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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the 53 weeks ended January 31, 1998 Commission file number 1-4947-1
J. C. Penney Funding Corporation
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(Exact name of registrant as specified in its charter)
DELAWARE 51-0101524
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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: None
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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 .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant: None
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Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 500,000 shares of
Common Stock of $100 par value, as of March 31, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of Registrant's 1997 Annual Report ("1997 Annual Report") are
incorporated into Parts I, II, and IV. Portions of J. C. Penney Company, Inc.'s
1997 Annual Report to Stockholders ("JCPenney's 1997 Annual Report") are
incorporated into Part I.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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PART I
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1. BUSINESS.
J. C. Penney Funding Corporation ("Funding"), which was incorporated in
Delaware in 1964, is a wholly-owned subsidiary of J. C. Penney Company, Inc.
("JCPenney"), also incorporated in Delaware. Funding's executive offices are
located in JCPenney's offices in Plano, Texas. Its business 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.
JCPenney, a company founded by James Cash Penney in 1902 and incorporated
in 1924, is a major retailer operating over 1,200 JCPenney department stores in
all 50 states, Puerto Rico, Mexico, and Chile. The major portion of JCPenney's
business consists of providing merchandise and services to consumers through
department stores that include catalog departments. JCPenney stores market
predominantly family apparel, jewelry, shoes, accessories, and home
furnishings. In addition, JCPenney, through its wholly-owned subsidiary, Eckerd
Corporation, operates a chain of approximately 2,780 drugstores located
predominantly throughout the northeast, southeast, and Sunbelt regions of the
United States. JCPenney also has several direct marketing insurance
subsidiaries, which market life, health, accident and credit insurance, as well
as a growing portfolio of non-insurance products. JCPenney's total revenues for
the 53 weeks ended January 31, 1998 were $30.5 billion and net income was $566
million. Pursuant to the terms of financing agreements between Funding and
JCPenney, payments from JCPenney to Funding are designed to produce earnings
sufficient to cover Funding's fixed charges, principally interest on borrowings,
at a coverage ratio mutually agreed upon between Funding and JCPenney. (See
"Loan Agreement" and "Receivables Agreement", below.) The earnings to fixed
charges coverage ratio has historically been, and in fiscal 1997 was, at least
1.5 to 1.
Operations of Funding. To finance the operations of JCPenney as described
under "Business" above, Funding sells its short-term notes (commercial paper) to
investors through dealer-placed programs. The short-term notes are guaranteed
on a subordinated basis by JCPenney. Funding has, from time to time, issued
long-term debt in public and private markets in the United States and abroad.
Prior to April 3, 1992, Funding issued commercial paper and master notes to
investors on a direct issue basis. Funding also has in place arrangements for
short-term bank borrowings. Short-term debt in fiscal 1997 averaged $2,247
million compared to $2,041 million in fiscal 1996 and $2,145 million in fiscal
1995. Short-term debt rates averaged 5.6 percent in fiscal 1997, compared to
5.5 percent in fiscal 1996 and 5.9 percent in fiscal 1995. Interest expense
increased in fiscal 1997 compared to fiscal 1996
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due to higher borrowing levels and higher short-term interest rates. Interest
expense decreased in fiscal 1996 as compared to fiscal 1995 due to lower
borrowing levels and lower short-term interest rates.
Credit Operations of JCPenney. Virtually all types of merchandise and
services sold by JCPenney in the United States, Puerto Rico, Mexico, and Chile
may be purchased on JCPenney's revolving credit card. In addition, JCPenney
accepts American Express, Diners Club (Mexico only), Discover (United States and
Puerto Rico only), MasterCard, and Visa at JCPenney stores, catalog, and
drugstores throughout the 50 states, Puerto Rico, Mexico, and Chile. For
additional information regarding the credit card operations of JCPenney, see
"Net Interest Expense and Credit Operations" (page 16), which appears in the
section of JCPenney's 1997 Annual Report entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and "Pre-tax cost of
JCPenney credit card", "Credit sales", and "Key JCPenney credit card
information" (page 33), which appear in the section of JCPenney's 1997 Annual
Report entitled "Supplemental Data (Unaudited)", on the pages indicated in the
parenthetical references, which are incorporated by reference herein.
Funding has never incurred any losses from JCPenney's retail credit
operation since, pursuant to the Receivables Agreement, JCPenney itself
administers the customer receivables when sold to Funding, receives all finance
charge revenue on those customer receivables, and bears all related costs.
Loan Agreement. Funding and JCPenney are parties to a Loan Agreement,
dated as of January 28, 1986, as amended ("Loan Agreement"), which provides for
unsecured loans 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. The loans may be either senior loans or subordinated loans,
at the election of JCPenney, provided that, without the consent of the Board of
Directors of Funding, the principal amount of loans outstanding at any time
under the Loan Agreement may not exceed specified limits. Currently such limits
may not exceed $8 billion in the aggregate for all loans and $1 billion in the
aggregate for all subordinated loans. The terms of each loan under the Loan
Agreement shall be as agreed upon at the time of such loan by Funding and
JCPenney, provided that Funding may require upon demand that any loan be paid,
and JCPenney may prepay without premium any loan, in whole or in part at any
time. Under the terms of the Loan Agreement, JCPenney and Funding agree from
time to time upon a mutually-acceptable earnings coverage of Funding's interest
and other fixed charges. If at the end of each fiscal quarter during which a
loan is outstanding, the earnings coverage of Funding's interest and other fixed
charges is less than the agreed upon ratio, JCPenney will pay to Funding an
additional amount sufficient to provide for such coverage to be not less than
the agreed upon ratio. In the event that JCPenney and Funding have
3
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not agreed upon a mutually acceptable ratio for any fiscal quarter, the
applicable quarterly payment with respect to such period will include an amount
equal to the excess, if any, of one and one-half percent of the daily average of
the aggregate principal amount outstanding on all loans during such period, over
the aggregate amount of interest accrued on all such loans during such period.
Receivables Agreement. Since December 1, 1985, JCPenney has not sold an
undivided interest in any of its customer receivables to Funding. The
Receivables Agreement between Funding and JCPenney, as amended ("Receivables
Agreement"), continues to be in full force and effect and while no purchases of
JCPenney customer receivables by Funding are presently contemplated, JCPenney
may again commence sales of its customer receivables to Funding.
The Receivables Agreement sets forth the terms and provisions governing
sales of customer receivables (other than specified types of customer
receivables immaterial in amount) by JCPenney to Funding. At the end of each
monthly accounting period, JCPenney may sell to Funding an undivided interest in
its undefaulted customer receivables which are not sold or contracted to be sold
by JCPenney to anyone other than Funding. Settlements are made as of the end of
each such monthly accounting period with respect to collections, defaults, and
other adjustments to customers' accounts occurring during that month.
The purchase price for the customer receivables acquired by Funding from
JCPenney is equal to the aggregate dollar amount of such customer receivables.
JCPenney pays to Funding at the end of each monthly accounting period a discount
in an amount agreed upon from time to time. In the event of a failure to agree
as to the amount of the discount, the amount to be paid is one-half of one
percent of the average daily closing balance of conveyed customer receivables
held by Funding during such monthly accounting period less the average daily
closing balance of the Contract Reserve Account during such period.
In addition, at the time of purchase of customer receivables from JCPenney,
Funding withholds from the purchase price, and adds to the Contract Reserve
Account, the lesser of (i) five percent of the amount of customer receivables
then being purchased, or (ii) the amount, if any, by which the amount in the
Contract Reserve Account is less than five percent of the total amount of
customer receivables then owned by Funding. If the amount in the Contract
Reserve Account should exceed five percent of the total amount of customer
receivables owned by Funding at the end of any monthly accounting period, such
excess is to be paid to JCPenney in accordance with the Receivables Agreement.
If any portion of a customer receivable becomes more than 180 days past due or
if the customer is, in the judgment of JCPenney, unable to make further payment,
such customer receivable is considered to be in default for the purposes of the
Receivables Agreement and is charged against the Contract Reserve Account.
Collections with respect to
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any such defaulted customer receivable are credited to the Contract Reserve
Account. As described above, all bad debts written off to date have been
covered by the Contract Reserve Account.
Funding acquires all of JCPenney's right, title, and interest in and to the
undivided portion of the customer receivables being conveyed to it. All sales
of customer receivables to Funding are without recourse to JCPenney. However,
in the event of returned, rejected, or repossessed merchandise to which any
previously conveyed undefaulted customer receivable relates, or in the event of
a breach of a warranty made by JCPenney in the Receivables Agreement to which
any previously conveyed undefaulted customer receivable relates, JCPenney is
obligated to pay to Funding the amount by which Funding has been damaged.
Either party has the right at any time to terminate the further sale or
purchase, as the case may be, of customer receivables under the Receivables
Agreement.
Certain state laws provide for recording or other notice formalities in
connection with the assignment of accounts receivable. Funding does not deem it
appropriate to utilize such procedures in connection with customer receivables
purchased from JCPenney. In the event of the bankruptcy or receivership of
JCPenney, it is possible that creditors of JCPenney might be deemed to have
superior rights to some or all of the customer receivables previously purchased
by Funding.
Committed Bank Credit Facilities. Committed bank credit facilities
available to Funding and JCPenney as of January 31, 1998 amounted to $3.0
billion. In 1997, Funding and JCPenney amended and restated the two existing
syndicated revolving credit facilities with a group of domestic and
international banks. These facilities, which support commercial paper borrowing
arrangements, include 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. (See page 2 of Funding's 1997 Annual Report which is
incorporated herein by reference.)
Employment. Funding has had no employees since April 30, 1992.
General. Legislation regulating consumer credit has been enacted in all
states and federally. Funding's operations have not been affected by such
legislation since Funding does not deal directly with consumers.
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2. PROPERTIES.
Funding owns no physical properties.
3. LEGAL PROCEEDINGS.
Funding has no material legal proceedings pending against it.
PART II
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5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
JCPenney owns all of Funding's outstanding common stock. Funding's common
stock is not traded, and no dividends have been, or are currently intended to
be, declared by Funding on its common stock.
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Balance Sheets of Funding as of January 31, 1998 and January 25, 1997,
and the related statements of income, reinvested earnings, and cash flows for
each of the years in the three-year period ended January 31, 1998, appearing on
pages 3 through 5 of Funding's 1997 Annual Report, together with the related
notes and the Independent Auditors' Report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing on page 6 of Funding's 1997 Annual
Report, the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing on page 2 thereof, the section of Funding's
1997 Annual Report entitled "Five Year Financial Summary" appearing on page 7
thereof, and the unaudited quarterly financial highlights ("Quarterly Data")
appearing on page 8 thereof, are incorporated herein by reference in response to
Item 8 of Form 10-K.
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Funding has had no change in or disagreements with its independent
certified public accountants on accounting or auditing matters or on financial
statement disclosure.
6
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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 Form 10-K for financial statements incorporated by
reference to Funding's 1997 Annual Report.
(a)(2) Financial Statement Schedules.
All schedules have been omitted as they are inapplicable or not
required under the rules, or the information has been submitted in the
financial statements or in the notes to the financial statements
incorporated by reference to Funding's 1997 Annual Report.
(a)(3) Exhibits.
See separate Exhibit Index on pages G-1 through G-5.
(b) Reports on Form 8-K filed during the fourth quarter of fiscal 1997.
None.
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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 FUNDING CORPORATION
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(Registrant)
By /s/ R. B. Cavanaugh
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R. B. Cavanaugh
Chairman of the Board
Dated: April 30, 1998
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Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ R. B. Cavanaugh
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R. B. Cavanaugh Chairman of the Board April 30, 1998
(principal executive
officer); Director
S. F. Walsh*
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S. F. Walsh President April 30, 1998
(principal financial
officer); Director
W. J. Alcorn*
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W. J. Alcorn Controller (principal April 30, 1998
accounting officer)
D. A. McKay*
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D. A. McKay Director April 30, 1998
*By /s/ R. B. Cavanaugh
--------------------
R. B. Cavanaugh
Attorney-in-fact
9
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EXHIBIT INDEX
Exhibit
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3. (i) Articles of Incorporation
(a) Certificate of Incorporation of Funding, effective April 13, 1964
(incorporated by reference to Exhibit 3(a) to Funding's Annual Report on
Form 10-K for the 52 weeks ended January 29, 1994*).
(b) Certificate of Amendment of Certificate of Incorporation, effective
January 1, 1969 (incorporated by reference to Exhibit 3(b) to Funding's
Annual Report on Form 10-K for the 52 weeks ended January 29, 1994*).
(c) Certificate of Amendment of Certificate of Incorporation, effective
August 11, 1987 (incorporated by reference to Exhibit 3(c) to Funding's
Annual Report on Form 10-K for the 52 weeks ended January 29, 1994*).
(d) Certificate of Amendment of Certificate of Incorporation, effective
April 10, 1988 (incorporated by reference to Exhibit 3(d) to Funding's
Annual Report on Form 10-K for the 52 weeks ended January 29, 1994*).
(ii) Bylaws
(a) Bylaws of Funding, as amended to May 19, 1995 (incorporated by reference
to Exhibit 3(ii) to Funding's Quarterly Report on Form 10-Q for the 13
and 39 weeks ended October 26, 1996*).
4. Instruments defining the rights of security holders, including indentures
(a) Issuing and Paying Agency Agreement dated as of March 16, 1992, between
J. C. Penney Funding Corporation and Morgan Guaranty Trust Company of
New York (incorporated by reference to Exhibit 4(a) to Funding's Current
Report on Form 8-K, Date of Report - April 3, 1992*).
(b) Issuing and Paying Agency Agreement dated as of February 3, 1997,
between J. C. Penney Funding Corporation and The Chase Manhattan Bank
(incorporated by reference to Exhibit 4(b) to
G-1
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EXHIBIT INDEX
Exhibit
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Funding's Annual Report on Form 10-K for the 52 weeks ended January 25,
1997*).
(c) Guaranty dated as of February 17, 1997, executed by J. C. Penney
Company, Inc.(incorporated by reference to Exhibit 4(c) to Funding's
Annual Report on Form 10-K for the 52 weeks ended January 25, 1997*).
(d) Amended and Restated 364-Day Revolving Credit Agreement dated as of
December 3, 1996, among J. C. Penney Company, Inc., J. C. Penney Funding
Corporation, the Lenders party thereto, Morgan Guaranty Trust Company of
New York, as Agent for the Lenders, and Bank of America Illinois,
Bankers Trust Company, The Chase Manhattan Bank, Citibank, N.A., Credit
Suisse, and NationsBank of Texas, N.A., as Co-Agents for the Lenders
(incorporated by reference to Exhibit 4(d) to Funding's Annual Report on
Form 10-K for the 52 weeks ended January 25, 1997*).
(e) Amended and Restated Five-Year Revolving Credit Agreement dated as of
December 3, 1996, among J. C. Penney Company, Inc., J. C. Penney Funding
Corporation, the Lenders party thereto, Morgan Guaranty Trust Company of
New York, as Agent for the Lenders, and Bank of America Illinois,
Bankers Trust Company, The Chase Manhattan Bank, Citibank, N.A., Credit
Suisse, and NationsBank of Texas, N.A., as Co-Agents for the Lenders
(incorporated by reference to Exhibit 4(e) to Funding's Annual Report on
Form 10-K for the 52 weeks ended January 25, 1997*).
(f) Amendment and Restatement Agreement to 364-Day 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.
(g) 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
G-2
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EXHIBIT INDEX
Exhibit
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Manhattan Bank, Citibank, N.A., Credit Suisse First Boston, and
NationsBank of Texas, N.A., as Managing Agents.
(h) Commercial Paper Dealer Agreement dated March 16, 1992 between J. C.
Penney Funding Corporation and J.P. Morgan Securities Inc. (incorporated
by reference to Exhibit 10(a) to Funding's Current Report on Form 8-K,
Date of Report-April 3, 1992*).
(i) Commercial Paper Dealer Agreement dated March 16, 1992 between J. C.
Penney Funding Corporation and The First Boston Corporation
(incorporated by reference to Exhibit 10(b) to Funding's Current Report
on Form 8-K, Date of Report- April 3, 1992*).
(j) Commercial Paper Dealer Agreement dated May 3, 1994 between J. C. Penney
Funding Corporation and Merrill Lynch Money Markets Inc. (incorporated
by reference to Exhibit 4(g) to Funding's Annual Report on Form 10-K for
the 52 weeks ended January 28, 1995*).
(k) Commercial Paper Dealer Agreement dated January 25, 1995 between J. C.
Penney Funding Corporation and Morgan Stanley & Co. Incorporated
(incorporated by reference to Exhibit 4(h) to Funding's Annual Report on
Form 10-K for the 52 weeks ended January 28, 1995*).
(l) Commercial Paper Dealer Agreement dated February 7, 1997 between J. C.
Penney Funding Corporation and Credit Suisse First Boston Corporation
(incorporated by reference to Exhibit 4(l) to Funding's Annual Report on
Form 10-K for the 52 weeks ended January 25, 1997*).**
(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 Funding's Annual Report on
Form 10-K for the 52 weeks ended January 25, 1997*).
Instruments evidencing long-term debt, previously issued but now fully
prepaid, have not been filed as exhibits hereto because none of the debt
authorized under any such instrument exceeded 10 percent of the total assets
of the Registrant. The Registrant agrees to furnish a copy of any of its
long-term debt instruments to the Securities and Exchange Commission upon
request.
G-3
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EXHIBIT INDEX
Exhibit
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10. Material Contracts
THE CORPORATION HAS NO COMPENSATORY PLANS OR ARRANGEMENTS REQUIRED TO BE
FILED AS EXHIBITS TO THIS REPORT PURSUANT TO ITEM 14(c) OF THIS REPORT.
(a) Amended and Restated Receivables Agreement dated as of January 29, 1980
between J. C. Penney Company, Inc. and J. C. Penney Financial
Corporation (incorporated by reference to Exhibit 10(a) to Funding's
Annual Report on Form 10-K for the 52 weeks ended January 29, 1994*).
(b) Amendment No. 1 to Amended and Restated Receivables Agreement dated as
of January 25, 1983 between J. C. Penney Company, Inc. and J. C. Penney
Financial Corporation (incorporated by reference to Exhibit 10(b) to
Funding's Annual Report on Form 10-K for the 52 weeks ended January 29,
1994*).
(c) Loan Agreement dated as of January 28, 1986 between J. C. Penney
Company, Inc. and J. C. Penney Financial Corporation (incorporated by
reference to Exhibit 1 to Funding'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
J. C. Penney Company, Inc. and J. C. Penney Financial Corporation
(incorporated by reference to Exhibit 1 to Funding'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
J. C. Penney Company, Inc. and J. C. Penney Funding Corporation
(incorporated by reference to Exhibit 10(e) to Funding's Annual Report
on Form 10-K for the 52 weeks ended January 25, 1997*).
(f) Line of Credit Agreement dated as of July 1, 1994, between J. C. Penney
Funding Corporation and J. C. Penney Chile, Inc. (incorporated by
reference to Exhibit 10(e) to Funding's Annual Report on Form 10-K for
the 52 weeks ended January 28, 1995*).
* SEC file number 1-4947-1
** Funding has entered into identical Commercial Paper Dealer Agreements
dated February 7, 1997 with each of Merrill Lynch
G-4
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EXHIBIT INDEX
Exhibit
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Money Markets Inc., J.P. Morgan Securities Inc., and Morgan Stanley &
Co. Incorporated, which agreements are omitted pursuant to Instruction 2
to Item 601 of Regulation S-K. Funding agrees to furnish a copy of any
of such agreements to the Securities and Exchange Commission upon
request.
13. Annual Report to Security Holders
Excerpt from Funding's 1997 Annual Report.
23. Consent of Independent Certified Public Accountants
24. Power of Attorney
27. Financial Data Schedule
Financial Data Schedule for the 53 week period ended January 31, 1998.
99. Additional Exhibits
Excerpt from JCPenney's 1997 Annual Report to Stockholders.
