from F1 to F2.
Information about certain aspects of the business of the Company included
under the captions of "Investments and Fair Value of Financial Instruments"
(pages 28 and 29) and "Segment Reporting" (page 39), which appear in the section
of the Company's 1998 Annual Report to Stockholders entitled "Notes to the
Consolidated Financial Statements", "Five Year Financial Summary" (page 40),
"Five Year Operations Summary" (page 41), and "Supplemental Data (unaudited)"
(pages 42 through 44), which appear in the Company's 1998 Annual Report to
Stockholders on the pages indicated in the parenthetical references, is
incorporated herein by reference and filed hereto as Exhibit 13 in response to
Item 1 of Form 10-K.
In addition, information about J. C. Penney Funding Corporation, a wholly
owned consolidated subsidiary of the Company, which appears in Item 1 of its
separate Annual Report on Form 10-K for the fiscal year ended January 30, 1999,
is incorporated herein by reference and filed hereto as Exhibit 99(a) in
response to Item 1 of Form 10-K.
SUPPLIERS. The Company purchases its merchandise from approximately 4,150
---------
domestic and foreign suppliers, many of whom have done business with the Company
for many years. In addition, Eckerd purchases merchandise and pharmaceuticals
from approximately 3,100 suppliers, substantially all of which are domestic.
The majority of Eckerd's suppliers have done business with Eckerd for many
years. In addition to its Plano, Texas home office, the Company, through its
international purchasing subsidiary, maintained buying offices in twelve foreign
countries and quality assurance inspection offices in an additional six foreign
countries as of January 30, 1999.
EMPLOYMENT. The Company and its consolidated subsidiaries employed
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approximately 262,000 persons as of January 30, 1999.
ENVIRONMENT. Environmental protection requirements did not have a material
-----------
effect upon the Company's operations during fiscal 1998. While management
believes it unlikely, it is possible that compliance with such requirements will
lengthen lead time in expansion plans and increase construction, and therefore
operating costs due in part to the expense and time required to conduct
environmental and ecological studies.
2. PROPERTIES.
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At January 30, 1999, the Company operated 3,925 retail stores, comprised of
1,148 JCPenney department stores, 21 Renner department stores and 2,756
drugstores, in all 50 states, Puerto Rico, Brazil, Mexico, and Chile, of which
288 JCPenney department stores and 16 drugstores were owned. In addition, the
Company owns six store locations that are leased to other tenants and not
operated as units of the Company. The Company also operated six catalog
fulfillment centers, of which four were owned, and owned one store
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distribution center, three drugstore distribution centers, J. C. Penney Direct
Marketing Services, Inc. and Eckerd corporate offices, and the Company's home
office facility and approximately 240 acres of property in Plano, Texas,
adjacent to the facility. Information relating to certain of the Company's
facilities included under the caption "Five Year Operations Summary", which
appears on page 41 of the Company's 1998 Annual Report to Stockholders, is
incorporated herein by reference and filed hereto as Exhibit 13 in response to
Item 2 of Form 10-K.
3. LEGAL PROCEEDINGS.
-----------------
The Company has no material legal proceedings pending against it.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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No matter was submitted to a vote of stockholders during the fourth quarter
of fiscal 1998.
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EXECUTIVE OFFICERS OF THE REGISTRANT.
------------------------------------
The following is a list, as of March 22, 1999, of the names and ages of the
executive officers of the Company and of the offices and other positions held by
each such person with the Company. The terms of all executive officers will
expire on May 21, 1999. There is no family relationship between any of the
named persons.
<TABLE>
<CAPTION>
OFFICES AND OTHER POSITIONS
NAME HELD WITH THE COMPANY AGE
------------ --------------------------- ---
<S> <C> <C>
James E. Oesterreicher...Chairman of the Board and
Chief Executive Officer; Director 57
Marilee J. Cumming.......President of Merchandising for JCPenney
Stores and Catalog 51
Gary L. Davis............Executive Vice President, Chief
Human Resources and Administration
Officer 56
Gale Duff-Bloom..........President of Marketing and Company
Communications 59
David V. Evans...........Senior Vice President, Chief
Information Officer 53
John E. Fesperman........President and Chief Operating Officer,
JCPenney Direct Marketing
Services, Credit, and Facilities
Services 53
Thomas D. Hutchens.......President and Chief Operating
Officer, International 58
Charles R. Lotter........Executive Vice President, Secretary
and General Counsel 61
Donald A. McKay..........Executive Vice President and
Chief Financial Officer 53
Francis A. Newman........Chairman of the Board,
President and Chief Executive
Officer of Eckerd Corporation 50
Michael W. Taxter........Senior Vice President, Director
of JCPenney Stores 47
</TABLE>
_____________
Mr. Oesterreicher was elected Chairman of the Board effective January 1997 and
has served as Chief Executive Officer since 1995. He served as Vice Chairman of
the Board from 1995 to 1997. From 1992 to 1995, he served as President of
JCPenney Stores and Catalog.
Ms. Cumming was elected President of Merchandising for JCPenney Stores and
Catalog, effective March 1, 1999. Prior to that, she served as President of the
Women's Apparel Division from 1996 to 1999, and from 1993 to 1996, President of
the Home and Leisure Division.
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Mr. Davis, who was elected Executive Vice President, Chief Human Resources and
Administration Officer, effective April 1, 1998, served as Senior Vice
President, Director of Human Resources and Administration from 1997 to 1998.
From 1996 to 1997, he served as Senior Vice President and Director of Personnel
and Administration. He was elected President of the Northwestern Region in 1992
and served in that capacity until 1996.
Ms. Duff-Bloom was elected President of Marketing and Company Communications
in February 1996. She was elected Senior Executive Vice President and served as
Director of Personnel and Company Communications from January 1995 to February
1996. She was elected an Executive Vice President in 1993 and served as
Director of Administration from 1993 to 1995.
Mr. Evans was elected Senior Vice President, Chief Information Officer,
effective November 1, 1997. Prior to that, he served as Senior Vice President,
Director of Information Systems and from 1995 to 1997 he served as Senior Vice
President, Director of Planning and Information Systems. He was elected a Vice
President in 1987 and served as Director of Information Systems from 1987 to
1995.
Mr. Fesperman was elected President and Chief Operating Officer, JCPenney
Direct Marketing Services, Credit, and Facilities Services, effective December
1, 1997. Prior to that, he served as Senior Vice President, Director of
Planning, Facilities, and International Development and from 1996 to 1997 he
served as Senior Vice President and Director of Support Services and Subsidiary
Operations. He was elected a Vice President in 1993 and served as Director of
Insurance from 1991 to 1996.
Mr. Lotter was elected an Executive Vice President in 1993. He was elected
Senior Vice President, General Counsel and Secretary in 1987. He has also
served as a director of Eckerd Corporation since December 1996.
Mr. McKay was elected an Executive Vice President in 1997. He was elected
Senior Vice President and Chief Financial Officer in 1996. From 1994 to 1996,
he served as Vice President and Controller. He was elected Vice President and
Treasurer in 1985 and served in that capacity until 1994. He has also served as
a director of Eckerd Corporation since December 1996.
Mr. Newman was elected Chairman of the Board of Eckerd Corporation in May
1997. He has served as Chief Executive Officer of Eckerd Corporation since
February 1996. He is also President and a director of Eckerd Corporation,
positions he has held since July 1993. Prior to joining Eckerd, Mr. Newman
served as President, Chief Executive Officer and a director of F&M Distributors,
Inc. ("F&M"), a drugstore chain, since 1986. F&M filed bankruptcy under Chapter
11 of the United States Bankruptcy Code in December 1994. Prior to joining F&M,
he was the Executive Vice President of Household Merchandising, Inc., a retail
firm, from 1984 to 1986 and the Senior Vice President of Merchandising for F. W.
Woolworth, a
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retail firm, from 1980 to 1984.
Mr. Taxter was elected Senior Vice President, Director of JCPenney Stores,
effective March 1, 1999. In 1998, he was elected Senior Vice President and
served as Director of Strategic Development. In 1995, he was elected Regional
President and served as President of the South and Southeastern Region from 1996
to 1998. Prior to that, he served as Director of Coordination between 1993 and
1996.
PART II
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5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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The Company's Common Stock is traded principally on the New York Stock
Exchange, as well as on other exchanges in the United States. In addition, the
Company has authorized 25 million shares of Preferred Stock, of which 792
thousand shares of Series B ESOP Convertible Preferred Stock were issued and
outstanding at January 30, 1999. Additional information relating to the Common
Stock and Preferred Stock of the Company included under the captions
"Consolidated Statements of Stockholders' Equity" (page 23), "Capital Stock"
(page 30), and "Quarterly Data (Unaudited)" (page 40), which appear in the
Company's 1998 Annual Report to Stockholders on the pages indicated in the
parenthetical references, is incorporated herein by reference and filed hereto
as Exhibit 13 in response to Item 5 of Form 10-K.
6. SELECTED FINANCIAL DATA.
-----------------------
Information for the fiscal years 1994-1998 included in the "Five Year
Financial Summary" on page 40 of the Company's 1998 Annual Report to
Stockholders is incorporated herein by reference and filed hereto as Exhibit 13
in response to Item 6 of Form 10-K.
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
--------------------------------------------------------------------------
OPERATIONS.
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The discussion and analysis included under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations", which
appears in the Company's 1998 Annual Report to Stockholders on pages 12 through
20 thereof, is incorporated herein by reference and filed hereto as Exhibit 13
in response to Item 7 of Form 10-K.
-8-
<PAGE>
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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The Company holds an interest rate swap with a notional principal amount of
$375 million entered into in connection with the issuance of asset-backed
certificates in 1990. This swap presents no material risk to the Company's
results of operations.
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
The Consolidated Balance Sheets of the Company 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, appearing on pages 22 through 25 of the
Company's 1998 Annual Report to Stockholders, together with the Independent
Auditors' Report of KPMG LLP, independent certified public accountants,
appearing on page 21 of the Company's 1998 Annual Report to Stockholders, the
Notes to the Consolidated Financial Statements on pages 26 through 39, and the
quarterly financial highlights ("Quarterly Data (unaudited)")appearing on page
40 thereof, are incorporated herein by reference and filed hereto as Exhibit 13
in response to Item 8 of Form 10-K.
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
-------------------------------------------------------------------------
DISCLOSURE.
----------
None.
PART III*
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10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.*
--------------------------------------------------
11. EXECUTIVE COMPENSATION.*
----------------------
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
----------------------------------------
OWNERS AND MANAGEMENT.*
---------------------
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.*
----------------------------------------------
____________
* Pursuant to General Instruction G to Form 10-K, the information called for
by Items 10, with respect to directors of the Company (to the extent not set
forth in Part I hereof), 11, 12, and 13 is incorporated by reference to the
Company's 1999 Proxy Statement, which involves the election of directors, the
final copy of which the Company filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, on April 13, 1999.
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<PAGE>
PART IV
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14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
----------------------------------------------------------------
(a)(1) All Financial Statements. See Item 8 of this Annual Report on Form
10-K for financial statements incorporated by reference to the Company's 1998
Annual Report to Stockholders.
(a)(2) Financial Statement Schedules. Schedule II (Valuation and Qualifying
Accounts and Reserves) is attached on Page F-1. See Independent Auditors'
Report of KPMG LLP, independent certified public accountants, appearing on page
13 of this Annual Report on Form 10-K.
All other schedules have been omitted as they are inapplicable or not required
under the rules, or the information has been submitted in the consolidated
financial statements and related financial information included in the Company's
1998 Annual Report to Stockholders incorporated herein by reference and filed
hereto as Exhibit 13.
Separate financial statements are filed for J. C. Penney Funding Corporation,
a wholly owned consolidated subsidiary, in its separate Annual Report on Form
10-K for the 52 weeks ended January 30, 1999, which financial statements,
together with the Independent Auditors' Report of KPMG LLP thereon, are
incorporated herein by reference and filed hereto as Exhibit 99(b).
(a)(3) Exhibits. See separate Exhibit Index on pages G-1 through G-10.
(b) Current Reports on Form 8-K. During the last quarter of the period
covered by this Annual Report on Form 10-K, the Company filed its Current Report
on Form 8-K (Item 5 - Other Events) dated November 23, 1998.
(c) Each management contract or compensatory plan or arrangement required
to be filed as an exhibit to this form is filed as part of the separate Exhibit
Index on pages G-1 through G-10 and specifically identified as such beginning on
page G-5.
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<PAGE>
SIGNATURES
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
J. C. PENNEY COMPANY, INC.
--------------------------
(Registrant)
By: /s/ C. R. LOTTER
-----------------------
C. R. Lotter
Executive Vice President,
Secretary and General Counsel
Dated: April 28, 1999
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<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
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<S> <C> <C>
J. E. Oesterreicher* Chairman of the Board and April 28, 1999
- ----------------------
J. E. Oesterreicher Chief Executive Officer
(principal executive officer);
Director
D. A. McKay* Executive Vice President and April 28, 1999
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D. A. McKay Chief Financial Officer
(principal financial officer)
W. J. Alcorn* Vice President and Controller April 28, 1999
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W. J. Alcorn (principal accounting officer)
M. A. Burns* Director April 28, 1999
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M. A. Burns
T. J. Engibous* Director April 28, 1999
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T. J. Engibous
K. B. Foster* Director April 28, 1999
- ----------------------
K. B. Foster
V. E. Jordan, Jr.* Director April 28, 1999
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V. E. Jordan, Jr.
George Nigh* Director April 28, 1999
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George Nigh
J. C. Pfeiffer* Director April 28, 1999
- ----------------------
J. C. Pfeiffer
A. W. Richards* Director April 28, 1999
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A. W. Richards
F. Sanchez-Loaeza* Director April 28, 1999
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F. Sanchez-Loaeza
C. S. Sanford, Jr.* Director April 28, 1999
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C. S. Sanford, Jr.
R. G. Turner* Director April 28, 1999
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R. G. Turner
</TABLE>
*By: /s/ C. R. LOTTER
------------------
C. R. Lotter
Attorney-in-fact
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<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors of
J. C. Penney Company, Inc.:
Under date of February 25, 1999, we reported on the 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, as contained in the 1998 Annual Report to
Stockholders. These consolidated financial statements and our report thereon
are incorporated by reference in the Company's Annual Report on Form 10-K for
the 1998 fiscal year. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule listed in Item 14(a)(2) of the Annual Report on
Form 10-K. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Dallas, Texas
February 25, 1999
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SCHEDULE II
J. C. PENNEY COMPANY, INC.
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Amounts in millions)
- --------------------------------------------------------------------------------
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
January 30, January 31, January 25,
Description 1999 1998 1997
- --------------------------------------------------------------------------------
Reserves deducted from assets
- -----------------------------
Allowance for doubtful accounts (1)
Balance at beginning of period $ 105 $ 77 $ 63
Additions charged to costs and
expenses 241 249 196
Deductions of write-offs, less
recoveries (228) (221) (182)
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Balance at end of period $ 118 $ 105 $ 77
====== ====== ======
(1) Excludes amounts related to the Company's retained interest in JCP
Master Credit Card Trust.
Allowance for loan losses -
JCPenney National Bank
Balance at beginning of period $ - $ 51 $ 47
Additions charged to costs and
expenses - 8 83
Deductions of write-offs, less
recoveries - (11) (79)
Reduction in reserves related
to the sale of the bank
receivables portfolio - (48) -
------ ------ ------
Balance at end of period $ - $ - $ 51
====== ====== ======
F-1
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EXHIBIT INDEX
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Exhibit
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3. (i) ARTICLES OF INCORPORATION Restated Certificate of Incorporation of
-------------------------
the Company, as amended.
(ii) BYLAWS Bylaws of Company, as amended to January 11, 1995
------
(incorporated by reference to Exhibit 3(ii)(a) to Company's Annual
Report on Form 10-K for the 52 week period ended January 28, 1995*).
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
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(a) Indenture, dated as of October 1, 1982, between the Company and U.S.
Bank Trust National Association (formerly First Trust of California,
National Association) (as Successor Trustee to Bank of America National
Trust and Savings Association) (incorporated by reference to Exhibit
4(a) to Company's Annual Report on Form 10-K for the 52 week period
ended January 29, 1994*).
(b) First Supplemental Indenture, dated as of March 15, 1983, between the
Company and U.S. Bank Trust National Association (formerly First Trust
of California, National Association) (as Successor Trustee to Bank of
America National Trust and Savings Association)(incorporated by
reference to Exhibit 4(b) to Company's Annual Report on Form 10-K for
the 52 week period ended January 29, 1994*).
(c) Second Supplemental Indenture, dated as of May 1, 1984, between the
Company and U.S. Bank Trust National Association (formerly First Trust
of California, National Association)(as Successor Trustee to Bank of
America National Trust and Savings Association)(incorporated by
reference to Exhibit 4(c) to Company's Annual Report on Form 10-K for
the 52 week period ended January 29, 1994*).
(d) Third Supplemental Indenture, dated as of March 7, 1986, between the
Company and U.S. Bank Trust National Association (formerly First Trust
of
G-1
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California, National Association) (as Successor Trustee to Bank of
America National Trust and Savings Association)(incorporated by
reference to Exhibit 4(d) to Company's Registration Statement on Form
S-3, SEC File No. 33-3882).
(e) Fourth Supplemental Indenture, dated as of June 7, 1991, between the
Company and U.S. Bank Trust National Association (formerly First Trust
of California, National Association) (as Successor Trustee to Bank of
America National Trust and Savings Association)(incorporated by
reference to Exhibit 4(e) to Registrant's Registration Statement on
Form S-3, SEC File No. 33-41186).
(f) Indenture, dated as of April 1, 1994, between the Company and U.S.
Bank Trust National Association (formerly First Trust of California,
National Association) (as Successor Trustee to Bank of America National
Trust and Savings Association) (incorporated by reference to Exhibit
4(a) to Company's Registration Statement on Form S-3, SEC File No. 33-
53275).
(g) Rights Agreement, dated as of March 26, 1999, by and between the
Company and ChaseMellon Shareholder Services L.L.C. as Rights Agent
(incorporated by reference to Exhibit 4 to Company's Current Report on
Form 8-K, Date of Report - March 10, 1999*).
(h) Amended and Restated 364-Day Revolving Credit Agreement dated as of
December 3, 1996, among J. C. Penney Company, Inc., J. C. Penney
Funding Corporation, the Lenders party thereto, Morgan Guaranty Trust
Company of New York, as Agent for the Lenders, and Bank of America
Illinois, Bankers Trust Company, The Chase Manhattan Bank, Citibank,
N.A., Credit Suisse First Boston, and NationsBank of Texas, N.A., as
Co-Agents for the Lenders (incorporated by reference to Exhibit 4(d) to
J. C. Penney Funding Corporation's Annual Report on Form 10-K for the
52 weeks ended January 25, 1997, SEC File No. 1-4947-1).
(i) Amended and Restated Five-Year Revolving Credit Agreement dated as of
December 3, 1996, among J. C. Penney Company, Inc., J. C. Penney
Funding Corporation, the Lenders party thereto, Morgan Guaranty Trust
Company of New York, as Agent for the Lenders, and Bank of America
Illinois, Bankers Trust Company, The Chase Manhattan Bank, Citibank,
N.A., Credit Suisse
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First Boston, and NationsBank of Texas, N.A., as Co-Agents for the
Lenders (incorporated by reference to Exhibit 4(e) to J. C. Penney
Funding Corporation's Annual Report on Form 10-K for the 52 weeks ended
January 25, 1997, SEC File No. 1-4947-1).
(j) Amendment and Restatement Agreement to 364-Day Revolving Credit
Agreement, dated as of November 20, 1998, among J. C. Penney Company,
Inc., J. C. Penney Funding Corporation, the Lenders parties thereto,
Morgan Guaranty Trust Company of New York, as Agent, Citibank, N. A.,
Nationsbanc Montgomery Securities LLC and The Chase Manhattan Bank, as
Co-Syndication Agents, and Credit Suisse First Boston and First Union
National Bank, as Managing Agents (incorporated by reference to Exhibit
4(f) to J. C. Penney Funding Corporation's Annual Report on Form 10-K
for the 52 weeks ended January 30, 1999, SEC File No. 1-4947-1).
(k) Amendment and Restatement Agreement to Five-Year Revolving Credit
Agreement, dated as of November 21, 1997, among J. C. Penney Company,
Inc., J. C. Penney Funding Corporation, the Lenders party thereto,
Morgan Guaranty Trust Company of New York, as Agent, and Bank of
America National Trust and Savings Association, Bankers Trust Company,
The Chase Manhattan Bank, Citibank, N.A., Credit Suisse First Boston
and NationsBank of Texas, N.A., as Managing Agents (incorporated by
reference to Exhibit 4(g) to J. C. Penney Funding Corporation's Annual
Report on Form 10-K for the 53 weeks ended January 31, 1998, SEC File
No. 1-4947-1).
(l) Guaranty dated as of February 17, 1997, executed by J. C. Penney
Company, Inc. (incorporated by reference to Exhibit 4(c) to J. C.
Penney Funding Corporation's Annual Report on Form 10-K for the 52
weeks ended January 25, 1997, SEC File No. 1-4947-1).
(m) Guaranty dated as of December 3, 1996, executed by J. C. Penney
Company Inc. with respect to the Amended and Restated 364-Day and Five-
Year Revolving Credit Agreements, each dated as of December 3, 1996
(incorporated by reference to Exhibit 4(m) to J. C. Penney Funding
Corporation's Annual Report on Form 10-K for the 52 weeks ended January
25, 1997, SEC File
G-3
<PAGE>
No. 1-4947-1).
Other instruments evidencing long-term debt have not been filed as exhibits
hereto because none of the debt authorized under any such instrument exceeds 10
percent of the total assets of the Registrant and its consolidated subsidiaries.
The Registrant agrees to furnish a copy of any of its long-term debt instruments
to the Securities and Exchange Commission upon request.
10. MATERIAL CONTRACTS
------------------
(i) OTHER THAN COMPENSATORY PLANS OR ARRANGEMENTS
---------------------------------------------
(a) Amended and Restated Receivables Agreement dated as of January 29,
1980 between Company and J. C. Penney Funding Corporation
(incorporated by reference to Exhibit 10(i)(a) to Company's Annual
Report on Form 10-K for the 52 week period ended January 29, 1994*).
(b) Amendment No. 1 to Amended and Restated Receivables Agreement dated as
of January 25, 1983 between Company and J. C. Penney Funding
Corporation (incorporated by reference to Exhibit 10(i)(b) to
Company's Annual Report on Form 10-K for the 52 week period ended
January 29, 1994*).
(c) Loan Agreement dated as of January 28, 1986 between Company and J. C.
Penney Funding Corporation (incorporated by reference to Exhibit 4 to
Company's Current Report on Form 8-K, Date of Report - January 28,
1986*).
(d) Amendment No. 1 to Loan Agreement dated as of January 28, 1986 between
Company and J. C. Penney Funding Corporation (incorporated by
reference to Exhibit 1 to Company's Current Report on Form 8-K, Date
of Report - December 31, 1986*).
(e) Amendment No. 2 to Loan Agreement dated as of January 28, 1986 between
Company and J. C. Penney Funding Corporation (incorporated by
reference to Exhibit 10(i)(e) to Company's Annual Report on Form 10-K
for the 52 weeks ended January 25, 1997*).
(f) Personal Services Agreement dated as of February 12, 1997 between
Company and W. R. Howell
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<PAGE>
(incorporated by reference to Exhibit 10(i)(f) to Company's Annual
Report on Form 10-K for the 52 weeks ended January 25, 1997*).
(ii) COMPENSATORY PLANS OR ARRANGEMENTS REQUIRED TO BE FILED AS EXHIBITS TO THIS
---------------------------------------------------------------------------
REPORT PURSUANT TO ITEM 14 (C) OF THIS REPORT.
---------------------------------------------
(a) J. C. Penney Company, Inc. 1989 Management Incentive Compensation
Program as amended through March 27, 1990 (incorporated by reference
to Exhibit 10(e) to Company's Annual Report on Form 10-K for the 52
week period ended January 27, 1990*).
(b) September 1995 Amendment to J. C. Penney Company, Inc. 1989 Management
Incentive Compensation Program, as amended (incorporated by reference
to Exhibit 10(ii)(b)to Company's Annual Report on Form 10-K for the 52
weeks ended January 25, 1997*).
(c) Supplemental Retirement Program for Management Profit-Sharing
Associates of J. C. Penney Company, Inc., as amended through April 1,
1996 (incorporated by reference to Exhibit 10(ii)(c) to Company's
Annual Report on Form 10-K for the 52 weeks ended January 25, 1997*).
(d) July 1997 Amendment to Supplemental Retirement Program for Management
Profit-Sharing Associates of J. C. Penney Company, Inc. (incorporated
by reference to Exhibit 10(b) to Company's Quarterly Report on Form
10-Q for the 13 and 39 week periods ended October 25, 1997*).
(e) December 1997 Amendment to Supplemental Retirement Program for
Management Profit-Sharing Associates of J. C. Penney Company, Inc.
(incorporated by reference to Exhibit 10 (ii)(e) to Company's Annual
Report on Form 10-K for the 53 weeks ended January 31, 1998*)
(f) March 1998 Amendment to Supplemental Retirement Program for
Management Profit-Sharing Associates of J. C. Penney Company, Inc.
G-5
<PAGE>
(g) January 1999 Amendment to Supplemental Retirement Program for
Management Profit-Sharing Associates of J. C. Penney Company, Inc.
(h) J. C. Penney Company, Inc. Retirement Plan for Non-Associate
Directors (incorporated by reference to Exhibit 10(b) to Company's
Quarterly Report on Form 10-Q for the 13 week period ended April 26,
1997*).
(i) J. C. Penney Company, Inc. Directors' Equity Program Tandem Restricted
Stock Award/Stock Option Plan (incorporated by reference to Exhibit
10(k) to Company's Annual Report on Form 10-K for the 52 week period
ended January 28, 1989*).
(j) J. C. Penney Company, Inc. 1989 Equity Compensation Plan (incorporated
by reference to Exhibit A to Company's definitive Proxy Statement for
its Annual Meeting of Stockholders held on May 19, 1989*).
(k) February 1995 Amendment to J. C. Penney Company, Inc. 1989 Equity
Compensation Plan (incorporated by reference to Exhibit 10(ii)(k) to
Company's Annual Report on Form 10-K for the 52 week period ended
January 28, 1995*).
(l) February 1996 Amendment to J. C. Penney Company, Inc. 1989 Equity
Compensation Plan, as amended (incorporated by reference to Exhibit
10(ii)(k) to Company's Annual Report on Form 10-K for the 52 week
period ended January 27, 1996*).
(m) J. C. Penney Company, Inc. 1993 Equity Compensation Plan
(incorporated by reference to Exhibit A to Company's definitive Proxy
Statement for its Annual Meeting of Stockholders held on May 21,
1993*).
(n) February 1995 Amendment to J. C. Penney Company, Inc. 1993 Equity
Compensation Plan (incorporated by reference to Exhibit 10(ii)(l) to
Company's Annual Report on Form 10-K for the 52 week period ended
January 28, 1995*).
(o) November 1995 Amendment to J. C. Penney Company, Inc. 1993 Equity
Compensation Plan, as amended (incorporated by reference to Exhibit
G-6
<PAGE>
10(ii)(n) to Company's Annual Report on Form 10-K for the 52 week
period ended January 27, 1996*).
(p) J. C. Penney Company, Inc. 1993 Non-Associate Directors' Equity Plan
(incorporated by reference to Exhibit B to Company's definitive Proxy
Statement for its Annual Meeting of Stockholders held on May 21,
1993*).
(q) February 1995 Amendment to J. C. Penney Company, Inc. 1993 Non-
Associate Directors' Equity Plan (incorporated by reference to Exhibit
10(ii)(m) to Company's Annual Report on Form 10-K for the 52 week
period ended January 28, 1995*).
(r) J. C. Penney Company, Inc. Deferred Compensation Plan as amended
through July 14, 1993 (incorporated by reference to Exhibit 10(a) to
Company's Report on Form 10-Q for the 13 and 26 week periods ended
July 31, 1993*).
(s) J. C. Penney Company, Inc. Deferred Compensation Plan for Directors,
as amended effective April 9, 1997 (incorporated by reference to
Exhibit 10(a) to Company's Quarterly Report on Form 10-Q for the 13
week period ended April 26, 1997*).
(t) Directors' Charitable Award Program (incorporated by reference to
Exhibit 10(r) to Company's Annual Report on Form 10-K for the 52 week
period ended January 27, 1990*).
(u) Form of Indemnification Trust Agreement between Company and The Chase
Manhattan Bank (formerly Chemical Bank) dated as of July 30, 1986, as
amended (incorporated by reference to Exhibit 1 to Exhibit B to
Company's definitive Proxy Statement for its Annual Meeting of
Stockholders held on May 29, 1987*).
(v) Form of Indemnification Agreement between Company and individual
Indemnitees (incorporated by reference to Exhibit B to Company's
definitive Proxy Statement for its Annual Meeting of Stockholders held
on May 29, 1987*).
(w) J. C. Penney Company, Inc. Benefit Restoration Plan (incorporated by
reference to Exhibit
G-7
<PAGE>
10(ii)(y) to Company's Annual Report on Form 10-K for the 52 week
period ended January 27, 1996*).
(x) February 1996 Amendment to J. C. Penney Company, Inc. Benefit
Restoration Plan (incorporated by reference to Exhibit 10(ii)(z) to
Company's Annual Report on Form 10-K for the 52 weeks ended January
25, 1997*).
(y) July 1997 Amendment to J. C. Penney Company, Inc. Benefit Restoration
Plan (incorporated by reference to Exhibit 10(c) to Company's
Quarterly Report on Form 10-Q for the 13 and 39 week periods ended
October 25, 1997*).
(z) December 1997 Amendment to J. C. Penney Company, Inc. Benefit
Restoration Plan (incorporated by reference to Exhibit 10(ii)(ac) to
Company's Annual Report on Form 10-K for the 53 weeks ended January
31, 1998*).
(aa) December 1998 Amendment of J. C. Penney Company, Inc. Benefit
Restoration Plan.
(ab) January 1999 Amendment to J. C. Penney Company, Inc. Benefit
Restoration Plan.
(ac) Supplemental Term Life Insurance Plan for Management Profit-Sharing
Associates of J. C. Penney Company, Inc. (incorporated by reference
to Exhibit 10(ii)(aa) to Company's Annual Report on Form 10-K for the
52 weeks ended January 25, 1997*).
(ad) January 1995 Amendment to Supplemental Term Life Insurance Plan for
Management Profit-Sharing Associates of J. C. Penney Company,
Inc. (incorporated by reference to Exhibit 10(ii)(ab) to Company's
Annual Report on Form 10-K for the 52 weeks ended January 25, 1997*).
(ae) November 1997 Amendment to Supplemental Term Life Insurance Plan for
Management Profit-Sharing Associates of J. C. Penney Company, Inc.
