-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BwNUYy5nyVI0b9hEyMFpErW5lbsW5kOBaOY4nAk3nuYCzEdUAdQ8IxdLlmpgFPQb qR61GxgxUX6YGSaaF9uVXA== 0000077182-99-000019.txt : 19991215 0000077182-99-000019.hdr.sgml : 19991215 ACCESSION NUMBER: 0000077182-99-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991030 FILED AS OF DATE: 19991214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENNEY J C CO INC CENTRAL INDEX KEY: 0000077182 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 135583779 STATE OF INCORPORATION: DE FISCAL YEAR END: 0126 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00777 FILM NUMBER: 99774267 BUSINESS ADDRESS: STREET 1: 6501 LEGACY DR CITY: PLANO STATE: TX ZIP: 75024-3698 BUSINESS PHONE: 9724311000 10-Q 1 FORM 10Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 _______________ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 _______________ For the 13 and 39 week periods Commission file number 1-777 ended October 30, 1999 J. C. PENNEY COMPANY, INC. ___________________________________________________________________________ (Exact name of registrant as specified in its charter) Delaware 13-5583779 ___________________________________________________________________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6501 Legacy Drive, Plano, Texas 75024 - 3698 ___________________________________________________________________________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (972) 431-1000 _______________________ ___________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . _______ _______ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 260,441,831 shares of Common Stock of 50c par value, as of October 30, 1999. -1- PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS. The following interim financial information is unaudited but, in the opinion of the Company, includes all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation. Certain amounts have been reclassified to conform with the current period presentation. The financial information should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the 52 weeks ended January 30, 1999. Statements of Income (Amounts in millions except per share data) 13 weeks ended 39 weeks ended ____________________ __________________ Oct. 30, Oct. 31, Oct. 30, Oct. 31, 1999 1998 1999 1998 ________ _________ ________ ________ Retail sales $ 7,696 $ 7,297 $ 22,024 $ 20,613 Direct Marketing revenue 282 252 832 749 _________ _________ _________ ________ Total revenue 7,978 7,549 22,856 21,362 _________ _________ _________ ________ Costs and expenses Cost of goods sold, occupancy, buying, and warehousing costs 5,639 5,282 16,245 15,065 Selling, general, and administrative expenses 1,784 1,622 5,114 4,680 Costs and expenses of Direct Marketing operations 219 194 655 578 Real estate and other (7) (10) (27) (12) Net interest expense and credit operations (1) 106 142 243 350 Acquisition amortization 18 15 80 68 _________ _________ _________ ________ Total costs and expenses 7,759 7,245 22,310 20,729 _________ _________ _________ ________ Income before income taxes 219 304 546 633 Income taxes 77 118 198 246 _________ _________ _________ ________ Net income $ 142 $ 186 $ 348 $ 387 ========= ========= ========= ========= Earnings per common share: Net income $ 142 $ 186 $ 348 $ 387 Less: preferred stock dividends (9) (10) (27) (28) _________ _________ _________ ________ Earnings for basic EPS 133 176 321 359 Dilutive stock options and convertible preferred stock 9 10 -- 27 _________ _________ _________ ________ Earnings for diluted EPS $ 142 $ 186 $ 321 $ 386 Shares Average shares outstanding (used for basic EPS) 260 254 259 253 Dilutive common stock equivalents 16 18 -- 19 _________ ________ ________ ________ Average diluted shares outstanding 276 272 259 272 Earnings per share Basic $ 0.51 $ 0.69 $ 1.24 $ 1.42 Diluted 0.51 0.68 1.24 1.42 (1) Net interest expense and credit operations for the 39 weeks ended October 30, 1999 includes a $5 million pre-tax gain, or 1 cent per share after tax, on the early extinguishment of Eckerd Corporation's 9.25 percent Notes due 2004. -2- Balance Sheets (Amounts in millions) Oct. 30, Oct. 31, Jan. 30, 1999 1998 1999 ________ __________ ________ ASSETS Current assets Cash and short-term investments of $392, $552, and $95 $ 392 $ 552 $ 96 Retained interest in JCP Master Credit Card Trust 461 1,032 415 Receivables, net 4,455 3,573 4,415 Merchandise inventories 6,971 7,017 6,031 Prepaid expenses 151 147 168 ________ ________ _________ Total current assets 12,430 12,321 11,125 Properties, net of accumulated depreciation of $3,152, $3,267, and $2,875 5,434 5,332 5,458 Investments, principally held by Direct Marketing 1,812 1,896 1,961 Deferred policy acquisition costs 904 810 847 Goodwill and other intangible assets net of accumulated amortization of $305, $180, and $225 3,173 2,867 2,933 Other assets 1,359 1,303 1,314 -------- -------- -------- $ 25,112 $ 24,529 $ 23,638 ======== ======== ======== -3- Balance Sheets (Amounts in millions) Oct. 30, Oct. 31, Jan. 30, 1999 1998 1999 ________ ________ ________ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 3,784 $ 3,903 $ 3,465 Short-term debt 3,223 2,518 1,924 Current maturities of long-term debt 625 625 438 Deferred taxes 155 123 143 ________ ________ ________ Total current liabilities 7,787 7,169 5,970 Long-term debt 6,504 6,737 7,143 Deferred taxes 1,545 1,388 1,517 Insurance policy and claims reserves 992 919 946 Other liabilities 917 895 893 ________ ________ ________ Total liabilities 17,745 17,108 16,469 Stockholders' equity Capital stock Preferred stock, without par value: Authorized, 25 million shares - issued and outstanding, 0.8 million shares for all periods presented of Series B ESOP convertible preferred 457 483 475 Common stock, par value 50c: Authorized, 1,250 million shares - issued and outstanding, 260, 254, and 250 million shares 3,236 2,877 2,850 ________ ________ ________ Total capital stock 3,693 3,360 3,325 ________ ________ ________ Reinvested earnings At beginning of year 3,858 4,066 4,066 Net income 348 387 594 Common stock dividends declared (427) (414) (549) Preferred stock dividends declared, net of tax (18) (19) (39) Common stock retired -- -- (214) ________ ________ ________ Reinvested earnings at end of period 3,761 4,020 3,858 Accumulated other comprehensive income/(loss) (87) 41 (14) ________ ________ ________ Total stockholders' equity 7,367 7,421 7,169 ________ ________ ________ $25,112 $24,529 $23,638 ======== ======== ======== The accumulated balances for net unrealized changes in debt and equity securities were ($6), $70, and $65, and for currency translation adjustments were ($81), ($29), and ($79) as of the respective dates shown. Net unrealized changes in investment securities are shown net of deferred taxes of ($3), $40, and $36, respectively. A deferred tax asset has not been established for currency translation adjustments. -4- Statements of Cash Flows (Amounts in millions) 39 weeks ended ________________________________ Oct. 30, Oct. 31, 1999 1998 _________ _________ Operating activities Net income $ 348 $ 387 Depreciation and amortization, including intangible assets 513 459 Deferred taxes 36 70 Change in cash from: Customer receivables 215 558 Other receivables (301) (274) Inventories, net of trade payables (517) (469) Current taxes payable (51) (113) Other assets and liabilities, net 68 (405) _________ _________ 311 213 _________ _________ Investing activities Capital expenditures (429) (508) Purchases of investment securities (649) (511) Proceeds from the sale of bank receivables 22 -- Proceeds from sales of investment securities 681 382 _________ _________ (375) (637) _________ _________ Financing activities Change in short-term debt 1,243 1,101 Payments of long-term debt (455) (50) Common stock issued, net 13 68 Dividends paid, preferred and common (441) (430) _________ _________ 360 689 _________ __________ Net increase/(decrease) in cash and short-term investments 296 265 Cash and short-term investments at beginning of year 96 287 _________ __________ Cash and short-term investments at end of second quarter $ 392 $ 552 ========= ========= Non-cash transactions: On March 1, 1999, the Company issued 9.6 million shares of common stock to complete the acquisition of Genovese Drug Stores, Inc. (Genovese). The total value of the transaction, including debt assumed and conversion of options for Genovese common stock to options for the Company's common stock, was $414 million. -5- Notes to Interim Financial Information 1. Reserves and Other Charges During 1996 and 1997, the Company recorded other charges principally related to drugstore integration activities, department store and drugstore closings and FAS 121 impairments, and early retirement and reduction in force programs (collectively other charges, net). The following tables provide a roll forward of reserves that were established for certain categories of these charges. These reserves are reviewed for adequacy on a periodic basis and are adjusted as appropriate based on those reviews. Except as indicated below, no adjustments were deemed necessary in the third quarter of 1999. The following schedules, and the accompanying discussion, provide the status of the reserves as of October 30, 1999. 