G-5
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EXHIBIT 4(F)
AMENDED AND RESTATED 364-DAY REVOLVING CREDIT
AGREEMENT
AMENDED AND RESTATED 364-DAY REVOLVING CREDIT AGREEMENT dated as of
November 21, 1997 among J. C. PENNEY COMPANY, INC. and J. C. PENNEY FUNDING
CORPORATION (the "BORROWERS"), the LENDERS listed on the signature pages hereof
(the "LENDERS"), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the
"AGENT"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (successor
to 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
Managing Agents (the "MANAGING AGENTS").
W I T N E S S E T H:
WHEREAS, certain of the parties hereto have heretofore entered into a
364-Day Revolving Credit Agreement dated as of December 16, 1993, as amended and
restated as of December 7, 1994, as amended as of December 6, 1995, and as
amended and restated as of December 3, 1996 (the "AGREEMENT"); and
WHEREAS, the parties hereto desire to amend such Agreement as set forth
herein and to restate the Agreement in its entirety to read as set forth in the
Agreement with the amendments specified below;
NOW, THEREFORE, the parties hereto agree as follows:
Section 1. Definitions; References. Unless otherwise specifically defined
herein, each term used herein which is defined in the Agreement shall have the
meaning assigned to such term in the Agreement. Each reference to "HEREOF",
"HEREUNDER", "HEREIN" and "HEREBY" and each other similar reference and each
<PAGE>
reference to "THIS AGREEMENT" and each other similar reference contained in the
Agreement shall from and after the date hereof refer to the Agreement as amended
and restated hereby.
Section 2. Managing Agents; Co-Agents. (a) Each reference to "Co-Agent"
and "Co-Agents" in the Agreement as heretofore in effect is changed to "Managing
Agent" and "Managing Agents" respectively.
(b) The following new definition is added to Section 1.01 of the Agreement
immediately after "Closing Date":
"Co-Agents" shall mean the Lenders who are indicated as being Co-Agents on
---------
the signature pages hereof.
(c) The last sentence of Article VIII is amended to read in its entirety as
follows:
No Managing Agent or Co-Agent shall have any duties or responsibilities
hereunder in its capacity as such.
Section 3. Extension of Maturity Date. (a) The definition of "MATURITY
DATE" in Section 1.01 of the Agreement is amended to read in its entirety as
follows:
"MATURITY DATE" shall mean November 20, 1998.
(b) The date "December 2, 1997" in Section 2.11(d) of the Agreement is
changed to "November 20, 1998".
Section 4. Financial Statements. (a) Each reference to "January 27, 1996"
in Sections 3.05 and 3.06 of the Agreement is changed to "January 25, 1997".
(b) The date "July 27, 1996" in Section 3.05 of the Agreement is changed
to "July 26, 1997".
Section 5. Confirmation of Guaranty. J. C. Penney Company, Inc. confirms
that its subordinated Guaranty of the obligations of J. C. Penney Funding
Corporation dated as of December 3, 1996, shall apply to the obligations of J.
C. Penney Funding Corporation under the Agreement as amended and restated
hereby.
2
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Section 6. Changes in Commitments. With effect from and including the
date this Amendment and Restatement becomes effective in accordance with Section
9 hereof, (i) each Person listed on the signature pages hereof which is not a
party to the Agreement shall become a Lender party to the Agreement, (ii the
Commitment of each Lender shall be the amount set forth opposite the name of
such Lender on the Commitment Schedule annexed hereto and (iii) Schedule 2.01 to
the Agreement shall be amended to read as set forth in Part I of said Commitment
Schedule. Any Lender whose Commitment is changed to zero shall upon such
effectiveness cease to be a Lender party to the Agreement, and all accrued fees
and other amounts payable under the Agreement for the account of such Lender
shall be due and payable on such date; provided that, subject to Section 2.20,
the provisions of Sections 2.13, 2.15, 2.19 and 9.05 of the Agreement shall
continue to inure to the benefit of each such Lender.
Section 7. Assignments. (a) The phrase "in substantially the form of
Exhibit E" is added to clause (iv) of the proviso to Section 9.04(b) of the
-------
Agreement immediately following the words "an instrument".
(b) Exhibit A hereto is added to the Agreement as Exhibit E thereto.
(c) The definition of "ELIGIBLE ASSIGNEE" is amended by the addition of
the following clause (d):
and (d) with the prior written consent of the Borrowers, any other
financial institution.
Section 8. Governing Law. This Amendment and Restatement shall be
governed by and construed in accordance with the laws of the State of New York.
Section 9. Counterparts; Conditions to Effectiveness. This Amendment and
Restatement may be signed in any number of counterparts, each of which shall be
an original, with the same effect as if the signatures thereto and hereto were
upon the same instrument. This Amendment and Restatement shall become effective
as of the date hereof when the Agent shall have received:
(a) duly executed counterparts hereof signed by the Borrowers and all of
the Lenders (or, in the case of any party as to which an executed counterpart
shall not have been received, the Agent shall have received telegraphic, telex
or other written confirmation from such party of execution of a counterpart
hereof by such party);
(b) an opinion of Charles R. Lotter, General Counsel for the Borrowers,
dated the date hereof and addressed to the Lenders, to the effect set forth in
3
<PAGE>
Exhibit B hereto, and the Borrowers hereby instruct such counsel to deliver such
opinion to the Agent;
(c) a certificate from a Responsible Officer of each Borrower, dated the
date hereof, and certifying that the representations and warranties set forth in
Article III of the Agreement shall be true and correct in all material respects
on and as of the date hereof with the same effect as though made on and as of
such date, except to the extent such representations and warranties expressly
relate to an earlier date;
(d) a certificate from a Responsible Officer of each Borrower, dated the
date hereof, and certifying that on such date, no Event of Default or Default
shall have occurred and be continuing;
(e) for its own account all fees due and payable to it and in such amounts
as have been previously agreed upon in writing between the Borrowers and the
Agent in connection with this Amendment and Restatement; and
(f) (i) a certificate of the Secretary or Assistant Secretary of each
Borrower, dated the date hereof and certifying (A) that attached thereto is a
true and complete copy of resolutions duly adopted by the Board of Directors of
such Borrower authorizing the execution, delivery and performance of the
Agreement as hereby amended and restated and the borrowings thereunder, and that
such resolutions have not been modified, rescinded or amended and are in full
force and effect, and (B) as to the incumbency and specimen signature of each
officer executing this Amendment and Restatement or any other document delivered
in connection herewith on behalf of such Borrower and (ii) a certificate of
another officer of each Borrower as to the incumbency and specimen signature of
the Secretary or Assistant Secretary executing the certificate pursuant to (i)
above.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Restatement to be duly executed as of the date first above written.
J. C. PENNEY COMPANY, INC.
By /s/ Robert B. Cavanaugh
----------------------------------------
Name: Robert B. Cavanaugh
Title: Vice President and Treasurer
J. C. PENNEY FUNDING CORPORATION
By /s/ Stephen F. Walsh
----------------------------------------
Name: Stephen F. Walsh
Title: President
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Lender and as Agent
By /s/ Laura E. Loffredo
----------------------------------------
Name: Laura E. Loffredo
Title: Vice President
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Lender and as
Managing Agent
By /s/ J. Casey Cosgrove
----------------------------------------
Name: J. Casey Cosgrove
Title: Assistant Vice President
<PAGE>
BANKERS TRUST COMPANY, as Lender and
as Managing Agent
By /s/ Anthony LoGrippo
----------------------------------------
Name: Anthony LoGrippo
Title: Vice President
THE CHASE MANHATTAN BANK, as Lender
and as Managing Agent
By /s/ Margaret T. Lane
----------------------------------------
Name: Margaret T. Lane
Title: Assistant Vice President
CITIBANK, N.A., as Lender and as Managing
Agent
By /s/ Richard F. Kurth
----------------------------------------
Name: Richard F. Kurth
Title: Vice President
CREDIT SUISSE FIRST BOSTON, as Lender and
as Managing Agent
By /s/ Robert N. Finney
----------------------------------------
Name: Robert N. Finney
Title: Managing Director
By /s/ Thomas G. Muoio
----------------------------------------
Name: Thomas G. Muoio
Title: Vice President
<PAGE>
NATIONSBANK OF TEXAS, N.A., as Lender
and as Managing Agent
By /s/ Suzanne B. Smith
----------------------------------------
Name: Suzanne B. Smith
Title: Vice President
THE BANK OF TOKYO-MITSUBISHI, LTD., as
Lender and as Co-Agent
By /s/ John M. Mearns
----------------------------------------
Name: John M. Mearns
Title: Vice President and Manager
CORESTATES BANK, N.A., as Lender and as
Co-Agent
By /s/ Randal D. Southern
----------------------------------------
Name: Randal D. Southern
Title: Vice President
FLEET NATIONAL BANK, as Lender and as
Co-Agent
By /s/ Thomas J. Bullard
----------------------------------------
Name: Thomas J. Bullard
Title: Vice President
PNC BANK, NATIONAL ASSOCIATION, as
Lender and as Co-Agent
By /s/ Philip K. Liebscher
----------------------------------------
Name: Philip K. Liebscher
Title: Vice President
<PAGE>
ROYAL BANK OF CANADA, as Lender and as
Co-Agent
By /s/ Karen T. Hull
----------------------------------------
Name: Karen T. Hull
Title: Retail Group Manager
WACHOVIA BANK, N.A., as Lender and as
Co-Agent
By /s/ Roderick S. Miles
----------------------------------------
Name: Roderick S. Miles
Title: Senior Vice President
BANKBOSTON, N.A.
By /s/ Judith C. E. Kelly
----------------------------------------
Name: Judith C. E. Kelly
Title: Vice President
THE FIRST NATIONAL BANK OF CHICAGO
By /s/ Catherine A. Muszynski
----------------------------------------
Name: Catherine A. Muszynski
Title: Vice President
FIRST UNION NATIONAL BANK
By /s/ Dennis Harvey
----------------------------------------
Name: Dennis Harvey
Title: Senior Vice President
<PAGE>
MELLON BANK, N.A.
By /s/ Marc T. Kennedy
----------------------------------------
Name: Marc T. Kennedy
Title: Assistant Vice President
NATIONAL AUSTRALIA BANK LIMITED
A.C.N. 004044937
By /s/ Michael G. McHugh
----------------------------------------
Name: Michael g. McHugh
Title: Vice President
SUNTRUST BANK, ATLANTA
By /s/ Todd C. Davis
----------------------------------------
Name: Todd C. Davis
Title: Assistant Vice President
By /s/ John A. Fields, Jr.
----------------------------------------
Name: John A. Fields, Jr.
Title: Vice President
THE BANK OF NEW YORK
By /s/ Charlotte Sohn
----------------------------------------
Name: Charlotte Sohn
Title: Vice President
<PAGE>
WELLS FARGO BANK N.A.
By /s/ Marsha Anderson
----------------------------------------
Name: Marsha Anderson
Title: Vice President
By /s/ Gene Fuentes
----------------------------------------
Name: Gene Fuentes
Title: Vice President
CRESTAR BANK
By /s/ James P. Duval, Jr.
----------------------------------------
Name: James P. Duval, Jr.
Title: Vice President
THE NORTHERN TRUST COMPANY
By /s/ John E. Burda
----------------------------------------
Name: John E. Burda
Title: Second Vice President
BANK OF HAWAII
By /s/ Brenda K. Testerman
----------------------------------------
Name: Brenda K. Testerman
Title: Vice President
BANK ONE, TEXAS N.A.
By /s/ Scott Rhea
----------------------------------------
Name: Scott Rhea
Title: Vice President
<PAGE>
BARCLAYS BANK PLC
By /s/ Gary F. Albanese
----------------------------------------
Name: Gary F. Albanese
Title: Associate Director
CREDIT AGRICOLE INDOSUEZ
By /s/ Katherine L. Abbott
----------------------------------------
Name: Katherine L. Abbott
Title: First Vice President
By /s/ Dean Balice
----------------------------------------
Name: Dean Balice
Title: Senior Vice President
Branch Manger
FIRST SECURITY BANK OF UTAH, N.A.
By /s/ Judy Callister
----------------------------------------
Name: Judy Callister
Title: Vice President
MARINE MIDLAND BANK
By /s/ William M. Holland
----------------------------------------
Name: William M. Holland
Title: Vice President
<PAGE>
ISTITUTO BANCARIO SAN PAOLO DI
TORINO SPA
By /s/ Robert Wurster
----------------------------------------
Name: Robert Wurster
Title: First Vice President
By /s/ Wendell Jones
----------------------------------------
Name: Wendell Jones
Title: Vice President
NORWEST BANK MINNESOTA, N.A.
By /s/ Scott D. Bjelde
----------------------------------------
Name: Scott D. Bjelde
Title: Vice President
THE SAKURA BANK, LTD.
By /s/ Yasumasa Kikuchi
----------------------------------------
Name: Yasumasa Kikuchi
Title: Senior Vice President
STATE STREET BANK & TRUST COMPANY
By /s/ Johnny Ip
----------------------------------------
Name: Johnny Ip
Title: Vice President
<PAGE>
THE FUJI BANK, LTD.
HOUSTON AGENCY
By /s/ Philip C. Lauinger III
----------------------------------------
Name: Philip C. Lauinger III
Title: Vice President & Manager
U.S. BANK NATIONAL ASSOCIATION
By /s/ David A. Draxler
----------------------------------------
Name: David A. Draxler
Title: Vice President
FIRSTAR BANK MILWAUKEE, N.A.
By /s/ James Spredemann
----------------------------------------
Name: James Spredemann
Title: Vice President
HIBERNIA NATIONAL BANK
By /s/ Troy J. Villafarra
----------------------------------------
Name: Troy J. Villafarra
Title: Vice President
THE YASUDA TRUST AND BANKING CO.,
LTD., NEW YORK BRANCH
By /s/ Rohn J. Laudenschlager
----------------------------------------
Name: Rohn J. Laudenschlager
Title: Senior Vice President
<PAGE>
UMB BANK, N.A.
By /s/ David Proffitt
----------------------------------------
Name: David Proffitt
Title: Senior Vice President
<PAGE>
DEPARTING LENDERS
-----------------
THE CANADIAN IMPERIAL BANK OF
COMMERCE
By /s/ Elizabeth Fischer
----------------------------------------
Name: Elizabeth Fischer
Title: CIBC Oppenheimer Corp., as Agent
UNION BANK OF SWITZERLAND, NEW YORK BRANCH
By /s/ Mary V. Turnbach
----------------------------------------
Name: Mary V. Turnbach
Title: Assistant Treasurer
By /s/ Paula Mueller
----------------------------------------
Name: Paula Mueller
Title: Vice President
BANQUE NATIONALE DE PARIS
By /s/ David P. Camp
----------------------------------------
Name: David P. Camp
Title: Banking Officer
DAI-ICHI KANGYO BANK, LTD.
By /s/ Seiji Imai
----------------------------------------
Name: Seiji Imai
Title: Vice President
<PAGE>
COMPAGNIE FINANCIERE DE CIC ET DE
L'UNION EUROPEENNE
By /s/ Martha Skidmore
----------------------------------------
Name: Martha Skidmore
Title: Vice President
By /s/ Eric Longuet
----------------------------------------
Name: Eric Longuet
Title: Vice President
THE INDUSTRIAL BANK OF JAPAN, TRUST COMPANY
By /s/ Kazutoshi Kuwahara
----------------------------------------
Name: Kazutoshi Kuwahara
Title: Executive Vice President
The Industrial Bank of Japan, Limited
Houston Office (Authorized Representative)
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED
By /s/ Sadao Muraoka
----------------------------------------
Name: Sadao Muraoka
Title: Head of Southwest Region
THE SANWA BANK LTD.
By /s/ Warren G. Parham
----------------------------------------
Name: Warren G. Parham
Title: Vice President
<PAGE>
WELLS FARGO BANK (TEXAS), N.A.
By /s/ Ken Taylor
----------------------------------------
Name: Ken Taylor
Title: Assistant Vice President
<PAGE>
COMMITMENT SCHEDULE
-------------------
I. Continuing Lenders
NAME OF LENDER AND APPLICABLE LENDING OFFICE COMMITMENT
Morgan Guaranty Trust Company of New York $87,500,000
Bank of America National Trust and Savings Association $72,500,000
Bankers Trust Company $72,500,000
The Chase Manhattan Bank $72,500,000
Citibank, N.A. $72,500,000
Credit Suisse First Boston $72,500,000
NationsBank of Texas, N.A. $72,500,000
The Bank of Tokyo-Mitsubishi, Ltd. $55,000,000
CoreStates Bank, N.A. $55,000,000
Fleet National Bank $55,000,000
PNC Bank, National Association $55,000,000
Royal Bank of Canada $55,000,000
Wachovia Bank, N.A. $55,000,000
BankBoston $37,500,000
The First National Bank of Chicago $37,500,000
First Union National Bank $37,500,000
Mellon Bank, N.A. $37,500,000
National Australia Bank Limited $37,500,000
SunTrust Bank, Atlanta $37,500,000
The Bank of New York $37,500,000
Wells Fargo Bank N.A. $37,500,000
Crestar Bank $25,000,000
2
<PAGE>
NAME OF LENDER AND APPLICABLE LENDING OFFICE COMMITMENT
The Northern Trust Company $25,000,000
Bank of Hawaii $20,000,000
Bank One, Texas N.A. $20,000,000
Barclays Bank PLC $20,000,000
Credit Agricole Indosuez $20,000,000
First Security Bank of Utah, N.A. $20,000,000
Marine Midland Bank $20,000,000
Istituto Bancario San Paolo Di Torino S.p.A $20,000,000
Norwest Bank Minnesota, N.A. $20,000,000
The Sakura Bank, Ltd. $20,000,000
State Street Bank & Trust Company $20,000,000
The Fuji Bank, Ltd., Houston Agency $20,000,000
U.S. Bank National Association $20,000,000
Firstar Bank Milwaukee, N.A. $17,500,000
Hibernia National Bank $15,000,000
The Yasuda Trust and Banking Co., Ltd., New York Branch $15,000,000
UMB Bank, N.A. $10,000,000
2
<PAGE>
II. Departing Lenders
NAME OF LENDER AND APPLICABLE LENDING OFFICE COMMITMENT
Banque Nationale de Paris $ 0
The Canadian Imperial Bank of Commerce $ 0
Compagnie Financiere de CIC et de L'Union Europeenne $ 0
Dai-Ichi Kangyo Bank, Ltd. $ 0
The Industrial Bank of Japan Ltd. $ 0
The Long Term Credit Bank of Japan, Ltd. $ 0
The Sanwa Bank Ltd. $ 0
Union Bank of Switzerland $ 0
Wells Fargo Bank (Texas), N.A. $ 0
Total $1,500,000,000
==============
3
<PAGE>
EXHIBIT A
ASSIGNMENT AND ASSUMPTION AGREEMENT
ASSIGNMENT AND ASSUMPTION AGREEMENT dated as of _________, _______ between
[NAME OF ASSIGNOR] (the "ASSIGNOR") and [NAME OF ASSIGNEE] (the "ASSIGNEE").
WHEREAS, this Assignment and Assumption Agreement (the "AGREEMENT") relates
to the Amended and Restated 364-Day Revolving Credit Agreement dated as of
November 21, 1997, among J. C. PENNEY COMPANY, INC. and J. C. PENNEY FUNDING
CORPORATION (the "BORROWERS"), the LENDERS listed on the signature pages thereto
(the "LENDERS"), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the
"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 (the "MANAGING
AGENTS") (as amended from time to time, the "CREDIT AGREEMENT");
WHEREAS, as provided under the Credit Agreement, the Assignor has a
Commitment to make Standby Loans to the Borrower in an aggregate principal
amount at any time outstanding not to exceed $____________;
WHEREAS, [Standby] Loans made to the Borrower by the Assignor under the
Credit Agreement in the aggregate principal amount of $__________ are
outstanding at the date hereof; and
WHEREAS, the Assignor proposes to assign to the Assignee all of the rights
of the Assignor under the Credit Agreement in respect of a portion of its
Commitment thereunder in an amount equal to $__________ (the "ASSIGNED AMOUNT"),
together with a corresponding portion of each of its outstanding [Standby]
Loans, and the Assignee proposes to accept such assignment and assume the
corresponding obligations of the Assignor under the Credit Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
contained herein, the parties hereto agree as follows:
Section 1. Definitions. All capitalized terms not otherwise defined
herein have the respective meanings set forth in the Credit Agreement.