(incorporated by reference to Exhibit 10(ii)(af) to Company's Annual
Report on Form 10-K for the 53 weeks ended January 31, 1998*).
(af) Employment Agreement dated as of February 4, 1996 between Eckerd
Corporation and Francis A.
G-8
<PAGE>
Newman (incorporated by reference to Exhibit 10.26 to Eckerd
Corporation's Annual Report on Form 10-K for the fiscal year ended
February 3, 1996, SEC File No. 1-4844).
(ag) Amendment No. 1, dated as of November 2, 1996, to the Employment
Agreement dated as of February 4, 1996, by and between Eckerd
Corporation and Francis A. Newman (incorporated by reference to
Exhibit (c)(3) to Company's Schedule 14D-1 dated November 2, 1996*).
(ah) J. C. Penney Company, Inc. 1997 Equity Compensation Plan
(incorporated by reference to Exhibit A to Company's definitive proxy
statement for its Annual Meeting of Stockholders held on May 16,
1997*).
(ai) J. C. Penney Company, Inc. 1998 EVA Performance Plan (incorporated by
reference to Exhibit 10(ii)(aj) to Company's Annual Report on Form
10-K for the 53 weeks ended January 31, 1998*).
(aj) J. C. Penney Company, Inc. Mirror Savings Plan I and II as amended
through January 1, 1999.
* SEC file number 1-777
11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
-----------------------------------------------
Computation of Net Income Per Common Share.
12. STATEMENT RE: COMPUTATION OF RATIOS
-----------------------------------
(a) Computation of Ratios of Available Income to Combined Fixed Charges
and Preferred Stock Dividend Requirement.
(b) Computation of Ratios of Available Income to Fixed Charges.
13. ANNUAL REPORT TO SECURITY HOLDERS
---------------------------------
Excerpt from Company's 1998 Annual Report to Stockholders.
G-9
<PAGE>
21. SUBSIDIARIES OF THE REGISTRANT
------------------------------
List of certain subsidiaries of the Company at March 22, 1999.
23. INDEPENDENT AUDITORS' CONSENT
-----------------------------
24. POWER OF ATTORNEY
-----------------
27. FINANCIAL DATA SCHEDULE
-----------------------
(a) Financial Data Schedule for the 52 week period ended January 30, 1999.
(b) Restated Financial Data Schedule for the 53 week period ended January 31,
1998.
(c) Restated Financial Data Schedule for the 52 week period ended January 25,
1997.
99. ADDITIONAL EXHIBITS
-------------------
(a) Item 1 of J. C. Penney Funding Corporation Annual Report on Form 10-K for
the 52 weeks ended January 30, 1999 (incorporated by reference to J. C.
Penney Funding Corporation Annual Report on Form 10-K for the 52 weeks
ended January 30, 1999 filed April 23, 1999, SEC File No. 1-4947-1).
(b) Excerpt from J. C. Penney Funding Corporation Annual Report.
G-10
<PAGE>
EXHIBIT 3(i)
RESTATED CERTIFICATE OF INCORPORATION
OF
J. C. PENNEY COMPANY, INC.
The present name of the corporation is J. C. Penney Company, Inc. (the
"Company"). The Company was incorporated under the name of J. C. Penney Company
by the filing of its original Certificate of Incorporation with the Secretary of
State of the State of Delaware on December 15, 1924. This Restated Certificate
of Incorporation of the Company restates and integrates but does not further
amend the provisions of the Company's Certificate of Incorporation as heretofore
amended and supplemented, and there is no discrepancy between those provisions
and the provisions of this Restated Certificate of Incorporation. This Restated
Certificate of Incorporation was duly adopted by the Board of Directors of the
Company in accordance with the provisions of Section 245 of the General
Corporation Law of the State of Delaware and hereby restates and integrates the
provisions of the Company's Certificate of Incorporation, as heretofore amended
and restated, to read in its entirety as follows:
First: The name of the corporation (which is herein referred to as the
Company) shall be J. C. Penney Company, Inc.
Second: The address of the Company's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington,
County of New Castle Delaware 19801. The name of the Company's registered agent
at such address is The Corporation Trust Company.
Third: The purpose of the Company is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
Fourth: The total number of shares of all classes of stock which the
Company shall have authority to issue is 1,275,000,000 shares, of which
25,000,000 shares shall be shares of Preferred Stock without par value
(hereinafter called Preferred Stock) and 1,250,000,000 shares shall be shares of
Common Stock of 50c par value (hereinafter called Common Stock).
Authority is hereby expressly granted to the Board of Directors from
time to time to issue the Preferred Stock as Preferred Stock of one or more
series and in connection with the creation of any such series to fix by the
resolution or
1
<PAGE>
resolutions providing for the issue of shares thereof the designation, powers,
preferences, and relative, participating, optional, or other special rights of
such series, and the qualifications, limitations, or restrictions thereof. Such
authority of the Board of Directors with respect to each such series shall
include, but not be limited to, the determination of the following:
(a) the distinctive designation of, and the number of shares
comprising, such series, which number may be increased (except where
otherwise provided by the Board of Directors in creating such series)
or decreased (but not below the number of shares thereof then
outstanding) from time to time by like action of the Board of
Directors;
(b) the dividend rate or amount for such series, the conditions
and dates upon which such dividends shall be payable, the relation
which such dividends shall bear to the dividends payable on any other
class or classes or any other series of any class or classes of stock,
and whether such dividends shall be cumulative, and if so, from which
date or dates for such series;
(c) whether or not the shares of such series shall be subject to
redemption by the Company and the times, prices, and other terms and
conditions of such redemption;
(d) whether or not the shares of such series shall be subject to
the operation of a sinking fund or purchase fund to be applied to the
purchase or redemption of such shares and if such a fund be
established, the amount thereof and the terms and provisions relative
to the application thereof;
(e) whether or not the shares of such series shall be convertible
into or exchangeable for shares of any other class or classes, or of
any other series of any class or classes, of stock of the Company and
if provision be made for conversion or exchange, the times, prices,
rates, adjustments, and other terms and conditions of such conversion
or exchange;
(f) whether or not the shares of such series shall have voting
rights, in addition to the voting rights provided by law, and if they
are to have such additional voting rights, the extent thereof;
(g) the rights of the shares of such series in the event of any
liquidation, dissolution, or winding up of the Company or upon any
2
<PAGE>
distribution of its assets; and
(h) any other powers, preferences, and relative, participating,
optional, or other special rights of the shares of such series, and
qualifications, limitations, or restrictions thereof, to the full
extent now or hereafter permitted by law and not inconsistent with the
provisions hereof.
All shares of any one series of Preferred Stock shall be identical in
all respects except as to the dates from which dividends thereon shall be
cumulative. All series of the Preferred Stock shall rank equally and be
identical in all respects except as otherwise provided in the resolution or
resolutions providing for the issue of any series of Preferred Stock.
Whenever dividends upon the Preferred Stock at the time outstanding, to
the extent of the preference to which such stock is entitled, shall have been
paid in full or declared and set apart for payment for all past dividend
periods, and after the provisions for any sinking or purchase fund or funds for
any series of Preferred Stock shall have been complied with, the Board of
Directors may declare and pay dividends on the Common Stock, payable in cash,
stock, or otherwise, and the holders of shares of Preferred Stock shall not be
entitled to share therein, subject to the provisions of the resolution or
resolutions creating any series of Preferred Stock.
In the event of any liquidation, dissolution, or winding up of the
Company or upon the distribution of the assets of the Company, all assets and
funds of the Company remaining, after the payment to the holders of the
Preferred Stock of the full preferential amounts to which they shall be entitled
as provided in the resolution or resolutions creating any series thereof, shall
be divided and distributed among the holders of the Common Stock ratably, except
as may otherwise be provided in any such resolution or resolutions. Neither the
merger or consolidation of the Company with another corporation nor the sale or
lease of all or substantially all the assets of the Company shall be deemed to
be a liquidation, dissolution, or winding up of the Company or a distribution of
its assets.
Except as otherwise required by law or provided by a resolution or
resolutions of the Board of Directors creating any series of Preferred Stock,
the holders of Common Stock shall have the exclusive power to vote and shall
have one vote in respect of each share of such stock held and the holders of
Preferred Stock shall have no voting power whatsoever. Except as otherwise
provided in such a resolution or resolutions, the authorized shares of any class
or classes may be increased or decreased by the affirmative vote of the holders
of a majority of the outstanding shares of stock of the Company entitled to
vote.
3
<PAGE>
Pursuant to the authority conferred by this Article Fourth upon the
Board of Directors of the Company, the Board of Directors created a series of
1,600,000 shares of Preferred Stock designated as Series A Junior Participating
Preferred Stock by filing a Certificate of Designations of the Company with the
Secretary of State of the State of Delaware (the "Secretary of State") on
January 29, 1986, as amended by the Amended Certificate of Designations of the
Company filed with the Secretary of State on February 15, 1990, and the voting
powers, designations, preferences and relative, participating, optional or other
special rights, and the qualifications, limitations or restrictions thereof, of
the Company's Series A Junior Participating Preferred Stock are set forth in
Appendix A hereto and are incorporated herein by reference.
Pursuant to the authority conferred by this Article Fourth upon the
Board of Directors of the Company, the Board of Directors created a series of
1,400,000 shares of Preferred Stock designated as Series B ESOP Convertible
Preferred Stock by filing a Certificate of Designations of the Company with the
Secretary of State on August 30, 1988, and the voting powers, designations,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, of the Company's Series
B ESOP Convertible Preferred Stock are set forth in Appendix B hereto and are
incorporated herein by reference.
Fifth: In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware, the Board of Directors is expressly
authorized and empowered:
(a) to make, alter, and repeal the Bylaws of the Company, subject
to the power of the stockholders of the Company to alter or repeal any
Bylaw made by the Board of Directors;
(b) subject to the laws of the State of Delaware, from time to
time to sell, lease, or otherwise dispose of any part or parts of the
properties of the Company and to cease to conduct the business
connected therewith or again to resume the same, as it may deem best;
and
(c) in addition to the powers and authorities hereinbefore and by
the laws of the State of Delaware conferred upon the Board of
Directors, to exercise all such powers and to do all such acts and
things as may be exercised or done by the Company; subject,
nevertheless, to the provisions of said laws, of the Certificate of
Incorporation as from
4
<PAGE>
time to time amended of the Company, and of its Bylaws.
Sixth: (a) Except as otherwise provided for or fixed by or pursuant
to the provisions of Article Fourth of this Certificate of Incorporation
relating to the rights of the holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation to elect
additional directors under specified circumstances, the number of directors of
the Company shall be fixed from time to time by or pursuant to the Bylaws of the
Company. The directors, other than those who may be elected pursuant to the
aforesaid provisions of said Article Fourth, shall be classified, with respect
to the time for which they severally hold office, into three classes, as nearly
equal in number as possible, as shall be provided in the manner specified in the
Bylaws of the Company, the first such class to be originally elected for a term
expiring at the annual meeting of stockholders to be held in 1986, the second
such class to be originally elected for a term expiring at the annual meeting of
stockholders to be held in 1987, and the third such class to be originally
elected for a term expiring at the annual meeting of stockholders to be held in
1988, with each director in each class to hold office until his or her successor
is elected and qualified. At each annual meeting of stockholders beginning with
the annual meeting of stockholders to be held in 1986, the successors of the
class of directors whose term expires at that meeting shall be elected to hold
office for a term expiring at the annual meeting of stockholders to be held in
the third year following the year of their election, with each director in each
such class to hold office until his or her successor is elected and qualified.
(b) Advance notice of stockholder nominations for the election of
directors shall be given in the manner provided by the Bylaws of the Company at
the time in effect.
(c) Except as otherwise provided for or fixed by or pursuant to the
provisions of Article Fourth of this Certificate of Incorporation relating to
the rights of the holders of any class or series of stock having a preference
over the Common Stock as to dividends or upon liquidation to elect additional
directors under specified circumstances, newly-created directorships resulting
from any increase in the number of directors and any vacancies on the Board of
Directors resulting from death, resignation, disqualification, removal, or other
cause shall be filled only by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum of the Board
of Directors. Any director elected in accordance with the preceding sentence
shall hold office for the remainder of the full term of the class of directors
in which the new directorship was created or the vacancy occurred and until such
director's successor shall have been elected and qualified. No decrease in the
number of directors constituting the Board of Directors shall shorten the term
of any incumbent director.
5
<PAGE>
(d) Except as otherwise provided for or fixed by or pursuant to the
provisions of Article Fourth of this Certificate of Incorporation relating to
the rights of the holders of any class or series of stock having a preference
over the Common Stock as to dividends or upon liquidation to elect additional
directors under specified circumstances, any director may be removed from
office, with or without cause, but only by the affirmative vote of at least 80%
of the combined voting power of the then-outstanding shares of all classes and
series of stock of the Company entitled to vote generally in the election of
directors ("Voting Stock"), voting together as a single class (it being
understood that for the purposes of this Article Sixth, each share of the Voting
Stock shall have the number of votes granted to it in accordance with Article
Fourth of this Certificate of Incorporation).
(e) Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of at least 80% of the
combined voting power of the Voting Stock, voting together as a single class,
shall be required to alter, amend, or repeal, or adopt any provision
inconsistent with, this Article Sixth.
Seventh: Section 1. The vote of stockholders of the Company required
to approve any Business Combination shall be as set forth in this Article
Seventh. The term "Business Combination", as well as other capitalized terms
used in this Article Seventh, shall have the respective meanings ascribed to
them in Section 3 of this Article Seventh.
Irrespective of any affirmative vote required by law or by this
Certificate of Incorporation, and except as otherwise expressly provided in
Section 2 of this Article Seventh:
(i) any merger or consolidation of the Company or any
Subsidiary with (a) any Interested Stockholder or (b) any other Person
(whether or not itself an Interested Stockholder or an Affiliate of an
Interested Stockholder) which is, or after such merger or consolidation
would be, an Interested Stockholder or an Affiliate of an Interested
Stockholder,
(ii) any sale, lease, exchange, mortgage, pledge, transfer, or
other disposition (in one transaction or a series of transactions) to
or with any Interested Stockholder or any Affiliate of any Interested
Stockholder of any assets of the Company or any Subsidiary having an
aggregate Fair Market Value of $100 million or more,
6
<PAGE>
(iii) any sale, lease, exchange, mortgage, pledge, transfer,
or other disposition (in one transaction or a series of transactions)
to the Company or any Subsidiary of any assets of any Interested
Stockholder or any Affiliate of any Interested Stockholder having an
aggregate Fair Market Value of $100 million or more,
(iv) any issuance or transfer by the Company or any Subsidiary
(in one transaction or a series of transactions) of any securities of
the Company or any Subsidiary to any Interested Stockholder or any
Affiliate of any Interested Stockholder in exchange for cash,
securities, or other property (or a combination thereof) having an
aggregate Fair Market Value of $100 million or more,
(v) the adoption of any plan or proposal for the liquidation
or dissolution of the Company proposed by or on behalf of any
Interested Stockholder or any Affiliate of any Interested Stockholder,
or
(vi) any reclassification of securities (including any reverse
stock split), or recapitalization of the Company, or any merger or
consolidation of the Company with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise involving an
Interested Stockholder), which has the effect, directly or indirectly,
of increasing the proportionate share of the outstanding shares of any
class of equity, or securities convertible into any equity, securities
of the Company or any Subsidiary, as the case may be, which is,
directly or indirectly, owned by any Interested Stockholder or any
Affiliate of any Interested Stockholder,
shall require the affirmative vote of at least 80% of the combined voting power
of the then-outstanding shares of all classes and series of stock of the Company
entitled to vote generally in the election of directors ("Voting Stock"), voting
together as a single class (it being understood that for the purposes of this
Article Seventh, each share of Voting Stock shall have the number of votes
granted to it in accordance with Article Fourth of this Certificate of
Incorporation). Such affirmative vote shall be required notwithstanding the
fact that no vote may be required, or that a lesser percentage may otherwise be
applicable, by law or in any agreement with any national securities exchange or
otherwise.
Section 2. Any Business Combination which meets all the conditions
specified in either paragraph A or paragraph B below shall not be subject to the
provisions of Section 1 of this Article Seventh and shall require only such
affirmative
7
<PAGE>
vote as is required by law and any other provision of this Certificate of
Incorporation:
A. the Business Combination shall have been approved by a majority of
the Disinterested Directors;
- or -
B. all the following conditions with respect to such Business
Combination shall have been met:
(i) the aggregate amount of cash and the Fair Market Value as of
the date of the consummation of the Business Combination of consideration
other than cash to be received per share by holders of Common Stock in such
Business Combination, shall be at least equal in value to the higher of the
following:
(a) if applicable, the highest per share price (including
any brokerage commissions, transfer taxes, soliciting dealers' fees,
and option costs) paid by the Interested Stockholder (before or after
becoming an Interested Stockholder), or any Affiliate or Associate
thereof, in acquiring Beneficial Ownership of any shares of Common
Stock (1) within the two-year period immediately prior to the first
public announcement of the proposal of the Business Combination
("Announcement Date") or (2) in the transaction in which it became an
Interested Stockholder, whichever is higher; or
(b) the Fair Market Value per share of Common Stock of the
Company (1) on the Announcement Date, or (2) on the date on which the
Interested Stockholder became an Interested Stockholder ("Determination
Date"), whichever is higher;
(ii) the aggregate amount of cash and the Fair Market Value as of
the date of the consummation of the Business Combination of consideration
other than cash to be received per share by holders of shares of any class or
series of outstanding Voting Stock other than Common Stock shall be at least
equal to the highest of the following (it being intended that the
requirements of this paragraph B(ii) of this Section 2 of Article Seventh
shall be required to be met with respect to every class or series, as the
case may be, of outstanding Voting Stock, whether or not the Interested
Stockholder has previously acquired any shares of such class or series of
Voting Stock):
(a) if applicable, the highest per share price (including
8
<PAGE>
any brokerage commissions, transfer taxes, soliciting dealers' fees,
and option costs) paid by the Interested Stockholder (before or after
becoming an Interested Stockholder) for any shares of such class or
series of Voting Stock acquired by it (1) within the two-year period
immediately prior to the Announcement Date or (2) in the transaction in
which it became an Interested Stockholder, whichever is higher;
(b) if applicable, the highest preferential amount per share
to which the holders of shares of such class or series, as the case may
be, of Voting Stock are entitled in the event of any voluntary or
involuntary liquidation, dissolution, or winding up of the Company; or
(c) the Fair Market Value per share of such class or series,
as the case may be, of Voting Stock on the Announcement Date or on the
Determination Date, whichever is higher;
(iii) the price determined in accordance with paragraphs B(i) and
B(ii) of this Section 2 of Article Seventh shall be subject to appropriate
adjustment in the event of any stock dividend, stock split, combination of
shares, or similar event;
(iv) the consideration to be received by the holders of a
specified class or series of outstanding Voting Stock (including Common Stock)
shall be in cash or in the same form as that which the Interested Stockholder
has previously paid for shares of such class or series of Voting Stock; if the
Interested Stockholder had paid for shares of any class or series of Voting
Stock with varying forms of consideration, the form of consideration for such
class or series of Voting Stock shall, at the option of the Interested
Stockholder, be either cash or the form used to acquire the largest number of
shares of such class or series of Voting Stock previously acquired by it;
(v) after such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business Combination: (a)
except as approved by a majority of the Disinterested Directors, there shall
have been no failure to declare and pay at the regular date therefor any full
quarterly dividends (whether or not cumulative) on the outstanding Preferred
Stock; (b) there shall have been (i) no reduction in the annual rate of
dividends payable or last paid, as the case may be, on the Common Stock
(except as necessary to reflect any subdivision of such Common Stock) except
as approved by a majority of the Disinterested Directors and (ii) an increase
in the annual rate of dividends last paid on the Common Stock, as necessary
to reflect any reclassification (including any reverse stock
9
<PAGE>
split), recapitalization, reorganization, or any similar transaction which
has the effect of reducing the number of outstanding shares of such Common
Stock, unless the failure so to increase such annual rate shall have been
approved by a majority of the Disinterested Directors; and (c) such
Interested Stockholder shall not have acquired Beneficial Ownership of any
additional shares of Voting Stock, except as part of the transaction which
resulted in such Interested Stockholder becoming an Interested Stockholder;
(vi) after such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the benefit,
directly or indirectly (except proportionately as a stockholder), of any
loans, advances, guarantees, pledges, or other financial assistance or any
tax credits or other tax advantages provided by, or as a result of its equity
position in, the Company, whether in anticipation of or in connection with
such Business Combination or otherwise; and
(vii) a proxy statement or information statement describing the
proposed Business Combination (and including the views of the Disinterested
Directors, if requested by the Disinterested Directors, and of an independent
investment banker, if any, selected by such Disinterested Directors with
respect to the proposed Business Combination) and complying with the
disclosure and other requirements of the Securities Exchange Act of 1934 and
the rules and regulations thereunder (or any subsequent provisions replacing
such requirements of such Act, rules, or regulations) shall be mailed at
least 30 days prior to the consummation of such Business Combination (whether
or not such proxy statement or information statement is required to be mailed
pursuant to such Act or subsequent provisions) to stockholders of the
Company.
Section 3. For purposes of this Article Seventh:
__. A. An "Affiliate" of, or a Person "Affiliated" with, a specified
Person, shall mean a Person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the Person specified.
B. "Announcement Date" shall have the meaning set forth in paragraph
B(i)(a) of Section 2 of this Article Seventh.
C. The term "Associate" used to indicate a relationship with any
Person shall mean (1) any corporation or organization (other than the Company or
any Subsidiary), of which such Person is an officer or partner or is, directly
or indirectly, the Beneficial Owner of 10% or more of any class of equity
securities, (2) any trust or other estate in which such Person has a substantial
beneficial interest or
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<PAGE>
as to which such Person serves as a trustee or in a similar fiduciary capacity,
and (3) any relative or spouse of such Person, or any relative of such spouse,
who has the same home as such Person or who is a director or officer of the
Company or any Subsidiary.
D. A Person shall be a "Beneficial Owner" of any Voting Stock:
(i) which such Person or any of its Affiliates or Associates
owns, directly or indirectly;
(ii) which such Person or any of its Affiliates or Associates has
(a) the right to acquire (whether such right is exercisable immediately
or only after the passage of time) pursuant to any agreement,
arrangement, or understanding or upon the exercise of conversion
rights, exchange rights, warrants, or options, or otherwise, or (b) the
right to vote (whether or not irrevocable) pursuant to any agreement,
arrangement, or understanding; or
(iii) which is Beneficially Owned, directly or indirectly, by
another Person with which such Person or any of its Affiliates or
Associates has any agreement, arrangement, or understanding for the
purpose of acquiring, holding, voting, or disposing of any shares of
Voting Stock,
and any Voting Stock of which a Person shall be the Beneficial Owner shall be
"Beneficially Owned" by, or be under the "Beneficial Ownership" of, such Person.
E. "Business Combination" shall mean any transaction which is
referred to in any one or more of clauses (i) through (vi) of Section 1 of this
Article Seventh.
F. In the event of any Business Combination in which the Company
survives, the phrase "consideration other than cash to be received" as used in
paragraphs B(i) and (ii) of Section 2 of this Article Seventh shall include
shares of Common Stock and shares of any other class or series of outstanding
Voting Stock retained by the holders of such shares, or both.
G. "Determination Date" shall have the meaning set forth in paragraph
B(i)(b) of Section 2 of this Article Seventh.
H. "Disinterested Director" shall mean any member of the Board of
Directors who is not an Affiliate, an Associate, or a nominee of the Interested
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Stockholder and who was a member of the Board of Directors prior to the time
that the Interested Stockholder became an Interested Stockholder, and any
successor of a Disinterested Director who is not an Affiliate or Associate of
the Interested Stockholder and is recommended to succeed a Disinterested
Director by a majority of Disinterested Directors then on the Board of
Directors.
I. "Fair Market Value" shall mean: (i) in the case of stock, the
highest closing sale price of a share of such stock during the 30 calendar day
period immediately preceding the date in question on the Composite Tape for New
York Stock Exchange-Listed Stocks, or, if such stock is not quoted on such
Composite Tape, on the New York Stock Exchange, or, if such stock is not listed
on such Exchange, on the principal United States securities exchange registered
under the Securities Exchange Act of 1934 on which such stock is listed, or, if
such stock is not listed on any such exchange, the highest closing bid quotation
with respect to a share of such stock during the 30 calendar day period
immediately preceding the date in question on the National Association of
Securities Dealers, Inc. Automated Quotations System or any system then in use,
or if no such quotations are available, the fair market value on the date in
question of a share of such stock as determined by a majority of the
Disinterested Directors; and (ii) in the case of property other than cash or
stock, the fair market value of such property on the date in question as
determined by a majority of the Disinterested Directors.
J. "Interested Stockholder" shall mean any Person (other than the
Company, any Subsidiary, or any employee benefit plan of the Company or any
Subsidiary) who or which:
(i) is the Beneficial Owner, directly or indirectly, of at
least 10% of the Voting Stock;
(ii) is an Affiliate of the Company and at any time within the
two-year period immediately prior to the date in question was the
Beneficial Owner, directly or indirectly, of at least 10% of the Voting
Stock; or
(iii) is an assignee of or has otherwise succeeded to any shares
of Voting Stock which were at any time within the two-year period
immediately prior to the date in question Beneficially Owned by any
Interested Stockholder, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions not
involving a public offering within the meaning of the Securities Act of
1933, as amended.
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<PAGE>
For purposes of determining whether a person is an Interested
Stockholder, the number of shares of Voting Stock deemed to be outstanding shall
include shares deemed owned through application of paragraph D of this Section
3, but shall not include any other shares of Voting Stock which may be issuable
pursuant to any agreement, arrangement, or understanding or upon exercise of
conversion rights, warrants, or options, or otherwise.
K. "Person" shall mean any individual, firm, trust, partnership,
association, corporation, or other entity.
L. "Subsidiary" shall mean any corporation of which a majority of any
class of equity security is owned, directly or indirectly, by the Company.
M. "Voting Stock" shall have the meaning set forth in Section 1 of
this Article Seventh.
Section 4. A majority of the Disinterested Directors shall have the
power and duty to determine for the purposes of this Article Seventh, on the
basis of information known to them after reasonable inquiry, (A) whether a
person is an Interested Stockholder, (B) the number of shares of Voting Stock
beneficially owned by any person, (C) whether a Person is an Affiliate or
Associate of another, and (D) whether the assets which are the subject of any
Business Combination have, or the consideration to be received for the issuance
or transfer of securities by the Company or any Subsidiary in any Business
Combination has, an aggregate Fair Market Value of $100 million or more. A
majority of the Disinterested Directors shall have the further power to
interpret all the terms and provisions of this Article Seventh.
Section 5. Nothing contained in this Article Seventh shall be
construed to relieve any Interested Stockholder from any fiduciary obligation
imposed by law.
Section 6. Notwithstanding any other provisions of this Certificate of
Incorporation or the Bylaws (and notwithstanding the fact that a lesser
percentage may otherwise be specified by law, this Certificate of Incorporation,
or the Bylaws), the affirmative vote of at least 80% of the Voting Stock, voting
together as a single class (it being understood that for the purposes of this
Article Seventh, each share of the Voting Stock shall have the number of votes
granted to it in accordance with Article Fourth of this Certificate of
Incorporation), shall be required to alter, amend, or repeal, or adopt any
provisions inconsistent with, this Article Seventh.
Eighth: Any action required or permitted to be taken by the holders of
the Voting Stock must be effected at a duly called annual or special meeting of
such
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<PAGE>
holders and may not be effected by any consent in writing by such holders.
Notwithstanding anything contained in this Certificate of Incorporation to the
contrary, the affirmative vote of at least 80% of the combined voting power of
the then-outstanding shares of all classes and series of stock of the Company
entitled to vote generally in the election of directors ("Voting Stock"), voting
together as a single class (it being understood that for the purposes of this
Article Eighth, each share of the Voting Stock shall have the number of votes
granted to it in accordance with Article Fourth of this Certificate of
Incorporation), shall be required to alter, amend, or repeal, or adopt any
provisions inconsistent with, this Article Eighth.
Ninth: The Board of Directors shall have the power to make, alter,
amend, or repeal, or adopt any provision inconsistent with, the Bylaws (except
insofar as the Bylaws adopted by the stockholders shall otherwise provide). Any
Bylaws made by the directors under the powers conferred hereby may be altered,
amended, or repealed, and any provisions inconsistent therewith may be adopted,
by the directors or by the stockholders. Notwithstanding the foregoing and
anything contained in this Certificate of Incorporation to the contrary, Section
2 of Article II, and Sections 3, 12, 13, and 15 of Article III of the Bylaws,
all as in effect simultaneously with the effectiveness of this Article, shall
not be altered, amended, or repealed, and no provision inconsistent therewith
shall be adopted, without the affirmative vote of at least 80% of the combined
voting power of the then-outstanding shares of all classes and series of stock
of the Company entitled to vote generally in the election of directors ("Voting
Stock"), voting together as a single class (it being understood that for the
purposes of this Article Ninth, each share of the Voting Stock shall have the
number of votes granted to it in accordance with Article Fourth of this
Certificate of Incorporation). Notwithstanding anything contained in this
Certificate of Incorporation to the contrary, the affirmative vote of at least
80% of the Voting Stock, voting together as a single class, shall be required to
alter, amend, or repeal, or adopt any provision inconsistent with, this Article
Ninth.
Tenth: A director of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit. If the Delaware General Corporation Law is hereafter amended to permit
further limitation on or elimination of the personal liability of the Company's
directors for breach of fiduciary duty, then a director of the Company shall be
exempt from such liability for any such breach to the full extent permitted by
the Delaware General Corporation Law as so amended from time to time. Any
repeal or modification of the foregoing provisions of this
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<PAGE>
Article Tenth, or the adoption of any provision inconsistent herewith, shall not
adversely affect any right or protection of a director of the Company hereunder
in respect of any act or omission of such director occurring prior to such
repeal, modification, or adoption of an inconsistent provision.
IN WITNESS WHEREOF, the Company has caused this Restated Certificate
of Incorporation to be signed in its name by its Chairman of the Board this ____
day of _______________, 1996.
J. C. PENNEY COMPANY, INC.
By:
----------------------------
William R. Howell
Chairman of the Board
15
<PAGE>
EXHIBIT A
---------
SECOND AMENDED CERTIFICATE OF DESIGNATIONS
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
J. C. PENNEY COMPANY, INC.
Pursuant to Section 151 of the Delaware
General Corporation Law
J. C. Penney Company, Inc., a company organized and existing under the
laws of the State of Delaware (the "Company"), DOES HEREBY CERTIFY:
1. That by resolution of the Board of Directors of the Company dated
January 28, 1986, and by a Certificate of Designations filed in the office of
the Secretary of State of Delaware on January 29, 1986, the Company authorized
the issuance of a series of 1,600,000 shares of Series A Junior Participating
Preferred Stock of the Company (the "Series A Preferred Stock") and established
the voting powers, designations, preferences and relative, participating and
other rights, and the qualifications, limitations or restrictions thereof.