1996 Charges: ____________ 1997 1998 3rd Qtr 1999 YTD __________________ ___________________ Y/E Cash Y/E Cash Ending ($ in millions) Reserve Outlays Reserve Outlays Reserve _______ __________________ ____________________ Eckerd drugstores _________________ Future lease obligations (1) $ 66 $ (7) $ 59 $ (2) $ 57 Allowance for notes receivable (2) 25 -- 25 -- 25 Other (1) 4 -- 4 -- 4 __________________________ _____________________ Total $ 95 $ (7) $ 88 $ (2) $ 86 __________________________ ____________________ Amounts are reflected on the consolidated balance sheets as follows: 1) Reserve balances are included as a component of accounts payable and accrued expenses. 2) The allowance for notes receivable, which was established in connection with the drugstore divestiture discussed below, is included as a reduction of other assets. Future lease obligations - In 1996 the Company identified certain __________________________ drugstores that would be closed in connection with its acquisition of Eckerd Corporation, and established a reserve for the present value of future lease obligations for the closed drugstores. Costs are being charged against the reserve as incurred; the interest component related to lease payments is recorded as rent expense in the period incurred with no corresponding increase in the reserve. Through the third quarter of 1999, approximately $2 million in lease payments had been charged against the reserve. Allowance for notes receivable - In connection with the Eckerd acquisition, ______________________________ the Federal Trade Commission required that the Company divest certain drugstores in North Carolina and South Carolina. A portion of the proceeds from the sale of these drugstores was financed by the Company through a note receivable for $33 million. A reserve for 75 percent of the face value of the note receivable was established due to the significant constraints on the Company's ability to collect on the note. Other - The remaining charges, the majority of which have been expensed as _____ incurred, were related to integration activities for the Fay's drugstores acquired by the Company in October 1996, and other activities such as contract terminations. -6- 1997 Charges: ____________ 1998 3rd Qtr 1999 YTD __________________ ___________________ 1997 Cash Cash Y/E Outlays Y/E Outlays Ending ($ in millions) Reserve & Other Reserve & Other Reserve _______ __________________ ____________________ Department stores __________________ and catalog ___________ Future lease obligations (1) $ 55 $ (35) $ 20 $ (3) $ 17 Eckerd drugstores Future obligations, primarily leases (1) 35 (8) 27 (2) 25 _____ _________________ ___________________ Total $ 90 $ (43) $ 47 $ (5) $ 42 _______ _________________ ___________________ 1) Reserve balances are included as a component of accounts payable and accrued expenses. Department stores and catalog: Future lease obligations - In 1997, the Company identified 97 ___________________________ underperforming stores that did not meet the Company's profit objectives and several support units (credit service centers and warehouses) which were no longer needed. All of these facilities had closed by the end of fiscal 1998. The store closing plan anticipated that the Company would remain liable for all future lease obligations. The reserve as of the end of the third quarter of 1999 represents future lease obligations, and costs are being charged against the reserve as incurred. The reserve has been reduced by $3 million through the third quarter of 1999. Eckerd drugstores: Future obligations, primarily leases - During 1997, the Company established ____________________________________ reserves for the present value of future lease payments for an additional portfolio of drugstores that were identified for closure. In addition, reserves were established for pending litigation and other miscellaneous charges, each individually insignificant. Through the end of the third quarter of 1999, the reserves had been reduced by $2 million. On a combined basis, the reserves totaled $25 million at the end of the third quarter. 2. Earnings Per Share At October 30, 1999, approximately 0.8 million shares of preferred stock, which were convertible into 15.4 million common shares, were issued and outstanding. These potential common shares, and the related dividend, were excluded from the calculation of diluted earnings per share (EPS) for the 39 weeks ended October 30, 1999 because their inclusion would have had an anti-dilutive effect on EPS. In addition, options to purchase 5.0 million and 2.2 million common shares for the 13 weeks ended October 30, 1999 and October 31, 1998, respectively, and options to purchase 5.0 million and 1.5 million common shares for the 39 weeks ended October 30, 1999 and October 31, 1998, respectively, were outstanding and were excluded from the computation of diluted earnings per share because the option exercise price was greater than the average market price for the respective periods. -7- ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Financial Condition ___________________ Merchandise inventories on a FIFO basis totaled $7,234 million at the end of the third quarter compared with $7,269 million at the end of last year's third quarter. Current year totals include approximately $164 million of inventory attributable to Genovese drugstores ($148 million) and Renner department stores ($16 million). Inventories for department stores and catalog totaled $4,870 million at October 30, 1999 and were below last year levels by nearly five percent. Inventories for comparable department stores declined approximately six percent from the prior year. Eckerd drugstore inventories totaled $2,363 million compared with $2,157 million last year. The current cost of inventories exceeded the LIFO basis amount carried on the balance sheet by approximately $263 million at October 30, 1999 and $252 million at October 31, 1998. Total customer receivables serviced were $3,628 million at the end of the third quarter compared with $3,893 million at the end of last year's third quarter. The decline is related to a number of factors, principally tightening the Company's credit-granting policies and reducing the scope of credit promotions, both of which have taken place over the past two to three years, the migration of credit sales from the Company's proprietary credit card to third-party credit cards, and declines in sales volumes. Properties, net of accumulated depreciation, totaled $5,434 million at October 30, 1999 compared with $5,332 million at the end of last year's third quarter. On March 1, 1999, the Company completed the acquisition of Genovese. The acquisition was accomplished through an exchange of approximately 9.6 million shares of Company common stock for the outstanding shares of Genovese. The total value of the transaction, including the assumption of approximately $60 million of debt and the conversion of outstanding Genovese options to options for Company common stock, was $414 million. The acquisition is being accounted for under the purchase method. The purchase price is being allocated to assets acquired, including intangible assets (principally prescription files and favorable lease rights), and liabilities assumed based on their estimated fair value. The excess purchase price over the fair value of assets acquired and liabilities assumed, representing goodwill, is being amortized over 40 years. Goodwill and other intangible assets, net, totaled $3,173 million compared with $2,867 million at the end of last year's third quarter. Current year balances include approximately $316 million in intangible assets and goodwill associated with the Genovese acquisition. At October 30, 1999, the consolidated balance sheet included reserves totaling $103 million which are included as a component of accounts payable and accrued expenses and $25 million which is reflected as a reduction of other assets. These reserves were established in connection with the Company's 1996 and 1997 other charges, net, and relate primarily to future lease obligations on stores and other support facilities closed in connection with those charges, and a -8- note receivable related to the divestiture of certain drugstores, respectively. In 1999, these reserves have been reduced by $7 million through the end of the third quarter. See Note 1 to Interim Financial Information. Results of Operations _____________________ Consolidated operating results ($ in millions) 13 weeks ended 39 weeks ended ____________________ ____________________ Oct. 30, Oct. 31, Oct. 