<PAGE>
Section 2. Assignment. The Assignor hereby assigns and sells to the
Assignee all of the rights of the Assignor under the Credit Agreement to the
extent of the Assigned Amount and a corresponding portion of each of its
outstanding [Standby] Loans, and the Assignee hereby accepts such assignment
from the Assignor and assumes all of the obligations of the Assignor under the
Credit Agreement to the extent of the Assigned Amount. Upon the execution and
delivery hereof by the Assignor and the Assignee [and the execution of the
consent attached hereto by the Borrowers and the Agent] (1) and the payment
of the amounts specified in Section 3 required to be paid on the date hereof (i)
the Assignee shall, as of the effective date hereof, succeed to the rights and
be obligated to perform the obligations of a Lender under the Credit Agreement
with a Commitment in an amount equal to the Assigned Amount and acquire the
rights of the Assignor with respect to a corresponding portion of each of the
Assignor's outstanding [Standby] Loans and (ii) the Commitment of the Assignor
shall, as of the date hereof, be reduced by the Assigned Amount, and the
Assignor shall be released from its obligations under the Credit Agreement to
the extent such obligations have been assumed by the Assignee. The assignment
provided for herein shall be without recourse to the Assignor.
Section 3. Payments. As consideration for the assignment and sale
contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the
effective date hereof in Federal funds the amount heretofore agreed between
them. (2) Facility fees accrued before the date hereof are for the account
of the Assignor and such fees accruing on and after the date hereof with respect
to the Assigned Amount are for the account of the Assignee. Each of the
Assignor and the Assignee agrees that if it receives any amount under the Credit
Agreement which is for the account of the other party hereto, it shall receive
the same for the account of such other party to the extent of such other party's
interest therein and promptly pay the same to such other party.
Section 4. Effective Date. This Agreement shall become or be deemed to be
effective on ___________________ ____, _________. (3)
- - -----------------------
(1) Delete if consent is not required.
(2) Amount should combine principal together with accrued interest and
breakage compensation, if any, to be paid by the Assignee, net of any portion of
any upfront fee to be paid by the Assignor to the Assignee. It may be preferable
in an appropriate case to specify these amounts generically or by formula rather
than as a fixed sum.
(3) Effective date of assignment. Must be at least five days after
execution of this instrument.
2
<PAGE>
[Section 5. Consent of the Borrowers and the Agent. This Agreement is
conditioned upon the consent of the Borrowers and the Agent pursuant to Section
9.04(b)(i) of the Credit Agreement.] (4)
Section 6. Confirmation by Assignee. The Assignee hereby confirms and
agrees to the matters set forth in Section 9.04(c) of the Credit Agreement.
Section 7. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
Section 8. Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered by their duly authorized officers as of the date first
above written.
[NAME OF ASSIGNOR]
By:
-----------------------------------------
Name:
Title:
[NAME OF ASSIGNEE]
By:
-----------------------------------------
Name:
Title:
[The undersigned consent to the foregoing assignment.]
- - -------------------
(4) Delete if consent is not required.
3
<PAGE>
J. C. PENNEY COMPANY, INC.
By:
-----------------------------------------
Name:
Title:
J. C. PENNEY FUNDING
CORPORATION
By:
-----------------------------------------
Name:
Title:
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as Agent
By:
-----------------------------------------
Name:
Title:
4
<PAGE>
EXHIBIT B
---------
November 21, 1997
Each of the lenders referred to below
Re: Amended and Restated 364-Day Revolving Credit Agreement of
J. C. Penney Company, Inc. and
J. C. Penney Funding Corporation
Dear Ladies and Gentlemen:
As the General Counsel of J. C. Penney Company, Inc., a Delaware
corporation ("JCPenney"), and of J. C. Penney Funding Corporation, a Delaware
corporation ("Funding" and, together with JCPenney, "Borrowers"), I have been
asked to render an opinion pursuant to Section 9(b) of the Amended and Restated
364-Day Revolving Credit Agreement dated as of November 21, 1997 among the
Borrowers, Morgan Guaranty Trust Company of New York, as Agent (the "Agent"),
the lenders listed on the signature pages thereof (the "Lenders"), 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 (the "Managing Agents") (the "Amendment and
Restatement") which amends and restates the 364-Day Revolving Credit Agreement
dated as of December 16, 1993, as amended and restated with new Lenders as of
December 7, 1994, as amended with new Lenders as of December 6, 1995 and as
amended and restated as of December 3, 1996 (such Credit Agreement, as amended
and restated by the Amendment and Restatement, the "Credit Agreement").
In rendering the opinion set forth below, I have examined originals,
photostatic, or certified copies of the Credit Agreement, the respective
corporate records and documents of the Borrowers, copies of public documents,
certificates of the officers or representatives of the Borrowers, and such other
instruments and documents, and have made such inquiries, as I have deemed
necessary as a basis for such opinion. In making such examinations, I have
assumed the genuineness of all signatures (other than the signatures of the
Borrowers) and the authenticity of all documents submitted to me as originals,
the conformity to original documents of all documents submitted to me as
certified or photostatic copies, and the authenticity of the originals of such
latter documents. As to questions of fact material to such opinion, to the
extent I deemed necessary, I have relied upon the representations and warranties
of the Borrowers made in the Credit Agreement
<PAGE>
and upon certificates of the officers of the Borrowers. Capitalized terms not
otherwise defined in this opinion letter have the meanings specified in the
Credit Agreement.
Based upon the foregoing, I am of the opinion that:
1. Each of the Borrowers has been duly incorporated and is validly
existing and in good standing under the laws of the State of Delaware, and is
duly qualified as a foreign corporation and in good standing under the laws of
each jurisdiction where the failure to so qualify would have a Material Adverse
Effect. Each of the Borrowers has the requisite corporate power and authority to
own, pledge, and operate its properties and assets, to lease the property it
operates under lease, and to conduct its business as now conducted.
2. The execution, delivery, and performance by the Borrowers of the
Credit Agreement, the Borrowings by the Borrowers under the Credit Agreement (i)
are within the corporate power of each of the Borrowers; (ii)have been duly
authorized by each of the Borrowers by all necessary corporate action; (iii) are
not in contravention of JCPenney's Restated Certificate of Incorporation,
Funding's Certificate of Incorporation, as amended, or either of the Borrower's
bylaws; (iv) to the best of my knowledge do not violate any material law,
statute, rule, or regulation, or any material order of any Governmental
Authority, applicable to either of the Borrowers; (v) do not conflict with or
result in the breach of, or constitute a default under, the material borrowing
indentures, agreements, or other instruments of either of the Borrowers; (vi) do
not result in the creation or imposition of any Lien upon any of the property or
assets of either of the Borrowers other than any Lien created by the Credit
Agreement; and (vii) do not require the consent or approval of, or any filing
with, any Governmental Authority or any other person party to those agreements
described above other than those that have been obtained or made or where the
failure to obtain such consent or approval would not result in a Material
Adverse Effect.
3. The Credit Agreement has been duly executed and delivered by each of
the Borrowers and constitutes a legal, valid, and binding obligation of each
such Borrower, enforceable against such Borrower in accordance with its terms,
except as such enforcement may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium, and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
4. Neither Borrower is an "investment company" within the meaning of the
Investment Company Act of 1940, as amended, or a "public-utility company" or a
"holding company" within the meaning of the Public Utility Holding Company Act
of 1935, as amended.
2
<PAGE>
5. To the best of my knowledge, except as set forth in Schedule 3.09 of
the Credit Agreement, no litigation by or before any Governmental Authority is
now pending or threatened against JCPenney or Funding (i) which involves the
Credit Agreement or (ii) as to which there is a reasonable possibility of an
adverse determination and which, if adversely determined, would, individually or
in the aggregate result in a Material Adverse Effect.
6. The Support Agreements have been duly executed and delivered by
JCPenney and, where applicable, Funding and, as of the date hereof, are in full
force and effect in accordance with their terms.
The opinions expressed herein are limited to the laws of the State of
Delaware with respect to the opinions provided in paragraph 1 (except as to due
qualification as a foreign corporation and good standing under the laws of other
jurisdictions) and clauses (i), (ii), and (iii) of paragraph 2. The other
opinions expressed are limited to the laws of the State of New York and the laws
of the United States. I do not express any opinion herein concerning any laws
of any other jurisdictions. This opinion is furnished to you in connection with
the transactions contemplated by the Credit Agreement, and may not be relied
upon by any other person, firm, or corporation for any purpose or by you in any
other context without my prior written consent.
Very truly yours,
Charles R. Lotter
Executive Vice President,
Secretary and General Counsel
3
<PAGE>
EXHIBIT 4(G)
AMENDED AND RESTATED FIVE-YEAR REVOLVING CREDIT
AGREEMENT
AMENDED AND RESTATED FIVE-YEAR REVOLVING CREDIT AGREEMENT dated as of
November 21, 1997 among J. C. PENNEY COMPANY, INC. and J. C. PENNEY FUNDING
CORPORATION (the "BORROWERS"), the LENDERS listed on the signature pages hereof
(the "LENDERS"), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the
"AGENT"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (successor
to 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
Managing Agents (the "MANAGING AGENTS").
W I T N E S S E T H:
WHEREAS, certain of the parties hereto have heretofore entered into a
Five-Year Revolving Credit Agreement dated as of December 16, 1993, as amended
and restated as of December 7, 1994, as amended as of December 6, 1995, and as
amended and restated as of December 3, 1996 (the "AGREEMENT"); and
WHEREAS, the parties hereto desire to amend such Agreement as set forth
herein and to restate the Agreement in its entirety to read as set forth in the
Agreement with the amendments specified below;
NOW, THEREFORE, the parties hereto agree as follows:
Section 1. Definitions; References. Unless otherwise specifically defined
herein, each term used herein which is defined in the Agreement shall have the
meaning assigned to such term in the Agreement. Each reference to
<PAGE>
"HEREOF", "HEREUNDER", "HEREIN" and "HEREBY" and each other similar reference
and each reference to "THIS AGREEMENT" and each other similar reference
contained in the Agreement shall from and after the date hereof refer to the
Agreement as amended and restated hereby.
Section 2. Managing Agents; Co-Agents. (a) Each reference to "Co-Agent"
and "Co-Agents" in the Agreement as heretofore in effect is changed to "Managing
Agent" and "Managing Agents" respectively.
(b) The following new definition is added to Section 1.01 of the Agreement
immediately after "Closing Date":
"Co-Agents" shall mean the Lenders who are indicated as being Co-Agents on
---------
the signature pages hereof.
(c) The last sentence of Article VIII is amended to read in its entirety
as follows:
No Managing Agent or Co-Agent shall have any duties or responsibilities
hereunder in its capacity as such.
Section 3. Extension of Maturity Date. (a) The definition of "MATURITY
DATE" in Section 1.01 of the Agreement is amended to read in its entirety as
follows:
"MATURITY DATE" shall mean November 21, 2002.
(b) The date "December 3, 2001" in Section 2.11(d) of the Agreement is
changed to "November 21, 2002".
Section 4. Financial Statements. (a) Each reference to "January 27, 1996"
in Sections 3.05 and 3.06 of the Agreement is changed to "January 25, 1997".
(b) The date "July 27, 1996" in Section 3.05 of the Agreement is changed
to "July 26, 1997".
Section 5. Confirmation of Guaranty. J. C. Penney Company, Inc. confirms
that its subordinated Guaranty of the obligations of J. C. Penney Funding
Corporation dated as of December 3, 1996 shall apply to the obligations of J. C.
Penney Funding Corporation under the Agreement as amended and restated hereby.
2
<PAGE>
Section 6. Changes in Commitments. With effect from and including the
date this Amendment and Restatement becomes effective in accordance with Section
9 hereof, (i) each Person listed on the signature pages hereof which is not a
party to the Agreement shall become a Lender party to the Agreement, (ii the
Commitment of each Lender shall be the amount set forth opposite the name of
such Lender on the Commitment Schedule annexed hereto and (iii) Schedule 2.01 to
the Agreement shall be amended to read as set forth in Part I of said Commitment
Schedule. Any Lender whose Commitment is changed to zero shall upon such
effectiveness cease to be a Lender party to the Agreement, and all accrued fees
and other amounts payable under the Agreement for the account of such Lender
shall be due and payable on such date; provided that, subject to Section 2.20,
the provisions of Sections 2.13, 2.15, 2.19 and 9.05 of the Agreement shall
continue to inure to the benefit of each such Lender.
Section 7. Assignments. (a) The phrase "in substantially the form of
Exhibit E" is added to clause (iv) of the proviso to Section 9.04(b) of the
-------
Agreement immediately following the words "an instrument".
(b) Exhibit A hereto is added to the Agreement as Exhibit E thereto.
(c) The definition of "ELIGIBLE ASSIGNEE" is amended by the addition of
the following clause (d):
and (d) with the prior written consent of the Borrowers, any other
financial institution.
Section 8. Governing Law. This Amendment and Restatement shall be
governed by and construed in accordance with the laws of the State of New York.
Section 9. Counterparts; Conditions to Effectiveness. This Amendment and
Restatement may be signed in any number of counterparts, each of which shall be
an original, with the same effect as if the signatures thereto and hereto were
upon the same instrument. This Amendment and Restatement shall become effective
as of the date hereof when the Agent shall have received:
(a) duly executed counterparts hereof signed by the Borrowers and all of
the Lenders (or, in the case of any party as to which an executed counterpart
shall not have been received, the Agent shall have received telegraphic, telex
or other written confirmation from such party of execution of a counterpart
hereof by such party);
(b) an opinion of Charles R. Lotter, General Counsel for the Borrowers,
dated the date hereof and addressed to the Lenders, to the effect set forth in
3
<PAGE>
Exhibit B hereto, and the Borrowers hereby instruct such counsel to deliver such
opinion to the Agent;
(c) a certificate from a Responsible Officer of each Borrower, dated the
date hereof, and certifying that the representations and warranties set forth in
Article III of the Agreement shall be true and correct in all material respects
on and as of the date hereof with the same effect as though made on and as of
such date, except to the extent such representations and warranties expressly
relate to an earlier date;
(d) a certificate from a Responsible Officer of each Borrower, dated the
date hereof, and certifying that on such date, no Event of Default or Default
shall have occurred and be continuing;
(e) for its own account all fees due and payable to it and in such amounts
as have been previously agreed upon in writing between the Borrowers and the
Agent in connection with this Amendment and Restatement; and
(f) (i) a certificate of the Secretary or Assistant Secretary of each
Borrower, dated the date hereof and certifying (A) that attached thereto is a
true and complete copy of resolutions duly adopted by the Board of Directors of
such Borrower authorizing the execution, delivery and performance of the
Agreement as hereby amended and restated and the borrowings thereunder, and that
such resolutions have not been modified, rescinded or amended and are in full
force and effect, and (B) as to the incumbency and specimen signature of each
officer executing this Amendment and Restatement or any other document delivered
in connection herewith on behalf of such Borrower and (ii) a certificate of
another officer of each Borrower as to the incumbency and specimen signature of
the Secretary or Assistant Secretary executing the certificate pursuant to (i)
above.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Restatement to be duly executed as of the date first above written.
J. C. PENNEY COMPANY, INC.
By /s/ Robert B. Cavanaugh
------------------------------------------
Name: Robert B. Cavanaugh
Title: Vice President and Treasurer
J. C. PENNEY FUNDING CORPORATION
By /s/ Stephen F. Walsh
------------------------------------------
Name: Stephen F. Walsh
Title: President
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Lender and as Agent
By /s/ Laura Loffredo
------------------------------------------
Name: Laura Loffredo
Title: Vice President
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Lender and as
Managing Agent
By /s/ J. Casey Cosgrove
------------------------------------------
Name: J. Casey Cosgrove
Title: Assistant Vice President
<PAGE>
BANKERS TRUST COMPANY, as Lender and
as Managing Agent
By /s/ Anthony LoGrippo
------------------------------------------
Name: Anthony LoGrippo
Title: Vice President
THE CHASE MANHATTAN BANK, as Lender
and as Managing Agent
By /s/ Margaret T. Lane
------------------------------------------
Name: Margaret T. Lane
Title: Assistant Vice President
CITIBANK, N.A., as Lender and
as Managing Agent
By /s/ Richard F. Kurth
------------------------------------------
Name: Richard F. Kurth
Title: Vice President
CREDIT SUISSE FIRST BOSTON, as Lender and
as Managing Agent
By /s/ Robert N. Finney
------------------------------------------
Name: Robert N. Finney
Title: Managing Director
By /s/ Thomas G. Muoio
------------------------------------------
Name: Thomas G. Muoio
Title: Vice President
<PAGE>
NATIONSBANK OF TEXAS, N.A., as Lender
and as Managing Agent
By /s/ Suzanne B. Smith
------------------------------------------
Name: Suzanne B. Smith
Title: Vice President
THE BANK OF TOKYO-MITSUBISHI, LTD., as
Lender and as Co-Agent
By /s/ John M. Mearns
------------------------------------------
Name: John M. Mearns
Title: Vice President and Manager
CORESTATES BANK, N.A., as Lender and as
Co-Agent
By /s/ Randal D. Southern
------------------------------------------
Name: Randal D. Southern
Title: Vice President
FLEET NATIONAL BANK, as Lender and as
Co-Agent
By /s/ Thomas J. Bullard
------------------------------------------
Name: Thomas J. Bullard
Title: Vice President
PNC BANK, NATIONAL ASSOCIATION, as
Lender and as Co-Agent
By /s/ Philip K. Liebscher
------------------------------------------
Name: Philip K. Liebscher
Title: Vice President
<PAGE>
ROYAL BANK OF CANADA, as Lender and as
Co-Agent
By /s/ Karen T. Hull
------------------------------------------
Name: Karen T. Hull
Title: Retail Group Manager
WACHOVIA BANK, N.A., as Lender and as
Co-Agent
By /s/ Roderick S. Miles
------------------------------------------
Name: Roderick S. Miles
Title: Senior Vice President
BANKBOSTON, N.A.
By /s/ Judith C. E. Kelly
------------------------------------------
Name: Judith C. E. Kelly
Title: Vice President
THE FIRST NATIONAL BANK OF CHICAGO
By /s/ Catherine A. Muszynski
------------------------------------------
Name: Catherine A. Muszynski
Title: Vice President
FIRST UNION NATIONAL BANK
By /s/ Dennis Harvey
------------------------------------------
Name: Dennis Harvey
Title: Senior Vice President
<PAGE>
MELLON BANK, N.A.
By /s/ Marc T. Kennedy
------------------------------------------
Name: Marc T. Kennedy
Title: Assistant Vice President
NATIONAL AUSTRALIA BANK LIMITED
A.C.N. 004044937
By /s/ Michael G. McHugh
------------------------------------------
Name: Michael G. McHugh
Title: Vice President
SUNTRUST BANK, ATLANTA
By /s/ Todd C. Davis
------------------------------------------
Name: Todd C. Davis
Title: Assistant Vice President
By /s/ John A. Fields, Jr.
------------------------------------------
Name: John A. Fields, Jr.
Title: Vice President
THE BANK OF NEW YORK
By /s/ Charlotte Sohn
------------------------------------------
Name: Charlotte Sohn
Title: Vice President
<PAGE>
WELLS FARGO BANK N.A.
By /s/ Marsha Anderson
------------------------------------------
Name: Marsha Anderson
Title: Vice President
By /s/ Gene Fuentes
------------------------------------------
Name: Gene Fuentes
Title: Vice President
CRESTAR BANK
By /s/ James P. Duval, Jr.
------------------------------------------
Name: James P. Duval, Jr.