2. That an Amended Certificate of Designation of the Series A
Preferred Stock was filed with the Secretary of State of Delaware on February
15, 1990.
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<PAGE>
3. That as of the date hereof no shares of such Series A Preferred
Stock are outstanding and no shares of such Series A Preferred Stock have been
issued.
4. That pursuant to authority conferred on the Board of Directors of
the Company by its Restated Certificate of Incorporation and the provisions of
Section 151(g) of the General Corporation Law of the State of Delaware, the
Board of Directors on March 10, 1999 adopted the following resolution amending
in their entireties the voting powers, preferences, and relative, participating,
optional or other special rights of the shares of the Series A Preferred Stock,
and the qualifications, limitations or restrictions thereof effective upon the
redemption of the rights (the "1990 Rights") issued pursuant to the Rights
Agreement between the Company and ChaseMellon Shareholder Services L.L.C., as
successor Rights Agent, dated February 14, 1990.
RESOLVED, that effective upon the redemption of the 1990 Rights and
pursuant to the authority conferred upon the Board of Directors of the Company
by its Restated Certificate of Incorporation and by the provisions of Section
151(g) of the General Corporation Law of the State of Delaware, the voting
powers, preferences and relative participating, optional or other special rights
of the Series A Junior Preferred Stock of the Company, and the qualifications,
limitations or restrictions thereof, be, and the same hereby are, amended in
their entireties to be as follows:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Company in accordance with the provisions of its Restated
Certificate of Incorporation, a series of Preferred Stock of the Company be, and
hereby is, created and that the designation and amount thereof and the voting
powers, preferences and relative,
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<PAGE>
participating, optional or other special rights of the shares of such series,
and the qualifications, limitations or restrictions thereof are as follows:
Section 1. Designation and Amount. The shares of such series shall
be designated "Series A Junior Participating Preferred Stock" (the "Series A
Preferred Stock") and the number of shares constituting such series shall be
1,600,000.
Section 2. Dividends and Distributions.
(A) Subject to the provisions for adjustment hereinafter set forth,
the holders of shares of Series A Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors out of funds legally
available for the purpose, (i) cash dividends in an amount per share (rounded to
the nearest cent) equal to 1,000 times the aggregate per share amount of all
cash dividends declared or paid on the Common Stock, 50c par value per share, of
the Company (the "Common Stock") and (ii) a preferential cash dividend
("Preferential Dividend"), if any, on the first day of February, May, August and
November of each year (each a "Quarterly Dividend Payment Date"), commencing on
the first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Preferred Stock, in an amount equal to $50.00
per share of Series A Preferred Stock less the per share amount of all cash
dividends declared on the Series A Preferred Stock pursuant to clause (i) of
this sentence since the immediately preceding Quarterly Dividend Payment Date
or, with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series A Preferred Stock. In
the event the Company shall, at any time after the issuance of any share or
fraction of a share of Series A Preferred Stock, make any distribution on the
shares of Common Stock of the Company, whether by way of a dividend or a
reclassification of stock, a recapitalization, reorganization or partial
liquidation of the Company or otherwise, which
A-3
<PAGE>
is payable in cash or any debt security, debt instrument, real or personal
property or any other property (other than cash dividends subject to the
immediately preceding sentence and other than a distribution of shares of Common
Stock or other capital stock of the Company and other than a distribution of
rights or warrants to acquire any such share, including any debt security
convertible into or exchangeable for any such share), at a price less than the
Current Market Price of such share, then, and in each such event the Company
shall simultaneously pay on each then outstanding share of Series A Preferred
Stock of the Company a distribution, in like kind, of 1,000 times such
distribution paid on a share of Common Stock (subject to the provisions for
adjustment hereinafter set forth). The dividends and distributions on the Series
A Preferred Stock to which holders thereof are entitled pursuant to clause (i)
of the first sentence of this paragraph and the second sentence of this
paragraph are hereinafter referred to as "Participating Dividends," and the
multiple of such cash and noncash dividends on the Common Stock applicable to
the determination of the Participating Dividends, which shall be 1,000 initially
but shall be adjusted from time to time as hereinafter provided, is hereinafter
referred to as the "Dividend Multiple". In the event the Company shall at any
time after March 26, 1999 (the "Effective Date") declare or pay any dividend or
make any distribution on Common Stock payable in shares of Common Stock, or
effect a subdivision or split or a combination, consolidation or reverse split
of the outstanding shares of Common Stock into a greater or lesser number of
shares of Common Stock, or issue any of its capital stock in a reclassification
of the Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing or surviving
corporation), then in each such case the Dividend Multiple thereafter applicable
to the determination of the amount of Participating Dividends which holders of
shares of
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<PAGE>
Series A Preferred Stock shall be entitled to receive shall be the Dividend
Multiple applicable immediately prior to such event multiplied by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided for or fixed by or pursuant to the
provisions of Article Fourth of the Restated Certificate of Incorporation of the
Company relating to the rights of holders of any class or series of stock having
a preference over the Common Stock as to dividends, the Company shall declare
each Participating Dividend at the same time it declares any cash or noncash
dividend or distribution on the Common Stock in respect of which a Participating
Dividend is required to be paid. No cash or noncash dividend or distribution on
the Common Stock in respect of which a Participating Dividend is required shall
be paid or set aside for payment on the Common Stock unless a Participating
Dividend in respect of such dividend or distribution on the Common Stock shall
be simultaneously paid or set aside for payment on the Series A Preferred Stock.
(C) Preferential Dividends shall begin to accumulate on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issuance of any shares of Series A Preferred Stock.
Accumulated but unpaid Preferential Dividends shall cumulate but shall not bear
interest. Preferential Dividends paid on the shares of Series A Preferred Stock
in an amount less than the total amount of such dividends at the time
accumulated and payable on such shares shall be allocated pro rata on a share-
by-share basis among all such shares at the time outstanding.
Section 3. Voting Rights. The holders of shares of Series A
Preferred Stock shall have the following voting rights:
A-5
<PAGE>
(A) Subject to the provisions for adjustment hereinafter set forth,
each share of Series A Preferred Stock shall entitle the holder thereof to 1,000
votes on all matters submitted to a vote of the stockholders of the Company.
The number of votes which a holder of Series A Preferred Stock is entitled to
cast, as the same may be adjusted from time to time as hereinafter provided, is
hereinafter referred to as the "Vote Multiple." In the event the Company shall
at any time after the Effective Date declare or pay any dividend on Common Stock
payable in shares of Common Stock, or effect a subdivision or split or a
combination, consolidation or reverse split of the outstanding shares of Common
Stock into a greater or lesser number of shares of Common Stock, or issue any of
its capital stock in a reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation, then in each such case the
Vote Multiple thereafter applicable to the determination of the number of votes
per share to which holders of shares of Series A Preferred Stock shall be
entitled after such event shall be the Vote Multiple immediately prior to such
event multiplied by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(B) Except as otherwise provided herein, in the Restated Certificate
of Incorporation, in any resolution or resolutions of the Board of Directors of
the Company providing for the issue of any other series of Preferred Stock or by
law, the holders of shares of Series A Preferred Stock, the holders of shares of
Common Stock and the holders of shares of any other class or series of capital
stock of the Company entitled to vote
A-6
<PAGE>
generally for the election of directors shall vote together as one class on all
matters submitted to a vote of stockholders of the Company.
(C) In the event that the Preferential Dividends accrued on the Series
A Preferred Stock for four or more consecutive quarterly periods shall not have
been declared and paid or set apart for payment, the holders of record of the
Series A Preferred Stock, voting together with the holders of record of any
other series of Preferred Stock of the Company which shall then have the right,
expressly granted by the Restated Certificate of Incorporation of the Company or
in any resolution or resolutions of the Board of Directors of the Company
providing for the issue of such shares of Preferred Stock, to elect directors
upon such a default in the payment of dividends by the Company shall have the
right, at the next meeting of stockholders called for the election of directors,
voting together as a class, to elect two members to the Board of Directors,
which directors shall be in addition to the number provided for pursuant to the
Company's By laws prior to such event, to serve until the next Annual Meeting
and until their successors are elected and qualified or their earlier
resignation, removal or incapacity or until such earlier time as all accrued and
unpaid Preferential Dividends upon the outstanding shares of Series A Preferred
Stock shall have been paid (or set aside for payment) in full. The holders of
shares of Series A Preferred Stock shall continue to have the right to elect
directors as provided by the immediately preceding sentence until all accrued
and unpaid Preferential Dividends upon the outstanding shares of Series A
Preferred Stock shall have been paid (or set aside for payment) in full. Such
directors may be removed and replaced by such stockholders, and
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<PAGE>
vacancies in such directorships may be filled only by such stockholders (or by
the remaining director elected by such stockholders, if there be one) in the
manner permitted by law. Subject to the foregoing, any directors elected
pursuant to this paragraph 3(C) shall be elected annually and shall not
constitute members of any Class of directors as contemplated by Article Sixth of
the Company's Restated Certificate of Incorporation.
(D) Except as otherwise required by law or set forth herein, holders
of Series A Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote as
set forth herein) for the taking of any corporate action.
Section 4. Certain Restrictions.
(A) Whenever Preferential Dividends or Participating Dividends are in
arrears or the Company shall be in default in payment thereof, thereafter and
until all accrued and unpaid Preferential Dividends and Participating Dividends,
whether or not declared, on shares of Series A Preferred Stock outstanding shall
have been paid or set aside for payment in full, and in addition to any and all
other rights which any holder of shares of Series A Preferred Stock may have in
such circumstances, the Company shall not
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration, any
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends or make any other distributions
on any shares of stock ranking on a parity as to dividends with the Series
A Preferred
A-8
<PAGE>
Stock, unless dividends are paid ratably on the Series A Preferred Stock
and all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are
then entitled;
(iii) except as permitted by subparagraph (iv) of this paragraph
(A), redeem or purchase or otherwise acquire for consideration shares of
any stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock, provided that
the Company may at any time redeem, purchase or otherwise acquire shares of
any such parity stock in exchange for shares of any stock of the Company
ranking junior (both as to dividends and upon liquidation, dissolution or
winding up) to the Series A Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares
of Series A Preferred Stock, or any shares of stock ranking on a parity
with the Series A Preferred Stock (either as to dividends or upon
liquidation, dissolution or winding up), except in accordance with a
purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such terms as the
Board of Directors, after consideration of the respective annual dividend
rates and other relative rights and preferences of the respective series
and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
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<PAGE>
(B) The Company shall not permit any subsidiary of the Company to
purchase or otherwise acquire for consideration any shares of stock of the
Company ranking junior to the Series A Preferred Stock unless the Company could,
under paragraph (A) of this Section 4, purchase or otherwise acquire such shares
at such time and in such manner.
(C) The Company shall not issue any shares of Series A Preferred Stock
except upon exercise of Rights issued pursuant to that certain Rights Agreement
dated as of March 26, 1999 between the Company and ChaseMellon Shareholder
Services L.L.C., as Rights Agent, a copy of which is on file with the Secretary
of the Company at the principal executive office of the Company and shall be
made available to holders of record of Common Stock or Series A Preferred Stock
without charge upon written request therefor addressed to the Secretary of the
Company. Notwithstanding the foregoing sentence, nothing contained in the
provisions hereof shall prohibit or restrict the Company from issuing for any
purpose any series of Preferred Stock with rights and privileges similar to,
different from, or greater than, those of the Series A Preferred Stock.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Company in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. All such shares
upon their retirement and cancellation shall become authorized but unissued
shares of Preferred Stock, without designation as to series, and such shares may
be reissued as part of a new series of Preferred Stock to be created by
resolution or resolutions of the Board of Directors.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
voluntary or involuntary liquidation, dissolution or winding up of the Company,
no
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<PAGE>
distribution shall be made (i) to the holders of shares of stock ranking junior
to the Series A Preferred Stock (either as to dividends or upon liquidation,
dissolution or winding up) unless the holders of shares of Series A Preferred
Stock shall have received, subject to adjustment as hereinafter provided, the
greater of (A) $1,000 ($1.00 per one one-thousandth of a share) plus an amount
equal to all accumulated and unpaid dividends and distributions thereon, whether
or not declared, to the date of such payment, and (B) the amount equal to 1,000
times the aggregate amount to be distributed per share to holders of Common
Stock, as the same may be adjusted as hereinafter provided, or (ii) to the
holders of stock ranking on a parity upon liquidation, dissolution or winding up
with the Series A Preferred Stock, unless simultaneously therewith distributions
are made ratably on the Series A Preferred Stock and all other shares of such
parity stock in proportion to the total amounts to which the holders of shares
of Series A Preferred Stock are entitled under clause (i)(A) of this sentence
and to which the holders of such parity shares are entitled, in each case upon
such liquidation, dissolution or winding up. The amount to which holders of
Series A Preferred Stock shall be entitled upon liquidation, dissolution or
winding up of the Company pursuant to clause (i)(B) of the foregoing sentence is
hereinafter referred to as the "Participating Liquidation Amount," and the
multiple of the amount to be distributed to holders of shares of Common Stock
upon the liquidation, dissolution or winding up of the Company applicable
pursuant to said clause to the determination of the Participating Liquidation
Amount, which shall be 1,000 but may be adjusted from time to time as
hereinafter provided, is hereinafter referred to as the "Liquidation Multiple."
In this event the Company shall at any time after the Effective Date declare or
pay any dividend on Common Stock payable in shares of Common Stock, or effect a
subdivision or split or a combination, consolidation or reverse split of the
outstanding shares of Common Stock
A-11
<PAGE>
into a greater or lesser number of shares of Common Stock, or issue any of its
capital stock in a reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), then in each such case the
Liquidation Multiple thereafter applicable to the determination of the
Participating Liquidation Amount to which holders of Series A Preferred Stock
shall be entitled after such event shall be the Liquidation Multiple applicable
immediately prior to such event multiplied by a fraction the numerator of which
is the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 7. Certain Reclassifications and Other Events.
(A) In the event that holders of shares of Common Stock receive after
the Effective Date, in respect of their shares of Common Stock any share of
capital stock of the Company (other than any share of Common Stock of the
Company), whether by way of reclassification, recapitalization, reorganization,
dividend or other distribution or otherwise ("Transaction"), then in each such
event the dividend rights, voting rights and rights upon the liquidation,
dissolution or winding up of the Company of the shares of Series A Preferred
Stock shall be adjusted so that after such event the holders of Series A
Preferred Stock shall be entitled, in respect of each share of Series A
Preferred Stock held, in addition to such rights in respect thereof to which
such holder was entitled immediately prior to such adjustment, to (i) such
additional dividends as equal the Dividend Multiple in effect immediately prior
to such Transaction multiplied by the additional dividends which the holder of a
share of Common Stock shall be entitled to receive by virtue of the receipt in
the Transaction of such capital stock, (ii) such additional voting rights as
equal the Vote
A-12
<PAGE>
Multiple in effect immediately prior to such Transaction multiplied by the
additional voting rights which the holder of a share of Common Stock shall be
entitled to receive by virtue of the receipt in the Transaction of such capital
stock and (iii) such additional distributions upon liquidation, dissolution or
winding up of the Company as equal the Liquidation Multiple in effect
immediately prior to such Transaction multiplied by the additional amount which
the holder of a share of Common Stock shall be entitled to receive upon
liquidation, dissolution or winding up of the Company by virtue of the receipt
in the Transaction of such capital stock, as the case may be, all as provided by
the terms of such capital stock.
(B) In the event that holders of shares of Common Stock receive after
the Effective Date, in respect of their shares of Common Stock any right or
warrant to purchase Common Stock (including as such a right, for all purposes of
this paragraph, any security convertible into or exchangeable for Common Stock)
at a purchase price per share less than the Current Market Price (as hereinafter
defined) of a share of Common Stock on the date of issuance of such right or
warrant, then in each such event the dividend rights, voting rights and rights
upon the liquidation, dissolution or winding up of the Company of the shares of
Series A Preferred Stock shall each be adjusted so that after such event the
Dividend Multiple, the Vote Multiple and the Liquidation Multiple shall each be
the product of the Dividend Multiple, the Vote Multiple and the Liquidation
Multiple, as the case may be, in effect immediately prior to such event
multiplied by a fraction the numerator of which shall be the number of shares of
Common Stock outstanding immediately before such issuance of rights or warrants
plus the maximum number of shares of Common Stock which could be acquired upon
exercise in full of all such rights or warrants and the denominator of which
shall be the number of shares of Common Stock
A-13
<PAGE>
outstanding immediately before such issuance of rights or warrants plus the
number of shares of Common Stock which could be purchased, at the Current Market
Price of the Common Stock at the time of such issuance, by the maximum aggregate
consideration payable upon exercise in full of all such rights or warrants.
(C) In the event that holders of shares of Common Stock receive after
the Effective Date in respect of their shares of Common Stock any right or
warrant to purchase capital stock of the Company (other than shares of Common
Stock), including as such a right, for all purposes of this paragraph, any
security convertible into or exchangeable for capital stock of the Company,
(other than Common Stock), at a purchase price per share less than the Fair
Market Value of such shares of capital stock on the date of issuance of such
right or warrant, then in each such event the dividend rights, voting rights and
rights upon liquidation, dissolution or winding up of the Company of the shares
of Series A Preferred Stock shall each be adjusted so that after such event each
holder of a share of Series A Preferred Stock shall be entitled, in respect of
each share of Series A Preferred Stock held, in addition to such rights in
respect thereof to which such holder was entitled immediately prior to such
event, to receive (i) such additional dividends as equal the Dividend Multiple
in effect immediately prior to such event multiplied, first, by the additional
dividends to which the holder of a share of Common Stock shall be entitled upon
exercise of such right or warrant by virtue of the capital stock which could be
acquired upon such exercise and multiplied again by the Discount Fraction (as
hereinafter defined), (ii) such additional voting rights as equal the Vote
Multiple in effect immediately prior to such event multiplied, first, by the
additional voting rights to which the holder of a share of Common Stock shall be
entitled upon exercise of such right or warrant by virtue of the capital stock
which could be acquired upon such exercise and multiplied again by
A-14
<PAGE>
the Discount Fraction and (iii) such additional distribution upon liquidation,
dissolution or winding up of the Company as equal the Liquidation Multiple in
effect immediately prior to such event multiplied, first, by the additional
amount which the holder of a share of Common Stock shall be entitled to receive
upon liquidation, dissolution or winding up of the Company upon exercise of such
right or warrant by virtue of the capital stock which could be acquired upon
such exercise and multiplied again by the Discount Fraction. For purposes of
this paragraph, the "Discount Fraction" shall be a fraction the numerator of
which shall be the difference between the Current Market Price of a share of the
capital stock subject to a right or warrant distributed to holders of shares of
Common Stock as contemplated by this paragraph immediately after the
distribution thereof and the purchase price per share for such share of capital
stock pursuant to such right or warrant and the denominator of which shall be
the Current Market Price of a share of such capital stock immediately after the
distribution of such right or warrant.
(D) For purposes of this Second Amended Certificate of Designations,
the "Current Market Price" of a share of capital stock of the Company (including
a share of Common Stock) on any date shall be deemed to be the average of the
daily closing price per share thereof over the 30 consecutive Trading Days (as
such term is hereinafter defined) immediately prior to such date; provided,
however, that, in the event that such Current Market Price of any such share of
capital stock is determined during a period which includes any date that is
within 30 Trading Days after (i) the ex-dividend date for a dividend or
distribution on stock payable in shares of such stock or securities convertible
into shares of such stock, or (ii) the effective date of any subdivision, split,
combination, consolidation, reverse stock split or reclassification of such
stock, then and in each such event, the Current Market Price shall be
appropriately adjusted by the Board of Directors to
A-15
<PAGE>
reflect the Current Market Price of such stock to take into account ex-dividend
or post-effective date trading. The closing price for any day shall be the last
sale price, regular way, or, in case, no such sale takes place on such day, the
average of the closing bid and asked prices, regular way (in either case, as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange), or,
if the shares are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the shares are listed or admitted to trading or, if the shares are not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the National Association
of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or such other
system then in use, or if on any such date the shares are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the shares selected by the Board of
Directors. The term "Trading Day" shall mean a day on which the principal
national securities exchange on which the shares are listed or admitted to
trading is open for the transaction of business or, if the shares are not listed
or admitted to trading on any national securities exchange, on which the New
York Stock Exchange or such other national securities exchange as may be
selected by the Board of Directors is open. If the shares are not publicly held
or not so listed or traded on any day within the period of 30 Trading Days
applicable to the determination of Current Market Price thereof as aforesaid,
"Current Market Price" shall mean the fair market value thereof per share as
determined in good faith by the Board of Directors. In either case referred to
in the foregoing sentence,
A-16
<PAGE>
the determination of Current Market Price shall be described in a statement
filed with the Secretary of the Company.
Section 8. Consolidation, Merger, etc. In the event that the Company
shall enter into any consolidation, merger, combination or other transaction in
which shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such event each
outstanding share of Series A Preferred Stock shall at the same time be
similarly exchanged for or changed into the aggregate amount of stock,
securities, cash and other property (payable in like kind), as the case may be,
for which or into which each share of Common Stock is changed or exchanged
multiplied by the highest of the Dividend Multiple, the Vote Multiple or the
Liquidation Multiple in effect immediately prior to such event.
Section 9. Effective Time of Adjustments.
(A) Adjustments to the Series A Preferred Stock required by the
provisions hereof shall be effective as of the time at which the event requiring
such adjustments occurs.
(B) The Company shall give prompt written notice to each holder of a
share of Series A Preferred Stock of the effect on any shares of any adjustment
to the dividend rights, voting rights or rights upon liquidation, dissolution
or winding up of the Company required by the provisions hereof. Notwithstanding
the foregoing sentence, the failure of the Company to give such notice shall not
affect the validity of or the force or effect of or the requirement for such
adjustment.
Section 10. No Redemption. The shares of Series A Preferred Stock
shall not be redeemable at the option of the Company or any holder thereof.
Notwithstanding the foregoing sentence of this Section, the Company may acquire
shares
A-17
<PAGE>
of Series A Preferred Stock in any other manner permitted by law, the provisions
of the Amended Certificate of Designations setting forth the rights, powers and
preferences of the Series A Preferred Stock and the Restated Certificate of
Incorporation of the Company.
Section 11. Ranking. Unless otherwise provided in the Restated
Certificate of Incorporation or a certificate of designations relating to a
subsequent series of Preferred Stock of the Company, the Series A Preferred
Stock shall rank junior to all other series of the Company's Preferred Stock as
to the payment of dividends and the distribution of assets on liquidation,
dissolution or winding up, and senior to the Common Stock.
Section 12. Amendment. After the Distribution Date (as defined in
the Rights Agreement), the provisions of the Amended Certificate of Designations
setting forth the rights, powers and preferences of the Series A Preferred Stock
and the Restated Certificate of Incorporation shall not be amended in any manner
which would materially affect the rights, privileges or powers of the Series A
Preferred Stock without, in addition to any other vote of stockholders required
by law, the affirmative vote of the holders of 66 2/3% of more of the
outstanding shares of Series A Preferred Stock, voting together as a single
class.
5. This Amended Certificate of Designations shall become effective at
5:01 p.m. on March 26, 1999.
A-18
<PAGE>
IN WITNESS WHEREOF, J. C. Penney Company, Inc. has caused this Second
Amended Certificate of Designations to be signed and attested this __ day of
March, 1999.
J. C. PENNEY COMPANY, INC.
By
----------------------------------------------
Name:
Title:
ATTEST:
- -----------------------------------
Name:
Title:
A-19
<PAGE>
EXHIBIT B
---------
CERTIFICATE OF DESIGNATIONS
OF
SERIES B ESOP CONVERTIBLE PREFERRED STOCK
of
J. C. PENNEY COMPANY, INC.
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
I, William R. Howell, Chairman of the Board of J. C. Penney Company,
Inc. ("Company"), a corporation organized and existing under the General
Corporation Law of the State of Delaware, in accordance with the provisions of
Section 151 thereof, DO HEREBY CERTIFY that, pursuant to the authority conferred
upon the Board of Directors by the Restated Certificate of Incorporation of the
Company, the Board of Directors authorized the series of Preferred Stock
hereinafter provided for and established the voting powers thereof and
authorized a committee of the Board of Directors to adopt, and said committee
has adopted, the following resolution creating a series of 1,400,000 shares of
Preferred Stock, without par value, designated as Series B ESOP Convertible
Preferred Stock:
RESOLVED that, pursuant to the authority vested in the Board of
Directors of the Company in accordance with the provisions of its Restated
Certificate of Incorporation, a series of Preferred Stock of the Company be, and
it hereby is, created, and that the designation and amount thereof and the
voting powers, preferences and relative, participating, optional or other
special rights of the shares of such series, and the qualifications, limitations
or restrictions thereof are as follows:
Section 1. Designation and Amount; Special Purpose Restricted Transfer
Issue.
(A) The shares of this series of Preferred Stock shall be designated
as Series B ESOP Convertible Preferred Stock ("Series B Preferred Stock") and
the number of shares constituting such series shall be 1,400,000.
(B) Shares of Series B Preferred Stock shall be issued only to a
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<PAGE>
trustee acting on behalf of an employee stock ownership plan or other employee
benefit plan of the Company. In the event of any transfer of shares of Series B
Preferred Stock to any person other than any such plan trustee, the shares of
Series B Preferred Stock so transferred, upon such transfer and without any
further action by the Company or the holder, shall be automatically converted
into shares of Common Stock on the terms otherwise provided for the conversion
of shares of Series B Preferred Stock into shares of Common Stock pursuant to
Section 5 hereof and no such transferee shall have any of the voting powers,
preferences and relative, participating, optional or special rights ascribed to
shares of Series B Preferred Stock hereunder but, rather, only the powers and
rights pertaining to the Common Stock into which such shares of Series B
Preferred Stock shall be so converted. Certificates representing shares of
Series B Preferred Stock shall be legended to reflect such restrictions on
transfer. Notwithstanding the foregoing provisions of this paragraph (B) of
Section 1, shares of Series B Preferred Stock (i) may be converted into shares
of Common Stock as provided by Section 5 hereof and the shares of Common Stock
issued upon such conversion may be transferred by the holder thereof as
permitted by law and (ii) shall be redeemable by the Company upon the terms and
conditions provided by Sections 6, 7 and 8 hereof.
Section 2. Dividends and Distributions.
(A) Subject to the provisions for adjustment hereinafter set forth,
the holders of shares of Series B Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors out of funds legally
available therefor, cash dividends ("Preferred Dividends") in an amount per
share equal to $47.40 per share per annum, and no more, payable semi-annually,
one-half on the first day of January and one-half on the first day of July of
each year (each a "Dividend Payment Date") commencing on January 1, 1989, to
holders of record at the start of business on such Dividend Payment Date.
Preferred Dividends shall begin to accrue on outstanding shares of Series B
Preferred Stock from the date of issuance of such shares of Series B Preferred
Stock. Preferred Dividends shall accrue on a daily basis whether or not the
Company shall have earnings or surplus at the time, but Preferred Dividends
accrued after January 1, 1989 on the shares of Series B Preferred Stock for any
period less than a full semi-annual period between Dividend Payment Dates shall
be computed on the basis of a 360-day year of 30-day months. A full semi-annual
dividend payment of $23.70 per share shall accrue for the period from the date
of issuance until January 1, 1989. Accumulated but unpaid Preferred Dividends
shall cumulate as of the Dividend Payment Date on which they first become
payable, but no interest shall accrue on accumulated but unpaid Preferred
Dividends.
(B) So long as any Series B Preferred Stock shall be outstanding, no
dividend shall be declared or paid or set apart for payment on any other series
of
B-2
<PAGE>
stock ranking on a parity with the Series B Preferred Stock as to dividends,
unless there shall also be or have been declared and paid or set apart for
payment on the Series B Preferred Stock, like dividends for all dividend payment
periods of the Series B Preferred Stock ending on or before the dividend payment
date of such parity stock, ratably in proportion to the respective amounts of
dividends accumulated and unpaid through such dividend payment period on the
Series B Preferred Stock and accumulated and unpaid or payable on such parity
stock through the dividend payment period on such parity stock next preceding
such dividend payment date. In the event that full cumulative dividends on the
Series B Preferred Stock have not been declared and paid or set apart for
payment when due, the Company shall not declare or pay or set apart for payment
any dividends or make any other distributions on, or make any payment on account
of the purchase, redemption or other retirement of any other class of stock or
series thereof of the Company ranking, as to dividends or as to distributions in
the event of a liquidation, dissolution or winding-up of the Company, junior to
the Series B Preferred Stock until full cumulative dividends on the Series B
Preferred Stock shall have been paid or declared and provided for; provided,
however, that the foregoing shall not apply to (i) any dividend payable solely
in any shares of any stock ranking, as to dividends or as to distributions in
the event of a liquidation, dissolution or winding-up of the Company, junior to
the Series B Preferred Stock, or (ii) the acquisition of shares of any stock
ranking, as to dividends or as to distributions in the event of a liquidation,
dissolution or winding up of the Company, junior to the Series B Preferred Stock
either (A) pursuant to any employee or director incentive or benefit plan or
arrangement (including any employment, severance or consulting agreement) of the
Company or any subsidiary of the Company heretofore or hereafter adopted or (B)
in exchange solely for shares of any other stock ranking junior to the Series B
Preferred Stock.
Section 3. Voting Rights. The holders of shares of Series B Preferred
Stock shall have the following voting rights:
(A) The holders of Series B Preferred Stock shall be entitled to vote
on all matters submitted to a vote of the holders of Common Stock of the
Company, voting together with the holders of Common Stock as one class. Each
share of the Series B Preferred Stock shall be entitled to the number of votes
equal to the number of shares of Common Stock into which such share of Series B
Preferred Stock could be converted on the record date for determining the
stockholders entitled to vote, rounded to the nearest one-tenth of a vote; it
being understood that whenever the "Conversion Price" (as defined in Section 5
hereof) is adjusted as provided in Section 9 hereof, the voting rights of the
Series B Preferred Stock shall also be similarly adjusted.
(B) Except as otherwise required by law or set forth herein, holders
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<PAGE>
of Series B Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for the taking of any
corporate action; provided, however, that the vote of at least 66-2/3% of the
outstanding shares of Series B Preferred Stock, voting separately as a series,
shall be necessary to adopt any alteration, amendment or repeal of any provision
of the Restated Certificate of Incorporation of the Company, as amended, or this
Resolution (including any such alteration, amendment or repeal effected by any
merger or consolidation in which the Company is the surviving or resulting
corporation) if such amendment, alteration or repeal would alter or change the
powers, preferences or special rights of the shares of Series B Preferred Stock
so as to affect them adversely.
Section 4. Liquidation, Dissolution or Winding Up.