30, Oct. 31, 1999 1998 1999 1998 _________ ________ _________ ________ Operating profit Department stores and catalog $ 250 $ 329 $ 556 $ 718 Eckerd drugstores 23 64 109 150 Direct marketing 63 58 177 171 Real estate and other 7 10 27 12 _______ ______ ________ _______ Total operating profit 343 461 869 1,051 Net interest and credit operations (106) (142) (243) (350) Acquisition amortization (18) (15) (80) (68) ________ ________ ________ _______ Income before income taxes 219 304 546 633 Income taxes (77) (118) (198) (246) ________ ________ ________ ________ Net income $ 142 $ 186 $ 348 $ 387 ======== ======== ======== ======== Operating profit (before net interest expense and credit operations, acquisition amortization, and income taxes) totaled $343 million compared with $461 million in last year's third quarter. Department store and catalog results declined primarily as a result of the effects of lower department store sales volumes. Eckerd drugstores operating profit declined as a result of both lower gross margins and higher selling, general and administrative (SG&A) expenses. Operating profits for J. C. Penney Direct Marketing Services, Inc. (Direct Marketing) increased in the third quarter compared with last year's period. Total Company results reflect continued improvement in net interest expense and credit operations, primarily due to lower bad debt expense. Net income totaled $142 million, or 51 cents per share, as compared with $186 million, or 68 cents per share in last year's third quarter. On a year to date basis, net income was $348 million, or $1.24 per share, compared with $387 million, or $1.42 per share, last year. -9- Segment Operating Results ------------------------- Department Stores and Catalog ----------------------------- 13 weeks ended 39 weeks ended ____________________ ____________________ Oct. 30, Oct. 31, Oct. 30, Oct. 31, 1999 1998 1999 1998 _________ ________ _________ ________ ($ in millions) Retail sales, net $ 4,685 $ 4,807 $12,990 $13,109 Cost of goods sold (3,209) (3,299) (8,963) (9,055) SG&A expenses (1,226) (1,179) (3,471) (3,336) ________ ________ ________ ________ Operating profit (1) $ 250 $ 329 $ 556 $ 718 Sales percent increase Total department stores (3.2) (5.0) (1.5) (2.1) Comparable stores (3.0) (4.0) (0.9) (1.7) Catalog 0.0 8.0 1.5 4.4 Ratios as a percent of sales: FIFO gross margin 31.5 31.4 31.0 30.9 SG&A expenses 26.2 24.5 26.7 25.4 FIFO operating profit 5.3 6.9 4.3 5.5 FIFO EBITDA (2) 8.6 9.0 8.3 8.5 1) Operating profit represents pre-tax income before net interest expense and credit operations and amortization of intangible assets. 2) Earnings before interest, income taxes, depreciation and amortization. EBITDA includes finance revenue, net of credit operating costs and bad debt expense. EBITDA is provided as an alternative assessment of operating performance and is not intended to be a substitute for GAAP measurements; calculations may be different for other companies. Operating profit for department stores and catalog was $250 million in this year's third quarter compared with $329 million last year. The decline was primarily related to the effects of lower sales volumes in department stores, where sales for comparable stores, those open at least a year, declined by 3.0 percent. Sales in private brand merchandise were strong for the period, especially Arizona Jean Co., St. John's Bay, and Delicates, all of which posted double-digit sales gains for the quarter. Sales for supplier exclusive brands including Crazy Horse by Liz Claiborne and Joneswear by Jones New York, also continue to perform very well. Sales of national brand jeanswear, athletic apparel and athletic footwear were soft during the quarter. Catalog sales were flat compared with third quarter last year. Internet sales, while still a small percentage of total sales, continue to increase at an accelerating rate. Gross margin as a percent of sales improved by 10 basis points in the third quarter compared to last year. The increase was principally related to the shift in sales to higher margin private and supplier exclusive brands and a reduced number of promotions. SG&A expenses increased as a percent of sales due to planned customer service initiatives and a decline in sales volume. SG&A expenses for the quarter reflect $12 million in additional investment for the expansion of the Company's internet infrastructure. Operating profit for the 39 weeks ended October 30, 1999 was $556 million compared with $718 million last year. Department store sales for the 39 weeks declined 0.9 percent on a comparable store basis, and catalog sales increased by 1.5 percent compared with last year. Gross margin as a percent of sales was 31.0 percent, up 10 basis points compared with last year. SG&A expenses for the first nine months increased approximately four percent compared with last year, principally related to salaries associated with customer service initiatives, new advertising campaign costs, and spending on the development -10- of the Company's internet infrastructure. As a percent of sales, SG&A expenses increased 130 basis points as a result of lower sales volumes. Eckerd Drugstores (1) _____________________ 13 weeks ended 39 weeks ended ____________________ ____________________ Oct. 30, Oct. 31, Oct. 30, Oct. 31, 1999 1998 1999 1998 _________ ________ _________ ________ ($ in millions) Retail sales, net $ 3,011 $ 2,490 $ 9,034 $ 7,504 Cost of goods sold (2,430) (1,983) (7,282) (6,010) SG&A expenses (558) (443) (1,643) (1,344) ________ ________ ________ ________ Operating profit (2) $ 23 $ 64 $ 109 $ 150 Sales percent increase Total 20.9 9.2 20.4 8.8 Comparable stores 9.6 10.0 10.8 8.9 Ratios as a percent of sales: FIFO gross margin 19.7 20.8 19.8 20.3 SG&A expenses 18.5 17.8 18.2 17.9 FIFO operating profit 1.2 3.0 1.6 2.4 FIFO EBITDA (2) 2.8 4.4 3.1 3.7 LIFO gross margin 19.3 20.4 19.4 19.9 LIFO operating profit 0.8 2.6 1.2 2.0 LIFO EBITDA (3) 2.4 4.0 2.7 3.3 1) Results reflect the inclusion of Genovese drugstores as of the acquisition date in March 1999. Pro forma results, assuming the Genovese acquisition occurred at the beginning of the periods reported would not differ materially from reported results. 2) Operating profit represents pre-tax income before interest and amortization of intangible assets. 3) Earnings before interest, income taxes, depreciation and amortization. EBITDA is provided as an alternative assessment of operating performance and is not intended to be a substitute for GAAP measurements; calculations may be different for other companies. Operating profit for Eckerd drugstores was $23 million in the third quarter compared with $64 million in last year's period. The decline was attributable to both lower gross margins and higher SG&A expenses. Operating profit reflects a LIFO charge of $12 million in this year's third quarter compared with $10 million last year. Eckerd experienced continued strong sales growth in the third quarter, increasing by 9.6 percent for comparable stores (including the pro forma results of the Genovese drugstores acquired on March 1, 1999) which is in addition to a 10.0 percent increase in the third quarter of 1998. Comparable store sales were led by a 15.1 percent increase in pharmacy sales, which were particularly strong in the managed care segment. Managed care sales accounted for approximately 87 percent of pharmacy sales in the third quarter, up from 84 percent last year. Non-pharmacy sales increased by 1.3 percent on a comparable store basis. FIFO gross margin totaled $581 million in the third quarter compared with $507 million in last year's period. FIFO gross margin declined 110 basis points as a percent of sales as a result of a higher percentage of lower margin branded drugs and lower generic dispensing rates, coupled with a higher percentage of managed care and overall pharmacy sales versus a year ago. In addition, as previously announced, the Eckerd shrinkage rate for the third quarter was adjusted to reflect higher shrinkage levels, further reducing gross margin. SG&A expenses increased by 70 basis points as a percent of sales in the third -11- quarter. The increase was primarily related to normal integration costs for the Genovese drugstore acquisition and expenses associated with a higher level of new and relocated store activity. Operating profit for Eckerd drugstores was $109 million for the 39 weeks ended October 30, 1999, down from $150 million last year. Operating profit reflects a $36 million LIFO charge in the first nine months of 1999 compared with a $27 million charge in last year's period. Sales were strong for the first nine months, increasing 10.8 percent on a comparable store basis. Same store sales were led by pharmacy sales which increased by 15.8 percent; non-pharmacy merchandise sales increased by 3.1 percent for the nine months. FIFO gross margin for the nine months declined by 50 basis points. Excluding the effects of the 1999 and 1998 second quarter charges related to inventory adjustments, systems upgrades and other items, FIFO gross margin declined by 100 basis points. The decline in gross margin was principally related to growth in managed care and mail order pharmacy sales, which carry lower margins, and to higher shrinkage rates. SG&A expenses increased by 30 basis points in total and remained unchanged from the prior year excluding the effects of second quarter charges. Direct Marketing 13 weeks ended 39 weeks ended ____________________ ____________________ Oct. 30, Oct. 31, Oct. 30, Oct. 31, 1999 1998 1999 1998 _________ ________ _________ ________ ($ in millions) Revenue $ 282 $ 252 $ 832 $ 749 Costs and expenses (1) (219) (194) (655) (578) _________ ________ ________ ________ Operating profit (2) $ 63 $ 58 $ 177 $ 171 Revenue, percent increase 11.9 8.2 11.1 9.2 Operating profit as a percent of revenue 22.3 23.0 21.3 22.8 1) Includes amortization of deferred acquisition costs of $59 million and $47 million for the third quarter and $168 million and $139 million for the first nine months of 1999 and 1998, respectively. 