Title: Vice President
THE NORTHERN TRUST COMPANY
By /s/ John E. Burda
------------------------------------------
Name: John E. Burda
Title: Second Vice President
BANK OF HAWAII
By /s/ Brenda K. Testermann
------------------------------------------
Name: Brenda K. Testermann
Title: Vice President
BANK ONE, TEXAS N.A.
By /s/ Scott Rhea
------------------------------------------
Name: Scott Rhea
Title: Vice President
<PAGE>
BARCLAYS BANK PLC
By /s/ Gary F. Albanese
------------------------------------------
Name: Gary F. Albanese
Title: Associate Director
CREDIT AGRICOLE INDOSUEZ
By /s/ Katherine L. Abbott
------------------------------------------
Name: Katherine L. Abbott
Title: First Vice President
By /s/ Dean Balice
------------------------------------------
Name: Dean Balice
Title: Senior Vice President
Branch Manager
FIRST SECURITY BANK OF UTAH, N.A.
By /s/ Judy Callister
------------------------------------------
Name: Judy Callister
Title: Vice President
MARINE MIDLAND BANK
By /s/ William M. Holland
------------------------------------------
Name: William M. Holland
Title: Vice President
<PAGE>
ISTITUTO BANCARIO SAN PAOLO DI
TORINO SPA
By /s/ Robert Wurster
------------------------------------------
Name: Robert Wurster
Title: First Vice President
By /s/ Wendell Jones
------------------------------------------
Name: Wendell Jones
Title: Vice President
NORWEST BANK MINNESOTA, N.A.
By /s/ Scott D. Bjelde
------------------------------------------
Name: Scott D. Bjelde
Title: Vice President
THE SAKURA BANK, LTD.
By /s/ Yasumasa Kikuchi
------------------------------------------
Name: Yasumasa Kikuchi
Title: Senior Vice President
STATE STREET BANK & TRUST COMPANY
By /s/ Johnny Ip
------------------------------------------
Name: Johnny Ip
Title: Vice President
<PAGE>
THE FUJI BANK, LTD.
HOUSTON AGENCY
By /s/ Philip C. Lauinger III
------------------------------------------
Name: Philip C. Lauinger
Title: Vice President and Manager
U.S. BANK NATIONAL ASSOCIATION
By /s/ David A. Draxler
------------------------------------------
Name: David A. Draxler
Title: Vice President
FIRSTAR BANK MILWAUKEE, N.A.
By /s/ James Spredemann
------------------------------------------
Name: James Spredemann
Title: Vice President
HIBERNIA NATIONAL BANK
By /s/ Troy J. Villafarra
------------------------------------------
Name: Troy J. Villafarra
Title: Vice President
THE YASUDA TRUST AND BANKING CO.,
LTD., NEW YORK BRANCH
By /s/ Rohn M. Laudenschlager
------------------------------------------
Name: Rohn M. Laudenschlager
Title: Senior Vice President
<PAGE>
UMB BANK, N.A.
By /s/ David Proffitt
------------------------------------------
Name: David Proffitt
Title: Senior Vice President
<PAGE>
DEPARTING LENDERS
-----------------
THE CANADIAN IMPERIAL BANK OF
COMMERCE
By /s/ Elizabeth O. Fischer
------------------------------------------
Name: Elizabeth O. Fischer
Title: Executive Director
CIBC Oppenheimer Corp., as Agent
UNION BANK OF SWITZERLAND, NEW YORK BRANCH
By /s/ Paula Mueller
------------------------------------------
Name: Paula Mueller
Title: Vice President
By /s/ Mary V. Turnbach
------------------------------------------
Name: Mary V. Turnbach
Title: Assistant Treasurer
BANQUE NATIONALE DE PARIS
By /s/ David P. Camp
------------------------------------------
Name: David P. Camp
Title: Banking Officer
DAI-ICHI KANGYO BANK, LTD.
By /s/ Seiji Imai
------------------------------------------
Name: Seiji Imai
Title: Vice President
<PAGE>
COMPAGNIE FINANCIERE DE CIC ET DE
L'UNION EUROPEENNE
By /s/ Martha Skidmore
------------------------------------------
Name: Martha Skidmore
Title: Vice President
By /s/ Eric Longuet
------------------------------------------
Name: Eric Longuet
Title: Vice President
THE INDUSTRIAL BANK OF JAPAN TRUST COMPANY
By /s/ Kazutoshi Kuwahara
------------------------------------------
Name: Kazutoshi Kuwahara
Title: Executive Vice President
The Industrial Bank of Japan, Limited,
Houston Office (Authorized Representative)
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED
By /s/ Sadao Muraoka
------------------------------------------
Name: Sadao Muraoka
Title: Head of Southwest Region
THE SANWA BANK LTD.
By /s/ Warren G. Parham
------------------------------------------
Name: Warren G. Parham
Title: Vice President
<PAGE>
WELLS FARGO BANK (TEXAS), N.A.
By /s/ Ken Taylor
------------------------------------------
Name: Ken Taylor
Title: Assistant Vice President
<PAGE>
COMMITMENT SCHEDULE
-------------------
I. Continuing Lenders
NAME OF LENDER AND APPLICABLE LENDING OFFICE COMMITMENT
Morgan Guaranty Trust Company of New York $87,500,000
Bank of America National Trust and Savings Association $72,500,000
Bankers Trust Company $72,500,000
The Chase Manhattan Bank $72,500,000
Citibank, N.A. $72,500,000
Credit Suisse First Boston $72,500,000
NationsBank of Texas, N.A. $72,500,000
The Bank of Tokyo-Mitsubishi, Ltd. $55,000,000
CoreStates Bank, N.A. $55,000,000
Fleet National Bank $55,000,000
PNC Bank, National Association $55,000,000
Royal Bank of Canada $55,000,000
Wachovia Bank, N.A. $55,000,000
BankBoston $37,500,000
The First National Bank of Chicago $37,500,000
First Union National Bank $37,500,000
Mellon Bank, N.A. $37,500,000
National Australia Bank Limited $37,500,000
SunTrust Bank, Atlanta $37,500,000
The Bank of New York $37,500,000
Wells Fargo Bank N.A. $37,500,000
Crestar Bank $25,000,000
2
<PAGE>
NAME OF LENDER AND APPLICABLE LENDING OFFICE COMMITMENT
The Northern Trust Company $25,000,000
Bank of Hawaii $20,000,000
Bank One, Texas N.A. $20,000,000
Barclays Bank PLC $20,000,000
Credit Agricole Indosuez $20,000,000
First Security Bank of Utah, N.A. $20,000,000
Marine Midland Bank $20,000,000
Istituto Bancario San Paolo Di Torino S.p.A $20,000,000
Norwest Bank Minnesota, N.A. $20,000,000
The Sakura Bank, Ltd. $20,000,000
State Street Bank & Trust Company $20,000,000
The Fuji Bank, Ltd., Houston Agency $20,000,000
U.S. Bank National Association $20,000,000
Firstar Bank Milwaukee, N.A. $17,500,000
Hibernia National Bank $15,000,000
The Yasuda Trust and Banking Co., Ltd., New York Branch $15,000,000
UMB Bank, N.A. $10,000,000
2
<PAGE>
II. Departing Lenders
NAME OF LENDER AND APPLICABLE LENDING OFFICE COMMITMENT
Banque Nationale de Paris $0
The Canadian Imperial Bank of Commerce $0
Compagnie Financiere de CIC et de L'Union Europeenne $0
Dai-Ichi Kangyo Bank, Ltd. $0
The Industrial Bank of Japan Ltd. $0
The Long Term Credit Bank of Japan, Ltd. $0
The Sanwa Bank Ltd. $0
Union Bank of Switzerland $0
Wells Fargo Bank (Texas), N.A. $0
Total $1,500,000,000
==============
3
<PAGE>
EXHIBIT A
ASSIGNMENT AND ASSUMPTION AGREEMENT
ASSIGNMENT AND ASSUMPTION AGREEMENT dated as of _________, _______ between
[NAME OF ASSIGNOR] (the "ASSIGNOR") and [NAME OF ASSIGNEE] (the "ASSIGNEE").
WHEREAS, this Assignment and Assumption Agreement (the "AGREEMENT") relates
to the Amended and Restated Five-Year Revolving Credit Agreement dated as of
November 21, 1997, among J. C. PENNEY COMPANY, INC. and J. C. PENNEY FUNDING
CORPORATION (the "BORROWERS"), the LENDERS listed on the signature pages thereto
(the "LENDERS"), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the
"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 (the "MANAGING
AGENTS") (as amended from time to time, the "CREDIT AGREEMENT");
WHEREAS, as provided under the Credit Agreement, the Assignor has a
Commitment to make Standby Loans to the Borrower in an aggregate principal
amount at any time outstanding not to exceed $____________;
WHEREAS, [Standby] Loans made to the Borrower by the Assignor under the
Credit Agreement in the aggregate principal amount of $__________ are
outstanding at the date hereof; and
WHEREAS, the Assignor proposes to assign to the Assignee all of the rights
of the Assignor under the Credit Agreement in respect of a portion of its
Commitment thereunder in an amount equal to $__________ (the "ASSIGNED AMOUNT"),
together with a corresponding portion of each of its outstanding [Standby]
Loans, and the Assignee proposes to accept such assignment and assume the
corresponding obligations of the Assignor under the Credit Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
contained herein, the parties hereto agree as follows:
Section 1. Definitions. All capitalized terms not otherwise defined
herein have the respective meanings set forth in the Credit Agreement.
<PAGE>
Section 2. Assignment. The Assignor hereby assigns and sells to the
Assignee all of the rights of the Assignor under the Credit Agreement to the
extent of the Assigned Amount and a corresponding portion of each of its
outstanding [Standby] Loans, and the Assignee hereby accepts such assignment
from the Assignor and assumes all of the obligations of the Assignor under the
Credit Agreement to the extent of the Assigned Amount. Upon the execution and
delivery hereof by the Assignor and the Assignee [and the execution of the
consent attached hereto by the Borrowers and the Agent] (1) and the payment
of the amounts specified in Section 3 required to be paid on the date hereof (i)
the Assignee shall, as of the effective date hereof, succeed to the rights and
be obligated to perform the obligations of a Lender under the Credit Agreement
with a Commitment in an amount equal to the Assigned Amount and acquire the
rights of the Assignor with respect to a corresponding portion of each of the
Assignor's outstanding [Standby] Loans and (ii) the Commitment of the Assignor
shall, as of the date hereof, be reduced by the Assigned Amount, and the
Assignor shall be released from its obligations under the Credit Agreement to
the extent such obligations have been assumed by the Assignee. The assignment
provided for herein shall be without recourse to the Assignor.
Section 3. Payments. As consideration for the assignment and sale
contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the
effective date hereof in Federal funds the amount heretofore agreed between
them. (2) Facility fees accrued before the date hereof are for the account
of the Assignor and such fees accruing on and after the date hereof with respect
to the Assigned Amount are for the account of the Assignee. Each of the
Assignor and the Assignee agrees that if it receives any amount under the Credit
Agreement which is for the account of the other party hereto, it shall receive
the same for the account of such other party to the extent of such other party's
interest therein and promptly pay the same to such other party.
Section 4. Effective Date. This Agreement shall become or be deemed to be
effective on ___________________ ____, _________. (3)
- - ----------------------
(1) Delete if consent is not required.
(2) Amount should combine principal together with accrued interest and
breakage compensation, if any, to be paid by the Assignee, net of any portion of
any upfront fee to be paid by the Assignor to the Assignee. It may be
preferable in an appropriate case to specify these amounts generically or by
formula rather than as a fixed sum.
(3) Effective date of assignment. Must be at least five days after execution
of this instrument.
2
<PAGE>
[Section 5. Consent of the Borrowers and the Agent. This Agreement is
conditioned upon the consent of the Borrowers and the Agent pursuant to Section
9.04(b)(i) of the Credit Agreement.] (4)
Section 6. Confirmation by Assignee. The Assignee hereby confirms and
agrees to the matters set forth in Section 9.04(c) of the Credit Agreement.
Section 7. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
Section 8. Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered by their duly authorized officers as of the date first
above written.
[NAME OF ASSIGNOR]
By:
-----------------------------------
Name:
Title:
[NAME OF ASSIGNEE]
By:
-----------------------------------
Name:
Title:
[The undersigned consent to the foregoing assignment.]
- - ----------------------------
(4) Delete if consent is not required.
3
<PAGE>
J. C. PENNEY COMPANY, INC.
By:
-----------------------------------
Name:
Title:
J. C. PENNEY FUNDING
CORPORATION
By:
-----------------------------------
Name:
Title:
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as
Agent
By:
-----------------------------------
Name:
Title:
4
<PAGE>
EXHIBIT B
---------
November 21, 1997
Each of the lenders referred to below
Re: Amended and Restated Five-Year Revolving Credit Agreement of
J. C. Penney Company, Inc. and
J. C. Penney Funding Corporation
Dear Ladies and Gentlemen:
As the General Counsel of J. C. Penney Company, Inc., a Delaware
corporation ("JCPenney"), and of J. C. Penney Funding Corporation, a Delaware
corporation ("Funding" and, together with JCPenney, "Borrowers"), I have been
asked to render an opinion pursuant to Section 9(b) of the Amended and Restated
Five-Year Revolving Credit Agreement dated as of November 21, 1997 among the
Borrowers, Morgan Guaranty Trust Company of New York, as Agent (the "Agent"),
the lenders listed on the signature pages thereof (the "Lenders"), 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 (the "Managing Agents") (the "Amendment and
Restatement") which amends and restates the Five-Year Revolving Credit Agreement
dated as of December 16, 1993, as amended and restated with new Lenders as of
December 7, 1994, as amended with new Lenders as of December 6, 1995 and as
amended and restated as of December 3, 1996 (such Credit Agreement, as amended
and restated by the Amendment and Restatement, the "Credit Agreement").
In rendering the opinion set forth below, I have examined originals,
photostatic, or certified copies of the Credit Agreement, the respective
corporate records and documents of the Borrowers, copies of public documents,
certificates of the officers or representatives of the Borrowers, and such other
instruments and documents, and have made such inquiries, as I have deemed
necessary as a basis for such opinion. In making such examinations, I have
assumed the genuineness of all signatures (other than the signatures of the
Borrowers) and the authenticity of all documents submitted to me as originals,
the conformity to original documents of all documents submitted to me as
certified or photostatic copies, and the authenticity of the originals of such
latter documents. As to questions of fact material to such opinion, to the
extent I deemed necessary, I have relied upon the representations and warranties
of the Borrowers made in the Credit Agreement
<PAGE>
and upon certificates of the officers of the Borrowers. Capitalized terms not
otherwise defined in this opinion letter have the meanings specified in the
Credit Agreement.
Based upon the foregoing, I am of the opinion that:
1. Each of the Borrowers has been duly incorporated and is validly
existing and in good standing under the laws of the State of Delaware, and is
duly qualified as a foreign corporation and in good standing under the laws of
each jurisdiction where the failure to so qualify would have a Material Adverse
Effect. Each of the Borrowers has the requisite corporate power and authority to
own, pledge, and operate its properties and assets, to lease the property it
operates under lease, and to conduct its business as now conducted.
2. The execution, delivery, and performance by the Borrowers of the
Credit Agreement, the Borrowings by the Borrowers under the Credit Agreement (i)
are within the corporate power of each of the Borrowers; (ii)have been duly
authorized by each of the Borrowers by all necessary corporate action; (iii) are
not in contravention of JCPenney's Restated Certificate of Incorporation,
Funding's Certificate of Incorporation, as amended, or either of the Borrower's
bylaws; (iv) to the best of my knowledge do not violate any material law,
statute, rule, or regulation, or any material order of any Governmental
Authority, applicable to either of the Borrowers; (v) do not conflict with or
result in the breach of, or constitute a default under, the material borrowing
indentures, agreements, or other instruments of either of the Borrowers; (vi) do
not result in the creation or imposition of any Lien upon any of the property or
assets of either of the Borrowers other than any Lien created by the Credit
Agreement; and (vii) do not require the consent or approval of, or any filing
with, any Governmental Authority or any other person party to those agreements
described above other than those that have been obtained or made or where the
failure to obtain such consent or approval would not result in a Material
Adverse Effect.
3. The Credit Agreement has been duly executed and delivered by each of
the Borrowers and constitutes a legal, valid, and binding obligation of each
such Borrower, enforceable against such Borrower in accordance with its terms,
except as such enforcement may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium, and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
4. Neither Borrower is an "investment company" within the meaning of the
Investment Company Act of 1940, as amended, or a "public-utility
2
<PAGE>
company" or a "holding company" within the meaning of the Public Utility Holding
Company Act of 1935, as amended.
5. To the best of my knowledge, except as set forth in Schedule 3.09 of
the Credit Agreement, no litigation by or before any Governmental Authority is
now pending or threatened against JCPenney or Funding (i) which involves the
Credit Agreement or (ii) as to which there is a reasonable possibility of an
adverse determination and which, if adversely determined, would, individually or
in the aggregate result in a Material Adverse Effect.
6. The Support Agreements have been duly executed and delivered by
JCPenney and, where applicable, Funding and, as of the date hereof, are in full
force and effect in accordance with their terms.
The opinions expressed herein are limited to the laws of the State of
Delaware with respect to the opinions provided in paragraph 1 (except as to due
qualification as a foreign corporation and good standing under the laws of other
jurisdictions) and clauses (i), (ii), and (iii) of paragraph 2. The other
opinions expressed are limited to the laws of the State of New York and the laws
of the United States. I do not express any opinion herein concerning any laws
of any other jurisdictions. This opinion is furnished to you in connection with
the transactions contemplated by the Credit Agreement, and may not be relied
upon by any other person, firm, or corporation for any purpose or by you in any
other context without my prior written consent.
Very truly yours,
Charles R. Lotter
Executive Vice President,
Secretary and General Counsel
3
<PAGE>
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 1997 ANNUAL REPORT
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
J. C. Penney Funding Corporation ("Funding") is a wholly-owned consolidated
subsidiary of J. C. Penney Company, Inc. ("JCPenney"). The business of Funding
consists of financing a portion of JCPenney's operations through loans to
JCPenney, the purchase of customer receivable balances that arise from the
retail credit sales of JCPenney, or a combination of both. No receivables have
been purchased by Funding since 1985. The loan agreement between Funding and
JCPenney provides for unsecured loans to be made by Funding to JCPenney. Each
loan is evidenced by a revolving promissory note and is payable upon demand in
whole or in part as may be required by Funding. Copies of Funding's loan and
receivables agreements with JCPenney are available upon request.
Funding issues commercial paper through Credit Suisse First Boston Corporation,
J.P. Morgan Securities Inc., Merrill Lynch Money Markets Inc., and Morgan
Stanley & Co. Incorporated to corporate and institutional investors in the
domestic market. The commercial paper is guaranteed by JCPenney on a
subordinated basis. The commercial paper is rated "A1" by Standard & Poor's
Corporation, "P1" by Moody's Investors Service, and "F1" by Fitch Investors
Service, Inc.
Income is derived primarily from earnings on loans to JCPenney and is designed
to produce earnings sufficient to cover interest expense at a coverage ratio of
at least one and one-half times.
In 1997, net income increased to $43 million from $38 million in 1996. Net
income for 1996 decreased from $43 million in 1995. The increase in 1997 is
attributed to higher borrowing levels and higher interest rates. The decrease
in 1996 is attributed to lower borrowing levels and lower interest rates.
Interest expense was $127 million in 1997 compared with $111 million in 1996 and
$128 million in 1995. Interest earned from JCPenney was $193 million in 1997
compared to $169 million in 1996 and $194 million in 1995.
Commercial paper borrowings averaged $2,129 million in 1997 compared to $1,827
million in 1996 and $2,145 million in 1995. The average interest rate on
commercial paper was 5.7 per cent in 1997, up from 5.4 per cent in 1996 and down
from 5.9 percent in 1995.