(A) Upon any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of Series B Preferred Stock shall be
entitled to receive out of assets of the Company which remain after satisfaction
in full of all valid claims of creditors of the Company and which are available
for payment to stockholders and subject to the rights of the holders of any
stock of the Company ranking senior to or on a parity with the Series B
Preferred Stock in respect of distributions upon liquidation, dissolution or
winding up of the Company, before any amount shall be paid or distributed among
the holders of Common Stock or any other shares ranking junior to the Series B
Preferred Stock in respect of distributions upon liquidation, dissolution or
winding up of the Company, liquidating distributions in the amount of $600.00
per share, plus an amount equal to all accumulated and unpaid dividends thereon
to the date fixed for distribution, and no more. If upon any liquidation,
dissolution or winding up of the Company, the amounts payable with respect to
the Series B Preferred Stock and any other stock ranking as to any such
distribution on a parity with the Series B Preferred Stock are not paid in full,
the holders of the Series B Preferred Stock and such other stock shall share
ratably in any distribution of assets in proportion to the full respective
preferential amounts to which they are entitled. After payment of the full
amount to which they are entitled as provided by the foregoing provisions of
this paragraph 4(A), the holders of shares of Series B Preferred Stock shall not
be entitled to any further right or claim to any of the remaining assets of the
Company.
(B) Neither the merger or consolidation of the Company with or into
any other corporation, nor the merger or consolidation of any other corporation
with or into the Company, nor the sale, transfer or lease of all or any portion
of the assets of the Company, shall be deemed to be a dissolution, liquidation
or winding up of the affairs of the Company for purposes of this Section 4, but
the holders of Series B Preferred Stock shall nevertheless be entitled in the
event of any such merger or consolidation to the rights provided by Section 8
hereof.
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<PAGE>
(C) Written notice of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, stating the payment date or dates
when, and the place or places where, the amounts distributable to holders of
Series B Preferred Stock in such circumstances shall be payable, shall be given
by first-class mail, postage prepaid, mailed not less than twenty (20) days
prior to any payment date stated therein, to the holders of Series B Preferred
Stock, at the address shown on the books of the Company or any transfer agent
for the Series B Preferred Stock.
Section 5. Conversion into Common Stock.
(A) A holder of shares of Series B Preferred Stock shall be entitled,
at any time prior to the close of business on the date fixed for redemption of
such shares pursuant to Section 6, 7 or 8 hereof, to cause any or all of such
shares to be converted into shares of Common Stock, initially at a conversion
rate equal to the ratio of $600.00 to the amount which initially shall be $60.00
and which shall be adjusted as hereinafter provided (and, as so adjusted, is
hereinafter sometimes referred to as the "Conversion Price") (that is, a
conversion rate initially equivalent to ten shares of Common Stock for each
share of Series B Preferred Stock so converted but that is subject to adjustment
as the Conversion Price is adjusted as hereinafter provided).
(B) Any holder of shares of Series B Preferred Stock desiring to
convert such shares into shares of Common Stock shall surrender the certificate
or certificates representing the shares of Series B Preferred Stock being
converted, duly assigned or endorsed for transfer to the Company (or accompanied
by duly executed stock powers relating thereto), at the principal executive
office of the Company or the offices of the transfer agent for the Series B
Preferred Stock or such office or offices in the continental United States of an
agent for conversion as may from time to time be designated by notice to the
holders of the Series B Preferred Stock by the Company or the transfer agent for
the Series B Preferred Stock, accompanied by written notice of conversion. Such
notice of conversion shall specify (i) the number of shares of Series B
Preferred Stock to be converted and the name or names in which such holder
wishes the certificate or certificates for Common Stock and for any shares of
Series B Preferred Stock not to be so converted to be issued, and (ii) the
address to which such holder wishes delivery to be made of such new certificates
to be issued upon such conversion.
(C) Upon surrender of a certificate representing a share or shares of
Series B Preferred Stock for conversion, the Company shall issue and send by
hand delivery (with receipt to be acknowledged) or by first-class mail, postage
prepaid, to the holder thereof or to such holder's designee, at the address
designated by such
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<PAGE>
holder, a certificate or certificates for the number of shares of Common Stock
to which such holder shall be entitled upon conversion. In the event that there
shall have been surrendered a certificate or certificates representing shares of
Series B Preferred Stock, only part of which are to be converted, the Company
shall issue and deliver to such holder or such holder's designee a new
certificate or certificates representing the number of shares of Series B
Preferred Stock which shall not have been converted.
(D) The issuance by the Company of shares of Common Stock upon a
conversion of shares of Series B Preferred Stock into shares of Common Stock
made at the option of the holder thereof shall be effective as of the earlier of
(i) the delivery to such holder or such holder's designee of the certificates
representing the shares of Common Stock issued upon conversion thereof or (ii)
the commencement of business on the second business day after the surrender of
the certificate or certificates for the shares of Series B Preferred Stock to be
converted, duly assigned or endorsed for transfer to the Company (or accompanied
by duly executed stock powers relating thereto) as provided by this Resolution.
On and after the effective day of conversion, the person or persons entitled to
receive the Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock, but no
allowance or adjustment shall be made in respect of dividends payable to holders
of Common Stock in respect of any period prior to such effective date. The
Company shall not be obligated to pay any dividends which shall have been
declared and shall be payable to holders of shares of Series B Preferred Stock
on a Dividend Payment Date if such Dividend Payment Date for such dividend shall
coincide with or be on or subsequent to the effective date of conversion of such
shares.
(E) The Company shall not be obligated to deliver to holders of Series
B Preferred Stock any fractional share or shares of Common Stock issuable upon
any conversion of such shares of Series B Preferred Stock, but in lieu thereof
may make a cash payment in respect thereof in any manner permitted by law.
(F) Whenever the Company shall issue shares of Common Stock upon
conversion of shares of Series B Preferred Stock as contemplated by this Section
5, the Company shall issue together with each such share of Common Stock one
right to purchase Series A Preferred Stock of the Company (or other securities
in lieu thereof) pursuant to the Rights Agreement dated as of January 28, 1986
between the Company and Morgan Guaranty Trust Company as Rights Agent, as such
agreement may from time to time be amended, or any rights issued to holders of
Common Stock of the Company in addition thereto or in replacement therefor,
whether or not such rights shall be exercisable at such time, but only if such
rights are issued and outstanding and held by other holders of Common Stock of
the Company at such time and have not expired.
B-6
<PAGE>
(G) The Company shall at all times reserve and keep available out of
its authorized and unissued Common Stock, solely for issuance upon the
conversion of shares of Series B Preferred Stock as herein provided, free from
any preemptive rights, such number of shares of Common Stock as shall from time
to time be issuable upon the conversion of all the shares of Series B Preferred
Stock then outstanding. The Company shall prepare and shall use its best
efforts to obtain and keep in force such governmental or regulatory permits or
other authorizations as may be required by law, and shall comply with all
requirements as to registration or qualification of the Common Stock, in order
to enable the Company lawfully to issue and deliver to each holder of record of
Series B Preferred Stock such number of shares of its Common Stock as shall from
time to time be sufficient to effect the conversion of all shares of Series B
Preferred Stock then outstanding and convertible into shares of Common Stock.
Section 6. Redemption At the Option of the Company.
(A) The Series B Preferred Stock shall be redeemable, in whole or in
part, at the option of the Company at any time after July 1, 1991, or on or
before July 1, 1991 if permitted by paragraph (C) or (D) of this Section 6, at
the following redemption prices per share:
During the Twelve-
Month Period Price Per
Beginning July 2, Share
------------------ ---------
1988. . . . . . . . . . . $ 647.40
1989. . . . . . . . . . . $ 642.66
1990. . . . . . . . . . . $ 637.92
1991. . . . . . . . . . . $ 633.18
1992. . . . . . . . . . . $ 628.44
1993. . . . . . . . . . . $ 623.70
1994. . . . . . . . . . . $ 618.96
1995. . . . . . . . . . . $ 614.22
1996. . . . . . . . . . . $ 609.48
1997. . . . . . . . . . . $ 604.74
and thereafter at $600.00 per share, plus, in each case, an amount equal to all
accumulated and unpaid dividends thereon to the date fixed for redemption.
Payment of the redemption price shall be made by the Company in cash or shares
of Common Stock, or a combination thereof, as permitted by paragraph (E) of this
Section 6. From and after the date fixed for redemption, dividends on shares of
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<PAGE>
Series B Preferred Stock called for redemption will cease to accrue, such shares
will no longer be deemed to be outstanding and all rights in respect of such
shares of the Company shall cease, except the right to receive the redemption
price. If less than all of the outstanding shares of Series B Preferred Stock
are to be redeemed, the Company shall either redeem a portion of the shares of
each holder determined pro rata based on the number of shares held by each
holder or shall select the shares to be redeemed by lot, as may be determined by
the Board of Directors of the Company.
(B) Unless otherwise required by law, notice of redemption will be
sent to the holders of Series B Preferred Stock at the address shown on the
books of the Company or any transfer agent for the Series B Preferred Stock by
first class mail, postage prepaid, mailed not less than twenty (20) days nor
more than sixty (60) days prior to the redemption date. Each such notice shall
state: (i) the redemption date; (ii) the total number of shares of the Series B
Preferred Stock to be redeemed and, if fewer than all the shares held by such
holder are to be redeemed, the number of such shares to be redeemed from such
holder; (iii) the redemption price; (iv) the place or places where certificates
for such shares are to be surrendered for payment of the redemption price; (v)
that dividends on the shares to be redeemed will cease to accrue on such
redemption date; and (vi) the conversion rights of the shares to be redeemed,
the period within which conversion rights may be exercised, and the Conversion
Price and number of shares of Common Stock issuable upon conversion of a share
of Series B Preferred Stock at the time. Upon surrender of the certificates for
any shares so called for redemption and not previously converted (properly
endorsed or assigned for transfer, if the Board of Directors of the Company
shall so require and the notice shall so state), such shares shall be redeemed
by the Company at the date fixed for redemption and at the redemption price set
forth in this Section 6.
(C) In the event of a change in the federal tax law of the United
States of America which has the effect of precluding the Company from claiming
any of the tax deductions for dividends paid on the Series B Preferred Stock
when such dividends are used as provided under Section 404(k)(2) of the Internal
Revenue Code of 1986, as amended and in effect on the date shares of Series B
Preferred Stock are initially issued, the Company may, in its sole discretion
and notwithstanding anything to the contrary in paragraph (A) of this Section 6,
elect to redeem such shares for the amount payable in respect of the shares upon
liquidation of the Company pursuant to Section 4 hereof.
(D) Notwithstanding anything to the contrary in paragraph (A) of this
Section 6, the Company may elect to redeem any or all of the shares of Series B
Preferred Stock at any time on or prior to July 1, 1991 on the terms and
conditions set forth in paragraphs (A) and (B) of this Section 6, if the last
reported sales price,
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regular way, of a share of Common Stock, as reported on the New York Stock
Exchange Composite Tape or, if the Common Stock is not listed or admitted to
trading on the New York Stock Exchange, on the principal national securities
exchange on which such stock is listed or admitted to trading or, if the Common
Stock is not listed or admitted to trading on any national securities exchange,
on the National Market System of the National Association of Securities Dealers,
Inc. Automated Quotation System ("NASDAQ") or, if the Common Stock is not quoted
on such National Market System, the average of the closing bid and asked prices
in over-the-counter market as reported by NASDAQ, for at least twenty (20)
trading days within a period of thirty (30) consecutive trading days ending
within five (5) days of the notice of redemption equals or exceeds one hundred
fifty percent (150%) of the Conversion Price (giving effect equitably in making
such calculation to any adjustments required by Section 9 hereof).
(E) The Company, at its option, may make payment of the redemption
price required upon redemption of shares of Series B Preferred Stock in cash or
in shares of Common Stock, or in a combination of such shares and cash, any such
shares to be valued for such purpose at their Fair Market Value (as defined in
paragraph (G) of Section 9 hereof, provided, however, that in calculating their
Fair Market Value the Adjustment Period shall be deemed to be the five (5)
consecutive trading days preceding, and including, the date of redemption).
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Section 7. Other Redemption Rights.
Shares of Series B Preferred Stock shall be redeemed by the Company for
cash or, if the Company so elects, in shares of Common Stock, or a combination
of such shares and cash, any such shares of Common Stock to be valued for such
purpose as provided by paragraph (E) of Section 6, at a redemption price of
$600.00 per share plus accumulated and unpaid dividends thereon to the date
fixed for redemption, at the option of the holder, at any time and from time to
time upon notice to the Company given not less than five (5) business days prior
to the date fixed by the holder in such notice for such redemption, when and to
the extent necessary (i) for such holder to provide for distributions required
to be made under, or to satisfy an investment election provided to participants
in accordance with, the J. C. Penney Company, Inc. Savings, Profit-Sharing and
Stock Ownership Plan, dated and effective as of August 22, 1988, as the same may
be amended, or any successor plan (the "Plan") to participants in the Plan or
(ii) for such holder to make payment of principal, interest or premium due and
payable (whether as scheduled or upon acceleration) on the 8.17% ESOP Notes Due
July 1, 1998 of the trust under the Plan or any indebtedness incurred by the
holder for the benefit of the Plan.
Section 8. Consolidation, Merger, etc.
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(A) In the event that the Company shall consummate any consolidation
or merger or similar transaction, however named, pursuant to which the
outstanding shares of Common Stock are by operation of law exchanged solely for
or changed, reclassified or converted solely into stock of any successor or
resulting company (including the Company) that constitutes "qualifying employer
securities" with respect to a holder of Series B Preferred Stock within the
meaning of Section 409(e) of the Internal Revenue Code of 1986, as amended, and
Section 407(c)(5) of the Employee Retirement Income Security Act of 1974, as
amended, or any successor provisions of law, and, if applicable, for a cash
payment in lieu of fractional shares, if any, the shares of Series B Preferred
Stock of such holder shall be assumed by and shall become preferred stock of
such successor or resulting company, having in respect of such company insofar
as possible the same powers, preferences and relative, participating, optional
or other special rights (including the redemption rights provided by Sections 6,
7 and 8 hereof), and the qualifications, limitations or restrictions thereon,
that the Series B Preferred Stock had immediately prior to such transaction,
except that after such transaction each share of the Series B Preferred Stock
shall be convertible, otherwise on the terms and conditions provided by Section
5 hereof, into the qualifying employer securities so receivable by a holder of
the number of shares of Common Stock into which such shares of Series B
Preferred Stock could have been converted immediately prior to such transaction
if such holder of Common Stock failed to exercise any rights of election to
receive any kind or amount of stock, securities, cash or other property (other
than such qualifying employer securities and a cash payment, if applicable, in
lieu of fractional shares) receivable upon such transaction (provided that, if
the kind or amount of qualifying employer securities receivable upon such
transaction is not the same for each non-electing share, then the kind and
amount of qualifying employer securities receivable upon such transaction for
each non-electing share shall be the kind and amount so receivable per share by
a plurality of the non-electing shares). The rights of the Series B Preferred
Stock as preferred stock of such successor or resulting company shall
successively be subject to adjustments pursuant to Section 9 hereof after any
such transaction as nearly equivalent to the adjustments provided for by such
section prior to such transaction. The Company shall not consummate any such
merger, consolidation or similar transaction unless all then outstanding shares
of the Series B Preferred Stock shall be assumed and authorized by the successor
or resulting company as aforesaid.
(B) In the event that the Company shall consummate any consolidation
or merger or similar transaction, however named, pursuant to which the
outstanding shares of Common Stock are by operation of law exchanged for or
changed, reclassified or converted into other stock or securities or cash or any
other property, or any combination thereof, other than any such consideration
which is constituted solely of qualifying employer securities (as referred to in
paragraph (A) of this Section 8) and cash payments, if applicable, in lieu of
fractional shares,
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outstanding shares of Series B Preferred Stock shall, without any action on the
part of the Company or any holder thereof (but subject to paragraph (C) of this
Section 8), be deemed converted by virtue of such merger, consolidation or
similar transaction immediately prior to such consummation into the number of
shares of Common Stock into which such shares of Series B Preferred Stock could
have been converted at such time and each share of Series B Preferred Stock
shall, by virtue of such transaction and on the same terms as apply to the
holders of Common Stock, be converted into or exchanged for the aggregate amount
of stock, securities, cash or other property (payable in like kind) receivable
by a holder of the number of shares of Common Stock into which such shares of
Series B Preferred Stock could have been converted immediately prior to such
transaction if such holder of Common Stock failed to exercise any rights of
election as to the kind or amount of stock, securities, cash or other property
receivable upon such transaction (provided that, if the kind or amount of stock,
securities, cash or other property receivable upon such transaction is not the
same for each non-electing share, then the kind and amount of stock, securities,
cash or other property receivable upon such transaction for each non-electing
share shall be the kind and amount so receivable per share by a plurality of the
non-electing shares).
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(C) In the event the Company shall enter into any agreement providing
for any consolidation or merger or similar transaction described in paragraph
(B) of this Section 8, then the Company shall as soon as practicable thereafter
(and in any event at least ten (10) business days before consummation of such
transaction) give notice of such agreement and the material terms thereof to
each holder of Series B Preferred Stock and each such holder shall have the
right to elect, by written notice to the Company, to receive, upon consummation
of such transaction (if and when such transaction is consummated), from the
Company or the successor of the Company, in redemption and retirement of such
Series B Preferred Stock, a cash payment equal to the amount payable in respect
of shares of Series B Preferred Stock upon liquidation of the Company pursuant
to Section 4 hereof. No such notice of redemption shall be effective unless
given to the Company prior to the close of business on the fifth business day
prior to consummation of such transaction, unless the Company or the successor
of the Company shall waive such prior notice, but any notice of redemption so
given prior to such time may be withdrawn by notice of withdrawal given to the
Company prior to the close of business on the fifth business day prior to
consummation of such transaction.
Section 9. Anti-dilution Adjustments.
(A) In the event the Company shall, at any time or from time to time
while any of the shares of the Series B Preferred Stock are outstanding, (i) pay
a dividend or make a distribution in respect of the Common Stock in shares of
Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii)
combine the outstanding shares of Common Stock into a smaller number of shares,
in each case whether by reclassification of shares, recapitalization of the
Company (including a recapitalization effected by a merger or consolidation to
which Section 8 hereof does not apply) or otherwise, the Conversion Price in
effect immediately prior to such action shall be adjusted by multiplying such
Conversion Price by the fraction the numerator of which is the number of shares
of Common Stock outstanding immediately before such event and the denominator of
which is the number of shares of Common Stock outstanding immediately after such
event. An adjustment made pursuant to this paragraph 9(A) shall be given
effect, upon payment of such a dividend or distribution, as of the record date
for the determination of shareholders entitled to receive such dividend or
distribution (on a retroactive basis) and in the case of a subdivision or
combination shall become effective immediately as of the effective date thereof.
(B) In the event that the Company shall, at any time or from time to
time while any of the shares of Series B Preferred Stock are outstanding, issue
to holders of shares of Common Stock as a dividend or distribution, including by
way of a reclassification of shares or a recapitalization of the Company, any
right or
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warrant to purchase shares of Common Stock (but not including as such a right or
warrant any security convertible into or exchangeable for shares of Common
Stock) at a purchase price per share less than the Fair Market Value (as
hereinafter defined) of a share of Common Stock on the date of issuance of such
right or warrant, then, subject to the provisions of paragraphs (E) and (F) of
this Section 9, the Conversion Price shall be adjusted by multiplying such
Conversion Price by the fraction the numerator of which shall be the number of
shares of Common Stock outstanding immediately before such issuance of rights or
warrants plus the number of shares of Common Stock which could be purchased at
the Fair Market Value of a share of Common Stock at the time of such issuance
for the maximum aggregate consideration payable upon exercise in full of all
such rights or warrants and the denominator of which shall be the number of
shares of Common Stock outstanding immediately before such issuance of rights or
warrants plus the maximum number of shares of Common Stock that could be
acquired upon exercise in full of all such rights and warrants.
(C) In the event the Company shall, at any time or from time to time
while any of the shares of Series B Preferred Stock are outstanding, issue, sell
or exchange shares of Common Stock (other than pursuant to any right or warrant
to purchase or acquire shares of Common Stock (including as such a right or
warrant any security convertible into or exchangeable for shares of Common
Stock) and other than pursuant to any employee or director incentive or benefit
plan or arrangement, including any employment, severance or consulting
agreement, of the Company or any subsidiary of the Company heretofore or
hereafter adopted) for a consideration having a Fair Market Value on the date of
such issuance, sale or exchange less than the Fair Market Value of such shares
on the date of such issuance, sale or exchange, then, subject to the provisions
of paragraphs (E) and (F) of this Section 9, the Conversion Price shall be
adjusted by multiplying such Conversion Price by the fraction the numerator of
which shall be the sum of (i) the Fair Market Value of all the shares of Common
Stock outstanding on the day immediately preceding the first public announcement
of such issuance, sale or exchange plus (ii) the Fair Market Value of the
consideration received by the Company in respect of such issuance, sale or
exchange of shares of Common Stock, and the denominator of which shall be the
product of (i) the Fair Market Value of a share of Common Stock on the day
immediately preceding the first public announcement of such issuance, sale or
exchange multiplied by (ii) the sum of the number of shares of Common Stock
outstanding on such day plus the number of shares of Common Stock so issued,
sold or exchanged by the Company. In the event the Company shall, at any time
or from time to time while any shares of Series B Preferred Stock are
outstanding, issue, sell or exchange any right or warrant to purchase or acquire
shares of Common Stock (including as such a right or warrant any security
convertible into or exchangeable for shares of Common Stock), other than any
such issuance to holders of shares of Common Stock as a
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dividend or distribution (including by way of a reclassification of shares or a
recapitalization of the Company) and other than pursuant to any employee or
director incentive or benefit plan or arrangement (including any employment,
severance or consulting agreement) of the Company or any subsidiary of the
Company heretofore or hereafter adopted, for a consideration having a Fair
Market Value on the date of such issuance, sale or exchange less than the Non-
Dilutive Amount (as hereinafter defined), then, subject to the provisions of
paragraphs (E) and (F) of this Section 9, the Conversion Price shall be adjusted
by multiplying such Conversion Price by a fraction the numerator of which shall
be the sum of (i) the Fair Market Value of all the shares of Common Stock
outstanding on the day immediately preceding the first public announcement of
such issuance, sale or exchange plus (ii) the Fair Market Value of the
consideration received by the Company in respect of such issuance, sale or
exchange of such right or warrant plus (iii) the Fair Market Value at the time
of such issuance of the consideration which the Company would receive upon
exercise in full of all such rights or warrants, and the denominator of which
shall be the product of (i) the Fair Market Value of a share of Common Stock on
the day immediately preceding the first public announcement of such issuance,
sale or exchange multiplied by (ii) the sum of the number of shares of Common
Stock outstanding on such day plus the maximum number of shares of Common Stock
which could be acquired pursuant to such right or warrant at the time of the
issuance, sale or exchange of such right or warrant (assuming shares of Common
Stock could be acquired pursuant to such right or warrant at such time).
(D) In the event the Company shall, at any time or from time to time
while any of the shares of Series B Preferred Stock are outstanding, make an
Extraordinary Distribution (as hereinafter defined) in respect of the Common
Stock, whether by dividend, distribution, reclassification of shares or
recapitalization of the Company (including a recapitalization or
reclassification effected by a merger or consolidation to which Section 8 hereof
does not apply) or effect a Pro Rata Repurchase (as hereinafter defined) of
Common Stock, the Conversion Price in effect immediately prior to such
Extraordinary Distribution or Pro Rata Repurchase shall, subject to paragraphs
(E) and (F) of this Section 9, be adjusted by multiplying such Conversion Price
by the fraction the numerator of which is (i) the product of (x) the number of
shares of Common Stock outstanding immediately before such Extraordinary
Distribution or Pro Rata Repurchase multiplied by (y) the Fair Market Value (as
herein defined) of a share of Common Stock on the record date with respect to an
Extraordinary Distribution, or on the applicable expiration date (including all
extensions thereof) of any tender offer which is a Pro Rata Repurchase, or on
the date of purchase with respect to any Pro Rata Repurchase which is not a
tender offer, as the case may be, minus (ii) the Fair Market Value of the
Extraordinary Distribution or the aggregate purchase price of the Pro Rata
Repurchase, as the case may be, and the denominator of which shall be the
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product of (A) the number of shares of Common Stock outstanding immediately
before such Extraordinary Dividend or Pro Rata Repurchase minus, in the case of
a Pro Rata Repurchase, the number of shares of Common Stock repurchased by the
Company multiplied by (B) the Fair Market Value of a share of Common Stock on
the record date with respect to an Extraordinary Distribution or on the
applicable expiration date (including all extensions thereof) of any tender
offer which is a Pro Rata Repurchase or on the date of purchase with respect to
any Pro Rata Repurchase which is not a tender offer, as the case may be. The
Company shall send each holder of Series B Preferred Stock (i) notice of its
intent to make any dividend or distribution and (ii) notice of any offer by the
Company to make a Pro Rata Repurchase, in each case at the same time as, or as
soon as practicable after, such offer is first communicated (including by
announcement of a record date in accordance with the rules of any stock exchange
on which the Common Stock is listed or admitted to trading) to holders of Common
Stock. Such notice shall indicate the intended record date and the amount and
nature of such dividend or distribution, or the number of shares subject to such
offer for a Pro Rata Repurchase and the purchase price payable by the Company
pursuant to such offer, as well as the Conversion Price and the number of shares
of Common Stock into which a share of Series B Preferred Stock may be converted
at such time.
(E) Notwithstanding any other provisions of this Section 9, the
Company shall not be required to make any adjustment of the Conversion Price
unless such adjustment would require an increase or decrease of at least one
percent (1%) in the Conversion Price. Any lesser adjustment shall be carried
forward and shall be made no later than the time of, and together with, the next
subsequent adjustment which, together with any adjustment or adjustments so
carried forward, shall amount to an increase or decrease of at least one percent
(1%) in the Conversion Price.
(F) If the Company shall make any dividend or distribution on the
Common Stock or issue any Common Stock, other capital stock or other security of
the Company or any rights or warrants to purchase or acquire any such security,
which transaction does not result in an adjustment to the Conversion Price
pursuant to the foregoing provisions of this Section 9, the Board of Directors
of the Company shall consider whether such action is of such a nature that an
adjustment to the Conversion Price should equitably be made in respect of such
transaction. If in such case the Board of Directors of the Company determines
that an adjustment to the Conversion Price should be made, an adjustment shall
be made effective as of such date, as determined by the Board of Directors of
the Company. The determination of the Board of Directors of the Company as to
whether an adjustment to the Conversion Price should be made pursuant to the
foregoing provisions of this paragraph 9(F), and, if so, as to what adjustment
should be made and when, shall be final and binding on the Company and all
stockholders of the
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Company. The Company shall be entitled to make such additional adjustments in
the Conversion Price, in addition to those required by the foregoing provisions
of this Section 9, as shall be necessary in order that any dividend or
distribution in shares of capital stock of the Company, subdivision,
reclassification or combination of shares of stock of the Company or any
recapitalization of the Company shall not be taxable to holders of the Common
Stock.
(G) For purposes of this Resolution, the following definitions shall
apply:
"Extraordinary Distribution" shall mean any dividend or other
distribution (effected while any of the shares of Series B Preferred Stock are
outstanding) (i) of cash, where the aggregate amount of such cash dividend or
distribution together with the amount of all cash dividends and distributions
made during the preceding period of 12 months, when combined with the aggregate
amount of all Pro Rata Repurchases (for this purpose, including only that
portion of the aggregate purchase price of such Pro Rata Repurchase which is in
excess of the Fair Market Value of the Common Stock repurchased as determined on
the applicable expiration date (including all extensions thereof) of any tender
offer or exchange offer which is a Pro Rata Repurchase, or the date of purchase
with respect to any other Pro Rata Repurchase which is not a tender offer or
exchange offer made during such period ), exceeds twelve and one-half percent
(12-1/2%) of the aggregate Fair Market Value of all shares of Common Stock
outstanding on the record date for determining the shareholders entitled to
receive such Extraordinary Distribution and (ii) any shares of capital stock of
the Company (other than shares of Common Stock), other securities of the Company
(other than securities of the type referred to in paragraph (B) of this Section
9), evidences of indebtedness of the Company or any other person or any other
property (including shares of any subsidiary of the Company), or any combination
thereof. The Fair Market Value of an Extraordinary Distribution for purposes of
paragraph (D) of this Section 9 shall be the sum of the Fair Market Value of
such Extraordinary Distribution plus the amount of any cash dividends which are
not Extraordinary Distributions made during such twelve month period and not
previously included in the calculation of an adjustment pursuant to paragraph
(D) of this Section 9.
"Fair Market Value" shall mean, as to shares of Common Stock or any
other class of capital stock or securities of the Company or any other issuer
which are publicly traded, the average of the Current Market Prices (as
hereinafter defined) of such shares or securities for each day of the Adjustment
Period (as hereinafter defined). "Current Market Price" of publicly traded
shares of Common Stock or any other class of capital stock or other security of
the Company or any other issuer for a day shall mean the last reported sales
price, regular way, or, in case no sale takes place on such day, the average of
the reported closing bid and
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asked prices, regular way, in either case as reported on the New York Stock
Exchange Composite Tape or, if such security is not listed or admitted to
trading on the New York Stock Exchange, on the principal national securities
exchange on which such security is listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the NASDAQ
National Market System or, if such security is not quoted on such National
Market System, the average of the closing bid and asked prices on each such day
in the over-the-counter market as reported by NASDAQ or, if bid and asked prices
for such security on each such day shall not have been reported through NASDAQ,
the average of the bid and asked prices for such day as furnished by any New
York Stock Exchange member firm regularly making a market in such security
selected for such purpose by the Board of Directors of the Company or a
committee thereof on each trading day during the Adjustment Period. "Adjustment
Period" shall mean the period of five (5) consecutive trading days, selected by
the Board of Directors of the Company or a committee thereof, during the 20
trading days preceding, and including, the date as of which the Fair Market
Value of a security is to be determined. The "Fair Market Value" of any security
which is not publicly traded or of any other property shall mean the fair value
thereof as determined by an independent investment banking or appraisal firm
experienced in the valuation of such securities or property selected in good
faith by the Board of Directors of the Company or a committee thereof, or, if no
such investment banking or appraisal firm is in the good faith judgment of the
Board of Directors or such committee available to make such determination, as
determined in good faith by the Board of Directors of the Company or such
committee.
"Non-Dilutive Amount" in respect of an issuance, sale or exchange by
the Company of any right or warrant to purchase or acquire shares of Common
Stock (including any security convertible into or exchangeable for shares of
Common Stock) shall mean the remainder of (i) the product of the Fair Market
Value of a share of Common Stock on the day preceding the first public
announcement of such issuance, sale or exchange multiplied by the maximum number
of shares of Common Stock which could be acquired on such date upon the exercise
in full of such rights and warrants (including upon the conversion or exchange
of all such convertible or exchangeable securities), whether or not exercisable
(or convertible or exchangeable) at such date, minus (ii) the aggregate amount
payable pursuant to such right or warrant to purchase or acquire such maximum
number of shares of Common Stock; provided, however, that in no event shall the
Non-Dilutive Amount be less than zero. For purposes of the foregoing sentence,
in the case of a security convertible into or exchangeable for shares of Common
Stock, the amount payable pursuant to a right or warrant to purchase or acquire
shares of Common Stock shall be the Fair Market Value of such security on the
date of the issuance, sale or exchange of such security by the Company.