2) Operating profit represents pre-tax income before amortization of intangible assets. Revenue totaled $282 million in the third quarter and $832 million for the first nine months of 1999, an increase of approximately 11 percent for both periods compared with last year. The increase was led by a 12 percent increase in health insurance premiums which account for approximately 62 percent of total revenues. Revenue generated from membership services products, which account for approximately eight percent of total revenues, increased by 41 percent and 49 percent compared with last year's third quarter and nine months, respectively. Operating profit totaled $63 million for the quarter, up 8.6 percent. Operating profit is up $6 million, or 3.5 percent for the year. Current year operating profit has been impacted by planned expenditures for new product development and international expansion activities in the United Kingdom and Pacific Rim. -12- Real Estate and Other _____________________ Third quarter of 1999 includes losses associated with the Company's exit from Chile ($19 million) a gain on the sale of an underperforming department store ($12 million) and realized gains on the sale of investment securities ($9 million), all of which were over and above normal activity. Operating losses incurred in Chile up through the date of store closings is reflected in the operating results of department stores and catalog. Net Interest Expense and Credit Operations __________________________________________ 13 weeks ended 39 weeks ended ____________________ ____________________ Oct. 30, Oct. 31, Oct. 30, Oct. 31, 1999 1998 1999 1998 _________ ________ _________ ________ ($ in millions) Revenue $ 172 $ 165 $ 536 $ 516 Bad debt expense (31) (69) (66) (167) Operating expenses (81) (82) (243) (247) Interest expense, net (166) (156) (470) (452) ________ ________ ________ ________ Total $ (106) $ (142) $ (243) $ (350) Net interest expense and credit operations totaled $106 million in the third quarter compared with $142 million in the comparable period last year. The decline from last year was principally related to improvement in bad debt levels. Bad debt expense in the third quarter was $38 million below last year's level principally as a result of significantly lower delinquency rates, due in part to the Company's previous efforts to tighten credit underwriting standards to improve portfolio performance. Net interest expense and credit operations totaled $243 million on a year to date basis compared with $350 million last year. The improvement was principally related to increased late fee revenue and significantly lower bad debt expense. As of the end of the quarter, the 90-day delinquency rate was 2.6 percent of customer receivables, down from 3.7 percent at the end of the third quarter of 1998. At October 30, 1999, customer receivables serviced totaled $3,628 million, a decrease of $265 million, or 6.8 percent, compared with a year ago. Income Taxes ____________ The Company's effective income tax rate was 35.3 percent in the third quarter compared with 38.8 percent last year. Several initiatives to reduce income taxes, coupled with lower income, have resulted in a favorable effective tax rate, on an annual basis, of approximately 37 percent. Year 2000 _________ The Year 2000 issue exists because many computer systems store and process dates using only the last two digits of the year. Such systems, if not changed, may interpret "00" as "1900" instead of the year "2000." The Company has been working to identify and address Year 2000 issues since January 1995. The scope of this effort includes internally developed information technology systems, purchased and leased software, embedded systems, and electronic data interchange transaction processing. -13- In October 1996, a company-wide task force was formed to provide guidance to the Company's operating and support departments and to monitor the progress of efforts to address Year 2000 issues. The Company has also consulted with various third parties, including, but not limited to, outside consultants, outside service providers, infrastructure suppliers, industry groups, and other retail companies and associations to develop industry-wide approaches to the Year 2000 issue, to gain insights to problems, and to provide additional perspectives on solutions. Year 2000 readiness work was more than 99 percent complete as of October 30, 1999. Since January 1999, the Company has been retesting all systems critical to the Company's core business. The Company has also focused on the Year 2000 readiness of its suppliers and service providers, both independently and in conjunction with the National Retail Federation. Despite the significant efforts to address Year 2000 concerns, the Company could potentially experience disruptions to some of its operations, including those resulting from noncompliant systems used by third party business and governmental entities. The Company has developed contingency plans to address potential Year 2000 disruptions. These plans include business continuity plans that address accessibility and functionality of Company facilities as well as steps to be taken if an event causes failure of a system critical to the Company's core business activities. Through October 30, 1999, the Company had incurred approximately $45 million to achieve Year 2000 compliance, including approximately $10 million related to capital projects. The Company's remaining cost for Year 2000 remediation is currently estimated to be $4 million. Total costs have not had, and are not expected to have, a material impact on the Company's financial results. New Accounting Rules -------------------- The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", which has been amended to be effective for quarters beginning after June 15, 2000. The Company has a limited exposure to derivative products and does not expect these new rules to have a material impact on reported results. Subsequent Events _________________ On December 6, 1999, the Company completed the previously announced sale of its proprietary credit card business to General Electric Capital Corporation. As a result of the transaction, the Company will reduce debt by approximately $4 billion. Also on December 6, 1999, the Company announced that it was cutting the quarterly dividend on its common stock to $0.2875. The dividend rate considered the overall performance of the various businesses of the Company and the need to reinvest earnings in these businesses. The move also takes into account, on a preliminary basis, the anticipated capital structure implications of creating the previously announced tracking stock covering Eckerd drugstores. -14- Seasonality ___________ The Company's business depends to a great extent on the last quarter of the year. Historically, sales for that period have averaged approximately one third of annual sales. Accordingly, the results of operations for the 13 and 39 weeks ended October 30, 1999 are not necessarily indicative of the results for the entire year. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company holds an interest rate swap with a notional principal amount of $375 million entered into in connection with the issuance of asset-backed certificates in 1990. This swap presents no material risk to the Company's results of operations. This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, which reflect the Company's current views of future events and financial performance, involve known and unknown risks and uncertainties that may cause the Company's actual results to be materially different from planned or expected results. Those risks and uncertainties include but are not limited to competition, consumer demand, seasonality, economic conditions, and government activity, and the year 2000 compliance readiness of the Company's suppliers and service providers as well as government agencies. Investors should take such risks and uncertainties into account when making investment decisions. -15- PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS. The Company has no material legal proceedings pending against it. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits ________ The following documents are filed as exhibits to this report: 4 (a) Amended and Restated 364-Day Revolving Credit Agreement dated as of October 1, 1999, among J. C. Penney Company, Inc. and J. C. Penney Funding Corporation, the Lenders party thereto, The Chase Manhattan Bank, as Administrative Agent, Salomon Smith Barney Inc., as Syndication Agent, and Bank of America, N.A. and Credit Suisse First Boston, as Co-Documentation Agents (incorporated by reference to Exhibit 4 (a) to J. C. Funding Corporation's Quarterly Report on Form 10-Q for the 39 weeks ended October 30, 1999, SEC File No. 1- 4971-1). 10(a) J. C. Penney Company, Inc. Mirror Savings Plan III, effective August 1, 1999. 10(b) Employment Agreement dated as of August 1, 1999. 11 Computation of net income per common share. 12(a) Computation of ratios of available income to combined fixed charges and preferred stock dividend requirement. 12(b) Computation of ratios of available income to fixed charges. 27(a) Financial Data Schedule for the nine months ended October 30, 1999. 27(b) Restated Financial Data Schedule for the nine months ended October 31, 1998. (b) Reports on Form 8-K ___________________ JCP Receivables, Inc. filed the following report on Form 8-K during the period covered by this report: Current Report of Form 8-K dated October 18,1999 (Item 5 - Other Events, Item 7 - Financial Statements and Exhibits). -16- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. J. C. PENNEY COMPANY, INC. By /S/W. J. Alcorn _______________________________ W. J. Alcorn Vice President and Controller (Principal Accounting Officer) Date: December 14, 1999 EX-10.(A) 2 MIRROR SAVINGS PLAN III EFFECTIVE 08/01/1999 Exhibit 10 (a) J. C. PENNEY COMPANY, INC. MIRROR SAVINGS PLAN III Adopted effective August 1, 1999 J. C. PENNEY COMPANY, INC. MIRROR SAVINGS PLAN III INTRODUCTION ____________ The J. C. Penney Company, Inc. Mirror Savings Plan ("Plan") III was adopted effective August 1, 1999 as part of a program to redesign the Company's qualified and non-qualified savings plans to optimize the retirement savings opportunities for certain Associates prior to the date they became eligible to participate in the J. C. Penney Company, Inc. Savings, Profit-Sharing and Stock Ownership Plan. The Plan is maintained by the Company on an unfunded basis primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees. J. C. PENNEY COMPANY, INC. MIRROR SAVINGS PLAN III TABLE OF CONTENTS _________________ Article Page _______ ____ ARTICLE ONE DEFINITIONS............................................ 1 ARTICLE TWO ELIGIBILITY AND PARTICIPATION.......................... 4 2.01 Eligibility Determined for Each Plan Year................ 4 2.02 Eligible Associate....................................... 4 2.03 Participation............................................ 4 2.04 Election to Defer........................................ 4 2.05 Deferral Amounts......................................... 5 2.06 Investment Elections..................................... 5 ARTICLE THREE BENEFITS............................................. 7 3.01 Establishment of Accounts................................ 7 3.02 Personal Accounts........................................ 7 ARTICLE FOUR TRANSFERS............................................. 8 4.01 Personal Accounts........................................ 8 ARTICLE FIVE VESTING............................................... 9 5.01 Personal Accounts........................................ 9 ARTICLE SIX TYPE OF PLAN........................................... 10 6.01 Top Hat Plan............................................. 10 6.02 No Funding............................................... 10 ARTICLE SEVEN DISTRIBUTIONS........................................ 11 7.01 Normal Form of Payment................................... 11 7.02 Separation from Service.................................. 11 7.03 Death.................................................... 11 7.04 Alternate Form of Payment................................ 11 7.05 Hardship Distribution.................................... 12 7.06 Fund-Specific Installments or Hardship Distributions..... 13 7.07 Form of Payments......................................... 13 7.08 Change of Control........................................ 13 7.09 Reemployed Participants.................................. 15 ARTICLE EIGHT AMENDMENT AND TERMINATION............................ 17 8.01 Plan Amendment........................................... 17 8.02 Plan Termination......................................... 17 8.03 Automatic Plan Termination............................... 17 ARTICLE NINE MISCELLANEOUS......................................... 18 9.01 Plan Administration..................................... 18 9.02 Plan Expenses............................................ 18 9.03 Effect on Other Benefits................................. 19 9.04 No Guarantee of Employment............................... 19 9.05 Disclaimer of Liability.................................. 19 9.06 Severability............................................. 19 9.07 Successors............................................... 19 9.08 Governing Law............................................ 19 9.09 Construction............................................. 19 9.10 Taxes.................................................... 20 9.11 Non-Assignability........................................ 20 9.12 Claims Procedure......................................... 20 ARTICLE ONE DEFINITIONS As used herein, the following words and phrases have the following respective meanings unless the context clearly indicates otherwise: 1.01 Active Participant: A Participant who defers part of his __________________ Compensation for a Plan Year (or part thereof) pursuant to an Election to Defer that satisfies the requirements of Section 2.04. 1.02 Associate: Any person who is classified as an associate and _________ employed by an Employer if the relationship between the Employer and such person constitutes the legal relationship of employer and employee. 1.03 Beneficiary: The person or persons designated by the Participant ___________ on a beneficiary form required by the Company for this purpose to receive benefits payable under the Plan because of the Participant's death. 1.04 Code: The Internal Revenue Code of 1986, as amended from time to ____ time. 1.05 Company: J. C. Penney Company, Inc., a Delaware corporation, or _______ its successor(s). 1.06 (Reserved) _________ 1.07 Compensation: The total cash remuneration paid to an Associate by ____________ his Employer, that qualifies as wages as the term wages is defined in Code section 3401(a), determined without regard to any reduction for workers' compensation and state disability insurance reimbursements, and all other compensation payments for which his Employer is required to furnish the Associate a written statement under Code sections 6041(d), 6051(a)(3) and 6052, reduced by any extraordinary items of special pay. In addition, Compensation includes any contributions made by the Associate's Employer on behalf of the Associate pursuant to a deferral election under any employee benefit plan containing a cash or deferred arrangement under Section 401(k) of the Code, and any amounts that would have been received as cash but for an election to receive benefits under a cafeteria plan meeting the requirements of Section 125 of the Code. Compensation also includes eligible cash incentive payments in the year paid to the Associate, and amounts deferred by the Active Participant pursuant to Section 2.05 of the Plan. Compensation for a Plan Year shall be determined without regard to the limitations 1 on annual compensation under Section 401(a)(17) of the Code. An Associate who is in the service of the armed forces of the United States during any period in which his reemployment rights are guaranteed by law will be considered to have received the same rate of Compensation during his absence that he was receiving immediately prior to his absence, provided he returns to employment with an Employer within the time such rights are guaranteed. 1.08 Eligible Associate: An Associate who has satisfied the eligibility __________________ requirements of the Plan for a Plan Year in accordance with Section 2.02. 1.09 Employer: The Company and any subsidiary company or affiliate of ________ the Company that is a Participating Employer as defined in Article I of the Savings Plan. 1.10 ERISA: The Employee Retirement Security Act of 1974, as amended _____ form time to time. 1.11 Exchange Act: The Securities Exchange Act of 1934, as amended from ____________ time to time. 1.12 Human Resources Committee: The Human Resources Committee of the _________________________ Management Committee of the Company. 