1997 total short term debt, including commercial paper and borrowings under the
"acquisition" credit facilities entered into in connection with JCPenney's
acquisition of Eckerd Corporation, averaged $2,247 million in 1997 compared to
$2,041 million in 1996, and $2,145 million in 1995. The average interest rate
on the total short term debt was 5.6 per cent in 1997, up from 5.5 per cent in
1996, and down from 5.9 per cent in 1995. The $1.9 billion credit line debt
under the "acquisition" credit facilities was paid off with proceeds from the
4(2) Commercial Paper Program established by Funding in February 1997.
Committed bank credit facilities available to Funding and JCPenney as of January
31, 1998 amounted to $3 billion. The facilities, as amended and restated in
1997, support JCPenney's short term borrowing program, and are comprised of a
$1.5 billion, 364-day revolver, and a $1.5 billion, five-year revolver. The
364-day revolver includes a $750 million seasonal credit line for the August to
January period thus allowing JCPenney to match its seasonal borrowing
requirements. There were no outstanding borrowings under these credit
facilities at January 31, 1998.
JCPenney has initiated actions to address the Year 2000 issue relating to
Funding. It is expected that compliance work will be substantially completed by
the end of 1998. Total costs associated with these efforts are not expected to
have a material impact on the financial results of either JCPenney or Funding.
In addition, Funding has communicated with its commercial paper dealers to
determine their Year 2000 compliance readiness. However, there can be no
guarantee that the systems of these commercial paper dealers on which Funding
relies will be timely converted, or that a failure to convert would not have a
material adverse effect on Funding's operations.
We would like to express our appreciation to the institutional investment
community, as well as to our credit line participants and commercial paper
dealers for their continued support during 1997.
/s/ Robert B. Cavanaugh
Robert B. Cavanaugh
Chairman of the Board
February 26, 1998
2
<PAGE>
STATEMENTS OF INCOME J. C. PENNEY FUNDING CORPORATION
($ in millions)
FOR THE YEAR 1997 1996 1995
------------------------
INTEREST INCOME FROM JCPENNEY....................... $ 193 $ 169 $ 194
INTEREST EXPENSE.................................... 127 111 128
------ ----- -----
INCOME BEFORE INCOME TAXES.......................... 66 58 66
Income taxes..................................... 23 20 23
------ ----- -----
NET INCOME.......................................... $ 43 $ 38 $ 43
====== ===== =====
STATEMENTS OF REINVESTED EARNINGS
($ in millions)
1997 1996 1995
------------------------
BALANCE AT BEGINNING OF YEAR........................ $ 964 $ 926 $ 883
NET INCOME.......................................... 43 38 43
------ ----- -----
BALANCE AT END OF YEAR.............................. $1,007 $ 964 $ 926
====== ===== =====
-----------
See Notes to Financial Statements on page 6
3
<PAGE>
BALANCE SHEETS J. C. PENNEY FUNDING CORPORATION
(In millions except share data)
1997 1996
---- ----
ASSETS
Loans to JCPenney.............................. $2,591 $5,062
====== ======
LIABILITIES AND EQUITY OF JCPENNEY
CURRENT LIABILITIES
Short term debt................................ $1,416 $3,952
Due to JCPenney................................ 23 1
------ ------
TOTAL CURRENT LIABILITIES................. 1,439 3,953
EQUITY OF JCPENNEY
Common stock (including contributed
capital), par value $100:
Authorized, 750,000 shares -
issued and outstanding, 500,000 shares.... 145 145
Reinvested earnings............................ 1,007 964
------ ------
TOTAL EQUITY OF JCPENNEY.................. 1,152 1,109
------ ------
TOTAL LIABILITIES AND EQUITY OF JCPENNEY.. $2,591 $5,062
====== ======
-----------
See Notes to Financial Statements on page 6
4
<PAGE>
STATEMENTS OF CASH FLOWS J. C. PENNEY FUNDING CORPORATION
($ in millions)
FOR THE YEAR 1997 1996 1995
----------------------------
OPERATING ACTIVITIES
Net income.................................... $ 43 $ 38 $ 43
(Increase)Decrease in loans to JCPenney....... 2,471 (2,499) 551
Increase(Decrease) in amount due to JCPenney.. 22 (9) (2)
------- ------- -----
$ 2,536 $(2,470) $ 592
FINANCING ACTIVITIES
Increase(Decrease) in short term debt......... $(2,536) $ 2,470 $(592)
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid................................. $ 127 $ 111 $ 128
Income taxes paid............................. $ 2 $ 28 $ 26
-----------
See Notes to Financial Statements on page 6
5
<PAGE>
INDEPENDENT AUDITORS' REPORT J. C. PENNEY FUNDING CORPORATION
To the Board of Directors of
J. C. Penney Funding Corporation:
We have audited the accompanying balance sheets of J. C. Penney Funding
Corporation as of January 31, 1998, and January 25, 1997, and the related
statements of income, reinvested earnings, and cash flows for each of the years
in the three year period ended January 31, 1998. These financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of J. C. Penney Funding
Corporation as of January 31, 1998, and January 25, 1997, and the results of its
operations and its cash flows for each of the years in the three year period
ended January 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
February 26, 1998
NOTES TO FINANCIAL STATEMENTS
NATURE OF OPERATIONS
- - --------------------
J. C. Penney Funding Corporation ("Funding") is a wholly-owned consolidated
subsidiary of J. C. Penney Company, Inc. ("JCPenney"). The principal business
of Funding consists of financing a portion of JCPenney's operations through
loans to JCPenney. To finance its operations, Funding issues commercial paper,
which is guaranteed by JCPenney on a subordinated basis, to corporate and
institutional investors in the domestic market. Funding has, from time to time,
issued long term debt in public and private markets in the United States and
abroad.
DEFINITION OF FISCAL YEAR
Funding's fiscal year ends on the last Saturday in January. Fiscal 1997 ended
January 31, 1998, fiscal 1996 ended January 25, 1997, and fiscal 1995 ended
January 27, 1996. Fiscal 1997 was a 53 week year; all other years presented are
52 weeks.
COMMERCIAL PAPER PLACEMENT
Funding places commercial paper solely through dealers. The average interest
rate on commercial paper at year end 1997, 1996, and 1995 was 5.7%, 5.5%, and
5.7%, respectively.
SUMMARY OF ACCOUNTING POLICIES
- - ------------------------------
INCOME TAXES
Funding's taxable income is included in the consolidated federal income tax
return of JCPenney. Income taxes in Funding's statement of income are computed
as if Funding filed a separate federal income tax return.
USE OF ESTIMATES
Funding's financial statements have been prepared in conformity with generally
accepted accounting principles. Certain amounts included in the financial
statements are estimated based on currently available information and
management's judgment as to the outcome of future conditions and circumstances.
While every effort is made to ensure the integrity of such estimates, including
the use of third party specialists where appropriate, actual results could
differ from these estimates.
LOANS TO JCPENNEY
- - -----------------
Funding and JCPenney are parties to a Loan Agreement which provides for
unsecured loans, payable on demand, to be made from time to time by Funding to
JCPenney for the general business purposes of JCPenney, subject to the
terms and conditions of the Loan Agreement. Under the terms of the Loan
Agreement, Funding and JCPenney agree upon a mutually-acceptable earnings
coverage of Funding's interest and other fixed charges. The earnings to fixed
charges ratio has historically been at least one and one-half times.
COMMITTED BANK CREDIT FACILITIES
- - --------------------------------
Committed bank credit facilities available to Funding and JCPenney as of January
31, 1998 amounted to $3 billion. The facilities, as amended and restated in
1997, support JCPenney's short term borrowing program, and are comprised of a
$1.5 billion, 364-day revolver, and a $1.5 billion, five-year revolver. The
364-day revolver includes a $750 million seasonal credit line for the August to
January period thus allowing JCPenney to match its seasonal borrowing
requirements. In the first quarter of 1997, JCPenney paid off and retired the
acquisition credit facilities used in connection with its acquisition of Eckerd
Corporation. There were no outstanding borrowings under these credit facilities
at January 31, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- - -----------------------------------
The fair value of short term debt (commercial paper) at January 31, 1998, and
January 25, 1997 approximates the amount as reflected on the balance sheet due
to its short average maturity.
The fair value of loans to JCPenney at January 31, 1998, and January 25, 1997
also approximates the amount reflected on the balance sheet because the loan is
payable on demand and the interest charged on the loan balance is adjusted to
reflect current market interest rates.
-----------
6
<PAGE>
FIVE YEAR FINANCIAL SUMMARY J. C. PENNEY FUNDING CORPORATION
($ in millions)
AT YEAR END 1997 1996 1995 1994 1993
------------------------------------------
CAPITALIZATION
Short term debt
Commercial paper............ $1,416 $2,049 $1,482 $2,074 $1,284
Credit line advance......... -- 1,903 -- -- --
------ ------ ------ ------ ------
Total short term debt..... 1,416 3,952 1,482 2,074 1,284
Equity of JCPenney............. 1,152 1,109 1,071 1,028 996
------ ------ ------ ------ ------
TOTAL CAPITALIZATION.............. $2,568 $5,061 $2,553 $3,102 $2,280
====== ====== ====== ====== ======
COMMITTED BANK CREDIT FACILITIES.. $3,000 $6,000 $3,000 $2,500 $1,250
FOR THE YEAR
INCOME............................ $ 193 $ 169 $ 194 $ 143 $ 71
EXPENSES.......................... $ 127 $ 111 $ 128 $ 94 $ 47
NET INCOME........................ $ 43 $ 38 $ 43 $ 32 $ 16
FIXED CHARGES - TIMES EARNED...... 1.52 1.52 1.52 1.52 1.52
PEAK SHORT TERM DEBT.............. $4,295 $4,010 $2,771 $2,649 $2,327
AVERAGE DEBT...................... $2,247 $2,041 $2,145 $1,990 $1,347
AVERAGE INTEREST RATES............ 5.6% 5.5% 5.9% 4.6% 3.2%
-----------
7
<PAGE>
QUARTERLY DATA J. C. PENNEY FUNDING CORPORATION
($ in millions) (Unaudited)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
-------------------- -------------------- -------------------- --------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995 1997 1996 1995
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income................ $ 82 32 48 29 33 48 35 36 52 47 68 46
Expenses.............. $ 54 21 31 19 22 32 23 24 34 31 44 31
Income before taxes... $ 28 11 17 10 11 16 12 12 18 16 24 15
Net income............ $ 18 7 11 7 7 10 8 8 12 10 16 10
Fixed charges -
times earned......... 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52
</TABLE>
COMMITTED REVOLVING CREDIT FACILITIES
AS OF JANUARY 31, 1998
Bank of America NT & SA Marine Midland Bank
Bank of Hawaii Mellon Bank, N.A.
The Bank of New York Morgan Guaranty Trust Company
The Bank of Tokyo-Mitsubishi, Ltd. of New York
Bank One, Texas N.A. National Australia Bank Limited
BankBoston, N.A. NationsBank of Texas, N.A.
Bankers Trust Company The Northern Trust Company
Barclays Bank PLC Norwest Bank Minnesota, N.A.
The Chase Manhattan Bank PNC Bank, N.A.
Citibank, N.A. Royal Bank of Canada
CoreStates Bank, N.A. The Sakura Bank, Ltd.
Credit Agricole Indosuez State Street Bank & Trust Company
Credit Suisse First Boston SunTrust Bank, Atlanta
Crestar Bank UMB Bank, N.A.
The First National Bank of Chicago U.S. Bank National Association
First Security Bank of Utah, N.A. Wachovia Bank, N.A.
First Union National Bank Wells Fargo Bank, N.A.
Firstar Bank Milwaukee, N.A. The Yasuda Trust & Banking Co.,
Fleet National Bank Ltd.
The Fuji Bank, Ltd.
Hibernia National Bank
Istituto Bancario San Paolo di
Torino S.p.A.
8
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
The Board of Directors of
J. C. Penney Funding Corporation:
We consent to incorporation by reference in: (1) the Registration Statement
(No. 33-28390) on Form S-8; (2) the Registration Statement (No. 33-59666) on
Form S-8; (3) the Registration Statement (No. 33-59668) on Form S-8; (4) the
Registration Statement (No. 33-66070) on Form S-8; (5) the Registration
Statement (No. 33-66072) on Form S-8; (6) the Registration Statement (No. 33-
56995) on Form S-8; (7) the Registration Statement (No. 333-13949) on Form S-8;
(8) the Registration Statement (No. 333-13951) on Form S-8; (9) the Registration
Statement (No. 333-22627) on Form S-8; (10) the Registration Statement (No. 333-
22607) on Form S-8; (11) the Registration Statement (No. 333-33343) on Form S-8;
(12) the Registration Statement (No. 333-27329) on Form S-8; and (13) the
Registration Statement (No. 333-23339) on Form S-3 of J. C. Penney Company,
Inc. of our report dated February 26, 1998, relating to the balance sheets of J.
C. Penney Funding Corporation as of January 31, 1998 and January 25, 1997, and
the related statements of income, reinvested earnings, and cash flows for each
of the years in the three-year period ended January 31, 1998, which report
appears in the 1997 Annual Report of J. C. Penney Funding Corporation, which
Annual Report is incorporated by reference in the Annual Report on Form 10-K of
J. C. Penney Funding Corporation for the year ended January 31, 1998.
/S/ KPMG Peat Marwick LLP
Dallas, Texas
April 30, 1998
<PAGE>
Exhibit 24
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, THAT each of the undersigned directors and
officers of J. C. PENNEY FUNDING CORPORATION, a Delaware corporation, which is
about to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Exchange Act of 1934, its Annual Report
on Form 10-K for the 53 weeks ended January 31, 1998, hereby constitutes and
appoints W. J. Alcorn and R. B. Cavanaugh, and each of them, his or her true and
lawful attorneys-in-fact and agents, with full power to act without the other,
for him or her and in his or her name, place, and stead, in any and all
capacities, to sign said Annual Report, which is about to be filed, and any and
all subsequent amendments to said Annual Report, and to file said Annual Report
and each subsequent amendment so signed, with all exhibits thereto, and any and
all documents in connection therewith, and to appear before the Securities and
Exchange Commission in connection with any matter relating to said Annual Report
and any subsequent amendments, hereby granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform any and all
acts and things requisite and necessary to be done in and about the premises as
fully and to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney as of
the 17th day of April, 1998.
/S/ R. B. Cavanaugh /S/ W. J. Alcorn
- - ------------------------------ --------------------------------
R. B. Cavanaugh W. J. Alcorn
Chairman of the Board Controller
(principal executive officer); (principal accounting officer)
Director
/S/ S. F. Walsh
- - ------------------------------
S. F. Walsh
President
(principal financial officer);
Director
/S/ D. A. McKay
- - ----------------------------
D. A. McKay
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 FUNDING CORPORATION 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> 0
<SECURITIES> 0
<RECEIVABLES> 2,591
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,591
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,591
<CURRENT-LIABILITIES> 1,439
<BONDS> 0
0
0
<COMMON> 145
<OTHER-SE> 1,007
<TOTAL-LIABILITY-AND-EQUITY> 2,591
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (66)
<INCOME-PRETAX> 66
<INCOME-TAX> 23
<INCOME-CONTINUING> 43
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fiscal 1997 was a year of transition and new initiatives for JCPenney.
During the course of the year, the Company:
. Completed the acquisition of Eckerd Corporation (Eckerd) and
converted its existing drugstores, consisting of approximately 1,100
former Thrift, Fay's, and Kerr drugstores, to the Eckerd nameplate
and format. This provides us with new growth opportunities and will
provide expected cost savings of $100 million per year.
. Announced a voluntary early retirement program, a corporate
restructuring, and the closing of underperforming stores and support
facilities, which will improve profitability in JCPenney stores and
catalog.
. Continued to generate record profits in its direct marketing
insurance operation.
Each of our business segments, which are described on page 2 of this Annual
Report, offers a unique opportunity for future growth. This is enhanced by
increased synergy that management believes can be achieved. The Company is
committed to maintaining a leadership position in the businesses in which it
operates, maintaining its financial strength, and enhancing stockholder value.
13
<PAGE>
MD&A (CONTINUED)
RESULTS OF
OPERATIONS
Earnings before restructuring and business integration expenses (one-time
charges), net of tax, totaled $839 million, or $3.12 per diluted share, in 1997
compared with $793 million, or $3.17 per share, in 1996 and $838 million, or
$3.33 per share, in 1995. Net income totaled $566 million, or $2.10 per diluted
share compared with $565 million, or $2.25 per share in 1996 and $838 million,
or $3.33 per share, in 1995. In 1997, the Company had an average of
approximately 20 million additional shares outstanding, primarily as a result of
the Eckerd acquisition.
During 1997, the Company recorded one-time charges of $447 million on a
pre-tax basis. These charges consisted of $151 million for a voluntary early
retirement program, $66 million for corporate restructurings, principally
related to JCPenney stores and catalog support functions, $148 million for
drugstore integration activities, and $145 million for store and support unit
closings. These amounts were offset by $63 million of gains from the sale of
certain business units. The Company expects to realize significant ongoing
savings, primarily from lower salary costs, once these initiatives have been
fully implemented.
FOURTH QUARTER
The Company finished the year with strong operating performance. Fourth
quarter earnings before one-time charges, net of tax, totaled $365 million, or
$1.36 per diluted share, compared with $301 million, or $1.20 per share, in last
year's fourth quarter, an increase of 21 per cent. Including one-time charges,
net income was $224 million, or 85 cents per share, compared with $94 million,
or 36 cents per share, in the comparable 1996 period, which also included one-
time charges. Fourth quarter operating results were positively impacted by
improvement in gross margin, primarily as a result of reduced markdown activity
for JCPenney stores and catalog, and continued strong profits from the direct
marketing insurance operation.
JCPENNEY STORES AND CATALOG
($ in millions) 1997 1996 1995
- - ----------------------------------------------------------------
JCPenney store sales $16,047 $15,734 $14,973
% inc/(dec)................... 2.0 (1) 5.1 (0.3)
Comp store % inc/(dec)........ (0.3)(2) 3.4 (1.4)
Catalog sales.................. $ 3,908 $ 3,772 $ 3,738
% inc/(dec)................... 3.6 (1) 0.9 (2.1)
FIFO gross margin %............ 30.8 30.1 30.8
LIFO gross margin %............ 30.9 30.2 30.8
SG&A %......................... 24.0 24.0 24.4
Operating earnings (FIFO)(3)... $ 1,371 $ 1,183 $ 1,199
% of sales.................... 6.8 6.1 6.4
================================================================
(1) Fiscal 1997 was comprised of 53 weeks. On a comparable 52-week basis,
JCPenney store sales increased 0.7 per cent and Catalog sales increased 2.7
per cent.
(2) 1997 comparable store sales are shown on a 52-week fiscal year basis.
(3) Operating earnings excludes net interest and credit operations, and one-time
charges.
1997 COMPARED WITH 1996
FIFO operating earnings increased to $1,371 million in 1997, up 15.9 per
cent compared with $1,183 million in 1996. The increase was principally the
result of improvements to gross margin and managing of selling, general, and
administrative (SG&A) expenses. Sales for JCPenney stores increased by 4.5 per
cent in the first half of the year and slowed in the second half of 1997. Sales
in the second half of 1996 and the first half of 1997 were stimulated by
promotional markdowns resulting from high inventory levels. Sales performance in
JCPenney stores in 1997 was led by the women's apparel division, particularly in
dresses and career and casual wear, and the children's and shoe division.
Catalog sales increased by 3.6 per cent in 1997 compared with 1996 and were led
by women's and men's apparel as well as the home division.
FIFO gross margin increased by 70 basis points in 1997 compared with 1996,
despite a very promotional first half of the year. The Company recorded a LIFO
credit of $20 million in both 1997 and 1996. SG&A expenses were well managed
across all areas of the Company, particularly advertising, and were flat as a
percentage of sales as compared with 1996.