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"Pro Rata Repurchase" shall mean any purchase of shares of Common Stock
by the Company or any subsidiary thereof, whether for cash, shares of capital
stock of the Company, other securities of the Company, evidences of indebtedness
of the Company or any other person or any other property (including shares of a
subsidiary of the Company), or any combination thereof, effected while any of
the shares of Series B Preferred Stock are outstanding, pursuant to any tender
offer or exchange offer subject to Section 13(e) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), or any successor provision of law, or
pursuant to any other offer available to substantially all holders of Common
Stock; provided, however, that no purchase of shares by the Company or any
subsidiary thereof made in open market transactions shall be deemed a Pro Rata
Repurchase. For purposes of this paragraph 9(G), shares shall be deemed to have
been purchased by the Company or any subsidiary thereof "in open market
transactions" if they have been purchased substantially in accordance with the
requirements of Rule 10b-18 as in effect under the Exchange Act, on the date
shares of Series B Preferred Stock are initially issued by the Company or on
such other terms and conditions as the Board of Directors of the Company or a
committee thereof shall have determined are reasonably designed to prevent such
purchases from having a material effect on the trading market for the Common
Stock.
(H) Whenever an adjustment to the Conversion Price and the related
voting rights of the Series B Preferred Stock is required pursuant to this
Resolution, the Company shall forthwith place on file with the transfer agent
for the Common Stock and the Series B Preferred Stock if there be one, and with
the Secretary of the Company, a statement signed by two officers of the Company
stating the adjusted Conversion Price determined as provided herein and the
resulting conversion ratio, and the voting rights (as appropriately adjusted),
of the Series B Preferred Stock. Such statement shall set forth in reasonable
detail such facts as shall be necessary to show the reason and the manner of
computing such adjustment, including any determination of Fair Market Value
involved in such computation. Promptly after each adjustment to the Conversion
Price and the related voting rights of the Series B Preferred Stock, the Company
shall mail a notice thereof and of the then prevailing conversion ratio to each
holder of shares of the Series B Preferred Stock.
Section 10. Ranking; Attributable Capital and Adequacy of Surplus;
Retirement of Shares.
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(A) The Series B Preferred Stock shall rank senior to the Series A
Preferred Stock and the Common Stock as to the payment of dividends and the
distribution of assets on liquidation, dissolution and winding up of the
Company, and, unless otherwise provided in the Restated Certificate of
Incorporation of the Company, as amended, or a Certificate of Designations
relating to a subsequent series of Preferred Stock, without par value, of the
Company, the Series B Preferred Stock shall rank junior to all other series of
the Company's Preferred Stock, without par value, as to the payment of dividends
and the distribution of assets on liquidation, dissolution or winding up.
(B) The capital of the Company allocable to the Series B Preferred
Stock for purposes of the Delaware General Corporation Law (the "Corporation
Law") shall be $600.00 per share. In addition to any vote of stockholders
required by law, the vote of the holders of a majority of the outstanding shares
of Series B Preferred Stock shall be required to increase the par value of the
Common Stock or otherwise increase the capital of the Company allocable to the
Common Stock for the purpose of the Corporation Law if, as a result thereof, the
surplus of the Company for purposes of the Corporation Law would be less than
the amount of Preferred Dividends that would accrue on the then outstanding
shares of Series B Preferred Stock during the following three years.
(C) Any shares of Series B Preferred Stock acquired by the Company by
reason of the conversion or redemption of such shares as provided by this
Resolution, or otherwise so acquired, shall be retired as shares of Series B
Preferred Stock and restored to the status of authorized but unissued shares of
preferred stock, without par value, of the Company, undesignated as to series,
and may thereafter be reissued as part of a new series of such preferred stock
as permitted by law.
Section 11. Miscellaneous.
(A) All notices referred to herein shall be in writing, and all
notices hereunder shall be deemed to have been given upon the earlier of receipt
thereof or three (3) business days after the mailing thereof if sent by
registered mail (unless first-class mail shall be specifically permitted for
such notice under the terms of this Resolution) with postage prepaid, addressed:
(i) if to the Company, to its office at 14841 North Dallas Parkway, Dallas Texas
75240 (Attention: Secretary) or to the transfer agent for the Series B Preferred
Stock, or other agent of the Company designated as permitted by this Resolution
or (ii) if to any holder of the Series B Preferred Stock or Common Stock, as the
case may be, to such holder at the address of such holder as listed in the stock
record books of the Company (which may include the records of any transfer agent
for the Series B Preferred Stock or Common Stock, as the case may be) or (iii)
to such other address as the Company
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<PAGE>
or any such holder, as the case may be, shall have designated by notice
similarly given.
(B) The term "Common Stock" as used in this Resolution means the
Company's Common Stock of 50c par value, as the same exists at the date of
filing of a Certificate of Designations relating to Series B Preferred Stock or
any other class of stock resulting from successive changes or reclassification
of such Common Stock consisting solely of changes in par value, or from par
value to no par value, or from no par value to par value. In the event that, at
any time as a result of an adjustment made pursuant to Section 9 of this
Resolution, the holder of any share of the Series B Preferred Stock upon
thereafter surrendering such shares for conversion shall become entitled to
receive any shares or other securities of the Company other than shares of
Common Stock, the Conversion Price in respect of such other shares or securities
so receivable upon conversion of shares of Series B Preferred Stock shall
thereafter be adjusted, and shall be subject to further adjustment from time to
time, in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to Common Stock contained in Section 9 hereof, and the
provisions of Sections 1 through 8 and 10 and 11 of this Resolution with respect
to the Common Stock shall apply on like or similar terms to any such other
shares or securities.
(C) The Company shall pay any and all stock transfer and documentary
stamp taxes that may be payable in respect of any issuance or delivery of shares
of Series B Preferred Stock or shares of Common Stock or other securities issued
on account of Series B Preferred Stock pursuant hereto or certificates
representing such shares or securities. The Company shall not, however, be
required to pay any such tax which may be payable in respect of any transfer
involved in the issuance or delivery of shares of Series B Preferred Stock or
Common Stock or other securities in a name other than that in which the shares
of Series B Preferred Stock with respect to which such shares or other
securities are issued or delivered were registered, or in respect of any payment
to any person with respect to any such shares or securities other than a payment
to the registered holder thereof, and shall not be required to make any such
issuance, delivery or payment unless and until the person otherwise entitled to
such issuance, delivery or payment has paid to the Company the amount of any
such tax or has established, to the satisfaction of the Company, that such tax
has been paid or is not payable.
(D) In the event that a holder of shares of Series B Preferred Stock
shall not by written notice designate the name in which shares of Common Stock
to be issued upon conversion of such shares should be registered or to whom
payment upon redemption of shares of Series B Preferred Stock should be made or
the address to which the certificate or certificates representing such shares,
or such payment, should be sent, the Company shall be entitled to register such
shares, and
B-21
<PAGE>
make such payment, in the name of the holder of such Series B Preferred Stock as
shown on the records of the Company and to send the certificate or certificates
representing such shares, or such payment, to the address of such holder shown
on the records of the Company.
(E) Unless otherwise provided in the Restated Certificate of
Incorporation, as amended, of the Company, all payments in the form of
dividends, distributions on voluntary or involuntary dissolution, liquidation or
winding-up or otherwise made upon the shares of Series B Preferred Stock and any
other stock ranking on a parity with the Series B Preferred Stock with respect
to such dividend or distribution shall be made pro rata, so that amounts paid
per share on the Series B Preferred Stock and such other stock shall in all
cases bear to each other the same ratio that the required dividends,
distributions or payments, as the case may be, then payable per share on the
shares of the Series B Preferred Stock and such other stock bear to each other.
(F) The Company may appoint, and from time to time discharge and
change, a transfer agent for the Series B Preferred Stock. Upon any such
appointment or discharge of a transfer agent, the Company shall send notice
thereof by first-class mail, postage prepaid, to each holder of record of Series
B Preferred Stock.
- --------------------
B-22
<PAGE>
Exhibit 10(ii)(f)
AMENDMENTS TO
J. C. PENNEY COMPANY, INC.
SUPPLEMENTAL RETIREMENT PROGRAM
1. Paragraph (7) (Special Rules for VERP Plan Participants) of Article IV
(Benefits) is amended effective September 15, 1997 to add a subparagraph
(h) to read as follows:
(h) Notwithstanding any other provision of the Plan, an Eligible
Management Associate (excluding Officers of the Company) who is entitled to
receive a benefit under the Plan pursuant to the formula described in
Paragraph (1) of Article IV and who retires as part of the Voluntary Early
Retirement Program announced in 1997 shall receive the greater of:
(i) The amount payable under the Plan pursuant to Paragraph (1) of
Article IV as of his Early Retirement Date, Traditional
Retirement Date, or Delayed Retirement Date, as the case may be
(the "Plan Benefit"), or
(ii) The amount derived by subtracting the aggregate benefit payable
to the Associate from the Pension Plan and, if applicable, the
Benefit Restoration Plan from the benefit communicated to the
Associate in the personalized VERP communication materials as the
aggregate benefit earned as of January 1, 1998, from the Plan,
the Pension Plan and, if applicable, the Benefit Restoration
Plan.
2. Paragraph (1) (Additional Credited Service and Other Adjustments) of
Article VIII (miscellaneous) is amended, effective September 15, 1997 to
add at the end the following subparagraph:
Notwithstanding any other provision of the Plan, an Eligible
Management Associate (excluding Officers of the Company) who is
entitled to a benefit pursuant to the formula described in paragraph
(1) of Article IV as of the Associate's Early Retirement Date,
Traditional Retirement Date or Delayed Retirement Date, as the case
may be ("formula benefit"), (i) who received from the Company as part
of the Company's offer in 1997 to participate in the Voluntary Early
Retirement Program, a personalized statement showing the aggregate
benefits earned as of January 1, 1998, from the Plan, the Pension Plan
and, if applicable, the Benefit Restoration Plan, ("earned benefit")
and (ii) who retires from the Company prior to January 1, 1999,
<PAGE>
shall receive the greater of: (a) the formula benefit, or (b) an
amount derived by subtracting the aggregate benefit payable to the
Associate from the Pension Plan and, if applicable, the Benefit
Restoration Plan from the earned benefit.
<PAGE>
Exhibit 10(ii)(g)
AMENDMENTS TO
J. C. PENNEY COMPANY, INC.
SUPPLEMENTAL RETIREMENT PROGRAM
RESOLVED that pursuant to Paragraph (2) (Amendment and Termination) of
Article VIII (Miscellaneous) of the Supplemental Retirement Program for
Management Profit-Sharing Associates of J. C. Penney Company, Inc. ("Program"),
the Program shall be amended effective January 13, 1999 to add a new Paragraph
(11) to Article VIII to read as follows:
(11) Change of Control: Solely for the purposes of this Paragraph (11), the
-----------------
term Eligible Management Associate shall include all active associates who upon
their retirement would qualify as an Eligible Management Associate as of the
date of a "Change of Control" (as hereinafter defined).
Upon a Change of Control, assets of the Company in an amount sufficient to
pay benefits that have accrued under the Plan up to that date shall immediately
be transferred to a grantor trust to be established by the Company for the
purpose of paying benefits hereunder. Each Eligible Management Associate's
vested benefits shall thereafter be paid to him from such trust in accordance
with the terms of the Plan; provided that at the time of such Change of Control,
the Eligible Management Associate may take an irrevocable election to have his
Plan benefits paid in a single-sum immediately upon the later of (i) the date of
the Change of Control, or (ii) the Eligible Management Associate's retirement
date; in which event his benefits shall be reduced by 10% as a penalty for early
payment. The amount transferred to the grantor trust shall include the amount
necessary to pay benefits for Eligible Management Associates who have not yet
retired, determined as if they retired on the date of the Change of Control. On
each anniversary date of the date of a Change of Control, the Company shall
transfer to the grantor trust an amount necessary to pay all benefits that have
accrued under the Plan during the preceding twelve months.
For purposes of this Paragraph (11), a Change of Control shall be deemed to
have occurred if:
(1) at any time during any 24-month period, at least a majority of the
Board of Directors of the Company does not consist of Continuing Directors
(meaning directors of the Company at the beginning of such 24-month period and
directors who subsequently became such, and whose election, or nomination for
election, by the Company's stockholders, was approved by a majority of the then
Continuing Directors); or
(2) at any time during any 12-month period, the Company's directors in
office at the beginning of such 12-month period cease to constitute at least a
majority of the Board of Directors (disregarding any vacancy occurring during
such period by reason of
1
<PAGE>
death or disability, but deeming any individual whose election, or nomination
for election, by the Company's stockholders, to fill such vacancy was approved
by a majority of the directors in office immediately prior to such vacancy, to
have been in office at the beginning of such 12-month period); or
(3) any person or "group" (as determined for purposes of Rule 13D-G under
the Securities Exchange Act of 1934, as amended, or any successor regulation),
except any majority-owned subsidiary or any Company employee benefit plan or any
trust or investment manager thereunder, shall have acquired "beneficial
ownership" (as determined for purposes of Rule 13D-G under the Securities
Exchange Act of 1934, as amended, or any successor regulation) of shares of
Company common stock having 20% or more of the voting power of all outstanding
shares of Company capital stock, unless such acquisition is approved in advance
by a majority of the Board of Directors in office immediately preceding such
acquisition; or
(4) a merger or consolidation occurs to which the Company is a party,
whether or not the Company is the surviving corporation, in which outstanding
shares of Company common stock are converted into shares of stock or securities
of another company, partnership, or other entity (other than a conversion into
shares of voting common stock of the successor corporation or a holding company
or entity thereof) or other securities (of either the Company or another
company) or cash or other property (excluding payments made solely for
fractional shares); or,
(5) the sale of all, or substantially all, of the Company's assets occurs.
RESOLVED that the Human Resources Committee be, and hereby is, authorized
in the name and on behalf of the Company, to adopt, execute, and deliver, or
cause to be adopted, executed, and delivered any amendments to the Plan and
Program, and any instruments and documents as may be necessary to effectuate the
purposes and intent of the foregoing resolutions and each of them; and
RESOLVED that the officers of the Company and its counsel be, and they
hereby are, authorized to take all such further actions, and to effectuate and
deliver all such further instruments and documents in the name and on behalf of
the Company, and under its corporate seal or otherwise, and to pay all such
expenses as shall in their judgment be necessary, proper, or advisable in order
fully to carry out the intent and effectuate the purposes and intent of the
foregoing resolutions and each of them.
2
<PAGE>
EXHIBIT 10(ii)(aa)
AMENDMENTS TO
J. C. PENNEY COMPANY, INC.
BENEFIT RESTORATION PLAN
------------------------
Adopted December 11, 1998
<PAGE>
1. Article I (Introduction) is amended effective January 1, 1999 to add the
following paragraphs:
Effective January 1, 1999, amounts credited to the Annual Benefit Limit
Make-Up Account as of December 31, 1998 of each Participant were transferred
into the J. C. Penney Company, Inc. Mirror Savings Plan II and therefore
were no longer payable under the J. C. Penney Company, Inc. Benefit
Restoration Plan after December 31, 1998.
Effective January 1, 1999, the Thrift Drug, Inc. Benefit Restoration Plan
was merged into the J. C. Penney Company, Inc. Benefit Restoration Plan.
2. Article II (Definitions) is amended effective January 1, 1999 (a) to delete
the definitions entitled Annual Benefit Limit Make-Up Account, Beneficiary,
------------------------------------ -----------
Company Account(s), Compensation, Earnings Dollar Limit, Interest Income
------------------ ------------ --------------------- ---------------
Account, Performance Unit Plan, Profit Incentive Compensation, Savings,
------- --------------------- ----------------------------- --------
Profit-Sharing and Stock Ownership Plan, and (b) to delete the definition
---------------------------------------
entitled Personnel Committee and to substitute therefor the definition
-------------------
entitled Human Resources Committee.
-------------------------
3. The Benefit Restoration Plan is amended effective January 1, 1999 to delete
the words "Personnel Committee" in each place they appear and to substitute
therefore the words "Human Resources Committee" in each such place.
4. Article III (Participation) is amended effective January 1, 1999 to delete
Paragraph (2) (Annual Benefit Limit Make-Up Account Benefit) in its
entirety.
5. Article IV (Benefits) is amended effective January 1, 1999 to delete (a)
Paragraph (2) (Annual Benefit Limit Make-Up Account) in its entirety, (b)
unnumbered subparagraph two of Paragraph (3) (Death Benefit) in its
entirety, and (c) unnumbered subparagraph two of Paragraph (4) (Vesting) in
its entirety.
6. Article IV (Benefits is amended effective August 1, 1995 to add to Paragraph
(3) (Death Benefit) the following sentence:
If a Participant has elected an optional form of payment and dies while in
pay status but before receiving all benefits payable under that option, the
remaining payments, if any, will be made to the person designated by the
Participant as his beneficiary at the time the optional form of payment was
elected.
7. Article V (Form and Commencement of Benefit Payments) is amended effective
January 1, 1999 to delete unnumbered subparagraph two of Paragraph (1)
(Optional Forms and Commencement of Benefit Payments) in its entirety.
<PAGE>
8. Article VII (Type of Plan) is amended effective January 1, 1999 to delete
sentence three in its entirety and to substitute therefor the following
sentence three:
The portion of this Plan in Paragraph (1) of Article IV, which comprises the
benefit determined due to the limit on annual benefits under the Pension
Plan imposed by Section 415 of the Code, constitutes a separable part of
this Plan which is maintained by the Company solely for the purpose of
providing benefits for certain Associates in excess of the limitations on
benefits imposed by Section 415 of the Code.
9. Article VIII (Miscellaneous) is amended effective January 1, 1999 to delete
unnumbered subparagraph two of Paragraph (1) (Amendment and Termination) in
its entirety and to substitute therefor the following subparagraph two:
In no event will any amendment, modification, suspension, discontinuance, or
termination adversely affect the Plan benefit payable pursuant to Paragraph
(1) of Article IV for any Participant for whom benefit payments have already
begun in accordance with the Plan as in effect prior to the effective date
of the amendment, modification, suspension, discontinuance, or termination
unless otherwise required to comply with applicable law.
10. Article VIII (Miscellaneous) is amended effective January 1, 1999 to delete
the words in sentence one of Paragraph (2) (Rights of Associates) "Except
for the Associate's nonforfeitable interest in the value of the Annual
Benefit Limit Make-Up Account established in accordance with Paragraph (2)
of Article IV," and to capitalize the next following word "Neither" as the
new first word of sentence one.
11. Article VIII (Miscellaneous) is amended effective January 1, 1998 to delete
the title of Paragraph (5) (Cessation and Recalculation of Benefits) and
sentence one in their entirety and to substitute therefor the following
title and sentence one:
(5) Reemployed Participants: If a retired Participant again becomes an
--- -----------------------
Associate of a Participating Employer, the payment of benefits
hereunder shall continue.
12. Article IX (Claims Procedures) is amended to delete the words "Benefits
Administration Manager" in each place they appear and to substitute therefor
the words "Benefits Administration Committee or its delegate" in each such
place.
13. Appendix I (Participating Employers) is amended effective January 1, 1999
in its entirety as follows.
<PAGE>
APPENDIX I
Participating Employers
-----------------------
J. C. Penney Company, Inc.
JCPenney Business Services, Inc.
(until January 24, 1996)
J. C. Penney Casualty Insurance Company
J. C. Penney Funding Corporation
J. C. Penney Life Insurance Company
J. C. Penney National Bank
J. C. Penney Media Corporation
(from and after April 3, 1996)
J. C. Penney Overseas Services, Inc.
(from and after July 1, 1996)
J. C. Penney Receivables, Inc.
JCPenney Puerto Rico, Inc.
Eckerd Corporation
(from and after January 1, 1999)
EDC Drug Stores, Inc.
(formerly Kerr Drug Stores, Inc.)
(from and after January 1, 1999)
Fay's Incorporated
(from and after January 1, 1999)
Quest Membership Services, Inc.
(from and after January 1, 1999)
TDI Managed Care Services, Inc.
(from and after January 1, 1999)
Thrift Drug, Inc.
(from and after January 1, 1999)
Thrift Drug Services, Inc.
(from and after January 1, 1999)
<PAGE>
Exhibit 10(ii)(ab)
AMENDMENTS TO
J. C. PENNEY COMPANY, INC.
BENEFIT RESTORATION PLAN
RESOLVED that pursuant to Paragraph (1) (Amendment and Termination) of
Article VIII (Miscellaneous) of the J. C. Penney Company, Inc. Benefit
Restoration Plan ("Plan"), the Plan shall be amended effective January 13, 1999
to add a new Paragraph (9) to Article VIII to read as follows:
(9) Change of Control: Upon a Change of Control (as hereinafter defined),
-----------------
assets of the Company in an amount sufficient to pay benefits that
have accrued under the Plan up to that date shall immediately be
transferred to a grantor trust to be established by the Company for
the purpose of paying benefits hereunder, and the Participant's vested
benefits shall thereafter be paid to the Participant from such trust
in accordance with the terms of the Plan; provided that at the time of
such Change of Control, the Participant may make an irrevocable
election to have his Plan benefits paid in a single-sum immediately
upon the later of (i) the date of the Change of Control, or (ii) the
participant's retirement date, in which his benefits shall be reduced
by 10% as a penalty for early payment. On each anniversary date of the
date of a Change of Control, the Company shall transfer to the grantor
trust an amount necessary to pay all benefits accrued under the Plan
during the preceding twelve months.
For purposes of this paragraph (9), a Change of Control shall be deemed to
have occurred if:
(1) at any time during any 24-month period, at least a majority of the
Board of Directors of the Company does not consist of Continuing Directors
(meaning directors of the Company at the beginning of such 24-month period and
directors who subsequently became such, and whose election, or nomination for
election, by the Company's stockholders, was approved by a majority of the then
Continuing Directors); or
(2) at any time during any 12-month period, the Company's directors in
office at the beginning of such 12-month period cease to constitute at least a
majority of the Board of Directors (disregarding any vacancy occurring during
such period by reason of death or disability, but deeming any individual whose
election, or nomination for election, by the Company's stockholders, to fill
such vacancy was approved by a majority of the directors in office immediately
prior to such vacancy, to have been in office at the beginning of such 12-month
period); or
(3) any person or "group" (as determined for purposes of Rule 13D-G under
the Securities Exchange Act of 1934, as amended, or any successor regulation),
except
1
<PAGE>
any majority-owned subsidiary or any Company employee benefit plan or any trust
or investment manager thereunder, shall have acquired "beneficial ownership" (as
determined for purposes of Rule 13D-G under the Securities Exchange Act of 1934,
as amended, or any successor regulation) of shares of Company common stock
having 20% or more of the voting power of all outstanding shares of Company
capital stock, unless such acquisition is approved in advance by a majority of
the Board of Directors in office immediately preceding such acquisition; or
(4) a merger or consolidation occurs to which the Company is a party,
whether or not the Company is the surviving corporation, in which outstanding
shares of Company common stock are converted into shares or securities of
another company, partnership, or other entity (other than a conversion into
shares of voting common stock of the successor corporation or a holding company
or entity thereof) or other securities (of either the Company or another
company) or cash or other property (excluding payments made solely for
fractional shares); or,
(5) the sale of all, or substantially all, of the Company's assets occurs.
2
<PAGE>
EXHIBIT 10(ii)(aj)
J. C. PENNEY COMPANY, INC.
MIRROR SAVINGS PLAN II
Adopted effective January 1, 1999
<PAGE>
J. C. PENNEY COMPANY, INC.
MIRROR SAVINGS PLAN I (or II)
INTRODUCTION
------------
The J. C. Penney Company, Inc. Mirror Savings Plan I (or II) ("Plan") was
adopted effective January 1, 1999 as part of a program to redesign the Company's
qualified and non-qualified savings plans to optimize the retirement savings
opportunities for Associates.
The Plan is maintained by the Company on an unfunded basis primarily for
the purpose of providing deferred compensation to a select group of management
or highly compensated employees.
Merged into the Plan effective January 1, 1999 were the J. C. Penney
Company, Inc. 1995 Deferred Compensation Plan and the Annual Benefit Limit Make-
Up Accounts as of December 31, 1998 under the J. C. Penney Company, Inc. Benefit
Restoration Plan and the Thrift Drug, Inc. Benefit Restoration Plan. On and
after January 1, 1999 the J. C. Penney Company, Inc. 1995 Deferred Compensation
Plan is no longer in existence.
(Plan II)
<PAGE>
J. C. PENNEY COMPANY, INC.
MIRROR SAVINGS PLAN I (or II)
TABLE OF CONTENTS
-----------------
Article Page
- ------- ----
ARTICLE ONE DEFINITIONS..................................... 1
ARTICLE TWO ELIGIBILITY AND PARTICIPATION................... 4
2.01 Eligibility Determined for Each Plan Year........... 4
2.02 Eligible Associate.................................. 4
2.03 Participation....................................... 4
2.04 Election to Defer................................... 5
2.05 Deferral Amounts.................................... 5
2.06 Investment Elections................................ 6
ARTICLE THREE BENEFITS........................................ 7
3.01 Establishment of Accounts........................... 7
3.02 Personal Accounts................................... 7
3.03 Company Accounts.................................... 7
3.04 Mirror Company Matching Contributions............... 8
3.05 Partial-Year Mirror Company Matching Contributions.. 9
ARTICLE FOUR TRANSFERS....................................... 10
4.01 Personal Accounts................................... 10
4.02 Company Accounts.................................... 10
ARTICLE FIVE VESTING......................................... 11
5.01 Personal Accounts................................... 11
5.02 Company Accounts.................................... 11
5.03 Forfeitures......................................... 11
ARTICLE SIX TYPE OF PLAN.................................... 12
6.01 Top Hat Plan........................................ 12
6.02 No Funding.......................................... 12
<PAGE>
ARTICLE SEVEN DISTRIBUTIONS................................... 13
7.01 Normal Form of Payment.............................. 13
7.02 Separation from Service............................. 13
7.03 Death............................................... 13
7.04 Alternate Form of Payment........................... 13
7.05 Hardship Distribution............................... 14
7.06 Fund-Specific Installments or Hardship Distributions.15
7.07 Form of Payments.................................... 15
7.08 Change of Control................................... 15
7.09 Reemployed Participants............................. 16
ARTICLE EIGHT AMENDMENT AND TERMINATION....................... 18
8.01 Plan Amendment...................................... 18
8.02 Plan Termination.................................... 18
8.03 Automatic Plan Termination.......................... 18
ARTICLE NINE MISCELLANEOUS................................... 19
9.01 Plan Administration................................. 19
9.02 Plan Expenses....................................... 19
9.03 Effect on Other Benefits............................ 20
9.04 No Guarantee of Employment.......................... 20
9.05 Disclaimer of Liability............................. 20
9.06 Severability........................................ 20
9.07 Successors.......................................... 20
9.08 Governing Law....................................... 20
9.09 Construction........................................ 21
9.10 Taxes............................................... 21
9.11 Non-Assignability................................... 21
9.12 Claims Procedure.................................... 21
<PAGE>
ARTICLE ONE
DEFINITIONS
As used herein, the following words and phrases have the following
respective meanings unless the context clearly indicates otherwise:
1.01 Active Participant: A Participant who defers part of his Compensation for a
------------------
Plan Year (or part thereof) pursuant to an Election to Defer that satisfies the
requirements of Section 2.04.
1.02 Associate: Any person who is classified as an associate and employed by an
---------
Employer if the relationship between the Employer and such person constitutes
the legal relationship of employer and employee.
1.03 Beneficiary: The person or persons designated by the Participant on a
-----------
beneficiary form required by the Company for this purpose to receive benefits
payable under the Plan because of the Participant's death.
1.04 Code: The Internal Revenue Code of 1986, as amended from time to time.
----
1.05 Company: J. C. Penney Company, Inc., a Delaware corporation, or its
-------
successor(s).
1.06 Company Account: A phantom account established in accordance with Article
---------------
Three to which Mirror Company Matching Contributions plus earnings are credited.
1.07 Compensation: The total cash remuneration paid to an Associate by his
------------
Employer, that qualifies as wages as the term wages is defined in Code section
3401(a), determined without regard to any reduction for workers' compensation
and state disability insurance reimbursements, and all other compensation
payments for which his Employer is required to furnish the Associate a written
statement under Code sections 6041(d), 6051(a)(3) and 6052, reduced by any
extraordinary items of special pay.
In addition, Compensation includes any contributions made by the
Associate's Employer on behalf of the Associate pursuant to a deferral election
under any employee benefit plan containing a cash or deferred arrangement under
Section 401(k) of the Code, and any amounts that would have been received as
cash but for an election to receive benefits under a cafeteria plan meeting the
requirements of Section 125 of the Code.
Compensation also includes eligible cash incentive payments in the year
paid to the Associate, and amounts deferred by the Active Participant pursuant
to Section 2.05 of the Plan.
1
<PAGE>
Compensation for a Plan Year shall be determined without regard to the
limitations on annual compensation under Section 401(a)(17) of the Code.
An Associate who is in the service of the armed forces of the United States
during any period in which his reemployment rights are guaranteed by law will be
considered to have received the same rate of Compensation during his absence
that he was receiving immediately prior to his absence, provided he returns to
employment with an Employer within the time such rights are guaranteed.
1.08 Eligible Associate: An Associate who has satisfied the eligibility
------------------
requirements of the Plan for a Plan Year in accordance with Section 2.02.
1.09 Employer: The Company and any subsidiary company or affiliate of the
--------
Company that is a Participating Employer as defined in Article I of the Savings
Plan.
1.10 ERISA: The Employee Retirement Security Act of 1974, as amended from time
-----
to time.
1.11 Exchange Act: The Securities Exchange Act of 1934, as amended from time to
------------
time.
1.12 Human Resources Committee: The Human Resources Committee of the Management
-------------------------
Committee of the Company.
1.13 Mirror Company Matching Contributions: The phantom amounts deemed to be
-------------------------------------
contributed by the Company for each Plan Year as determined under Section 3.04.
1.14 Mirror Investment Funds: Phantom funds established as book reserve entries
-----------------------
in the books and records of the Company to which a Participant's deferral
amounts under the Plan are credited based on the investment elections of the
Participant. The investment returns of such funds shall be assumed to match the
returns of the same investment funds available to participants under the Savings
Plan which are currently:
(1) Interest Income Fund;
(2) Conservative Fund;
(3) Moderate Fund;
(4) Aggressive Fund; and
(5) Penney Common Stock Fund.