1.13 (Reserved) _________ 1.14 Mirror Investment Funds: Phantom funds established as book reserve _______________________ entries in the books and records of the Company to which a Participant's deferral amounts under the Plan are credited based on the investment elections of the Participant. The investment returns of such funds shall be assumed to match the returns of the same investment funds available to participants under the Savings Plan which are currently: (1) Interest Income Fund; (2) Conservative Fund; (3) Moderate Fund; (4) Aggressive Fund; and (5) Penney Common Stock Fund. 1.15 Participant: An Eligible Associate who participates in the Plan in ___________ accordance with Article Two, and who has not yet received a distribution of the entire amount of his vested benefits under the Plan. 1.16 Personal Account: A phantom account established in accordance with ________________ Article Three to which a Participant's deferral amounts plus earnings are credited. 1.17 Personnel and Compensation Committee: The Personnel and ____________________________________ Compensation Committee of the Board of Directors of the Company. 2 1.18 Plan: The J. C. Penney Company, Inc. Mirror Savings Plan III, ____ effective August 1, 1999, as amended from time to time. 1.19 Plan Year: August 1, 1999 through December 31, 1999, and each _________ calendar year thereafter. 1.20 Separation from Service: The termination of employment of an _______________________ Eligible Associate or a Participant because of retirement, resignation, discharge, disability or death. 1.21 Valuation Date: With respect to all Mirror Investment Funds, each ______________ day of a calendar year on which the New York Stock Exchange is open. With respect to transactions or distributions initiated by a Participant or Beneficiary, (a) the date of receipt by the Plan Administrator of the request if it is received prior to the close of the New York Stock Exchange, or (b) the next trading day if the request is received after the close of the New York Stock Exchange. With respect to distributions not initiated by a Participant, the date the distribution is processed. 3 ARTICLE TWO ELIGIBILITY AND PARTICIPATION 2.01 Eligibility Determined for Each Plan Year _________________________________________ The eligibility of each Associate to participate in the Plan as an Active Participant is determined for each Plan Year in accordance with Section 2.02 below. Eligibility for, or participation in, the Plan for a Plan Year does not give an Associate the right to defer part of his Compensation under the Plan for any other Plan Year. 2.02 Eligible Associate __________________ An Associate shall be eligible to participate in the Plan as an Active Participant for a Plan Year if the Associate has been designated as an Eligible Associate by the Vice President and Director of Human Resources in his sole discretion (or his successor by title or position) and has received a written offer to participate in the Plan. An Associate shall not be designated as an Eligible Associate unless he is employed with the Company at a position responsibility level of 15 or above, or with an Employer at a comparable position responsibility level as determined by the Vice President and Director of Human Resources in his sole discretion (or his successor by title or position). 2.03 Participation _____________ An Eligible Associate for a Plan Year shall participate in the Plan for that Plan Year as an Active Participant by making a timely Election to Defer in accordance with Section 2.04 below. An Eligible Associate who fails to satisfy the requirements of Section 2.04 below shall not be allowed to make an Election to Defer and shall not be an Active Participant for that Plan Year. A Participant who is not an Active Participant for a Plan Year shall continue to participate in the Plan in all respects except that such Participant shall not have the right to defer part of his Compensation under the Plan for that Plan Year. 2.04 Election to Defer _________________ An Eligible Associate for a Plan Year may elect to defer a percentage (as described in Section 2.05 below) of his Compensation for such Plan Year. The Election to Defer for a Plan Year must be made in a manner approved by the Plan Administrator and must be received by the Plan Administrator 4 (a) For the Plan Year ending on December 31, 1999, before September 1, 1999 and shall be effective on September 1, 1999, or (b) For a Plan Year beginning after December 31, 1999, before the last day of the month in which occurs the Eligible Associate's date of hire and shall be effective on the first day of the next month, or (c) For any Plan Year not described in (a) or (b) above, by December 31 of the preceding Plan Year and shall be effective on January 1 following such preceding Plan Year. An Eligible Associate may change his Election to Defer by filing a new Election to Defer with the Plan Administrator by the applicable deadline. An Active Participant cannot change his Election to Defer during a Plan Year for that Plan Year. An Active Participant may terminate his Election to Defer during a Plan Year for that Plan Year but shall not be permitted to make another Election to Defer for that Plan Year. Such termination shall be effective as of the next available payroll period following receipt of the termination by the Plan Administrator. An Election to Defer also shall terminate if: (1) the Eligible Associate is eligible to participate in the J. C. Penney Company, Inc. Mirror Savings Plan II, or (2) the Eligible Associate or Participant has a Separation from Service with an Employer, or (3) the Plan is terminated, or (4) upon a Change of Control that occurs before the date that payment of Compensation would have been made if not deferred. 2.05 Deferral Amounts ________________ An Active Participant for a Plan Year may defer (a) up to 14% of his Compensation in that Plan Year up to the Earnings Dollar Limit (as defined below), and (b) up to 75% of his Compensation in that Plan Year that exceeds the Earnings Dollar Limit provided, however, that for the Plan Year ending on December 31, 1999 an Active Participant may defer all or part of his supplemental cash payments and signing bonus. All deferral amounts shall be in whole percentages and made by payroll deduction. Compensation in a Plan Year that is paid prior to the effective date of the Active Participant's Election to Defer cannot be deferred for that Plan Year. The Earnings Dollar Limit of an Active Participant for a Plan Year shall be shall be 5 $160,000, as adjusted for cost-of-living increases in accordance with Section 401(a)(17) of the Code. 2.06 Investment Elections ____________________ A Participant shall complete an election, in the manner determined by the Plan Administrator, requesting that all of his future deferral amounts (in whole percentages) be applied to the purchase for him, as of the earliest practicable Valuation Date after such amounts are deferred, of units in his Personal Accounts within any one or more of the Mirror Investment Funds in each case at a price equal to the value of such units as of such Valuation Date. Such election initially must be made prior to the commencement of his participation in the Plan and may be changed at any time during the Plan Year. Each such election or change in election shall be effective as soon as administratively feasible following receipt by the Plan Administrator or its delegate of the Participant's election. In the event that no timely investment election by the Participant is on file with the Plan Administrator, such Participant shall be deemed to have elected that all deferral amounts shall be applied to the purchase for him of units in the Personal Account within the Mirror Investment Fund that is the Interest Income Fund. 6 ARTICLE THREE BENEFITS 3.01 Establishment of Accounts _________________________ A Personal Account within each Mirror Investment Fund shall be established for each Participant in the Plan as if assets were invested in a trust. All amounts credited to the Personal Accounts of a Participant shall at all times be held in the Company's general funds as part of the Company's general assets, unless a trust is established pursuant to Section 7.08. The value, including gains and losses, of such accounts and funds shall be determined by the Plan Administrator in the same manner that the value is determined under the Savings Plan. As of each Valuation Date, the net asset value of a unit shall equal the net asset value of a unit as determined under the Savings Plan. No funds shall be allocated by the Company to any Personal Account or Mirror Investment Fund under the Plan. 3.02 Personal Accounts _________________ All amounts deferred by an Active Participant pursuant to Article Two shall be credited to his Personal Accounts within his Mirror Investment Funds specified in his investment election. 