14
<PAGE>
MD&A (CONTINUED)
1996 COMPARED WITH 1995
FIFO operating earnings were $1,183 million in 1996 compared with $1,199
million in 1995. Sales in JCPenney stores were soft in the first half of 1996
compared with 1995 and accelerated in the second half as inventory levels rose
and the Company implemented aggressive marketing programs to drive traffic in
the stores. Catalog sales were weak through most of the year but strengthened in
December and January, generating a small sales gain for the year. FIFO gross
margin declined by 70 basis points in 1996 compared with 1995, primarily as a
result of aggressive marketing programs designed to boost sales volumes and
reduce inventory levels. In 1995, the Company recorded a $7 million LIFO credit.
SG&A expenses were well managed in 1996, improving by 40 basis points as a per
cent of sales.
ECKERD DRUGSTORES
Pro Forma
---------------
($ in millions) 1997 1996 1995
- - -------------------------------------------------------------------------------
Sales $9,663 $8,526 $7,730
% increase 13.3(1) 10.3 9.6
Comp store % increase 7.4(2) 7.8 7.8
FIFO gross margin % 21.7 21.9 22.9
LIFO gross margin % 21.4 21.7 22.9
SG&A % 17.3 17.7 18.9
Operating earnings (FIFO)(3) $ 424 $ 360 $ 311
% of sales 4.4 4.2 4.0
===============================================================================
(1) Fiscal 1997 was comprised of 53 weeks. On a comparable 52-week basis, sales
increased 11.2 per cent.
(2) 1997 comparable store sales are shown on a 52-week fiscal year basis.
(3) Operating earnings excludes interest expense, amortization of intangibles,
and one-time charges.
The following commentary compares 1997 actual results with 1996 and 1995
pro forma results, assuming that the Company's drugstore acquisitions had
occurred as of the beginning of 1995, to provide a more meaningful evaluation of
operating performance.
1997 COMPARED WITH 1996
Throughout 1997, Eckerd was heavily involved in the integration of the
former Thrift, Fay's, and Kerr drugstore operations into the Eckerd nameplate
and format. Despite the significant integration activities, FIFO operating
earnings increased $64 million to $424 million, an increase of 17.8 per cent
compared with 1996 results. The increase was driven primarily by sales volumes
and reduced SG&A expenses from the combined operations. Sales growth was strong
the entire year, increasing by 7.4 per cent on a comparable store basis (those
stores open at least one year), and was strongest in the Southeast and Sunbelt
regions, which comprise historical Eckerd markets. Sales improvement was driven
by a 16.1 per cent increase in prescription drug sales, which represented 53 per
cent of total sales for the year. Prescription drug sales continue to be
positively impacted by growth in managed care sales, which exceed 80 per cent of
the prescription business.
FIFO gross margin increased by $229 million in 1997 but declined by 20
basis points as a per cent of sales. The decline in gross margin per cent was
primarily attributable to grand reopening promotional activities for the
converted regions and the growth in the managed care prescription business,
which carries lower margins. In 1997, Eckerd recorded a $32 million LIFO charge
compared with a pro forma charge of $23 million in 1996, reflecting continued
inflation in prescription drug prices. SG&A expenses were well leveraged as a
result of higher sales volumes and the elimination of duplicate support
functions. For the year, SG&A expenses improved by 40 basis points as a per cent
of sales. Both gross margin and SG&A expenses were positively impacted by
synergies arising from consolidation of the drugstore operations.
1996 COMPARED WITH 1995
FIFO operating earnings increased in 1996, principally as a result of
strong sales growth. Sales for the year grew at a 10.3 per cent rate, driven
primarily by managed care prescription sales growth. Drugstore gross margin
increased on a dollar basis in 1996, primarily as a result of higher sales
levels, but decreased as a per cent of sales, primarily as a result of declines
in managed care prescription gross margins. There was no LIFO impact in 1995.
SG&A expenses were well leveraged in 1996 compared with 1995.
15
<PAGE>
MD&A (CONTINUED)
JCPENNEY INSURANCE
($ in millions) 1997 1996 1995
- - --------------------------------------------------------
Revenue $ 928 $ 818 $ 680
% increase 13.4 20.3 22.1
Operating earnings $ 214 $ 186 $ 157
% increase 15.1 18.5 23.6
% of revenue 23.1 22.7 23.1
========================================================
JCPenney Insurance continues to be a solid contributor to the Company's
operating performance. In 1997, revenues grew to $928 million compared with $818
million in 1996 and $680 million in 1995. The revenue growth over the three-year
period is primarily attributable to successfully maintaining and enhancing
marketing relationships with third-party businesses throughout the United States
and Canada, principally banks, oil companies, and retailers. Revenue and
operating earnings have been enhanced by growth in the non-insurance segment,
which consists of marketing membership discount services through existing
business relationships. Operating earnings increased to $214 million in 1997
compared with $186 million in 1996 and $157 million in 1995. The increase in
operating earnings continued to be driven by strong growth in revenue.
NET INTEREST EXPENSE AND CREDIT OPERATIONS
($ in millions) 1997 1996 1995
- - ---------------------------------------------------------------------------
Finance charge revenue(1) $(673) $(641) $(631)
Credit costs(1) 639 560 489
Interest expense, net 581 359 325
- - ---------------------------------------------------------------------------
Net interest and credit costs $ 547 $ 278 $ 183
Delinquency rate 3.9% 3.7% 3.3%
===========================================================================
(1) Includes amounts related to the Company's retained interest in JCP Master
Credit Card Trust.
Net interest and credit costs increased in 1997 compared with 1996, due
principally to bad debt on customer receivables and interest expense for the
drugstore acquisitions. Finance charge revenue increased in 1997 compared with
1996 levels, primarily as a result of modifications that were made to credit
terms in selected states. These increases were more than offset by bad debt
expense. In 1997, bad debt expense, including additions to reserves for future
bad debt losses, was $343 million compared with $267 million in 1996. In both
1997 and 1996, bad debt expense was negatively impacted by continuing high
levels of delinquencies and personal bankruptcies. Interest expense in 1997
exceeded the prior year, primarily as a result of $3.0 billion of debt that was
issued in connection with the Eckerd acquisition.
In 1996, finance charge revenue was relatively flat with 1995 levels.
Credit operating costs increased as a result of rising bad debt expense. The
increase in interest expense in 1996 compared with 1995 was generally related to
higher levels of debt required to finance increases in working capital,
drugstore acquisitions, and capital spending for JCPenney stores.
INCOME TAXES
The effective income tax rate in 1997 increased to 38.8 per cent compared
with 37.9 per cent in 1996 and 37.5 per cent in 1995. The increase in 1997 was
primarily related to amortization of goodwill associated with the drugstore
acquisitions, which provides no tax benefit.
FINANCIAL
CONDITION
The Company's goal is to maintain a strong balance sheet in order to
provide financial flexibility and increase stockholder value. The Company's
financial condition has remained strong and market capitalization has increased
to $18.1 billion, an increase of $6.8 billion, or 60 per cent, over the past two
years. Total stockholder return, which includes price appreciation and
dividends, was 47 per cent in 1997. The Company's strong financial condition has
allowed a consistent increase in the dividend on common stock, including an
increase to an indicated annual rate of $2.18 which was approved by the Board of
Directors in March 1998. The dividend has increased in each of the last six
years, over which time it has increased in excess of 65 per cent.
MERCHANDISE INVENTORY
($ in millions) 1997 1996 1995
- - -----------------------------------------------------------
JCPenney stores and catalog $4,239 $4,311 $3,815
Eckerd drugstores 2,148 1,676 346
Less LIFO reserves (225) (265) (226)
- - -----------------------------------------------------------
Total $6,162 $5,722 $3,935
===========================================================
Merchandise inventory levels for JCPenney stores and catalog declined by
1.7 per cent from the prior year, primarily as a result of better management of
the merchandise procurement process. Inventory levels increased by 13 per cent
in 1996 compared with 1995, partly as a result of the addition of three million
square feet of
16
<PAGE>
MD&A (CONTINUED)
gross selling space. Inventory levels for Eckerd in 1997 increased by 28 per
cent compared to 1996. The increase was primarily related to conversion
activities and the addition of 1.0 million square feet of new space. The
increase from 1995 levels was principally the result of the Eckerd and Fay's
acquisitions.
INTANGIBLE ASSETS
Intangible assets consist principally of favorable lease rights,
prescription files, software, trade name, and goodwill. They represent the
excess of the purchase price over the fair value of assets received in the
Company's drugstore acquisitions. The increase from 1996 levels is related to
the completion of the Eckerd acquisition in February 1997.
DEBT TO CAPITAL
1997 1996 1995
- - ----------------------------------------------------------
Debt to capital per cent 60.4% 64.5%* 52.6%
==========================================================
* Upon completion of the Eckerd acquisition, the Company's debt to capital per
cent decreased to 60.1 per cent.
The Company issued $3.0 billion of long term debt in the first quarter of
1997, which represented a conversion of short term debt that had been issued in
connection with the Eckerd acquisition. The average effective interest rate on
this debt was 7.5 per cent and the average maturity was 30 years. With the
issuance of this debt, the Company's average interest rate decreased by about 10
basis points and the average maturity was extended, capitalizing on a favorable
interest rate environment. Total debt, both on and off-balance-sheet, was
$11,237 million at the end of 1997 compared with $10,807 million and $6,542
million at the end of fiscal 1996 and 1995, respectively. The increase in debt
over the past two years is primarily related to the acquisition of Eckerd and
the growth of the drugstore operation.
During the last two years, the Company issued 28.4 million shares of common
stock in connection with its drugstore acquisitions. In addition, the Company
acquired 7.5 million shares of its common stock in 1996 for $366 million, as
part of a share purchase program. The Company has the authority to acquire an
additional 10 million shares under previously approved share purchase programs.
The Company's debt ratings did not change during the year (see Supplemental
Data, page 34, for current ratings) and continue to be among the highest in the
retail industry.
CAPITAL EXPENDITURES
($ in millions) 1997 1996 1995
- - ------------------------------------------------------------
JCPenney stores and catalog $ 443 $ 636 $ 615
Eckerd drugstores 341 103 53
Other 26 51 81
- - ------------------------------------------------------------
Total $ 810 $ 790 $ 749
============================================================
Capital expenditures in 1997 increased over 1996 and 1995 levels, due
primarily to growth in the Company's drugstore operations. Eckerd added 272 new
or acquired drugstores and relocated an additional 127 drugstores in 1997,
primarily in the Southeast and Sunbelt areas of the country. In 1997 and 1996,
the Company committed approximately $200 million per year to the modernization
and updating of existing JCPenney store locations. 1995 reflects $173 million
for the purchase of seven department stores in the Washington, D.C. area. It is
anticipated that capital spending in 1998 will total approximately $500 million
for JCPenney stores and catalog, with the majority of the spending related to
new and relocated stores and improvements to existing space. Capital spending
for Eckerd in 1998 is expected to total approximately $250 million as the
Company continues to expand its drugstore operation and to relocate drugstores
to more profitable freestanding locations.
CASH FLOW
The Company expects to generate sufficient cash flow internally to meet
substantially all of its cash flow requirements for working capital, capital
expenditures, and dividends in the foreseeable future.
YEAR 2000
The Company has initiated actions to address the year 2000 issue. It is
expected that compliance work will be substantially completed by the end of
1998. Total costs associated with these efforts, which are being expensed as
incurred, have not had, and are not expected to have, a material impact on the
Company's financial results.
INFLATION AND CHANGING PRICES
Inflation and changing prices have not had a significant impact on the
Company in recent years due to low levels of inflation.
17
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the Year ($ in millions except per share data) 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE
Retail sales $29,618 $22,653 $20,562
Insurance revenue 928 818 680
------------------------------
Total revenue 30,546 23,471 21,242
------------------------------
COSTS AND EXPENSES
Cost of goods sold, occupancy, buying, and warehousing costs 21,379 16,058 14,352
Selling, general, and administrative expenses 6,456 5,262 4,923
Costs and expenses of insurance operations 714 632 523
Other unallocated (39) (45) (80)
Net interest expense and credit operations 547 278 183
Amortization of intangibles and minority interest 117 23 --
Restructuring and business integration expenses, net 447 354 --
------------------------------
Total costs and expenses 29,621 22,562 19,901
------------------------------
INCOME BEFORE INCOME TAXES 925 909 1,341
Income taxes 359 344 503
- - --------------------------------------------------------------------------------------------------------
NET INCOME $ 566 $ 565 $ 838
=========================================================================================================
</TABLE>
EARNINGS PER COMMON SHARE
(In millions, except per share data)
<TABLE>
<CAPTION>
1997 Income Shares EPS
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 566
Less: preferred stock dividends (40)
------------------------------
Basic EPS 526 247 $ 2.13
Stock options and convertible preferred stock 36 21
------------------------------
Diluted EPS $ 562 268 $ 2.10
------------------------------
1996
- - --------------------------------------------------------------------------------------------------------
Net income $ 565
Less: preferred stock dividends (40)
------------------------------
Basic EPS 525 226 $ 2.32
Stock options and convertible preferred stock 35 22
------------------------------
Diluted EPS $ 560 248 $ 2.25
------------------------------
1995
- - --------------------------------------------------------------------------------------------------------
Net income $ 838
Less: preferred stock dividends (41)
------------------------------
Basic EPS 797 226 $ 3.52
Stock options and convertible preferred stock 33 23
------------------------------
Diluted EPS $ 830 249 $ 3.33
========================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements on pages 23 through 30.
18
<PAGE>
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Guaranteed Total
Common Preferred LESOP Reinvested Stockholders'
($ in millions) Stock Stock Obligation Earnings Equity
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January 28, 1995 $ 1,030 $ 630 $ (307) $4,262 $5,615
Comprehensive income
Net income 838 838
Net unrealized change in
debt and equity securities 82 82
Currency translation adjustments (10) (10)
----------------------------------------------------------
Total comprehensive income 910 910
Dividend declared (474) (474)
Common stock issued 113 113
Common stock retired (31) (301) (332)
Preferred stock retired (27) (27)
LESOP payment 79 79
- - -----------------------------------------------------------------------------------------------------------
January 27, 1996 1,112 603 (228) 4,397 5,884
Comprehensive income
Net income 565 565
Net unrealized change in
debt and equity securities (18) (18)
Currency translation adjustments (3) (3)
----------------------------------------------------------
Total comprehensive income 544 544
Dividend declared (511) (511)
Common stock issued 350 350
Common stock retired (46) (320) (366)
Preferred stock retired (35) (35)
LESOP payment 86 86
- - -----------------------------------------------------------------------------------------------------------
January 25, 1997 1,416 568 (142) 4,110 5,952
Comprehensive income
Net income 566 566
Net unrealized change in
debt and equity securities 14 14
Currency translation adjustments (3) (3)
----------------------------------------------------------
Total comprehensive income 577 577
Dividend declared (573) (573)
Common stock issued 1,350 1,350
Preferred stock retired (42) (42)
LESOP payment 93 93
- - -----------------------------------------------------------------------------------------------------------
January 31, 1998 $ 2,766 $ 526 $ (49) $4,114 $7,357
===========================================================================================================
</TABLE>
The accumulated balances for net unrealized changes in debt and equity
securities were $66, $52, and $70, and for currency translation adjustments were
($18), ($15), and ($12) at the end of 1997, 1996, and 1995, respectively.
See Notes to Consolidated Financial Statements on pages 23 through 30.
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
ASSETS ($ in millions) 1997 1996
- - ----------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash (including short term investments of $208 and $131) $ 287 $ 131
Retained interest in JCP Master Credit Card Trust 1,073 1,111
Receivables, net (bad debt reserves of $105 and $77) 3,819 4,646
Merchandise inventory (including LIFO reserves of $225 and $265) 6,162 5,722
Prepaid expenses 143 102
------------------
TOTAL CURRENT ASSETS 11,484 11,712
Property and equipment
Land and building 2,993 2,931
Furniture and fixtures 4,089 3,710
Leasehold improvements and other 1,192 1,074
Accumulated depreciation (2,945) (2,701)
------------------
Property and equipment, net 5,329 5,014
Investments, primarily insurance operations 1,774 1,605
Deferred insurance policy acquisition costs 752 666
Goodwill and other intangible assets, net (amortization of $108 and $6) 2,940 1,861
Other assets 1,214 1,230
- - ----------------------------------------------------------------------------------------------
$ 23,493 $22,088
==============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY ($ in millions)
- - ----------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses
(including trade payables of $1,551 and $1,558) $ 4,155 $ 3,738
Short term debt 1,417 3,950
Current maturities of long term debt 449 250
Deferred taxes 116 28
------------------
TOTAL CURRENT LIABILITIES 6,137 7,966
Long term debt 6,986 4,565
Deferred taxes 1,325 1,362
Insurance policy and claims reserves 872 781
Other liabilities (including bank deposits of $724 in 1996) 816 1,462
STOCKHOLDERS' EQUITY
Preferred stock 526 568
Guaranteed LESOP obligation (49) (142)
Common stock 2,766 1,416
Reinvested earnings 4,114 4,110
------------------
TOTAL STOCKHOLDERS' EQUITY 7,357 5,952
- - ----------------------------------------------------------------------------------------------
$ 23,493 $22,088
==============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements on pages 23 through 30.
20
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the Year ($ in millions) 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 566 $ 565 $ 838
Gain on the sale of consumer banking assets (52) -- --
Restructuring and business integration expenses 371 310 --
Depreciation and amortization, including intangibles 584 381 341
Deferred taxes 1 (18) 144
Change in cash from:
Customer receivables 215 (172) 40
Inventory, net of trade payables (395) (521) (55)
Other assets and liabilities, net (72) (163) 95
-----------------------------
1,218 382 1,403
-----------------------------
INVESTING ACTIVITIES
Capital expenditures (824) (704) (717)
Proceeds from the sale of consumer banking assets, net 276 -- --
Eckerd acquisition -- (1,776) --
Purchases of investment securities (401) (471) (583)
Proceeds from sales of investment securities 252 493 420
-----------------------------
(697) (2,458) (880)
-----------------------------
FINANCING ACTIVITIES
Change in short term debt (2,533) 2,401 (583)
Issuance of long term debt 2,990 596 991
Payments of long term debt (343) (133) (244)
Common stock issued, net 121 68 50
Common stock purchased and retired -- (366) (335)
Preferred stock retired (42) (35) (27)
Dividends paid, preferred and common (558) (497) (463)
-----------------------------
(365) 2,034 (611)
-----------------------------
NET INCREASE/(DECREASE) IN CASH AND SHORT TERM INVESTMENTS 156 (42) (88)
Cash and short term investments at beginning of year 131 173 261
- - --------------------------------------------------------------------------------------------------------
CASH AND SHORT TERM INVESTMENTS AT END OF YEAR $ 287 $ 131 $ 173
========================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 564 $ 390 $ 355
Interest received 45 60 54
Income taxes paid 225 356 409
</TABLE>
Non-Cash Transactions. Since February 1995, the Company has expanded its
drugstore portfolio through acquisitions that were accomplished in whole or in
part through the exchange of common stock. See footnote 2 for discussion of the
acquisition transactions.
See Notes to Consolidated Financial Statements on pages 23 through 30.
21
<PAGE>
COMPANY STATEMENT ON FINANCIAL INFORMATION
The Company is responsible for the information presented in this Annual
Report. The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and are considered to present
fairly in all material respects the Company's results of operations, financial
position, and cash flows. Certain amounts included in the consolidated financial
statements are estimated based on currently available information and judgment
as to the outcome of future conditions and circumstances. Financial information
elsewhere in this Annual Report is consistent with that in the consolidated
financial statements.
The Company's system of internal controls is supported by written policies
and procedures and supplemented by a staff of internal auditors. This system is
designed to provide reasonable assurance, at suitable costs, that assets are
safeguarded and that transactions are executed in accordance with appropriate
authorization and are recorded and reported properly. The system is continually
reviewed, evaluated, and where appropriate, modified to accommodate current
conditions. Emphasis is placed on the careful selection, training, and
development of professional managers.
An organizational alignment that is premised upon appropriate delegation of
authority and division of responsibility is fundamental to this system.