1.15 Participant: An Eligible Associate who participates in the Plan in
-----------
accordance with Article Two, and who has not yet received a distribution of the
entire amount of his vested benefits under the Plan.
1.16 Personal Account: A phantom account established in accordance with Article
----------------
Three to which a Participant's deferral amounts plus earnings are credited.
2
<PAGE>
1.17 Benefit Plans Review Committee: The Benefit Plans Review Committee of the
------------------------------
Board of Directors of the Company.
1.18 Plan: The J. C. Penney Company, Inc. Mirror Savings Plan I (or II),
----
effective January 1, 1999, as amended from time to time.
1.19 Savings Plan: The J. C. Penney Company, Inc. Savings, Profit-Sharing and
------------
Stock Ownership Plan, as amended from time to time.
1.20 Separation from Service: The termination of employment of an Eligible
-----------------------
Associate or a Participant because of retirement, resignation, discharge,
disability or death.
1.21 Valuation Date: With respect to all Mirror Investment Funds, each day of a
--------------
calendar year on which the New York Stock Exchange is open.
With respect to transactions or distributions initiated by a Participant or
Beneficiary, (a) the date of receipt by the Plan Administrator of the request if
it is received prior to the close of the New York Stock Exchange, or (b) the
next trading day if the request is received after the close of the New York
Stock Exchange.
With respect to distributions not initiated by a Participant, the date the
distribution is processed.
3
<PAGE>
ARTICLE TWO
ELIGIBILITY AND PARTICIPATION
2.01 Eligibility Determined for Each Plan Year
-----------------------------------------
The eligibility of each Associate to participate in the Plan as an Active
Participant is determined for each Plan Year based on the preceding Plan Year in
accordance with Section 2.02 below. Eligibility for, or participation in, the
Plan for a Plan Year does not give an Associate the right to defer part of his
Compensation under the Plan for any other Plan Year.
2.02 Eligible Associate
------------------
An Associate shall be eligible to participate in the Plan as an Active
Participant for a Plan Year if the Associate for the preceding Plan Year had:
(1) Satisfied the eligibility requirements of the Savings Plan; and
(2) Earnings in excess of $80,000 (as adjusted in accordance with Section
414(q)(1) of the Code) and less than $100,000 based on his actual
Compensation through October 31 of such year plus his projected
earnings from November 1 through December 31 of such year determined
by using his Base Salary (as defined below) in effect on October 31 of
such year. (Plan I)
(3) Earnings of at least $100,000 based on his actual Compensation through
October 31 of such year plus his projected earnings from November 1
through December 31 of such year determined by using his Base Salary
(as defined below) in effect on October 31 of such year. (Plan II)
Base Salary shall mean the aggregate amount of regular wages due and
payable to an Eligible Associate in that Plan Year or calendar year designated
by his Employer as the Eligible Associate's monthly pay as reflected on the
Employer's personnel records, including any such amounts otherwise due and
payable with respect to which his Election to Defer applies hereunder.
2.03 Participation
-------------
An Eligible Associate for a Plan Year shall participate in the Plan for
that Plan Year as an Active Participant by making a timely Election to Defer in
accordance with Section 2.04 below. An Eligible Associate who fails to satisfy
the requirements of Section 2.04 below shall not be allowed to make an Election
to Defer and shall not be an Active Participant for that Plan Year.
4
<PAGE>
A Participant who is not an Active Participant for a Plan Year shall
continue to participate in the Plan in all respects except that such Participant
shall not have the right to defer part of his Compensation under the Plan for
that Plan Year, and shall not be entitled to a Mirror Company Matching
Contribution (as determined under Section 3.04) for that Plan Year.
2.04 Election to Defer
-----------------
An Eligible Associate for a Plan Year may elect to defer a percentage (as
described in Section 2.05 below) of his Compensation for such Plan Year.
The Election to Defer for a Plan Year must be made in a manner approved by
the Plan Administrator and must be received by the Plan Administrator by
December 31 of the preceding Plan Year (or, in the case of the first Plan Year,
received by December 31, 1998). An Eligible Associate may change his Election
to Defer by filing a new Election to Defer with the Plan Administrator by the
applicable deadline.
An Active Participant cannot change his Election to Defer during a Plan
Year for that Plan Year. An Active Participant may terminate his Election to
Defer during a Plan Year for that Plan Year but shall not be permitted to make
another Election to Defer for that Plan Year. Such termination shall be
effective as of the next available payroll period following receipt of the
termination by the Plan Administrator.
An Election to Defer also shall terminate if:
(1) the Eligible Associate or Participant has a Separation from Service
with an Employer, or
(2) the Plan is terminated, or
(3) upon a Change of Control that occurs before the date that payment of
Compensation would have been made if not deferred.
2.05 Deferral Amounts
----------------
An Active Participant for a Plan Year may defer up to 14% of his
Compensation for that Plan Year. All deferral amounts shall be in whole
percentages and made by payroll deduction.
(Plan I)
An Active Participant for a Plan Year may defer (a) up to 14% of his
Compensation in that Plan Year up to the Earnings Dollar Limit (as defined
below), and (b) up to 75% of his Compensation in that Plan Year that exceeds the
Earnings Dollar Limit. All deferral amounts shall be in whole percentages and
made by payroll deduction.
5
<PAGE>
(Plan II)
The Earnings Dollar Limit of an Active Participant for a Plan Year shall be
$160,000, as adjusted for cost-of-living increases in accordance with Section
401(a)(17) of the Code.
(Plan II)
2.06 Investment Elections
--------------------
A Participant shall complete an election, in the manner determined by the
Plan Administrator, requesting that all of his future deferral amounts (in whole
percentages) be applied to the purchase for him, as of the earliest practicable
Valuation Date after such amounts are deferred, of units in his Personal
Accounts within any one or more of the Mirror Investment Funds in each case at a
price equal to the value of such units as of such Valuation Date.
Such election initially must be made prior to the commencement of his
participation in the Plan and may be changed at any time during the Plan Year.
Each such election or change in election shall be effective as soon as
administratively feasible following receipt by the Plan Administrator or its
delegate of the Participant's election.
In the event that no timely investment election by the Participant is on
file with the Plan Administrator, such Participant shall be deemed to have
elected that all deferral amounts shall be applied to the purchase for him of
units in the Personal Account within the Mirror Investment Fund that is the
Interest Income Fund.
6
<PAGE>
ARTICLE THREE
BENEFITS
3.01 Establishment of Accounts
-------------------------
A Personal Account and a Company Account within each Mirror Investment Fund
shall be established for each Participant in the Plan as if assets were invested
in a trust. All amounts credited to the Personal Accounts and Company Accounts
of a Participant shall at all times be held in the Company's general funds as
part of the Company's general assets, unless a trust is established pursuant to
Section 7.08.
The value, including gains and losses, of such accounts and funds shall be
determined by the Plan Administrator in the same manner that the value is
determined under the Savings Plan. As of each Valuation Date, the net asset
value of a unit shall equal the net asset value of a unit as determined under
the Savings Plan.
No funds shall be allocated by the Company to any Personal Account, Company
Account, Mirror Investment Fund, Mirror Company Matching Contribution, or
Partial-Year Mirror Company Matching Contribution under the Plan.
3.02 Personal Accounts
-----------------
All amounts deferred by an Active Participant pursuant to Article Two shall
be credited to his Personal Accounts within his Mirror Investment Funds
specified in his investment election.
All phantom amounts credited to a Participant in his account as of December
31, 1998 under the J. C. Penney Company, Inc. 1995 Deferred Compensation Plan
shall be transferred and credited as of January 1, 1999 to his Personal Account
within the Mirror Investment Fund that is the Interest Income Fund.
(Plan II)
3.03 Company Accounts
----------------
An amount deemed to be a Mirror Company Matching Contribution for a full
year (as determined under Section 3.04 below) shall be credited to the Company
Account of each Active Participant for a Plan Year as of the date a Company
matching contribution is allocated to the accounts of participants under the
Savings Plan for that Plan Year.
An Active Participant must be in the active employ of an Employer on
December 31 of the Plan Year to receive credit for a Mirror Company Matching
Contribution for that Plan Year; provided, however, that an Active Participant
who had a Separation from Service before December 31 of said year shall receive
credit for a Partial-Year Mirror Company Matching Contribution (as determined
under Section 3.05 below) if he qualified
7
<PAGE>
for a partial-year Company matching contribution under the Savings Plan for such
year.
A Mirror Company Matching Contribution for a full year shall be deemed to
be invested in his Company Account within the Mirror Investment Fund that is the
Penney Common Stock Fund. A Partial-Year Mirror Company Matching Contribution
shall be deemed to be invested in his Company Accounts within his Mirror
Investment Funds in accordance with the Participant's investment election for
his Personal Accounts under this Plan.
All phantom amounts credited to a Participant in his Annual Benefit Limit
Make-Up Account as of December 31, 1998 under the J. C. Penney Company, Inc.
Benefit Restoration Plan or the Thrift Drug, Inc. Benefit Restoration Plan shall
be transferred and credited as of January 1, 1999 to his Company Account within
the Mirror Investment Fund that is the Interest Income Fund.
(Plan II)
Any amount of Company contributions credited to the Participant's Company
account under the Savings Plan and subsequently cancelled so that said plan
could satisfy the average contribution percentage test (as described in the
Savings Plan) shall be credited to his Company Account within the Mirror
Investment Fund that is the Penney Common Stock Fund in the year paid.
All amounts credited to the Company Accounts of a Participant shall be
subject to the vesting provisions of Article Five.
3.04 Mirror Company Matching Contribution
------------------------------------
The Mirror Company Matching Contribution for an Active Participant is an
amount determined by subtracting (b) from (a) below where:
(a) Is the lesser of (c) or (d) below multiplied by the Company matching
contribution rate as determined under the Savings Plan for such year;
(b) Is the amount of the Company's matching contribution for a full year
actually allocated to the Active Participant's account under the Savings Plan
for such year;
(c) Is 6% multiplied by the Active Participant's Compensation for such year
determined without regard to the limitations (i) on annual additions under
Section 415(c)(1) of the Code, and (ii) on annual compensation under Section
401(a)(17) of the Code;
(d) Is the amount of the Active Participant's deposits under the Savings
Plan for the Plan Year plus the amounts deferred by the Active Participant
pursuant to Article Two for such year.
8
<PAGE>
3.05 Partial-Year Mirror Company Matching Contribution
-------------------------------------------------
The Partial-Year Mirror Company Matching Contribution is an amount
determined by subtracting (b) from (a) below where:
(a) Is the lessor of 50% of (c) below or 50% of (d) below multiplied by the
Company matching contribution rate as determined under the Savings Plan for such
year;
(b) Is the amount of the Company's matching contribution for a partial year
actually allocated to the Active Participant's account under the Savings Plan
for such year;
(c) Is 6% multiplied by the Active Participant's Compensation (as
determined below) for such year determined without regard to the limitations on
(i) annual additions under Section 415 (c)(i) of the Code, and (ii) annual
compensation under Section 401(a)(17) of the Code;
(d) Is the amount of the Active Participant's deposits under the Savings
Plan for the Plan Year plus the amounts deferred by the Active Participant
pursuant to Article Two for such year.
Compensation for the purpose of (c) above shall mean the Active
Participant's actual Compensation (other than eligible cash incentive payments)
received during the Plan Year plus 1/12 of such eligible cash incentive payments
received during the Plan Year multiplied by the number of months (including
partial months) during which the Active Participant was in the active employ of
his Employer.
9
<PAGE>
ARTICLE FOUR
TRANSFERS
4.01 Personal Accounts
-----------------
A Participant may elect, once in each calendar month of the Plan Year, to
transfer an amount (in whole percentages) equal to the value of all or part of
his units in his Personal Accounts within any one or more of the Mirror
Investment Funds to another one or more of his Personal Accounts within the
Mirror Investment Funds. The value of such units shall be determined as of the
Valuation Date. A transfer is effective only if made in the manner determined
by the Plan Administrator.
4.02 Company Accounts
----------------
A Participant who has attained age 55 and is 100% vested in his Company
Accounts under the Plan may elect, once in each calendar month of the Plan Year,
to transfer an amount (in whole percentages) equal to the value of all or part
of his units in his Company Accounts within any one or more of the Mirror
Investment Funds to another one or more of his Company Accounts within the
Mirror Investment Funds. The value of such units shall be determined as of the
Valuation Date. A transfer is effective only if made in the manner determined
by the Plan Administrator.
Notwithstanding any other provision of the Plan, a Participant who wishes
to make transfers from both his Personal Accounts and Company Accounts during
the same month, must do so as part of the same transaction.
10
<PAGE>
ARTICLE FIVE
VESTING
5.01 Personal Accounts
-----------------
A Participant shall be 100% vested in the value of his Personal Accounts
within his Mirror Investment Funds at all times without regard to whether he is
a Participant in the Plan for any future Plan Year.
5.02 Company Accounts
----------------
A Participant shall be vested in the value of his Company Accounts within
his Mirror Investment Funds in the same vesting percentage attributable to the
value of his Company accounts under the Savings Plan based on his full years of
service (as defined in the Savings Plan) in accordance with the following table:
Full years of service Vested Percentage
--------------------- -----------------
Less than 1 0%
1 20%
2 40%
3 60%
4 80%
5 or more 100%
5.03 Forfeitures
-----------
A Participant who is less than 100% vested in the value of his Company
Accounts as of his Separation from Service shall forfeit the non-vested value of
his Company Accounts. In the event the Participant subsequently is reemployed
by an Employer within 5 years, the amount forfeited (without earnings) hereunder
shall be restored to his Company Accounts only if his amount forfeited under the
Savings Plan is restored to his Savings Plan Company accounts. The restoration
of forfeitures under the Plan shall be made in the same manner as the
restoration of forfeitures under the Savings Plan.
11
<PAGE>
ARTICLE SIX
TYPE OF PLAN
6.01 Top Hat Plan
------------
The Plan is intended to be a "pension plan" as defined in ERISA and is
maintained by the Company on an unfunded basis primarily for the purpose of
providing deferred compensation to a select group of management or highly
compensated employees. As such, the Plan is intended to be construed so as not
to provide income to any Participant or Beneficiary for purposes of the Internal
Revenue Code prior to actual receipt of benefit payments under the Plan.
In the event that it should subsequently be determined by statute or by
regulation or ruling that the Plan is not "a plan which is unfunded and is
maintained primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees" within the meaning
of sections 201(2), 301(a)(3), 401(a)(1), and 4021(b)(6) of ERISA and section
2520.104-24 of Chapter 29 of the Code of Federal Regulations, participation in
the Plan shall be restricted by the Plan Administrator to the extent necessary
to assure that it will be such a plan within the meaning of such sections.
Notwithstanding any other provision of the Plan, if the benefits of a
Participant become taxable prior to distribution from the Plan, such amounts
shall be distributed as soon as practicable to the affected Participant.
6.02 No Funding
----------
Plan benefits shall be payable solely from the general assets of the
Company. The Company shall not be required to, but may at its discretion,
segregate or physically set aside any funds or assets attributable to Plan
benefits. The Company shall retain title to and beneficial ownership of all
assets of the Company, including any assets which may be used to pay Plan
benefits. The cost of the Plan shall be expensed and a book reserve shall be
maintained on the Company's financial statements.
No Participant or Beneficiary shall be deemed to have, pursuant to the
Plan, any legal or equitable interest in any specific assets of the Company. To
the extent that any Participant or Beneficiary acquires any right to receive
Plan benefits, such right shall arise merely as a result of a contractual
obligation and shall be no greater than, nor have any preference or priority
over, the rights of any general unsecured creditor of the Company.
12
<PAGE>
ARTICLE SEVEN
DISTRIBUTIONS
7.01 Normal Form of Payment
----------------------
The normal form of payment of benefits under the Plan shall be 5
substantially equal installments payable in accordance with Section 7.02 below.
7.02 Separation from Service
-----------------------
A Participant who has a Separation from Service for a reason other than
death shall be entitled to receive the vested benefits in his Personal Accounts
and Company Accounts in 5 substantially equal annual installments.
The first annual installment shall be paid in January following the year in
which occurs his Separation from Service. Each annual installment thereafter
shall be paid in January of each year. Payment dates shall be determined by the
Plan Administrator.
7.03 Death
-----
The Beneficiary of a Participant who (1) has a Separation from Service
because of death, or (2) dies while receiving Plan benefits shall be entitled to
receive the remaining annual installments to which the Participant was entitled
as of the date of death. The first annual installment payable to the
Beneficiary shall be paid in January following the Participant's date of death,
or, if later, after satisfactory proof of death is received by the Plan
Administrator. Each annual installment thereafter shall be paid in January of
each year. Payment dates shall be determined by the Plan Administrator.
A single-sum distribution shall be paid to the estate of the Participant if
as of the date of death (1) no valid beneficiary designation by the Participant
is on file with the Plan Administrator, or (2) the Beneficiary has predeceased
the Participant.
A single-sum distribution shall be paid to the estate of the Beneficiary if
the Beneficiary dies before receiving all benefits to which he was entitled
under the Plan.
7.04 Alternate Form of Payment
-------------------------
A Participant entitled to receive benefits under Section 7.02 above may
make an irrevocable election to receive (1) not more than 15 substantially equal
annual installments, or (2) a single-sum distribution. The election must be
made prior to the Participant's Separation from Service in a manner authorized
by the Plan Administrator. If no election
13
<PAGE>
has been made by the Participant, benefits shall be paid in the normal form of
payment in accordance with Section 7.02 above.
The first annual installment or single-sum distribution shall be paid in
January following the year in which occurs his Separation from Service;
provided, however, that the first annual installment or single-sum distribution
shall not be paid until the January following the expiration of at least one
calendar year after the year in which the Participant's election is made. Each
annual installment thereafter shall be paid in January of each year.
A Participant also may make an irrevocable election to defer payment of the
first installment or single-sum distribution to January of a later year provided
the election is made prior to the Participant's Separation from Service in a
manner authorized by the Plan Administrator. If no election has been made by
the Participant, benefits shall commence in accordance with Section 7.02 or
Section 7.04 above, whichever is applicable.
A Participant who elects both to change the normal form of payment and to
defer payment must make the elections at the same time.
7.05 Hardship Distribution
---------------------
A Participant or Beneficiary entitled to vested benefits under the Plan may
request a single-sum distribution to satisfy a severe financial hardship
resulting from an unforseen event or emergency (as defined below) beyond his
control. The distribution shall be limited to the amount necessary to satisfy
the severe financial hardship (including any applicable federal, state or local
taxes attributable to such distribution), and shall not exceed the current value
of vested benefits payable to or on behalf of the Participant or Beneficiary.
An unforseen event or emergency may include, but is not limited to, a
sudden and unexpected illness or accident of the Participant or Beneficiary or
his dependent, loss of his property due to casualty, or other similar
extraordinary and unforeseeable circumstances arising as the result of events
beyond his control, but shall not include the purchase of his home or the
college expenses of his child.
The determination of the existence of a severe financial hardship and the
approval of a hardship distribution shall be made by the Director of Personnel
(or his successor by title or position) or his delegate except as provided
below. Approval shall be given only if, taking into account all of the facts
and circumstances, continued deferral of benefits or adherence to the Plan's
payment schedule would result in a severe financial hardship to the Participant
or Beneficiary. Approval shall not be granted if such hardship is or may be
relieved through insurance, by liquidation of his assets (to the extent such
liquidation would not itself cause severe financial hardship), or by terminating
his Election to Defer.
14
<PAGE>
With respect to a Participant who is a member of the Management Committee
of the Company or a Participant who is subject to Section 16(b) of the Exchange
Act, the determination of the existence of a severe financial hardship and the
approval of the hardship distribution shall be made by the Benefit Plans Review
Committee.
In the case of a Participant or Beneficiary who receives a partial hardship
distribution while receiving benefit payments, the regular payment schedule of
the Participant or Beneficiary shall continue following such distribution.
7.06 Fund-Specific Installments or Hardship Distributions
----------------------------------------------------
The payment to a Participant or Beneficiary of installments or a hardship
distribution shall reduce the value of his accounts in his Mirror Investment
Fund(s) as designated by the Participant or Beneficiary. In the event the
Participant or Beneficiary fails to designate the Mirror Investment Funds from
which payment is to be made, the value of his Mirror Investment Funds shall be
reduced on a pro-rata basis.
7.07 Form of Payments
----------------
Payment of all benefits from the Plan shall be made only by check. No
payments of Company stock shall be permitted.
7.08 Change of Control
-----------------
At the time of commencement of participation in the Plan, a Participant may
make an irrevocable election to have his Plan benefits paid in a single-sum
immediately upon a Change of Control (as hereafter defined). If the Participant
makes such an election as described above, his vested Plan benefits shall be
paid in a single-sum upon a Change of Control.
If the Participant does not make such an election, then, upon a Change of
Control, assets of the Company in an amount sufficient to pay benefits then due
under the Plan shall immediately be transferred to a grantor trust to be
established by the Company for the purpose of paying benefits hereunder, and the
Personal Account and Company Account shall thereafter be paid to the Participant
from such trust in accordance with the terms of the Plan; provided that at the
time of such Change of Control, the Participant may make an irrevocable election
to have his Plan benefits paid in a single-sum immediately, in which event the
Participant's benefits shall be reduced by 10% as a penalty for early
withdrawal, and the Participant shall receive a single-sum payment of only 90%
of his benefits otherwise payable under the Plan. On each anniversary date of
the date of a Change of Control, the Company shall transfer to the grantor trust
an amount necessary to pay all benefits accrued under the Plan during the
preceding twelve months.
15
<PAGE>
For purposes of this Section 7.08, a Change of Control shall be deemed to
have occurred if:
(1) at any time during any 24-month period, at least a majority of the
Board of Directors of the Company does not consist of Continuing Directors
(meaning directors of the Company at the beginning of such 24-month period and
directors who subsequently became such, and whose election, or nomination for
election, by the Company's stockholders, was approved by a majority of the then
Continuing Directors); or
(2) at any time during any 12-month period, the Company's directors in
office at the beginning of such 12-month period cease to constitute at least a
majority of the Board of Directors (disregarding any vacancy occurring during
such period by reason of death or disability, but deeming any individual whose
election, or nomination for election, by the Company's stockholders, to fill
such vacancy was approved by a majority of the directors in office immediately
prior to such vacancy, to have been in office at the beginning of such 12-month
period); or
(3) any person or "group" (as determined for purposes of Rule 13D-G under
the Exchange Act or any successor regulation), except any majority-owned
subsidiary or any Company employee benefit plan or any trust or investment
manager thereunder, shall have acquired "beneficial ownership" (as determined
for purposes of Rule 13D-G under the Exchange Act or any successor regulation)
of shares of Company common stock having 20% or more of the voting power of all
outstanding shares of Company capital stock, unless such acquisition is approved
in advance by a majority of the Board of Directors in office immediately
preceding such acquisition; or
(4) a merger or consolidation occurs to which the Company is a party,
whether or not the Company is the surviving corporation, in which outstanding
shares of Company common stock are converted into shares of stock or securities
of another company, partnership, or other entity (other than a conversion into
shares of voting common stock of the successor corporation or a holding company
or entity thereof) or other securities (of either the Company or another
company) or cash or other property (excluding payments made solely for
fractional shares); or,
(5) the sale of all, or substantially all, of the Company's assets occurs.
7.09 Reemployed Participants
-----------------------
If the Participant is reemployed, his scheduled payments under Section 7.02
or Section 7.04 shall cease and his election, if any, under Section 7.04 shall
be void. The Participant may make a new election under Section 7.04 prior to
his subsequent Separation from Service that shall apply to any unpaid benefits
and to any additional benefits payable to or on behalf of the Participant
because of a subsequent Separation from Service.
16
<PAGE>
If no new election is made by the Participant, benefits shall be paid in
the normal form of payment in accordance with Section 7.02 above.
17
<PAGE>
ARTICLE EIGHT
AMENDMENT AND TERMINATION
8.01 Plan Amendment
--------------
The Benefit Plans Review Committee may amend the Plan at any time and from
time to time, without prior notice to any Participant or Beneficiary; provided,
however, that the Human Resources Committee also may make amendments that relate
primarily to the administration of the Plan, are applied in a uniform and
consistent manner to all Participants, and are reported to the Benefit Plans
Review Committee.
8.02 Plan Termination
----------------
The Board of Directors of the Company may terminate or discontinue the Plan
at any time. If the Plan is terminated, it shall be on such terms and
conditions as the Board of Directors of the Company shall deem appropriate.
8.03 Automatic Plan Termination
--------------------------
This Plan is expressly conditioned on the continued deferral of income tax
on amounts deferred by a Participant under the Plan until such amounts are
actually distributed to the Participant. If, as a result of an adverse
determination by the Internal Revenue Service or a change in the tax laws or
applicable income tax regulations, amounts deferred by Participants under the
Plan become subject to income tax prior to the actual distribution of such
amounts, the Plan and each Election to Defer hereunder shall automatically
terminate as of the effective date of such change in the law without any formal
action by the Board of Directors to terminate the Plan.
18
<PAGE>
ARTICLE NINE
MISCELLANEOUS
9.01 Plan Administration
-------------------
The Plan shall be administered under the direction of the Benefit Plans
Review Committee. Except as otherwise provided below, the Benefits
Administration Committee shall be considered the Plan Administrator for purposes
of ERISA.
The Benefit Plans Review Committee may delegate all or some of the
responsibility for the administration of the Plan to the Human Resources
Committee or the Benefits Administration Committee in which case such Committee
shall assume such delegated power and authority in administering the Plan to
that extent; provided, however, that in no event shall the Human Resources
Committee or the Benefits Administration Committee have any power or authority
with respect to matters involving a Participant who is a member of the
Management Committee of the Company or a Participant who is subject to Section
16(b) of the Exchange Act.
The Plan Administrator has the authority and discretion to construe and
interpret the Plan. As part of this authority, the Plan Administrator has the
discretion to resolve inconsistencies or ambiguities in the language of the
Plan, to supply omissions from or correct deficiencies in the language of the
Plan, and to adopt rules for the administration of the Plan which are not
inconsistent with the terms of the Plan. The Plan Administrator also has the
authority and discretion to resolve all questions of fact relating to any claim
for benefits as to any matter for which the Plan Administrator has
responsibility. All determinations of the Plan Administrator are final and
binding on all parties.
Each person considered to be a fiduciary with respect to the Plan shall
have only those powers and responsibilities as are specifically given that
person under this Plan. It is intended that each such person shall be
responsible for the proper exercise of his or her own powers and
responsibilities, and shall not be responsible for any act or failure to act of
any other person considered to be a fiduciary or any act or failure to act of
any person considered to be a non-fiduciary.
9.02 Plan Expenses
-------------
All Plan administration expenses incurred by the Company or the Plan
Administrator shall be paid by the Company.
19
<PAGE>
9.03 Effect on Other Benefits
------------------------
Participation in the Plan shall not reduce any welfare benefits or
retirement benefits offered by the Company, except that the amounts deferred
under the Plan and any Plan benefits shall not be considered "Compensation" for
purposes of the Savings Plan.
9.04 No Guarantee of Employment
--------------------------
Neither participation in the Plan nor any action taken under the Plan shall
confer upon a Participant any right to continue in the employ of an Employer or
affect the right of such Employer to terminate the Participant's employment at
any time.
9.05 Disclaimer of Liability
-----------------------
The Employer shall be solely responsible for the payment of Plan benefits
hereunder. The members of the Benefit Plans Review Committee and the Human
Resources Committee, and the officers, directors, employees, or agents of the
Company or any other Employer, shall not be liable for such benefits. Unless
otherwise required by law, no such person shall be liable for any action or
failure to act, except where such act or omission constitutes gross negligence
or willful or intentional misconduct.
9.06 Severability
------------
If any provision of the Plan shall be held invalid or unenforceable, such
invalidity or unenforceability shall apply only to that provision, and shall not
affect or render invalid or unenforceable any other provision of the Plan. In
such event, the Plan shall be administered and construed as if such invalid or
unenforceable provision were not contained herein. If the application of any
Plan provision to any Participant or Beneficiary shall be held invalid or
unenforceable, the application of such provision to any other Participant or
Beneficiary shall not in any manner be affected thereby.
9.07 Successors
----------
The Plan and any Election to Defer shall be binding on (i) the Company and
its successors and assigns, (ii) any Employer and its successors and assigns,
(iii) each Participant, (iv) each Beneficiary, and (v) the heirs, distributees,
and legal representatives of each Participant and Beneficiary.
9.08 Governing Law
-------------
Except to the extent that the Plan may be subject to the provisions of
ERISA, the Plan shall be construed and enforced according to the laws of the
State of Texas without giving effect to the conflict of laws principles thereof.
In the event limitations imposed by ERISA on legal actions do not apply, the
laws of the State of Texas shall apply, and a
20
<PAGE>
cause of action under the Plan must be brought no later than four years after
the date the action accrues.
9.09 Construction
------------
As used herein, the masculine shall include the feminine, the singular
shall include the plural, and vice versa, unless the context clearly indicates
otherwise. Titles and headings herein are for convenience only and shall not be
considered in construing the Plan. The words "hereof," "hereunder", and other
similar compounds of the word "here" shall mean and refer to the entire Plan and
not to any particular provision or Section.
9.10 Taxes
-----
Any taxes imposed on Plan benefits shall be the sole responsibility of the
Participant or Beneficiary. The Company shall deduct from Plan benefits any
federal taxes, state taxes, local taxes, or other taxes required to be withheld.
The Company shall, unless the Plan Administrator elects otherwise, withhold such
taxes at the applicable flat rate percentage. The Company shall also deduct from
any payment of Compensation, including any cash incentive payments, on the date
such payment would have been made if not deferred under this Plan Social
Security and Medicare taxes or other taxes required to be withheld on such date.
9.11 Non-Assignability
-----------------
Unless otherwise required by law, and prior to distribution to a
Participant or Beneficiary, Plan benefits shall not be subject to assignment,
transfer, sale, pledge, encumbrance, alienation, or charge by such Participant
or Beneficiary, and any attempt to do so shall be void. Plan benefits shall not
be liable for or subject to garnishment, attachment, execution, or levy, or
liable for or subject to the debts, contracts, or liabilities of the Participant
or Beneficiary; provided, however, that the Company may offset from the payment
of any Plan benefits to a Participant or Beneficiary amounts owed by the
Participant to an Employer.
9.12 Claims Procedure
----------------
If a Participant or Beneficiary ("claimant") does not receive the benefits
which the claimant believes he is entitled to receive under the Plan, the
claimant may file a claim for benefits with the Director of Personnel (or his
successor by title or position). All claims must be made in writing and must be
signed by the claimant. If the claimant does not furnish sufficient information
to determine the validity of the claim, the Director of Personnel will indicate
to the claimant any additional information which is required.