7 ARTICLE FOUR TRANSFERS 4.01 Personal Accounts _________________ A Participant may elect, once in each calendar month of the Plan Year, to transfer an amount (in whole percentages) equal to the value of all or part of his units in his Personal Accounts within any one or more of the Mirror Investment Funds to another one or more of his Personal Accounts within the Mirror Investment Funds. The value of such units shall be determined as of the Valuation Date. A transfer is effective only if made in the manner determined by the Plan Administrator. 8 ARTICLE FIVE VESTING 5.01 Personal Accounts _________________ A Participant shall be 100% vested in the value of his Personal Accounts within his Mirror Investment Funds at all times without regard to whether he is a Participant in the Plan for any future Plan Year. 9 ARTICLE SIX TYPE OF PLAN 6.01 Top Hat Plan ____________ The Plan is intended to be a "pension plan" as defined in ERISA and is maintained by the Company on an unfunded basis primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees. As such, the Plan is intended to be construed so as not to provide income to any Participant or Beneficiary for purposes of the Internal Revenue Code prior to actual receipt of benefit payments under the Plan. In the event that it should subsequently be determined by statute or by regulation or ruling that the Plan is not "a plan which is unfunded and is maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees" within the meaning of sections 201(2), 301(a)(3), 401(a)(1), and 4021(b)(6) of ERISA and section 2520.104-24 of Chapter 29 of the Code of Federal Regulations, participation in the Plan shall be restricted by the Plan Administrator to the extent necessary to assure that it will be such a plan within the meaning of such sections. Notwithstanding any other provision of the Plan, if the benefits of a Participant become taxable prior to distribution from the Plan, such amounts shall be distributed as soon as practicable to the affected Participant. 6.02 No Funding __________ Plan benefits shall be payable solely from the general assets of the Company. The Company shall not be required to, but may at its discretion, segregate or physically set aside any funds or assets attributable to Plan benefits. The Company shall retain title to and beneficial ownership of all assets of the Company, including any assets which may be used to pay Plan benefits. The cost of the Plan shall be expensed and a book reserve shall be maintained on the Company's financial statements. No Participant or Beneficiary shall be deemed to have, pursuant to the Plan, any legal or equitable interest in any specific assets of the Company. To the extent that any Participant or Beneficiary acquires any right to receive Plan benefits, such right shall arise merely as a result of a contractual obligation and shall be no greater than, nor have any preference or priority over, the rights of any general unsecured creditor of the Company. 10 ARTICLE SEVEN DISTRIBUTIONS 7.01 Normal Form of Payment ______________________ The normal form of payment of benefits under the Plan shall be 5 substantially equal installments payable in accordance with Section 7.02 below. 7.02 Separation from Service _______________________ A Participant who has a Separation from Service for a reason other than death shall be entitled to receive the vested benefits in his Personal Accounts in 5 substantially equal annual installments. The first annual installment shall be paid in January following the year in which occurs his Separation from Service. Each annual installment thereafter shall be paid in January of each year. Payment dates shall be determined by the Plan Administrator. 7.03 Death _____ The Beneficiary of a Participant who (1) has a Separation from Service because of death, or (2) dies while receiving Plan benefits shall be entitled to receive the remaining annual installments to which the Participant was entitled as of the date of death. The first annual installment payable to the Beneficiary shall be paid in January following the Participant's date of death, or, if later, after satisfactory proof of death is received by the Plan Administrator. Each annual installment thereafter shall be paid in January of each year. Payment dates shall be determined by the Plan Administrator. A single-sum distribution shall be paid to the estate of the Participant if as of the date of death (1) no valid beneficiary designation by the Participant is on file with the Plan Administrator, or (2) the Beneficiary has predeceased the Participant. A single-sum distribution shall be paid to the estate of the Beneficiary if the Beneficiary dies before receiving all benefits to which he was entitled under the Plan. 7.04 Alternate Form of Payment _________________________ A Participant entitled to receive benefits under Section 7.02 above may make an irrevocable election to receive (1) not more than 15 substantially equal annual installments, or (2) a single-sum distribution. The election must be made prior to the Participant's Separation from Service in a manner authorized by the Plan Administrator. If no election has been made by the Participant, benefits shall be paid in the normal form of payment in accordance with Section 7.02 above. 11 The first annual installment or single-sum distribution shall be paid in January following the year in which occurs his Separation from Service; provided, however, that the first annual installment or single-sum distribution shall not be paid until the January following the expiration of at least one calendar year after the year in which the Participant's election is made. Each annual installment thereafter shall be paid in January of each year. A Participant also may make an irrevocable election to defer payment of the first installment or single-sum distribution to January of a later year provided the election is made prior to the Participant's Separation from Service in a manner authorized by the Plan Administrator. If no election has been made by the Participant, benefits shall commence in accordance with Section 7.02 or Section 7.04 above, whichever is applicable. A Participant who elects both to change the normal form of payment and to defer payment must make the elections at the same time. 7.05 Hardship Distribution _____________________ A Participant or Beneficiary entitled to vested benefits under the Plan may request a single-sum distribution to satisfy a severe financial hardship resulting from an unforseen event or emergency (as defined below) beyond his control. The distribution shall be limited to the amount necessary to satisfy the severe financial hardship (including any applicable federal, state or local taxes attributable to such distribution), and shall not exceed the current value of vested benefits payable to or on behalf of the Participant or Beneficiary. An unforeseen event or emergency may include, but is not limited to, a sudden and unexpected illness or accident of the Participant or Beneficiary or his dependent, loss of his property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as the result of events beyond his control, but shall not include the purchase of his home or the college expenses of his child. The determination of the existence of a severe financial hardship and the approval of a hardship distribution shall be made by the Vice President and Director of Human Resources (or his successor by title or position) or his delegate except as provided below. Approval shall be given only if, taking into account all of the facts and circumstances, continued deferral of benefits or adherence to the Plan's payment schedule would result in a severe financial hardship to the Participant or Beneficiary. Approval shall not be granted if such hardship is or may be relieved through insurance, by liquidation of his assets (to the extent such liquidation would not itself cause severe financial hardship), or by terminating his Election to Defer. With respect to a Participant who is a member of the Management Committee of the Company or a Participant who is subject to Section 16(b) of the Exchange Act, the 12 determination of the existence of a severe financial hardship and the approval of the hardship distribution shall be made by the Personnel and Compensation Committee. In the case of a Participant or Beneficiary who receives a partial hardship distribution while receiving benefit payments, the regular payment schedule of the Participant or Beneficiary shall continue following such distribution. 