Communication programs are aimed at assuring that established policies and
procedures are disseminated and understood throughout the Company.
The consolidated financial statements have been audited by independent
auditors whose report appears below. This audit was conducted in accordance with
generally accepted auditing standards, which include the consideration of the
Company's internal controls to the extent necessary to form an independent
opinion on the consolidated financial statements prepared by management.
The Audit Committee of the Board of Directors is composed solely of
directors who are not officers or employees of the Company. The Audit
Committee's responsibilities include recommending to the Board for stockholder
approval the independent auditors for the annual audit of the Company's
consolidated financial statements. The Committee also reviews the independent
auditors' audit strategy and plan, scope, fees, audit results, and non-audit
services and related fees; internal audit reports on the adequacy of internal
controls; the Company's ethics program; status of significant legal matters; the
scope of the internal auditors' plans and budget and results of their audits;
and the effectiveness of the Company's program for correcting audit findings.
The independent auditors and Company personnel, including internal auditors,
meet periodically with the Audit Committee to discuss auditing and financial
reporting matters.
/s/ Da MCKAY
Donald A. McKay
Executive Vice President and
Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
of J. C. Penney Company, Inc.:
We have audited the accompanying consolidated balance sheets of J. C.
Penney Company, Inc. and Subsidiaries as of January 31, 1998 and January 25,
1997, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three year period ended January 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of J. C. Penney
Company, Inc. and Subsidiaries as of January 31, 1998 and January 25, 1997, and
the results of their operations and their cash flows for each of the years in
the three year period ended January 31, 1998 in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Dallas, Texas
February 26, 1998
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
2. DRUGSTORE ACQUISITIONS
3. RETAINED INTEREST IN JCP MASTER CREDIT CARD TRUST
4. INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
5. SHORT TERM DEBT
6. LONG TERM DEBT
7. CAPITAL STOCK
8. STOCK-BASED COMPENSATION
9. INTEREST EXPENSE, NET
10. LEASE COMMITMENTS
11. ADVERTISING COSTS
12. RETIREMENT PLANS
13. RESTRUCTURING AND BUSINESS INTEGRATION EXPENSES, NET
14. TAXES
15. SEGMENT REPORTING
1
SUMMARY OF
ACCOUNTING POLICIES
BASIS OF PRESENTATION. Certain prior year amounts have been reclassified to
conform with the current year presentation.
BASIS OF CONSOLIDATION. The consolidated financial statements present the
results of J. C. Penney Company, Inc. and its subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
DEFINITION OF FISCAL YEAR. The Company's fiscal year ends on the last
Saturday in January. Fiscal 1997 ended January 31, 1998; fiscal 1996 ended
January 25, 1997; and fiscal 1995 ended January 27, 1996. Fiscal 1997 was a 53-
week year; all other years presented are 52 weeks. The accounts of JCPenney
Insurance are on a calendar year basis.
RETAIL SALES. Retail sales include merchandise and services, net of
returns, and exclude all taxes.
EARNINGS PER COMMON SHARE. Basic earnings per share are computed by
dividing net income less dividend requirements on the Series B LESOP convertible
preferred stock, net of tax, by the weighted average common stock outstanding.
Diluted earnings per share assume the exercise of stock options and the
conversion of the Series B LESOP convertible preferred stock into the Company's
common stock. Additionally, it assumes adjustment of net income for the
additional cash requirements, net of tax, needed to fund the LESOP debt service
resulting from the assumed replacement of the preferred dividends with common
stock dividends.
CASH AND SHORT TERM INVESTMENTS. Cash invested in instruments with
remaining maturities of three months or less from time of investment is
reflected as short term investments.
ACCOUNTS RECEIVABLE. The Company's policy is to write off accounts when the
scheduled minimum payment has not been received for six consecutive months, if
any portion of the balance is more than 12 months past due, or if it is
otherwise determined that the customer is unable to pay. Collection efforts
continue subsequent to write-off, and recoveries are applied as a reduction of
bad debt losses.
MERCHANDISE INVENTORY. Substantially all merchandise inventory is valued at
the lower of cost (last-in, first-out) or market, determined by the retail
method. The Company applies internally developed indices to measure increases
and decreases in its own retail prices.
DEPRECIATION AND AMORTIZATION. The cost of buildings and equipment is
depreciated on a straight line basis over the estimated useful lives of the
assets. The primary useful life for buildings is 50 years, and ranges between
three and 20 years for furniture and equipment. Improvements to leased premises
are amortized over the expected term of the lease or their estimated useful
lives, whichever is shorter. Intangible assets, other than trade name, are
amortized over periods ranging from five to seven years. Trade name and goodwill
are amortized over 40 years.
IMPAIRMENT OF ASSETS. The Company assesses the recoverability of asset
values, including goodwill and other intangible assets, on a periodic basis by
comparing expected cashflows to net book value.
DEFERRED CHARGES. Expenses associated with the opening of new stores are
written off in the year of the store opening. Deferred policy acquisition costs,
principally marketing costs and commissions incurred by JCPenney Insurance to
secure new insurance policies, are amortized over the expected premium-paying
period of the related policies.
INVESTMENTS. The Company's investments are classified as available-for-sale
and are carried at fair value. Changes in unrealized gains and losses are
recorded directly to stockholders' equity, net of applicable income taxes.
Realized gains and losses are determined on a first-in, first-out basis.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INSURANCE POLICY AND CLAIMS RESERVES. Liabilities established by
JCPenney Insurance for future policy benefits are computed using a net level
premium method including assumptions as to investment yields, mortality,
morbidity, and persistency based on the Company's experience.
ADVERTISING. Costs for newspaper, television, radio, and other media
advertising are expensed as incurred. Catalog book preparation and printing
costs, which are considered direct response advertising, are charged to expense
over the life of the catalog, not to exceed six months.
DERIVATIVE FINANCIAL INSTRUMENTS. The Company selectively uses non-
leveraged, off-balance-sheet derivative instruments to manage its market and
interest rate risk, and does not hold derivative positions for trading purposes.
Current derivative positions consist of non-leveraged, off-balance-sheet
interest rate swaps which are accounted for by recording the net interest
received or paid as an adjustment to interest expense on a current basis. Gains
or losses resulting from market movements are not recognized.
USE OF ESTIMATES. The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting principles
requires that management estimate certain amounts that are reported. Actual
results may differ from these estimates.
NEW ACCOUNTING RULES. The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share,
in April 1997, SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information, in June
1997, and SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, in February 1998. SFAS No. 128 was effective in fiscal
1997, and SFAS's No. 130, No. 131 and No. 132 were adopted by the Company in
fiscal 1997; prior year numbers have been restated as required. None of the new
rules had a material impact on the Company.
2
DRUGSTORE
ACQUISITIONS
In February 1997, the Company completed the acquisition of Eckerd
Corporation (Eckerd), a 1,748 unit drugstore chain located primarily in the
Southeast and Sunbelt. The acquisition was accomplished through a two-step
transaction consisting of a cash tender offer for 50.1 per cent of the
outstanding Eckerd common stock (December 1996), followed by the exchange of
approximately 23.2 million shares of JCPenney common stock for the remaining
49.9 per cent of Eckerd common stock (February 1997). The total value of the
acquisition, including $760 million of Eckerd debt assumed by the Company, was
approximately $3.3 billion. The purchase price was allocated to assets acquired
and liabilities assumed based on their estimated fair value, and accordingly,
the Company recognized intangible assets consisting of favorable lease rights,
prescription files, computer software, and trade name. The excess of the
purchase price over the estimated fair value of assets acquired and liabilities
assumed is classified as goodwill and totaled $2.3 billion at the conclusion of
the acquisition.
In October 1996, the Company acquired Fay's Incorporated (Fay's), a 272
unit drugstore chain located primarily in New York state, through the issuance
of 5.2 million shares of common stock valued at $278 million and assumption of
$75 million of Fay's debt. The excess of the purchase price over the estimated
fair value of assets acquired and liabilities assumed totaled $220 million and
is classified as goodwill.
Both the Eckerd and Fay's acquisitions were accounted for under the
purchase method, and accordingly, the results of operations of both Eckerd and
Fay's are included in the Company's results of operations since the respective
dates of acquisition.
The following unaudited pro forma condensed statements of operations
give effect to the Eckerd and Fay's acquisitions as if the transactions occurred
at the beginning of each of the periods presented.
52 Weeks Ended
- - --------------------------------------------------------------------------------
($ in millions except Jan. 25, 1997 Jan. 27, 1996
per share data) Reported Pro forma Reported Pro forma
- - --------------------------------------------------------------------------------
Retail sales $22,653 $28,028 $20,562 $26,442
Net income 565 519 838 766
Per share, diluted 2.25 1.91 3.33 2.78
- - --------------------------------------------------------------------------------
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
RETAINED INTEREST IN JCP MASTER
CREDIT CARD TRUST
The Company previously transferred portions of its customer receivables
to a trust which, in turn, sold certificates representing undivided interests in
the trust in public offerings. As of January 31, 1998, $652 million of the
certificates were outstanding and the balance of the receivables in the trust
was $1,771 million. The Company owns the remaining undivided interest in the
trust not represented by the certificates and will continue to service all
receivables for the trust. The Company has made available to the trust $78
million in irrevocable letters of credit should such funds be required. None of
the letters of credit was in use as of January 31, 1998.
The retained interest in the trust is accounted for in accordance with SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities, and
is classified as available-for-sale. The carrying value of $1,073 million in
1997 and $1,111 million in 1996 includes a valuation reserve of $40 million and
$28 million, respectively. Due to the short-term nature of this investment, the
carrying value approximates fair value.
4
INVESTMENTS AND FAIR VALUE
OF FINANCIAL INSTRUMENTS
Amortized Fair
($ in millions) Cost Value
- - ---------------------------------------------
Fixed income securities $1,126 $1,167
Asset-backed certificates 431 459
Other 113 148
- - ---------------------------------------------
Total $1,670 $1,774
=============================================
INVESTMENTS. The Company's investments are recorded at fair value based on
quoted market prices and consist principally of fixed income and equity
securities, substantially all of which are held by JCPenney Insurance, and
asset-backed certificates. The majority of the fixed income securities mature
during the next ten years. Unrealized gains and losses are included in
stockholders' equity, net of tax, and are shown as a component of comprehensive
income.
FINANCIAL LIABILITIES. Financial liabilities are recorded in the
consolidated balance sheets at historical cost, which approximates fair value.
These values are not necessarily indicative of actual market transactions. The
fair value of long term debt, excluding capital leases, is based on the interest
rate environment and the Company's credit rating.
DERIVATIVE FINANCIAL INSTRUMENTS. Current derivative positions consist of
two offsetting interest rate swaps, which were entered into in connection with
the issuance of asset-backed certificates in 1990. These swaps help to protect
certificate holders by reducing the possibility of an early amortization of the
principal. The impact of these interest rate swaps is not material.
CONCENTRATIONS OF CREDIT RISK. The Company has no significant
concentrations of credit risk. Individual accounts comprising accounts
receivable are widely dispersed and investments are well diversified.
5
SHORT TERM
DEBT
($ in millions) 1997 1996
- - ------------------------------------------------------
Commercial paper $1,417 $2,050
Bank debt - 1,900
- - ------------------------------------------------------
Total $1,417 $3,950
Average interest rate at year end 5.6% 5.5%
======================================================
Committed bank credit facilities available to the Company as of January 31,
1998 totaled $3.0 billion. The facilities, as amended and restated in 1997,
support the Company's short term borrowing program and are comprised of a $1.5
billion, 364-day revolver and a $1.5 billion, five-year revolver. The 364-day
revolver includes a $750 million seasonal credit line for the August to January
period, allowing the Company to match its seasonal borrowing requirements. None
of the borrowing facilities was in use as of January 31, 1998. In the first
quarter of 1997, the Company paid off and retired the acquisition facility used
in connection with the Eckerd acquisition.
Also, the Company has $910 million of uncommitted credit lines in the form
of letters of credit with seven banks to support its direct import merchandise
program. As of January 31, 1998, $293 million of letters of credit issued by the
Company were outstanding.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
LONG TERM
DEBT
Jan. 31, 1998 Jan. 25, 1997
($ in millions) Avg Rate Balance Avg Rate Balance
- - -----------------------------------------------------------------------------
Notes and debentures
Due 0-5 years 7.1% $2,600 7.3% $1,425
Due 6-10 years 7.8% 1,760 8.0% 1,605
Due 11-15 years 8.0% 325 7.6% 425
Due 16-20 years 7.7% 780 7.5% 492
Due 21-30 years 7.5% 887 7.2% 550
Thereafter 7.5% 900 -- --
---------------------------------------------
Total notes and debentures 7.5% 7,252 7.6% 4,497
Guaranteed LESOP notes,
due 1998 49 142
Capital lease obligations
and other 134 176
Less current maturities (449) (250)
- - -----------------------------------------------------------------------------
Total long term debt $6,986 $4,565
=============================================================================
During 1997, the Company issued $3.0 billion of debt. These notes and
debentures had an average maturity of 30 years and an average interest rate of
7.5 per cent. In 1996, the Company issued $600 million in notes with an average
maturity of 20 years and an average interest rate of 7.3 per cent.
7
CAPITAL
STOCK
As of January 31, 1998, there were approximately 58 thousand stockholders
of record. On a combined basis, the Company's savings plans, including the
Company's leveraged employee stock ownership plan (LESOP), held 46.6 million
shares of common stock or 17.3 per cent of the Company's common shares after
giving effect to the conversion of preferred stock.
COMMON STOCK
1,250 million shares, par value $.50 are authorized; 251 million shares
were issued and outstanding as of January 31, 1998, and 224 million shares were
issued and outstanding as of January 25, 1997.
PREFERRED STOCK
In connection with the 1988 adoption of the LESOP, 25 million shares of
Series B LESOP convertible preferred stock, par value $.01 were authorized; 900
thousand shares were issued and outstanding as of January 31, 1998, and one
million shares were issued and outstanding as of January 25, 1997. Each share is
convertible into 20 shares of the Company's common stock at a conversion price
of $30 per common share. Dividends are cumulative and are payable semi-annually
at a rate of $2.37 per common share equivalent, a yield of 7.9 per cent. Shares
may be redeemed at the option of the Company or the LESOP under certain
circumstances. The redemption price may be satisfied in cash or common stock or
a combination of both, at the Company's sole discretion.
PREFERRED STOCK PURCHASE RIGHTS
In 1990, the Board of Directors declared a dividend distribution of one
preferred stock purchase right on each outstanding share of common stock in
connection with the redemption of the Company's then existing preferred stock
purchase rights program. These rights entitle the holder to purchase, for each
right held, 1/400 of a share of Series A junior participating preferred stock at
a price of $140. The rights are exercisable by the holder upon the occurrence of
certain events and are redeemable by the Company under certain circumstances as
described by the rights agreement.
8
STOCK-BASED
COMPENSATION
As of January 31, 1998, the Company had a single stock-based compensation
plan which was approved by stockholders in 1997 and which reserves 14 million
shares of common stock for issuance to plan participants upon the exercise of
options over the 10 year term of the plan. Approximately 2,000 associates,
generally consisting of selected management associates, are eligible to
participate. Shares acquired under the plan generally have a two year retention
requirement. Both the number of shares and the exercise price, which is based on
the average market price, are fixed at the date of grant and have a maximum term
of 10 years. The plan also provides for grants of stock options and stock awards
to members of the Board of Directors not otherwise employed by the Company.
Shares acquired by such directors are not transferable until a director
terminates service.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounts for stock-based compensation under the provisions of
APB No. 25, Accounting for Stock Issued to Employees. Accordingly, net income
and earnings per share shown in the consolidated statements of income appearing
on page 18 do not reflect any compensation cost for the Company's fixed stock
options. In accordance with SFAS No. 123, Accounting for Stock-Based
Compensation, the fair value of each fixed option granted is estimated on the
date of grant using the Black-Scholes option pricing model, with the following
assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
- - ------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 4.0% 3.9% 3.9%
Expected volatility 21.3% 22.3% 21.9%
Risk-free interest rate 6.3% 5.6% 7.0%
Expected option term 6 years 5 years 5 years
Fair value per share of options
granted $9.76 $8.88 $8.20
SFAS 123 compensation
expense (millions) $ 11 $ 11 $ 11
==================================================================
</TABLE>
The effect on earnings per share of recording compensation expense under
SFAS No. 123 was a reduction of about four cents per share in each of the years
presented.
The Company records compensation expense for stock and restricted stock
awards granted under the plan, if any, at the date of grant or over the vesting
period. Compensation expense for stock awards was not material in any year
presented.
The following table summarizes the status of the Company's fixed stock
option plans as of January 31, 1998, January 25, 1997, and January 27, 1996:
<TABLE>
<CAPTION>
1997 1996 1995
- - --------------------------------------------------
<S> <C> <C> <C>
Options (in thousands)
Outstanding 7,427 8,633 8,867
Exercisable 6,272 7,419 7,637
Average price
Outstanding $40.07 $36.39 $33.40
Exercisable $38.52 $34.54 $31.87
==================================================
</TABLE>
9
INTEREST
EXPENSE, NET
<TABLE>
<CAPTION>
($ in millions) 1997 1996 1995
- - -------------------------------------------------------------------------
<S> <C> <C> <C>
Short term debt $ 121 $ 102 $ 129
Long term debt 527 312 254
Other, net* (67) (55) (58)
- - -------------------------------------------------------------------------
Interest expense, net $ 581 $ 359 $ 325
=========================================================================
* Includes $34 in each year for interest income from the Company's investment
in asset-backed certificates.
</TABLE>
10
LEASE
COMMITMENTS
The Company conducts the major part of its operations from leased premises
that include retail stores, catalog fulfillment centers, warehouses, offices,
and other facilities. Almost all leases will expire during the next 20 years;
however, most leases will be renewed or replaced by leases on other premises.
Rent expense for real property operating leases totaled $541 million in 1997,
$333 million in 1996, and $281 million in 1995, including contingent rent based
on sales of $72 million, $48 million, and $36 million for the three years,
respectively.
The Company also leases data processing equipment and other personal property
under operating leases of primarily three to five years. Rent expense for
personal property leases was $126 million in 1997, and $106 million in both 1996
and 1995.
Future minimum lease payments for noncancelable operating and capital
leases and subleases as of January 31, 1998 were:
<TABLE>
<CAPTION>
($ in millions) Operating Capital
- - --------------------------------------------------
<S> <C> <C>
1998 $ 431 $13
1999 389 13
2000 354 12
2001 297 13
2002 274 9
Thereafter 1,931 15
- - --------------------------------------------------
Total minimum lease payments $3,676 $75
Present value $2,250 $64
Weighted average interest rate 10% 10%
==================================================
</TABLE>
The minimum lease payments are shown net of estimated executory costs,
which are principally real estate taxes, maintenance, and insurance.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11
ADVERTISING
COSTS
Advertising costs consist principally of newspaper, television, radio, and
catalog book costs. In 1997, the total cost of advertising was $977 million
compared with $988 million in 1996, and $969 million in 1995. The consolidated
balance sheets include deferred catalog book costs of $89 million as of January
31, 1998 and $98 million as of January 25, 1997, which are included in other
assets.