Each claim will be approved or disapproved by the Director of Personnel
within 90 days following receipt of the information necessary to process the
claim. In the event the Director of Personnel denies a claim for benefits in
whole or in part, the Director of
21
<PAGE>
Personnel will notify the claimant in writing of the denial of the claim. Such
notice by the Director of Personnel will also set forth, in a manner calculated
to be understood by the claimant, the specific reasons for such denial, the
specific Plan provisions on which the denial is based, a description of any
additional material or information necessary to perfect the claim with an
explanation of why such material or information necessary, and an explanation of
the Plan's claim review procedure as set forth below. If no action is taken by
the Director of Personnel on or a claim within 90 days, the claim will be deemed
to be denied for purposes of the review procedure below.
A claimant may appeal a denial of his or her claim by requesting a review
of the decision by the Plan Administrator. An appeal must be submitted in
writing within six months after the denial and must (i) request a review of the
claim for benefits under the Plan, (ii) set forth all the grounds upon which the
claimant's request for review is based and any facts in support thereof, and
(iii) set forth any issues or comments which the claimant deems pertinent to the
appeal.
The Plan Administrator will make a full and fair review of each appeal and
any written materials submitted in connection with the appeal. The Plan
Administrator will act upon each appeal within 60 days after receipt thereof,
unless special circumstances require an extension of the time for processing, in
which case a decision will be rendered as soon as possible but not later than
120 days after the appeal is received. The claimant will be given the
opportunity to review pertinent documents or materials upon submission of a
written request to the Plan Administrator, provided the Plan Administrator finds
the requested documents or materials pertinent to the appeal. On the basis of
its review, the Plan Administrator will make an independent determination of the
claimant's eligibility for benefits under the Plan.
The decision of the Plan Administrator on any claim for benefits will be
final and conclusive upon all parties thereto. In the event the Plan
Administrator denies an appeal in whole or in part, the Plan Administrator will
give written notice of the decision to the claimant, which notice will set
forth, in a manner calculated to be understood by the claimant, the specific
reasons for such denial and specific reference to the pertinent Plan provisions
on which the decision was based.
22
<PAGE>
Exhibit 11
J. C. PENNEY COMPANY, INC.
and Consolidated Subsidiaries
Computation of Net Income Per Common Share
------------------------------------------
(Amounts in millions except per common share data)
<TABLE>
<CAPTION>
52 Weeks Ended 53 Weeks Ended 52 Weeks Ended
January 30, 1999 January 31, 1998 January 25, 1997
------------------------ ------------------------ ------------------------
Shares Income Shares Income Shares Income
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Basic
- -----
Net income $ 594 $ 566 $ 565
Dividend on Series B ESOP
convertible preferred stock
(aftertax) (38) (40) (40)
---------- ---------- ----------
Adjusted net income 556 526 525
Weighted average number of
shares outstanding 252.8 247.4 226.4
---------- ---------- ---------- ---------- ---------- ----------
252.8 $ 556 247.4 $ 526 226.4 $ 525
========== ========== ========== ========== ========== ==========
Net income per common share $2.20 $2.13 $2.32
===== ===== =====
Diluted
- -------
Net income $ 594 $ 566 $ 565
Tax benefit differential on ESOP
dividend assuming stock is
fully converted - (1) (2)
Assumed additional contribution
to ESOP if preferred stock is
fully converted (1) (3) (3)
---------- ---------- ----------
Adjusted net income 593 562 560
Weighted average number of
shares outstanding (basic) 252.8 247.4 226.4
Stock options and other 1.8 2.5 2.7
Convertible preferred stock 16.6 18.2 19.4
---------- ---------- ---------- ---------- ---------- ----------
271.2 $ 593 268.1 $ 562 248.5 $ 560
========== ========== ========== ========== ========== ==========
Net income per common share $2.19 $2.10 $2.25
===== ===== =====
</TABLE>
<PAGE>
Exhibit 12 (a)
J. C. Penney Company, Inc.
and Consolidated Subsidiaries
Computation of Ratios of Available Income to Combined Fixed Charges
and Preferred Stock Dividend Requirement
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks Ended
Ended Ended --------------------------------------------
($ Millions) 01/30/99 01/31/98 01/25/97 01/27/96 01/28/95
------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Income from continuing operations $ 914 $ 882 $ 853 $ 1,285 $ 1,646
(before income taxes, before
capitalized interest, but after
preferred stock dividend)
Fixed charges
Interest (including capitalized interest) on:
Operating leases 225 180 110 102 95
Short term debt 106 121 102 129 92
Long term debt 557 527 312 254 225
Capital leases 4 7 6 6 7
Other, net 1 (5) 14 1 (1)
------------- ------------- ------------- -------------- -------------
Total fixed charges 893 830 544 492 418
Preferred stock dividend, before taxes 37 40 46 48 50
------------- ------------- ------------- -------------- -------------
Combined fixed charges and preferred
stock dividend requirement 930 870 590 540 468
Total available income $ 1,844 $ 1,752 $ 1,443 $ 1,825 $ 2,114
============= ============= ============= ============== =============
Ratio of available income to combined
fixed charges and preferred stock
dividend requirement 2.0 2.0 2.4 3.4 4.5
============= ============= ============= ============== =============
</TABLE>
The interest cost of the LESOP notes guaranteed by the Company is not included
in fixed charges above. The LESOP notes were repaid in July 1998.
<PAGE>
Exhibit 12 (b)
J. C. Penney Company, Inc.
and Consolidated Subsidiaries
Computation of Ratios of Available Income to Fixed Charges
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks Ended
Ended Ended --------------------------------------------
($ Millions) 01/30/99 01/31/98 01/25/97 01/27/96 01/28/95
------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Income from continuing operations $ 951 $ 922 $ 899 $ 1,333 $ 1,696
(before income taxes and
capitalized interest)
Fixed charges
Interest (including capitalized interest) on:
Operating leases 225 180 110 102 95
Short term debt 106 121 102 129 92
Long term debt 557 527 312 254 225
Capital leases 4 7 6 6 7
Other, net 1 (5) 14 1 (1)
------------- ------------- ------------- -------------- -------------
Total fixed charges 893 830 544 492 418
------------- ------------- ------------- -------------- -------------
Total available income $ 1,844 $ 1,752 $ 1,443 $ 1,825 $ 2,114
============= ============= ============= ============== =============
Ratio of available income to combined
fixed charges and preferred stock
dividend requirement 2.1 2.1 2.7 3.7 5.1
============= ============= ============= ============== =============
</TABLE>
The interest cost of the LESOP notes guaranteed by the Company is not included
in fixed charges above. The LESOP notes were repaid in July 1998.
<PAGE>
Exhibit 13
M a n a g e m e n t 's D i s c u s s i o n a n d A n a l y s i s
of Financial Condition and Results of Operations
<TABLE>
<CAPTION>
J. C. Penney Company, Inc.
- -------------------------------------------------- 52 Weeks 53 Weeks 52 Weeks
($ in millions) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Segment operating profit
Department stores and catalog (LIFO) $ 1,013 $ 1,368 $ 1,183
Eckerd drugstores (LIFO) 254 347 99
Direct marketing 233 214 186
- ----------------------------------------------------------------------------------------------------------
Total segments 1,500 1,929 1,468
Other unallocated 26 39 45
Net interest expense and credit operations (480) (547) (278)
Amortization of intangible assets (113) (117) (23)
Other charges, net 22 (379)(1) (303)(2)
----------------------------------------------
Income before income taxes 955 925 909
Income taxes (361) (359) (344)
- ----------------------------------------------------------------------------------------------------------
Net income $ 594 $ 566 $ 565
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company previously reported $447 million (pre-tax) of other charges,
net (formerly labeled as restructuring and business integration expenses,
net), in 1997. $45 million of this amount has been reclassified as a
reduction to drugstore gross margin and $23 million has been reclassified
as an increase to department stores and catalog SG&A.
(2) The Company previously reported $354 million (pre-tax) of other charges,
net, in 1996. $31 million of this amount has been reclassified as a
reduction to drugstore gross margin and $20 million has been reclassified
as an increase to department stores and catalog SG&A.
12
<PAGE>
R e s u l t s o f O p e r a t i o n s
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 on page 33 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 $3.04 in 1996. All
references to earnings per share are on a diluted basis.
Certain amounts reported as other charges (formerly labeled as restructuring and
business integration expenses), net, have been reclassified in this year's
report. Charges related to one-time start-up activities have been reclassified
to department stores and catalog selling, general, and administrative (SG&A)
expenses, and inventory integration losses associated with the Company's
drugstore operations have been reclassified to drugstore gross margin. Following
is a summary of the reclassifications and their effects on reported earnings per
share before other charges:
- ------------------------------------------- 1997 1996
($ in millions, except per share data) $ EPS $ EPS
- --------------------------------------------------------------------------------
As previously reported
Net income $ 566 $ 2.10 $ 565 $ 2.25
Other charges, net 273 1.02 228 0.92
-----------------------------------------
Earnings before other charges, net $ 839 $ 3.12 $ 793 $ 3.17
Reclassifications (net of tax) to:
Drugstore gross margin (28) (0.11) (19) (0.08)
Department stores and catalog SG&A (14) (0.05) (13) (0.05)
-----------------------------------------
Total reclassifications (42) (0.16) (32) (0.13)
Revised
Net income $ 566 $ 2.10 $ 565 $ 2.25
Other charges, net 231 0.86 196 0.79
-----------------------------------------
Earnings before other charges, net $ 797 $ 2.96 $ 761 $ 3.04
- --------------------------------------------------------------------------------
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 per cent of
sales because 1997 included an extra week.
13
<PAGE>
Department stores and catalog
- ------------------------------------- 52 Weeks 53 Weeks 52 Weeks
($ in millions) | 1998 1997 1996
- -------------------------------------|------------------------------------------
|
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 per cent inc/(dec) |
|
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 per cent 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%
|
LIFO operating profit | 5.3% 6.8% 6.1%
|
LIFO EBITDA(2) | 8.6% 9.7% 9.0%
- --------------------------------------------------------------------------------
(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 per
cent in 1998 and increased 2.0 per cent in 1997, while catalog sales
increased by 0.6 per cent and 3.6 per cent for 1998 and 1997, respectively.
(2) Earnings before interest, including interest on operating leases, income
taxes, depreciation, and amortization. EBITDA includes finance 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.
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 per cent 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 per cent on a 52-week basis and were strongest in
the third quarter when they increased by 8.0 per cent. 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 per cent 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 per cent 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
14
<PAGE>
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 per cent 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 per cent, 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 per cent 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 per cent 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 $20 million in both 1997
and 1996. SG&A expenses were well managed across all areas, particularly
advertising, and were flat as a percentage of sales as compared with 1996.
Eckerd drugstores
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
- -------------------------------- 1996(1)
($ in millions) 1998 1997(1) Pro Forma Historical
- ---------------------------------------------------------------------------------------------------
<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 per cent 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 per cent 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%
LIFO operating profit 2.5% 3.6% 3.6% 3.1%
LIFO EBITDA(4) 5.1% 5.8% 5.7% 5.4%
-----------------------------------------------------------------
</TABLE>
(1) 1997 and 1996 gross margin, operating profit, and EBITDA have been restated
to reflect inventory integration charges that were previously reported as
part of the Company's other charges. The inventory charges were primarily
related to the liquidation of nonconforming merchandise that resulted from
conversion of all drugstores to the Eckerd name and format.
(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 per cent and
13.3 per cent for 1998 and 1997, respectively.
(3) 1997 sales increase is calculated based upon 1996 pro forma sales.
(4) Earnings before interest, including interest on operating leases, 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.
15
<PAGE>
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 per cent for
comparable stores. Sales growth was fueled by a 15.0 per cent gain in comparable
pharmacy sales, which account for approximately 60 per cent of total store
sales. Non-pharmacy merchandise sales increased 1.5 per cent for the year, and
strengthened as the year progressed. Sales also benefited from the relocation of
175 stores to more convenient free-standing locations during the year; these
relocated stores typically generate sales growth of over 30 per cent.
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 per
cent 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 per cent 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, expenses were leveraged.
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 per cent on a 52-week
basis and 7.4 per cent 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 per
cent 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 per cent
of sales. The decline in gross margin per cent 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 $23 million charge in
1996, reflecting continued inflation in prescription drug prices. SG&A expenses
were well leveraged as a result of higher sales volumes and the elimination of
duplicate support functions. For the year, SG&A expenses improved by 40 basis
points as a per cent of sales.
16
<PAGE>
Direct Marketing
- --------------------------------------
($ in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
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
per cent of revenue 22.8% 23.1% 22.7%
- --------------------------------------------------------------------------------
(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.
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 per cent 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 $818 million in 1996. The increase
during both 1998 and 1997 was principally related to health insurance premiums,
which account for approximately 70 per cent of total premiums, and which
increased by 11.7 per cent and 17.6 per cent, respectively. Revenue growth for
the three-year period is attributable to successfully maintaining and enhancing
marketing relationships with businesses for the sale of insurance products
throughout the United States and Canada, principally banks, oil companies, and
retailers. In 1998, Direct Marketing expanded its international operations when
it began marketing through business relationships in the United Kingdom and
initiated activity in Australia.
Membership services, which consist principally of benefits for dental, pharmacy,
vision and hearing, as well as services for travelers and motorists represent a
small but growing component of the Direct Marketing business.
Net interest expense and credit operations
- ----------------------------
($ in millions) 1998 1997 1996
- -------------------------------------------------------------
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%
- -------------------------------------------------------------
Includes amounts related to the Company's retained interest in JCP Master Credit
Card Trust.
See page 42 for additional information.
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 per cent of receivables
compared with 3.9 per cent 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 per
cent at the end of 1997 compared with 3.7 per cent 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.
17
<PAGE>
The Company has experienced a migration of credit sales from its proprietary
credit card to third-party cards over the past several years (see Supplemental
Data on page 42). The Company has not experienced any significant adverse
effects on total 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 per cent
compared with 38.8 per cent in 1997 and 37.9 per cent in 1996.
F I N A N C I A L C O N D I T I O N
Cash flow from operating activities was $1,058 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 $4,082 million, a decrease of 3.7 per cent on
an overall basis and approximately two per cent 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 $2,176 million, an increase of 1.3 per cent 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
$5,014 million at the ends of fiscal 1997 and 1996, respectively.
At the end of 1998, the Company operated 1,148 JCPenney department stores,
comprising 115.3 million gross square feet. The decline in the store count over
the past two years was principally related to the closing of underperforming
stores that was a component of the Company's 1997 other charges. All stores
slated for closing had closed by the end of fiscal 1998. In addition, the
Company operated 2,756 Eckerd drugstores as of the end of fiscal 1998,
comprising 27.6 million square feet. Eckerd store counts have declined as a
result of closing underperforming and overlapping stores during the conversion
of former drugstore formats to Eckerd.
Capital expenditures
- ------------------------
($ in millions) 1998 1997 1996
- ------------------------------------------------------
Department stores and
catalog $ 420 $ 443 $ 636
Eckerd drugstores 256 341 103
Other corporate 20 26 51
------------------------------
Total $ 696 $ 810 $ 790
- ------------------------------------------------------
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.
18
<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 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 is expected to be $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.
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, totalled $2,933 million compared with $2,940 million in 1997 and $1,861
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. At the end of 1998, the consolidated balance sheet included reserves
totaling $110 million which are included as a component of accounts payable and
accrued expenses and $25 million in receivables, net. These reserves were
established in connection with 1996 and 1997 restructuring charges, principally
those related 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, Retirement Plans, on page 32. Payments
for both lease obligations and pension benefits will be paid out over an
extended period of time. See Note 13, Other Charges, Net, on page 33 for
additional information.
Debt to capital
1998 1997 1996
- ---------------------------------------------------------------
Debt to capital per cent 62.7%* 60.4% 64.5%**
- ---------------------------------------------------------------
* Upon completion of the Genovese Drug Stores, Inc. acquisition, the debt to
capital ratio declined to 61.9 per cent.
** Upon completion of the Eckerd acquisition, the debt to capital ratio declined
to 60.1 per cent.
The Company's debt to capital per cent, 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 per cent 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 the Eckerd acquisition. The average effective interest rate
on the debt issued in 1997 was 7.5 per cent 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.
19
<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 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 per cent 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 per cent of Eckerd 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 $65 million of debt, was approximately $420 million.
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 will be
classified as goodwill and amortized over 40 years. The acquisition will be
accounted for under the purchase method.
20
<PAGE>
COMPANY STATEMENT ON FINANCIAL INFORMATION
The Company is responsible for the information presented in this Annual Report.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and present fairly, in all material
respects, the Company's results of operations, financial position, and cash
flows. Certain amounts included in the consolidated financial statements are
estimated based on currently available information and judgment as to the
outcome of future conditions and circumstances. Financial information elsewhere
in this Annual Report is consistent with that in the consolidated financial
statements.
The Company's system of internal controls is supported by written policies and
procedures and supplemented by a staff of internal auditors. This system is
designed to provide reasonable assurance, at suitable costs, that assets are
safeguarded and that transactions are executed in accordance with appropriate
authorization, and are recorded and reported properly. The system is continually
reviewed, evaluated, and where appropriate, modified to accommodate current
conditions. Emphasis is placed on the careful selection, training, and
development of professional managers.
An organizational alignment that is premised upon appropriate delegation of
authority and division of responsibility is fundamental to this system.
Communication programs are aimed at assuring that established policies and
procedures are disseminated and understood throughout the Company.
The consolidated financial statements have been audited by independent auditors
whose report appears to the right. Their audit was conducted in accordance with
generally accepted auditing standards, which include the consideration of the
Company's internal controls to the extent necessary to form an independent
opinion on the consolidated financial statements prepared by management.
The Audit Committee of the Board of Directors is composed solely of directors
who are not officers or employees of the Company. The Audit Committee's
responsibilities include recommending to the Board for stockholder approval the
independent auditors for the annual audit of the Company's consolidated
financial statements. The Committee also reviews the independent auditors' audit
strategy and plan, scope, fees, audit results, and non-audit services and
related fees; internal audit reports on the adequacy of internal controls; the
Company's ethics program; status of significant legal matters; the scope of the
internal auditors' plans and budget and results of their audits; and the
effectiveness of the Company's program for correcting audit findings. The
independent auditors and Company personnel, including internal auditors, meet
periodically with the Audit Committee to discuss auditing and financial
reporting matters.
/s/ Donald A. McKay
Donald A. McKay
Executive Vice President and Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of J. C. Penney Company, Inc.:
We have audited the accompanying consolidated balance sheets of J. C. Penney
Company, Inc. and Subsidiaries as of January 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.
KPMG LLP
KPMG LLP
Dallas, Texas
February 25, 1999
21
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
J. C. Penney Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- ------------------------------------------------------
($ in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<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
Other unallocated (26) (39) (45)
Net interest expense and credit operations 480 547 278
Amortization of intangible assets 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
- ---------------------------------------------------------------------------------------------------------
Earnings per common share
- ------------------------------------------------------ Average
(in millions, except per share data) Income Shares EPS
- ---------------------------------------------------------------------------------------------------------
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 on pages 26 through 39.
22
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
J. C. Penney Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Accumulated
Guaranteed Other Total
- ----------------------- Common Preferred LESOP Reinvested Comprehensive Stockholders'
($ in millions) Stock Stock Obligation Earnings Income/(Loss)(1) Equity
- ------------------------------------------------------------------------------------------------------------
<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 $(49) million associated with
assets acquired and liabilities assumed in the purchase of Renner.
See Notes to the Consolidated Financial Statements on pages 26 through 39.
23
<PAGE>
CONSOLIDATED BALANCE SHEETS
J. C. Penney Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
($ in millions) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<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 $149 and $135) 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 other intangible assets, net (accumulated
amortization of $221 and $108) 2,933 2,940
Other assets 1,314 1,214
- ---------------------------------------------------------------------------------------------------------
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 on pages 26 through 39.
24
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
J. C. Penney Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- ----------------------------------------------------
($ in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<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
intangible assets 637 584 381
Deferred taxes 219 1 (18)
Change in cash from:
Customer receivables 258 215 (172)
Inventory, net of trade payables 64 (395) (521)
Current taxes payable (171) 116 31
Other assets and liabilities, net (521)(1) (188) (194)
-----------------------------------------------------
1,058 1,218 382
- ---------------------------------------------------------------------------------------------------------
Investing Activities
Capital expenditures (744) (824) (704)
Proceeds from the sale of banking assets, net - 276 -
Acquisitions(2) (247) - (1,776)
Purchase of investment securities (611) (401) (471)
Proceeds from the sale of investment securities 447 252 493
-----------------------------------------------------
(1,155) (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) The increase in other assets and liabilities, net, is principally related to
increases in Eckerd receivables and 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 on pages 26 through 39.
25
<PAGE>
Notes to the Consolidated Financial Statements
1 Summary of Accounting Policies
2 Retained Interest in JCP Master Credit Card Trust
3 Investments and Fair Value of Financial Instruments
4 Accounts Payable and Accrued Expenses
5 Short-Term Debt
6 Long-Term Debt
7 Capital Stock
8 Stock-Based Compensation
9 Interest Expense, Net
10 Lease Commitments
11 Advertising Costs
12 Retirement Plans
13 Other Charges, Net
14 Taxes
15 Segment Reporting
26
<PAGE>
1 SUMMARY OF ACCOUNTING POLICIES
Basis of presentation. Certain prior year amounts have been reclassified to
conform to the current year presentation.
Basis of consolidation. The consolidated financial statements present the
results of J. C. Penney Company, Inc. and its subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Definition of fiscal year. The Company's fiscal year ends on the last Saturday
in January. Fiscal 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.
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.
27
<PAGE>
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, 1999. 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.
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 $40 million,
respectively. Due to the short-term nature of this investment, the carrying
value approximates fair value.
3 INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
1998 1997
- -----------------------------------------------------------------------------
Amortized Fair Amortized Fair
($ in millions) Cost Value Cost Value
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
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
28
<PAGE>
principal. According to the terms of the swap, the Company pays fixed interest
at 9.625 per cent 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.
4 ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- -------------------------------------------------
($ in millions) 1998 1997
- -------------------------------------------------------------------------
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
- -------------------------------------------------------------------------
(1) Includes $110 million and $216 million for 1998 and 1997, respectively,
related to other charges, principally future lease obligations.
5 SHORT-TERM DEBT
- -------------------------------------------------
($ in millions) 1998 1997
- -------------------------------------------------------------------------
Commercial paper $ 1,924 $ 1,417
Average interest rate at year-end 5.1% 5.6%
- -------------------------------------------------------------------------
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, $280 million of letters of credit issued by the
Company were outstanding.
6 LONG-TERM DEBT
Jan. 30, 1999 Jan. 31, 1998
- ----------------------- Avg. Avg.
($ in millions) Rate Balance Rate Balance
- ------------------------------------------------------------
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
- ------------------------------------------------------------
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 per cent. 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 drugstore acquisitions. These notes and debentures had an
average maturity of 30 years and an average interest rate of 7.5 per cent. All
notes and debentures have similar characteristics regardless of due date and
therefore are grouped by maturity date.
29
<PAGE>
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 per cent 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 per
cent. Shares may be redeemed at the option of the 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 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 22 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
1998 1997 1996
- ----------------------------------------------------------
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
- ----------------------------------------------------------
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:
30
<PAGE>
Options
<TABLE>
<CAPTION>
- --------------------------------
(shares in thousands; price 1998 1997 1996
is weighted average) Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------
<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
- ----------------------------------------------------------------------------------------------------------
(shares in thousands; price and Remaining
remaining term are weighted averages) Shares Price Term (Yrs.) Shares Price
- ----------------------------------------------------------------------------------------------------------
<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
- ----------------------
($ in millions) 1998 1997 1996
- ---------------------------------------------------
Short-term debt $ 106 $ 121 $ 102
Long-term debt 557 527 312
Other, net* (52) (67) (55)
- ---------------------------------------------------
Interest expense, net $ 611 $ 581 $ 359
- ---------------------------------------------------
* 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
$106 million in 1996.
Future minimum lease payments for noncancelable operating and capital leases,
net of subleases, as of January 30, 1999 were:
- ------------------------------
($ in millions) Operating Capital
- --------------------------------------------------------
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%
- --------------------------------------------------------
Minimum lease payments are shown net of estimated executory costs, principally
real estate taxes, maintenance, and insurance.
31
<PAGE>
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 $89 million as of January 31, 1998.
12 RETIREMENT PLANS
The Company's retirement plans consist principally of a noncontributory pension
plan, a noncontributory supplemental retirement program for certain management
associates, a contributory medical and dental plan, and a savings plan,
including a 401(k) plan and an employee stock ownership plan. In addition, in
1998, the Company adopted two nonqualified savings plans. Pension plan assets
are invested in a balanced portfolio of equity and debt securities managed by
third party investment managers. In addition, Eckerd has a noncontributory
pension plan. As of January 1, 1999, all Eckerd retirement benefit plans were
frozen and all employees began to accrue benefits under the Company's retirement
plans. The following tables include the benefit obligation related to the
Company's early retirement program (see Note 13, page 33, for additional
information). The cost of these programs and the December 31 balances of plan
assets and obligations are shown below:
Expense
- -----------------------------
($ in millions) 1998 1997 1996
- -------------------------------------------------------
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
- -------------------------------------------------------
Assumptions
1998 1997 1996
- -------------------------------------------------------
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%
- -------------------------------------------------------
Assets and obligations
Pension plans*
- ------------------------------------
($ in millions) 1998 1997
- -------------------------------------------------------
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
- -------------------------------------------------------
* Includes supplemental retirement plan.
Medical and dental
- -----------------------------------
($ in millions) 1998 1997
- -------------------------------------------------------
Accumulated benefit obligation $ 334 $ 335
Net unrecognized losses 10 13
- -------------------------------------------------------
Net medical and dental liability $ 344 $ 348
- -------------------------------------------------------
A one per cent change in the health care trend rate would change the accumulated
benefit obligation and expense by approximately $24 million and $2 million,
respectively.
32
<PAGE>
13 OTHER CHARGES, NET
During 1996 and 1997, the Company recorded other charges principally related to
drugstore integration activities, department store closings and FAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of (FAS 121), impairments, and early retirements and reduction in
force programs. The following tables provide a summary of the charges by year
and by category as well as a roll forward of reserves that were established for
certain of the charges.
1996 Charges
<TABLE>
<CAPTION>
1996
-------------------------------------------------
- -------------------------------------------------------- Cash Other Y/E
($ in millions) Expense Outlays Changes Reserve
- ---------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
1996 | 1997 | 1998
-----------|---------------------------------|----------------------------------
- ---------------------------- Y/E | Cash Other Y/E | Cash Other Y/E
($ in millions) Reserve | Outlays Changes Reserve | Outlays Changes Reserve
- ---------------------------------------|---------------------------------|----------------------------------
<S> <C> | <C> <C> <C> | <C> <C> <C>
Eckerd drugstore | |
| |
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
receivables, net.
33
<PAGE>
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.
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.
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 Company
recorded an impairment charge of $15 million related to goodwill associated with
unprofitable business units operated by the former drugstore operations.
34
<PAGE>
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 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 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 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.
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 $17 million, the majority of which was expensed as incurred, was
related to integration activities for the Fay's stores and other activities such
as contract terminations.
1997 Charges
<TABLE>
<CAPTION>
1997
- ----------------------------------------------------------------------------------------------------------
Cash Other Y/E
($ in millions) Expense Outlays Changes Reserve
- ----------------------------------------------------------------------------------------------------------
<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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
1997 1998
-----------------------------------------------------------------
- ----------------------------------------- Y/E Cash Other Y/E
($ in millions) Reserves Outlays Changes Reserve
- ----------------------------------------------------------------------------------------------------------
<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 on page 32.
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:
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 per cent, 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%), $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 32.
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
36
<PAGE>
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 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. 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 pre-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
37
<PAGE>
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 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 $80 million in 1997.
14 TAXES
Deferred tax assets and liabilities reflected on the Company's consolidated
balance sheets were measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The major components of deferred tax
(assets)/liabilities as of January 30, 1999 and January 31, 1998 were as
follows:
Temporary differences
- ---------------------------------
($ in millions) 1998 1997
- ---------------------------------------------------------
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
- ---------------------------------------------------------
Income tax expense
- -----------------------
($ in millions) 1998 1997 1996
- ---------------------------------------------------------
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%
- ---------------------------------------------------------
Reconciliation of tax rates
- ------------------------------
(per cent of pre-tax income) 1998 1997 1996
- ---------------------------------------------------------
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
- ---------------------------------------------------------
38
<PAGE>
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. For more detailed descriptions of each business
segment, including products sold, see page 1 and pages 4 through 10 of this
report. Other items are shown in the table below for purposes of reconciling to
total Company consolidated amounts.
<TABLE>
<CAPTION>
Depreciation
- --------------------------------- Operating Total Capital and
($ in millions) Year Revenue Earnings Assets Expenditures Amortization
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Department stores and catalog 1998 $19,331 $ 1,013 $ 14,563 $ 439 $ 380
1997 19,955 1,368 14,980 464 366
1996 19,506 1,183 14,754 680 325
Eckerd drugstores 1998 10,325 254 6,361 256 138
1997 9,663 347 6,064 341 112
1996 3,147 99 4,389 103 41
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 23,527 696 524
1997 30,546 1,929 23,327 810 483
1996 23,471 1,468 21,129 790 372
Net interest expense and
credit operations 1998 (480)
1997 (547)
1996 (278)
Other unallocated and amortization
of intangible assets 1998 (87) 111 113
1997 (78) 166 101
1996 22 959 9
Other charges, net 1998 22
1997 (379)
1996 (303)
Total Company 1998 30,678 955 23,638 696 637
1997 30,546 925 23,493 810 584
1996 23,471 909 22,088 790 381
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Total Company operating earnings equals income before income taxes as shown on
the Company's consolidated statements of income.
39
<PAGE>
QUARTERLY DATA (UNAUDITED)
J. C. Penney Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- ------------------------------------------ First Second Third Fourth
($ in millions, except per share data) 1998 1997 1998 1997 1998 1997(1) 1998 1997(1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Retail sales, net $ 6,806 $ 6,481 $ 6,510 $ 6,420 $ 7,297 $ 7,208 $ 9,043 $ 9,509
Total revenue 7,052 6,705 6,761 6,649 7,549 7,441 9,316 9,751
LIFO gross margin 1,904 1,804 1,629 1,709 2,015 2,038 2,249 2,637
Net income 174 139 27 90 186 136 207 201
Net income per common share, diluted 0.64 0.53 0.08 0.32 0.68 0.49 0.77 0.76
Dividend per common share 0.545 0.535 0.545 0.535 0.545 0.535 0.545 0.535
Price range:
High 77 7/8 51 5/8 78 3/4 59 59 3/8 64 1/4 56 1/8 68 1/4
Low 64 11/16 44 7/8 58 45 5/8 42 5/8 54 11/16 38 1/8 53 1/4
Close 71 15/16 45 7/8 58 11/16 57 15/16 47 1/2 56 7/16 39 67 3/8
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 3rd and 4th quarter net income and net income per share have been restated
to shift $23 million, net of tax, of voluntary early retirement costs from
3rd to 4th quarter. The restatement had no effect on full year net income or
net income per share.
FIVE YEAR FINANCIAL SUMMARY
J. C. Penney Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- ----------------------------------------------
(in millions, except per share data) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results for the year
Total revenue $ 30,678 $ 30,546 $ 23,471 $ 21,242 $ 20,937
Retail sales, net 29,656 29,618 22,653 20,562 20,380
Per cent increase 0.1% 30.7% 10.2% 0.9% 7.4%
Net income 594 566 565 838 1,057
Return on beginning
stockholders' equity 8.1% 7.9%(1) 9.6% 14.9% 19.7%
Per common share
Net income, diluted $ 2.19 $ 2.10 $ 2.25 $ 3.33 $ 4.05
Dividends 2.18 2.14 2.08 1.92 1.68
Stockholders' equity 26.99 27.57 25.67 24.76 23.45
Financial position
Capital expenditures 696 810 790 749 544
Total assets 23,638 23,493 22,088 17,102 16,202
Long-term debt 7,143 6,986 4,565 4,080 3,335
Stockholders' equity 7,169 7,357 5,952 5,884 5,615
Other
Common shares outstanding at end of year 250 251 224 224 227
Weighted average common shares
Basic 253 247 226 226 234
Diluted 271 268 248 249 258
Number of employees at end of year (in thousands) 262 260 252 205 202
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Assumes the completion of the Eckerd acquisition in beginning equity.
40
<PAGE>
FIVE YEAR OPERATIONS SUMMARY
J. C. Penney Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Department stores
Number of stores
Beginning of year 1,203 1,228 1,238 1,233 1,246
Openings 12 34 36 43 29
Closings (67) (59) (46) (38) (42)
--------------------------------------------------------------
End of year 1,148(1) 1,203 1,228 1,238 1,233
Gross selling space (in millions) 115.3 118.4 117.2 114.3 113.0
Sales (in millions) $ 15,402 $ 16,047 $ 15,734 $ 14,973 $ 15,023
Sales including catalog desks (in millions) 18,208 19,089 18,694 17,930 18,048
Sales per gross square foot 156 157 159 156 159
- -----------------------------------------------------------------------------------------------------------
Catalog
Number of catalog units
Department stores 1,139 1,199 1,226 1,228 1,233
Freestanding sales centers and other 512 554 569 565 568
Drugstores 139 110 107 106 94
--------------------------------------------------------------
Total 1,790 1,863 1,902 1,899 1,895
Sales (in millions) $ 3,929 $ 3,908 $ 3,772 $ 3,738 $ 3,817
- -----------------------------------------------------------------------------------------------------------
Eckerd drugstores
Number of stores
Beginning of year 2,778 2,699 645 526 506
Openings 220(2) 199(2) 47 37 46
Acquisitions 36 200 2,020 97 -
Closings (278)(2) (320)(2) (13) (15) (26)
--------------------------------------------------------------
End of year 2,756 2,778 2,699 645 526
Gross selling space (in millions) 27.6 27.4 26.4 6.2 4.5
Sales (in millions) $ 10,325 $ 9,663 $ 3,147 $ 1,851 $ 1,540
Sales per gross square foot 350 314 261 253 243
- -----------------------------------------------------------------------------------------------------------
Direct Marketing
Revenue (in millions) $ 1,022 $ 928 $ 818 $ 680 $ 557
Distribution of revenue
JCPenney customers 50% 53% 56% 65% 73%
Other non-JCPenney customers 50% 47% 44% 35% 27%
Policies, certificates, and
memberships in force at year end (in millions) 14.7 13.2 11.3 9.6 7.5
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes 21 department stores operated in Brazil under the Renner name.
(2) Includes relocations of 175 drugstores in 1998 and 127 drugstores in 1997.
41
<PAGE>
SUPPLEMENTAL DATA
(UNAUDITED)
General. The following information is provided as a supplement to the Company's
audited financial statements. Its purpose is to facilitate an understanding of
the Company's credit operations, capital structure, and cash flows.
Credit operations. The following presents the results of the Company's
proprietary credit card operation and shows both the net cost of credit in
support of the Company's retail businesses and the net cost of credit measured
on an all-inclusive, economic basis. The "economic basis" of the cost of credit
includes the cost of equity capital in addition to debt used to finance accounts
receivable balances. The cost of equity capital is based on the Company's
minimum return on equity objective of 16 per cent. The results presented below
cover all JCPenney credit card accounts receivable serviced.
Pre-tax cost of JCPenney credit card
<TABLE>
<CAPTION>
- ----------------------------------------------
($ in millions) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ (788) $ (803) $ (772)
---------------------------------------------------
Bad debt expense 264 356 277
Operating expenses (including in-store costs) 270 281 298
Interest expense on debt financing 262 285 281
---------------------------------------------------
Total costs 796 922 856
Pre-tax cost of credit
Retail operations 8 119 84
Equity capital 131 144 138
- -------------------------------------------------------------------------------------------------------
Total - economic basis 139 263 222
Per cent of JCPenney credit sales 1.8% 3.0% 2.4%
- -------------------------------------------------------------------------------------------------------
</TABLE>
Department stores and catalog
<TABLE>
<CAPTION>
- ---------------------------------
($ in billions) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Per cent of Per cent of Per cent of
Eligible Eligible Eligible
Sales Sales Sales Sales Sales Sales
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JCPenney credit card $ 7.6 39.4% $ 8.6 43.4% $ 9.1 46.9%
Third-party credit cards 5.0 26.1% 4.7 23.5% 4.1 21.2%
- -------------------------------------------------------------------------------------------------------------
Total $ 12.6 65.4% $ 13.3 66.9% $ 13.2 68.1%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Key JCPenney credit card information
<TABLE>
<CAPTION>
- -----------------------------------------------
(in millions, except where noted) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of accounts serviced with balances 14.1 16.4 18.9
Total customer receivables serviced $ 4,149 $ 4,721 $ 5,006
Average customer receivables serviced $ 4,123 $ 4,576 $ 4,428
Average account balance (in dollars) $ 295 $ 287 $ 265
Average account maturity (in months) 4.7 4.5 4.5
90-day delinquency rate 3.0% 3.9% 3.7%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
Capital structure. The Company's objective is to maintain a capital structure
that will assure continuing access to financial markets so that it can, at
reasonable cost, provide for future needs and capitalize on attractive
opportunities for growth.
The debt to capital per cent shown in the table below includes both debt
recorded on the Company's consolidated balance sheets as well as
off-balance-sheet debt related to operating leases and the securitization of a
portion of the Company's customer accounts receivable (asset-backed
certificates).
Debt to capital per cent
- ------------------------
($ in millions) 1998 1997 1996
- ---------------------------------------------------------
Short-term debt,
net of cash investments $ 1,602 $ 1,209 $ 3,818
Long-term debt,
including current
maturities 7,581 7,435 4,815
-----------------------------
9,183 8,644 8,633
Off-balance-sheet debt:
Present value of
operating leases 2,715 2,250 1,800
Securitization of
receivables, net 146 343 374
-----------------------------
Total debt 12,044 11,237 10,807
Consolidated equity 7,169 7,357 5,952
- ---------------------------------------------------------
Total capital $ 19,213 $ 18,594 $ 16,759
Per cent of total debt
to capital 62.7%* 60.4% 64.5%**
- ---------------------------------------------------------
* Upon completion of the Genovese acquisition, the Company's debt to capital
ratio decreased to 61.9 per cent.
** Upon completion of the Eckerd acquisition, the Company's debt to capital
ratio decreased to 60.1 per cent.
The Company's debt to capital per cent has increased over the past three years
which is reflective of its drugstore acquisitions. The Company currently expects
the per cent to improve over the next several years.
Financing costs incurred by the Company to finance its operations, including
those costs related to off-balance-sheet liabilities, were as follows:
- --------------------------
($ in millions) 1998 1997 1996
- ----------------------------------------------------------
Interest expense, net $ 611 $ 581 $ 359
Interest portion of
LESOP debt payment 2 10 17
Off-balance-sheet
financing costs:
Interest imputed
on operating leases 225 180 110
Asset-backed
certificate interest 46 68 68
- ----------------------------------------------------------
Total $ 884 $ 839 $ 554
- ----------------------------------------------------------
Economic Value Added (EVA(R)). During 1998 the Company put the EVA concept in
place as a key decision-making criterion for management. EVA is a tool that
enables companies to measure the creation of financial value. Since the changes
in EVA are often closely related to the changes in a company's stock price, the
Company believes that management of the business on the basis of EVA will
maximize the return on capital invested by its stockholders. Training for all
management employees, focusing on the use of EVA as a management measurement
tool, will be completed in 1999.
The Company's principal aim is the continual improvement in EVA, which directs
attention to long-term performance. EVA principles are being incorporated into
decision-making processes, including acquisition analyses, capital expenditure
allocations, inventory management, and other strategic plans.
The Company has begun linking EVA performance with incentive compensation
programs. In 1998, approximately 400 senior management employees had EVA
performance as a component of their incentive compensation. 1998's EVA
performance plan award was zero because the EVA growth target for 1998 was not
met. In 1999, incentive compensation that includes an EVA component will be
expanded to cover additional management employees who participate in the
Company's incentive compensation program.
43
<PAGE>
EBITDA. Earnings before interest, taxes, depreciation, and amortization (EBITDA)
is a key measure of cash flow generated and is provided as an alternative
assessment of operating performance. It is not intended to be a substitute for
GAAP measurements. Following is a calculation of EBITDA by operating segment on
an individual and combined basis (excludes other unallocated); calculations may
vary for other companies:
Department Eckerd
- ----------------- stores & drug- Direct Total
($ in millions) catalog stores Marketing Segments
- --------------------------------------------------------
1998
Revenue $ 19,331 $ 10,325 $ 1,022 $ 30,678
Operating
profit 1,013 254 233 1,500
Depreciation
and amortization 380 138 6 524
Credit operating
results 131 - - 131
Other(1) 139 134 - 273
---------------------------------------
EBITDA 1,663 526 239 2,428
% of
revenue 8.6% 5.1% 23.4% 7.9%
- --------------------------------------------------------
1997
Revenue $ 19,955 $9,663 $ 928 $30,546
Operating
profit 1,368 347 214 1,929
Depreciation
and amortization 366 112 5 483
Credit operating
results 35 - - 35
Other(1) 160 97 - 257
---------------------------------------
EBITDA $ 1,929 $ 556 $ 219 $ 2,704
% of
revenue 9.7% 5.8% 23.6% 8.9%
- --------------------------------------------------------
1996
Revenue $ 19,506 $ 3,147 $ 818 $23,471
Operating
profit 1,183 99 186 1,468
Depreciation
and amortization 325 41 6 372
Credit operating
results 81 - - 81
Other(1) 165 30 - 195
---------------------------------------
EBITDA $ 1,754 $ 170 $ 192 $ 2,116
% of
revenue 9.0% 5.4% 23.5% 9.0%
- --------------------------------------------------------
(1) Consists of interest on operating leases and the ESOP, and the impact of
asset-backed certificates.
Credit ratings. The Company's objective is to maintain a strong investment grade
rating on its senior long-term debt and commercial paper. As of March 1999, the
Company's credit ratings were under review for possible downgrade. Credit
ratings at year end were:
Long-Term Commercial
Debt Paper
- -----------------------------------------------------
Standard & Poor's
Corporation A A1
Moody's Investors
Service A2 P1
Fitch Investors
Service, Inc. A F1
- -----------------------------------------------------
44
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
------------------------------
Set forth below is a list of certain subsidiaries of the Company at March 22,
1999. All of the voting securities of each named subsidiary are owned by the
Company or by another subsidiary of the Company.
SUBSIDIARIES
- ------------
Eckerd Corporation (Delaware)
J. C. Penney Direct Marketing Services, Inc.(Delaware)
J. C. Penney Funding Corporation (Delaware)
J. C. Penney Life Insurance Company (Vermont)
JCPenney Card Bank (National Association)
J. C. Penney Properties, Inc. (Delaware)
JCP Realty, Inc. (Delaware)
JCP Receivables, Inc. (Delaware)
Thrift Drug, Inc.
Separate financial statements are filed for J. C. Penney Funding Corporation,
which is a consolidated subsidiary, in a separate Annual Report on Form 10-K.
The names of other subsidiaries have been omitted because these unnamed
subsidiaries, considered in the aggregate as a single subsidiary, do not
constitute a significant subsidiary.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Board of Directors of
J. C. Penney Company, Inc.:
We consent to incorporation by reference in the Registration Statements on Form
S-8 (Nos. 33-28390, 33-59666, 33-59668, 33-66070, 33-66072, 33-56995, 333-13949,
333-13951, 333-22627, 333-22607, 33-33343, 333-27329, 333-71237) and Form S-3
(No. 333-57019) of J.C. Penney Company, Inc. of our report dated February 25,
1999, relating to the 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, which report is
incorporated by reference in the January 30, 1999 Annual Report on Form 10-K of
J.C. Penney Company, Inc. and to our report dated February 25, 1999 on the
related financial statement schedule, which report appears in the January 30,
1999 Annual Report on Form 10-K of J. C. Penney Company, Inc.
/s/ KPMG LLP
Dallas, Texas
April 23, 1999
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
-----------------
Each of the undersigned directors and officers of J. C. PENNEY COMPANY, INC., a
Delaware corporation ("Company") , which will file with the Securities and
Exchange Commission, Washington, D.C. ("Commission"), under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the 52 weeks ended January 30, 1999, hereby constitutes and appoints W. J.
Alcorn, R. B. Cavanaugh, C. R. Lotter, and D. A. McKay, and each of them, his or
her true and lawful attorneys-in-fact and agents, with full power to each of
them to act without the others, for him or her and in his or her name, place,
and stead, in any and all capacities, to sign such Annual Report, which is about
to be filed, and any and all subsequent amendments to such Annual Report
("Annual Report"), and to file such Annual Report so signed, with all exhibits
thereto, and any and all documents in connection therewith, and to appear before
the Commission in connection with any matter relating to such Annual Report,
hereby granting to the attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done in and about the premises as fully and to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney as of
the 10th day of March, 1999.
/s/ J. E. OESTERREICHER /s/ D. A. MCKAY
- ------------------------------ ------------------------------
J. E. Oesterreicher D. A. McKay
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Financial Officer
(principal executive officer); (principal financial officer)
Director
/s/ W. J. ALCORN
- ------------------------------
W. J. Alcorn
Vice President and Controller
(principal accounting officer)
<PAGE>
/s/ M. A. BURNS /s/ T. J. ENGIBOUS
- ------------------------------ ------------------------------
M. A. Burns T. J. Engibous
Director Director
/s/ K. B. FOSTER /s/ V. E. JORDAN, JR.
- ------------------------------ ------------------------------
K. B. Foster V. E. Jordan, Jr.
Director Director
/s/ GEORGE NIGH /s/ J. C. PFEIFFER
- ------------------------------ ------------------------------
George Nigh J. C. Pfeiffer
Director Director
/s/ A. W. RICHARDS /s/ FRANCISCO SANCHEZ-LOAEZA
- ------------------------------ ------------------------------
A. W. Richards Francisco Sanchez-Loaeza
Director Director
/s/ C. S. SANFORD, JR. /s/ R. G. TURNER
- ------------------------------ ------------------------------
C. S. Sanford, Jr. R. G. Turner
Director Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENT OF INCOME
OF J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES AS OF JANUARY 30, 1999, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> JAN-30-1999
<CASH> 96
<SECURITIES> 415
<RECEIVABLES> 4,564
<ALLOWANCES> 149
<INVENTORY> 6,031
<CURRENT-ASSETS> 11,125
<PP&E> 8,333
<DEPRECIATION> 2,875
<TOTAL-ASSETS> 23,638
<CURRENT-LIABILITIES> 5,970
<BONDS> 7,143
0
475
<COMMON> 2,850
<OTHER-SE> 3,844
<TOTAL-LIABILITY-AND-EQUITY> 23,638
<SALES> 29,656
<TOTAL-REVENUES> 30,678
<CGS> 21,859
<TOTAL-COSTS> 28,389
<OTHER-EXPENSES> 494
<LOSS-PROVISION> 229
<INTEREST-EXPENSE> 611
<INCOME-PRETAX> 955
<INCOME-TAX> 361
<INCOME-CONTINUING> 594
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 594
<EPS-PRIMARY> 2.20
<EPS-DILUTED> 2.19
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENT OF INCOME
OF J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES AS OF JANUARY 31, 1998, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 287
<SECURITIES> 1,073
<RECEIVABLES> 3,954
<ALLOWANCES> 135
<INVENTORY> 6,162
<CURRENT-ASSETS> 11,484
<PP&E> 8,274
<DEPRECIATION> 2,945
<TOTAL-ASSETS> 23,493
<CURRENT-LIABILITIES> 6,041
<BONDS> 6,986
0
526
<COMMON> 2,766
<OTHER-SE> 4,065
<TOTAL-LIABILITY-AND-EQUITY> 23,493
<SALES> 29,618
<TOTAL-REVENUES> 30,546
<CGS> 21,430
<TOTAL-COSTS> 27,903
<OTHER-EXPENSES> 830
<LOSS-PROVISION> 307
<INTEREST-EXPENSE> 581
<INCOME-PRETAX> 925
<INCOME-TAX> 359
<INCOME-CONTINUING> 566
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 566
<EPS-PRIMARY> 2.13
<EPS-DILUTED> 2.10
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENT OF INCOME
OF J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES AS OF JANUARY 25, 1997, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-25-1997
<PERIOD-END> JAN-25-1997
<CASH> 131
<SECURITIES> 1,111
<RECEIVABLES> 4,723
<ALLOWANCES> 77
<INVENTORY> 5,722
<CURRENT-ASSETS> 11,712
<PP&E> 7,715
<DEPRECIATION> 2,701
<TOTAL-ASSETS> 22,088
<CURRENT-LIABILITIES> 7,966
<BONDS> 4,565
0
568
<COMMON> 1,416
<OTHER-SE> 3,968
<TOTAL-LIABILITY-AND-EQUITY> 22,088
<SALES> 22,653
<TOTAL-REVENUES> 23,471
<CGS> 16,089
<TOTAL-COSTS> 21,371
<OTHER-EXPENSES> 594
<LOSS-PROVISION> 238
<INTEREST-EXPENSE> 359
<INCOME-PRETAX> 909
<INCOME-TAX> 344
<INCOME-CONTINUING> 565
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 565
<EPS-PRIMARY> 2.32
<EPS-DILUTED> 2.25
</TABLE>
<PAGE>
EXHIBIT 99(b)
Management's Discussion and Analysis of 1998 Annual Report
Financial Condition and Results of Operations
J. C. Penney Funding Corporation ("Funding") is a wholly-owned consolidated
subsidiary of J. C. Penney Company, Inc. ("JCPenney"). The business of Funding
consists of financing a portion of JCPenney's operations through loans to
JCPenney, the purchase of customer receivable balances that arise from the
retail credit sales of JCPenney, or a combination of both. No receivables have
been purchased by Funding since 1985. The loan agreement between Funding and
JCPenney provides for unsecured loans to be made by Funding to JCPenney. Each
loan is evidenced by a revolving promissory note and is payable upon demand in
whole or in part as may be required by Funding. Copies of Funding's loan and
receivables agreements with JCPenney are available upon request.
Funding issues commercial paper through Credit Suisse First Boston Corporation,
J.P. Morgan Securities Inc., Merrill Lynch Money Markets Inc., and Morgan
Stanley Dean Witter to corporate and institutional investors in the domestic
market. The commercial paper is guaranteed by JCPenney on a subordinated basis.
The commercial paper was rated "A1" by Standard & Poor's Corporation, "P1" by
Moody's Investors Service, and "F1" by Fitch Investors Service, Inc. at the end
of fiscal 1998. As of January 1999, JCPenney and Funding's credit ratings were
under review for possible downgrade.
Income is derived primarily from earnings on loans to JCPenney and is designed
to produce earnings sufficient to cover interest expense at a coverage ratio of
at least one and one-half times.
In 1998, net income decreased to $35 million from $43 million in 1997. Net
income for 1997 increased from $38 million in 1996. The decrease in 1998 is
attributed to lower lending levels and lower interest rates. The increase in
1997 is attributed to higher lending levels and higher interest rates. Interest
expense was $106 million in 1998 compared with $127 million in 1997 and $111
million in 1996. Interest earned from JCPenney was $160 million in 1998 compared
to $193 million in 1997 and $169 million in 1996.
Commercial paper borrowings averaged $1,922 million in 1998 compared to $2,129
million in 1997 and $1,827 million in 1996. The average interest rate on
commercial paper was 5.5 per cent in 1998, down from 5.6 per cent in 1997 and up
from 5.5 percent in 1996.
Committed bank credit facilities available to Funding and JCPenney as of January
30, 1999 amounted to $3 billion. The facilities, as amended and restated,
support JCPenney's short term borrowing program, and are comprised of a $1.5
billion, 364-day revolver, and a $1.5 billion, five-year revolver. The 364-day
revolver includes a $750 million seasonal credit line for the August to January
period thus allowing JCPenney to match its seasonal borrowing requirements.
There were no outstanding borrowings under these credit facilities during fiscal
1998.
JCPenney has initiated actions to address the Year 2000 issue relating to
Funding. Year 2000 readiness work was more than 90 per cent complete as of
January 30, 1999. Since January 1999, JCPenney has been retesting all systems
critical to JCPenney's core businesses. JCPenney has also focused on the Year
2000 readiness of its suppliers and service providers, both independently and in
conjunction with the National Retail Federation. Total costs associated with
these efforts are not expected to have a material impact on the financial
results of either JCPenney or Funding. In addition, Funding has communicated
with its commercial paper dealers to determine their Year 2000 readiness.
However, there can be no guarantee that the systems of these commercial paper
dealers on which Funding relies will be converted in a timely manner, or that a
failure to convert would not have a material adverse effect on Funding's
operations.
We would like to express our appreciation to the institutional investment
community, as well as to our credit line participants and commercial paper
dealers for their continued support during 1998.
Robert B. Cavanaugh
Chairman of the Board
February 25, 1999
3
<PAGE>
Statements of Income J. C. Penney Funding Corporation
($ in millions)
For the Year 1998 1997 1996
---------------------
Interest income from JCPenney........................ $ 160 $ 193 $ 169
Interest expense..................................... 106 127 111
------ ------ -----
Income before income taxes........................... 54 66 58
Income taxes...................................... 19 23 20
------ ------ -----
Net income........................................... $ 35 $ 43 $ 38
====== ====== =====
Statements of Reinvested Earnings
($ in millions)
1998 1997 1996
---------------------
Balance at beginning of year......................... $1,007 $ 964 $ 926
Net income........................................... 35 43 38
------ ------ -----
Balance at end of year............................... $1,042 $1,007 $ 964
====== ====== =====
See Notes to Financial Statements on page 7
4
<PAGE>
Balance Sheets J. C. Penney Funding Corporation
(In millions except share data)
1998 1997
--------------
Assets
Loans to JCPenney.............................. $3,129 $2,591
====== ======
Liabilities and Equity of JCPenney
Current Liabilities
Short term debt................................ $1,924 $1,416
Due to JCPenney................................ 18 23
------ ------
Total Current Liabilities................. 1,942 1,439
Equity of JCPenney
Common stock (including contributed
capital), par value $100:
Authorized, 750,000 shares -
issued and outstanding, 500,000 shares.... 145 145
Reinvested earnings............................ 1,042 1,007
------ ------
Total Equity of JCPenney.................. 1,187 1,152
------ ------
Total Liabilities and Equity of JCPenney.. $3,129 $2,591
====== ======
See Notes to Financial Statements on page 7
5
<PAGE>
Statements of Cash Flows J. C. Penney Funding Corporation
($ in millions)
For the Year 1998 1997 1996
--------------------------
Operating Activities
Net income.................................... $ 35 $ 43 $ 38
(Increase)Decrease in loans to JCPenney....... (538) 2,471 (2,499)
Increase(Decrease) in amount due to JCPenney.. (5) 22 (9)
----- -------- -------
$(508) $ 2,536 $(2,470)
Financing Activities
Increase(Decrease) in short term debt......... $ 508 $ (2,536) $ 2,470
Supplemental Cash Flow Information
Interest paid................................. $ 106 $ 127 $ 111
Income taxes paid............................. $ 23 $ 2 $ 28
See Notes to Financial Statements on page 7
6
<PAGE>
Independent Auditors' Report J. C. Penney Funding Corporation
To the Board of Directors of
J. C. Penney Funding Corporation:
We have audited the accompanying balance sheets of J. C. Penney Funding
Corporation as of January 30, 1999 and January 31, 1998, and the related
statements of income, reinvested earnings, and cash flows for each of the years
in the three-year period ended January 30, 1999. These financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of J. C. Penney Funding
Corporation as of January 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
KPMG LLP
Dallas, Texas
February 25, 1999
- --------------------------------------------------------------------------------
Notes to Financial Statements
Nature of Operations
- --------------------
J. C. Penney Funding Corporation ("Funding") is a wholly-owned consolidated
subsidiary of J. C. Penney Company, Inc. ("JCPenney"). The principal business
of Funding consists of financing a portion of JCPenney's operations through
loans to JCPenney. To finance its operations, Funding issues commercial paper,
which is guaranteed by JCPenney on a subordinated basis, to corporate and
institutional investors in the domestic market. Funding has, from time to time,
issued long term debt in public and private markets in the United States and
abroad.
Definition of Fiscal Year
Funding's fiscal year ends on the last Saturday in January. Fiscal 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 and Fiscal 1998 and 1996 were
52-week years.
Commercial Paper Placement
- --------------------------
Funding places commercial paper solely through dealers. The average interest
rate on commercial paper at year end 1998, 1997, and 1996 was 5.1%, 5.7%, and
5.5%, respectively.
Summary Of Accounting Policies
Income Taxes
Funding's taxable income is included in the consolidated federal income tax
return of JCPenney. Income taxes in Funding's statement of income are computed
as if Funding filed a separate federal income tax return.
Use of Estimates
Funding's financial statements have been prepared in conformity with generally
accepted accounting principles. Certain amounts included in the financial
statements are estimated based on currently available information and
management's judgment as to the outcome of future conditions and circumstances.
While every effort is made to ensure the integrity of such estimates, including
the use of third party specialists where appropriate, actual results could
differ from these estimates.
New Accounting Rules
- --------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income, in June 1997.
This statement, which was effective for fiscal years beginning after December
15, 1997, had no impact on Funding as comprehensive income is equal to net
income.
Loans to JCPenney
- -----------------
Funding and JCPenney are parties to a Loan Agreement which provides for
unsecured loans, payable on demand, to be made from time to time by Funding to
JCPenney for the general business purposes of JCPenney, subject to the
terms and conditions of the Loan Agreement. Under the terms of the Loan
Agreement, Funding and JCPenney agree upon a mutually-acceptable earnings
coverage of Funding's interest and other fixed charges. The earnings to fixed
charges ratio has historically been at least one and one-half times.
Committed Bank Credit Facilities
- --------------------------------
Committed bank credit facilities available to Funding and JCPenney as of January
30, 1999 amounted to $3 billion. The facilities, as amended and restated,
support JCPenney's short term borrowing program, and are comprised of a $1.5
billion, 364-day revolver, and a $1.5 billion, five-year revolver. The 364-day
revolver includes a $750 million seasonal credit line for the August to January
period thus allowing JCPenney to match its seasonal borrowing requirements.
There were no outstanding borrowings under these credit facilities at January
30, 1999.
Fair Value of Financial Instruments
- -----------------------------------
The fair value of short term debt (commercial paper) at January 30, 1999 and
January 31, 1998 approximates the amount as reflected on the balance sheet due
to its short average maturity.
The fair value of loans to JCPenney at January 30, 1999, and January 31, 1998
also approximates the amount reflected on the balance sheet because the loan is
payable on demand and the interest charged on the loan balance is adjusted to
reflect current market interest rates.
7
<PAGE>
Five Year Financial Summary J. C. Penney Funding Corporation
($ in millions)
<TABLE>
<CAPTION>
At Year End 1998 1997 1996 1995 1994
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Capitalization
Short term debt
Commercial paper.............. $1,924 $1,416 $2,049 $1,482 $2,074
Credit line advance........... -- -- 1,903 -- --
------ ------ ------ ------ ------
Total short term debt..... 1,924 1,416 3,952 1,482 2,074
Equity of JCPenney................. 1,187 1,152 1,109 1,071 1,028
------ ------ ------ ------ ------
Total capitalization..................... $3,111 $2,568 $5,061 $2,553 $3,102
====== ====== ====== ====== ======
Committed bank credit facilities......... $3,000 $3,000 $6,000 $3,000 $2,500
For the Year
Income................................... $ 160 $ 193 $ 169 $ 194 $ 143
Expenses................................. $ 106 $ 127 $ 111 $ 128 $ 94
Net income............................... $ 35 $ 43 $ 38 $ 43 $ 32
Fixed charges - times earned............. 1.52 1.52 1.52 1.52 1.52
Peak short term debt..................... $3,117 $4,295 $4,010 $2,771 $2,649
Average debt............................. $1,938 $2,247 $2,041 $2,145 $1,990
Average interest rates................... 5.5% 5.6% 5.5% 5.9% 4.6%
</TABLE>
8
<PAGE>
Quarterly Data J. C. Penney Funding Corporation
($ in millions) (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
----------------- ------------------- -------------------- ------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
----- ---- ---- ----- ----- ----- ----- ----- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income....................... $ 34 82 32 33 29 33 46 35 36 47 47 68
Expenses..................... $ 22 54 21 22 19 22 30 23 24 32 31 44
Income before taxes.......... $ 12 28 11 11 10 11 16 12 12 15 16 24
Net income................... $ 8 18 7 7 7 7 10 8 8 10 10 16
Fixed charges -
times earned............... 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52
</TABLE>
Committed Revolving Credit Facilities
as of January 30, 1999
Bank of America NT & SA Mellon Bank, N.A.
Bank of Hawaii Morgan Guaranty Trust Company
The Bank of New York of New York
The Bank of Tokyo-Mitsubishi, Ltd. National Australia Bank Limited
Bank One, Texas N.A. NationsBank, N.A.
BankBoston, N.A. The Northern Trust Company
Bankers Trust Company PNC Bank, N.A.
Barclays Bank PLC Royal Bank of Canada
The Chase Manhattan Bank The Sakura Bank, Ltd.
Citibank, N.A. State Street Bank & Trust Company
Credit Agricole Indosuez SunTrust Bank, Atlanta
Credit Suisse First Boston UMB Bank, N.A.
First National Bank of Chicago U.S. Bank National Association
First Security Bank of Utah, N.A. Wachovia Bank, N.A.
First Union National Bank Wells Fargo Bank, N.A.
Firstar Bank Milwaukee, N.A.
Fleet National Bank
The Fuji Bank, Ltd.
Hibernia National Bank
Istituto Bancario San Paolo di
Torino S.p.A.
Marine Midland Bank
9