12
RETIREMENT
PLANS
The Company's retirement plans consist principally of a noncontributory
pension plan, a noncontributory supplemental retirement program for certain
management associates, a contributory medical and dental plan, and a savings
plan, including a 401(k) plan and an employee stock ownership plan. Pension plan
assets are invested in a balanced portfolio of equity, including international,
and debt securities managed by third party investment managers. In addition,
Eckerd has a noncontributory pension plan. The cost of these programs and the
December 31 balances of plan assets and obligations are shown below:
<TABLE>
<CAPTION>
EXPENSE
($ in millions) 1997 1996 1995
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Pension and health care:
Service cost $ 68 $ 73 $ 47
Interest cost 200 186 171
Actual return on assets (488) (386) (464)
Net amortization and deferral 248 174 300
-------------------------------------
28 47 54
Savings plan expense 71 56 53
- - -----------------------------------------------------------------------------
Total retirement plans $ 99 $ 103 $ 107
=============================================================================
ASSUMPTIONS
Discount rate 7.25% 8.0% 7.25%
Expected return on plan assets 9.5% 9.5% 9.5%
Salary progression rate 4.0% 4.0% 4.0%
Health care trend rate 7.0% 7.0% 9.0%
=============================================================================
</TABLE>
ASSETS AND OBLIGATIONS
<TABLE>
<CAPTION>
PENSION PLANS*
($ in millions) 1997 1996
- - -----------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation $2,373 $1,895
- - -----------------------------------------------------------------------------
Projected benefit obligation
Beginning of year $2,187 $2,183
Service and interest cost 243 226
Actuarial (gain)/loss 400 (181)
Benefits paid (210) (130)
Amendments and other 129 89
--------------------------
End of year 2,749 2,187
Fair value of plan assets
Beginning of year 2,735 2,292
Company contributions 29 139
Net gains/(losses) 510 434
Benefits paid (210) (130)
--------------------------
End of year 3,064 2,735
Excess fair value over projected benefits 315 548
Transition asset, net of gains and prior
service cost (unrecognized) 125 23
- - -----------------------------------------------------------------------------
Prepaid pension cost $ 440 $ 571
=============================================================================
* Includes supplemental retirement plan
MEDICAL AND DENTAL
Accumulated benefit obligation $ 326 $ 291
Net unrecognized losses 13 45
- - -----------------------------------------------------------------------------
Net medical and dental liability $ 339 $ 336
=============================================================================
</TABLE>
A one per cent change in the health care trend rate would change the
accumulated benefit obligation and expense by approximately $24 million and $2
million, respectively.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13
RESTRUCTURING AND BUSINESS
INTEGRATION EXPENSES, NET
During 1997, the Company recorded restructuring and business integration
expenses totaling $447 million on a pre-tax basis, or $1.02 per diluted share.
These expenses consisted principally of costs for the Company's voluntary early
retirement program, integration of the drugstore operations, restructuring of
corporate support functions, and closing of underperforming department stores
and support facilities. These costs were partially offset by gains resulting
from the sale of certain business operations.
During 1996, the Company recorded costs totaling $354 million on a pre-tax
basis, or 92 cents per share, which were principally related to drugstore
acquisitions, including the Company's agreement with the Federal Trade
Commission to divest certain drugstores in North Carolina and South Carolina.
These expenses consisted of the following:
<TABLE>
<CAPTION>
($ in millions) 1997 1996
- - -------------------------------------------------------
<S> <C> <C>
Voluntary early retirement program $ 151 $ --
Drugstore integration 148 323
Corporate restructuring 66 11
Unit closings and other 145 20
Gain on the sale of business units (63)
---------------
447 354
Income taxes (174) (126)
- - -------------------------------------------------------
Restructuring and business integration
expenses, net $ 273 $ 228
=======================================================
</TABLE>
14
TAXES
Deferred tax assets and liabilities reflected on the Company's consolidated
balance sheet as of January 31, 1998 were measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
The major components of deferred tax (assets)/liabilities as of January 31,
1998 and January 25, 1997 were as follows:
<TABLE>
<CAPTION>
TEMPORARY DIFFERENCES ($ in millions) 1997 1996
- - ------------------------------------------------------------------------
<S> <C> <C>
Depreciation and amortization $ 977 $ 932
Leases 339 318
Restructuring and business
integration expenses (139) (73)
Other including comprehensive income 264 165
-------------------
1,441 1,342
Valuation allowance -- 48(1)
- - ------------------------------------------------------------------------
Total(2) $ 1,441 $ 1,390
========================================================================
</TABLE>
(1) Offsets deferred tax asset related to Eckerd operating loss carryforwards
which were subsequently utilized.
(2) Includes deferred taxes related to drugstore acquisitions of $165 in 1997
and $115 in 1996.
<TABLE>
<CAPTION>
Income tax expense ($ in millions) 1997 1996 1995
<S> <C> <C> <C>
Current
Federal $ 319 $ 321 $ 306
State and local 39 43 56
-----------------------------
358 364 362
-----------------------------
Deferred
Federal 3 (19) 124
State and local (2) (1) 17
-----------------------------
1 (20) 141
- - ------------------------------------------------------------------
Total $ 359 $ 344 $ 503
Effective tax rate 38.8% 37.9% 37.5%
==================================================================
Per cent of pre-tax income
- - ------------------------------------------------------------------
RECONCILIATION OF TAX RATES 1997 1996 1995
- - ------------------------------------------------------------------
Federal income tax at
statutory rate 35.0 35.0 35.0
State and local income
taxes, less federal income
tax benefit 2.8 3.0 3.6
Tax effect of dividends on
allocated LESOP shares (1.3) (1.3) (.8)
Tax credits and other 2.3 1.2 (.3)
- - ------------------------------------------------------------------
Total 38.8 37.9 37.5
==================================================================
</TABLE>
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15
SEGMENT
REPORTING
The Company operates in three business segments: JCPenney stores and
catalog, Eckerd drugstores, and JCPenney Insurance. The results of JCPenney
stores and catalog are combined. JCPenney stores and catalog generally serve the
same customer, have virtually the same mix of merchandise, and the majority of
catalog sales are completed in JCPenney stores. Other items are shown in the
table below for purposes of reconciling to total Company consolidated amounts.
<TABLE>
<CAPTION>
Depreciation
Operating Total Capital and
($ in millions) Year Revenue Earnings Assets Expenditures Amortization
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JCPenney stores and catalog 1997 $19,955 $1,391 $14,980 $464 $366
1996 19,506 1,203 14,754 680 325
1995 18,711 1,206 13,744 689 308
Eckerd drugstores 1997 9,663 392 6,064 341 112
1996 3,147 130 4,389 103 41
1995 1,851 81 618 53 26
JCPenney Insurance 1997 928 214 2,283 5 4
1996 818 186 1,986 7 5
1995 680 157 1,741 7 3
Total Segments 1997 30,546 1,997 23,327 810 482
1996 23,471 1,519 21,129 790 371
1995 21,242 1,444 16,103 749 337
Restructuring and Business
Integration Expenses 1997 (447)
1996 (354)
Net Interest and Credit Operations 1997 (547)
1996 (278)
1995 (183)
Other 1997 (78) 166 102
1996 22 959 10
1995 80 999 4
Total Company 1997 30,546 925 23,493 810 584
1996 23,471 909 22,088 790 381
1995 21,242 1,341 17,102 749 341
==============================================================================================================================
</TABLE>
(1) Total Company operating earnings equals income before income taxes as shown
on the Company's consolidated statements of income.
(2) Other operating earnings includes the banking and business services
operations, insurance capital gains, real estate operations, amortization of
goodwill and other intangible assets, and minority interest.
30
<PAGE>
QUARTERLY DATA UNAUDITED
J.C. PENNEY COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
($ in millions except per share data)
First Second Third Fourth
1997 1996 1997 1996 1997 1996 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Retail sales $ 6,481 $ 4,452 $ 6,420 $ 4,507 $ 7,208 $ 5,537 $ 9,509 $ 8,157
Total revenue 6,705 4,644 6,649 4,708 7,441 5,745 9,751 8,374
LIFO gross margin 1,804 1,340 1,709 1,312 2,038 1,700 2,688 2,243
Earnings before one-time
charges, net of tax 140 142 105 93 229 257 365 301
Net income 139 142 90 93 113 236 224 94
Per common share:
Earnings before
one-time
charges, net of tax,
diluted 0.53 0.57 0.38 0.37 0.85 1.03 1.36 1.20
Net income, diluted 0.53 0.57 0.32 0.37 0.40 0.95 0.85 0.36
Dividend 0.535 0.52 0.535 0.52 0.535 0.52 0.535 0.52
Price range
High 51 5/8 51 7/8 59 53 3/8 64 1/4 57 68 1/4 54 1/2
Low 44 7/8 45 3/4 45 5/8 47 1/4 54 11/16 49 1/4 53 1/4 46 1/4
Close 45 7/8 49 3/4 57 15/16 49 5/8 56 7/16 52 7/8 67 3/8 47 5/8
====================================================================================================================================
</TABLE>
FIVE YEAR FINANCIAL SUMMARY
J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(In millions except per share data) 1997 1996 1995 1994 1993
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results for the year:
Total revenue $ 30,546 $23,471 $ 21,242 $20,937 $19,440
Retail sales 29,618 22,653 20,562 20,380 18,983
Per cent increase 30.7 10.2 0.9 7.4 5.4
Earnings before one-time charges, net of tax 839 793 838 1,057 944
Per cent of total revenue 2.7 3.4 3.9 5.0 4.9
Return on beginning
stockholders' equity 11.7* 13.5 14.9 19.7 20.1
Net income 566 565 838 1,057 940
Per common share:
Earnings before one-time charges,
net of tax, diluted 3.12 3.17 3.33 4.05 3.55
Net income, diluted 2.10 2.25 3.33 4.05 3.53
Dividends 2.14 2.08 1.92 1.68 1.44
Stockholders' equity 29.16 25.67 24.76 23.45 21.53
Financial position
Capital expenditures 810 790 749 544 459
Total assets 23,493 22,088 17,102 16,202 14,788
Stockholders' equity 7,357 5,952 5,884 5,615 5,365
Number of common shares outstanding at year end 251 224 224 227 236
Weighted average common shares
Basic 247 226 226 234 236
Diluted 268 248 249 258 261
Number of employees at year end (In thousands) 260 252 205 202 193
==================================================================================================================================
</TABLE>
* Assumes the completion of the Eckerd acquisition in beginning equity.
31
<PAGE>
FIVE YEAR OPERATIONS SUMMARY
<TABLE>
<CAPTION>
J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES
1997 1996 1995 1994 1993
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JCPenney stores
Number of stores
Beginning of year 1,228 1,238 1,233 1,246 1,266
Openings 34 36 43 29 24
Closings (59) (46) (38) (42) (44)
- - -----------------------------------------------------------------------------------------------------------------------------------
End of year 1,203 1,228 1,238 1,233 1,246
Gross selling space (In million sq. ft.) 118.4 117.2 114.3 113.0 113.9
Sales (In millions) $16,047 $15,734 $14,973 $15,023 $14,056
Sales including catalog desks (In millions) 19,089 18,694 17,930 18,048 16,846
Sales per gross square foot 157 159 156 159 146
Catalog
Number of catalog units
JCPenney stores 1,199 1,226 1,228 1,233 1,246
Freestanding sales centers and other 554 569 565 568 557
Drugstores 110 107 106 94 101
- - -----------------------------------------------------------------------------------------------------------------------------------
Total 1,863 1,902 1,899 1,895 1,904
Sales (In millions) $ 3,908 $ 3,772 $ 3,738 $ 3,817 $ 3,514
Eckerd drugstores
Number of stores
Beginning of year 2,699 645 526 506 548
Openings 199* 47 37 46 35
Drugstore acquisitions 200 2,020 97 -- --
Closings (320)* (13) (15) (26) (77)
- - -----------------------------------------------------------------------------------------------------------------------------------
End of year 2,778 2,699 645 526 506
Gross selling space (In million sq. ft.) 27.4 26.4 6.2 4.5 4.6
Sales (In millions) $ 9,663 $ 3,147 $ 1,851 $ 1,540 $ 1,413
Sales per gross square foot 314 261 253 243 235
JCPenney Insurance (In millions)
Revenue $ 928 $ 818 $ 680 $ 557 $ 457
Distribution of revenue
JCPenney customers 53% 56% 65% 73% 83%
Banks, oil companies, and other customers 47% 44% 35% 27% 17%
Policies, certificates, and memberships in
force 13.2 11.3 9.6 7.5 5.8
==================================================================================================================================
* Includes 127 drugstore relocations.
</TABLE>
32
<PAGE>
SUPPLEMENTAL DATA (UNAUDITED)
GENERAL. The following information is provided as a supplement to the
Company's audited financial statements. Its purpose is to facilitate an
understanding of the Company's credit operations, capital structure, and cash
flows.
CREDIT OPERATIONS. The following presents the results of the Company's
proprietary credit card operation and shows both the net cost of credit in
support of the Company's retail businesses and the net cost of credit measured
on an all-inclusive, economic basis. The "economic basis" of the cost of credit
includes the cost of equity capital in addition to debt used to finance accounts
receivable balances. The cost of equity capital is based on the Company's
minimum return on equity objective of 16 per cent. The results presented below
cover all JCPenney credit card accounts receivable serviced.
<TABLE>
<CAPTION>
Pre-tax cost of JCPenney credit card
($ in millions) 1997 1996 1995
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Finance charge revenue $ (799) $ (759) $(743)
--------------------------------------
Bad debt expense 396 311 256
Operating expenses
(including in-store costs) 237 251 255
Interest expense on debt financing 285 281 278
--------------------------------------
Total costs 918 843 789
--------------------------------------
Pre-tax cost of credit -
retail operations 119 84 46
Pre-tax cost of equity capital 144 138 137
--------------------------------------
Pre-tax cost of credit -
economic basis $ 263 $ 222 $ 183
- - -----------------------------------------------------------------------------
Per cent of JCPenney credit sales 3.0% 2.4% 2.0%
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
Credit sales 1997 1996 1995
- - -------------------------------------------------------------------------------------------------------------------------------
Per cent Per cent Per cent
(JCPenney stores Amounts of Eligible Amounts of Eligible Amounts of Eligible
and catalog) (In billions) Sales (In billions) Sales (In billions) Sales
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JCPenney credit card $ 8.6 43.4 $ 9.1 46.9 $ 9.0 48.4
Third party credit cards 4.7 23.5 4.1 21.2 3.7 19.8
- - -------------------------------------------------------------------------------------------------------------------------------
Total $ 13.3 66.9 $13.2 68.1 $12.7 68.2
===============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
KEY JCPENNEY CREDIT CARD INFORMATION
(In millions, except where noted) 1997 1996 1995
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of accounts serviced with balances 14.8 17.0 17.0
Total customer receivables serviced $ 4,721 $5,006 $4,688
Average customer receivables financed 4,431 4,322 4,258
Average account balances
(in dollars) 318 295 275
Average account maturity
(months) 4.5 4.5 4.3
90-day delinquencies 3.9% 3.7% 3.3%
================================================================================
</TABLE>
CAPITAL STRUCTURE. The Company's objective is to maintain a capital
structure that will assure continuing access to financial markets so that it
can, at reasonable cost, provide for future needs and capitalize on attractive
opportunities for growth.
The debt to capital ratio shown in the table below includes both debt
recorded on the Company's consolidated balance sheet as well as off-balance-
sheet debt related to operating leases and the securitization of a portion of
the Company's customer accounts receivable (asset-backed certificates).
<TABLE>
<CAPTION>
Debt to capital ($ in millions) 1997 1996 1995
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Short term debt, net of cash investments $ 1,209 $ 3,818 $ 1,168
Long term debt, including current
maturities 7,435 4,815 4,080
-------------------------------------
8,644 8,633 5,248
Off-balance-sheet debt
Present value of operating leases 2,250 1,800 1,000
Securitization of accounts
receivable, net 343 374 294
-------------------------------------
Total debt 11,237 10,807 6,542
Consolidated equity 7,357 5,952 5,884
- - -------------------------------------------------------------------------------
Total capital $18,594 $16,759 $12,426
Per cent of total debt to capital 60.4% 64.5%* 52.6%
===============================================================================
</TABLE>
* Upon completion of the Eckerd acquisition, the Company's debt to capital ratio
decreased to 60.1 per cent.
The Company builds its capital base according to the different needs and
credit characteristics of its customer receivables and its other core retail
assets. Customer receivables are highly diversified and predictable financial
assets, very different from the core assets of a retailer, which include fixed
assets and merchandise inventories.
33
<PAGE>
SUPPLEMENTAL DATA (CONTINUED)
Accordingly, the Company finances receivables with more leverage, much like a
finance company. The standards for these assets are a debt ratio of
approximately 88 per cent and interest coverage of about 1.5 times. Core assets
are financed with less leverage and are more comparable to the leverage of non-
retail industrial companies with strong credit ratings. The Company's capital
structure as of January 31, 1998 was:
<TABLE>
<CAPTION>
Customer Core
($ in millions) Receivables Assets Combined
- - ---------------------------------------------------------------
<S> <C> <C> <C>
Debt $4,004 $ 7,233 $11,237
Equity 572 6,785 7,357
- - ---------------------------------------------------------------
Total capital $4,576 $14,018 $18,594
Debt to capital per cent 87.5% 51.6% 60.4%
===============================================================
</TABLE>
The historical debt to capital per cent and fixed charge coverage for the
prior three years, on a separate and combined basis, were:
<TABLE>
<CAPTION>
DEBT TO CAPITAL PER CENT 1997 1996 1995
- - ----------------------------------------------------------------------
<S> <C> <C> <C>
Combined 60.4 60.1* 52.6
Core assets 51.6 49.8 32.1
Customer receivables 87.5 87.5 87.5
======================================================================
* Assumes completion of the Eckerd acquisition
FIXED CHARGE COVERAGE 1997 1996 1995
- - ----------------------------------------------------------------------
Combined 2.0 2.4 3.4
Core assets 2.4 3.8 6.0
Customer receivables 1.5 1.5 1.5
======================================================================
</TABLE>
Financing costs incurred by the Company to finance its operations, including
those costs related to off-balance-sheet liabilities, were as follows:
<TABLE>
<CAPTION>
($ in millions) 1997 1996 1995
- - ----------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense, net $581 $359 $325
Interest portion of LESOP debt payment 10 17 23
Off-balance-sheet financing costs
Interest imputed on operating leases 180 110 102
Asset-backed certificates interest 68 68 68
- - ----------------------------------------------------------------------
Total $839 $554 $518
======================================================================
</TABLE>
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION (EBITDA) is a
key measure of cash flow generated. Following is a calculation of EBITDA by
operating segment on an individual and combined basis (excludes other
unallocated):
<TABLE>
<CAPTION>
Stores & Total
1997 Catalog Drugstores Insurance Segments
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $19,955 $9,663 $ 928 $30,546
Operating earnings 1,391 392 214 1,997
Depreciation and amortization 366 112 4 482
Interest and other* 195 97 -- 292
- - --------------------------------------------------------------------------------
EBITDA $ 1,952 $ 601 $ 218 $ 2,771
as a % of revenue 9.8% 6.2% 23.5% 9.1%
================================================================================
1996
- - --------------------------------------------------------------------------------
Revenue $19,506 $3,147 $ 818 $23,471
Operating earnings 1,203 130 186 1,519
Depreciation and amortization 325 41 5 371
Interest and other* 246 30 -- 276
- - --------------------------------------------------------------------------------
EBITDA $ 1,774 $ 201 $ 191 $ 2,166
as a % of revenue 9.1% 6.4% 23.3% 9.2%
================================================================================
1995
- - --------------------------------------------------------------------------------
Revenue $18,711 $1,851 $ 680 $21,242
Operating earnings 1,206 81 157 1,444
Depreciation and amortization 308 26 3 337
Interest and other* 313 22 -- 335
- - --------------------------------------------------------------------------------
EBITDA $ 1,827 $ 129 $ 160 $ 2,116
as a % of revenue 9.8% 7.0% 23.5% 10.3%
================================================================================
</TABLE>
* Consists of interest on operating leases and the LESOP, the impact of asset-
backed certificates, and finance charge revenue net of credit operating costs.
CREDIT RATINGS. Over the years, the Company has maintained one of the
highest credit ratings in the retail industry. The Company's objective is to
maintain a strong investment grade rating on its senior long term debt and
commercial paper. The credit ratings for the Company at year end were:
<TABLE>
<CAPTION>
Long Term Commercial
Debt Paper
- - -----------------------------------------------------------
<S> <C> <C>
Standard & Poor's Corporation A A1
Moody's Investors Service A2 P1
Fitch Investors Service, Inc. A F1
</TABLE>
34