7.06 Fund-Specific Installments or Hardship Distributions ____________________________________________________ The payment to a Participant or Beneficiary of installments or a hardship distribution shall reduce the value of his accounts in his Mirror Investment Fund(s) as designated by the Participant or Beneficiary. In the event the Participant or Beneficiary fails to designate the Mirror Investment Funds from which payment is to be made, the value of his Mirror Investment Funds shall be reduced on a pro-rata basis. 7.07 Form of Payments ________________ Payment of all benefits from the Plan shall be made only by check. No payments of Company stock shall be permitted. 7.08 Change of Control _________________ At the time of commencement of participation in the Plan, a Participant may make an irrevocable election to have his Plan benefits paid in a single-sum immediately upon a Change of Control (as hereafter defined). If the Participant makes such an election as described above, his vested Plan benefits shall be paid in a single-sum upon a Change of Control. If the Participant does not make such an election, then, upon a Change of Control, assets of the Company in an amount sufficient to pay benefits then due under the Plan shall immediately be transferred to a grantor trust to be established by the Company for the purpose of paying benefits hereunder, and the Personal Account and Company Account shall thereafter be paid to the Participant from such trust in accordance with the terms of the Plan; provided that at the time of such Change of Control, the Participant may make an irrevocable election to have his Plan benefits paid in a single-sum immediately, in which event the Participant's benefits shall be reduced by 10% as a penalty for early withdrawal, and the Participant shall receive a single-sum payment of only 90% of his benefits otherwise payable under the Plan. On each anniversary date of the date of a Change of Control, the Company shall transfer to the grantor trust an amount necessary to pay all benefits accrued under the Plan during the preceding twelve months. For purposes of this Section 7.08, a Change of Control shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (a) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such 13 Person any securities acquired directly from the Company or its Affiliates) representing 50% or more of the combined voting power of the Company's then outstanding securities; or (b) during any period of two consecutive calendar years, the following individuals cease for any reason to constitute a majority of the number of directors then serving as directors of the Company: individuals, who on July 14, 1999 constitute the Board of Directors of the Company and any new director (other than a director whose initial assumption of office is in connection with the settlement of an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board of Directors of the Company or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors on July 14, 1999 or whose appointment, election or nomination for election was previously so approved or recommended; or (c) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or entity, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any Parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 50% of the combined voting power of the securities of the Company, such surviving entity or any Parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected solely to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 50% or more of the combined voting power of the Company's then outstanding securities; or (d) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company, or there is consummated a sale or disposition by the Company or any of its subsidiaries of any assets which individually or as part of a series of related transactions constitute all or substantially all of the Company's consolidated assets, other than any such sale or disposition to an entity at least 50% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the voting securities of the Company immediately prior to such sale or disposition; or (e) the execution of a binding agreement that if consummated would result in a Change of Control of a type specified in subparagraphs (a) or (c) above (an "Acquisition Agreement") or of a binding agreement for the sale or disposition of assets that, if consummated, would result in a Change of Control of a type specified in subparagraph (d) above (an "Asset Sale Agreement") or the adoption by the Board of Directors of the 14 Company of a plan of complete liquidation or dissolution of the Company that, if consummated, would result in a Change of Control of a type specified in subparagraph (d) above (a "Plan of Liquidation"), provided, however, that a Change of Control of the type specified in this subparagraph (e) shall not be deemed to exist or have occurred as a result of the execution of such Acquisition Agreement or Asset Sale Agreement, or the adoption of such a Plan of Liquidation, from and after the Abandonment Date. As used in this subparagraph (e), the term "Abandonment Date" shall mean the date on which (i) an Acquisition Agreement, Asset Sale Agreement or Plan of Liquidation is terminated (pursuant to its terms or otherwise) without having been consummated, (ii) the parties to an Acquisition Agreement or Asset Sale Agreement abandon the transactions contemplated thereby, (iii) the Company abandons a Plan of Liquidation, or (iv) a court or regulatory body having competent jurisdiction enjoins or issues a cease and desist or stop order with respect to or otherwise prevents the consummation of, or a regulatory body notifies the Company that it will not approve an Acquisition Agreement, Asset Sale Agreement or Plan of Liquidation or the transactions contemplated thereby and such injunction, order or notice has become final and not subject to appeal; or (f) the Board adopts a resolution to the effect that, for purposes of this Plan, a Change of Control has occurred. Notwithstanding the foregoing, a Change of Control shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity (i) which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions, (ii) which is intended to reflect or track the value or performance of a particular division, business segment or subsidiary of the Company, or (iii) which is an affiliated company, subsidiary, or spin-off entity owned by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company on the date of such spin-off. As used in connection with the foregoing definition of Change of Control, "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act; "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act; "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time; "Parent" shall mean any entity that becomes the Beneficial Owner of at least 50% of the voting power of the outstanding voting securities of the Company or of an entity that survives any merger or consolidation of the Company or any direct or indirect subsidiary of the Company; and "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation or entity owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their 15 ownership of stock of the Company. 7.09 Reemployed Participants _______________________ If the Participant is reemployed, his scheduled payments under Section 7.02 or Section 7.04 shall cease and his election, if any, under Section 7.04 shall be void. The Participant may make a new election under Section 7.04 prior to his subsequent Separation from Service that shall apply to any unpaid benefits and to any additional benefits payable to or on behalf of the Participant because of a subsequent Separation from Service. If no new election is made by the Participant, benefits shall be paid in the normal form of payment in accordance with Section 7.02 above. 16 ARTICLE EIGHT AMENDMENT AND TERMINATION 8.01 Plan Amendment ______________ The Personnel and Compensation Committee may amend the Plan at any time and from time to time, without prior notice to any Participant or Beneficiary; provided, however, that the Human Resources Committee also may make amendments that relate primarily to the administration of the Plan, are applied in a uniform and consistent manner to all Participants, and are reported to the Personnel and Compensation Committee. 8.02 Plan Termination ________________ The Board of Directors of the Company may terminate or discontinue the Plan at any time. If the Plan is terminated, it shall be on such terms and conditions as the Board of Directors of the Company shall deem appropriate. 8.03 Automatic Plan Termination __________________________ This Plan is expressly conditioned on the continued deferral of income tax on amounts deferred by a Participant under the Plan until such amounts are actually distributed to the Participant. If, as a result of an adverse determination by the Internal Revenue Service or a change in the tax laws or applicable income tax regulations, amounts deferred by Participants under the Plan become subject to income tax prior to the actual distribution of such amounts, the Plan and each Election to Defer hereunder shall automatically terminate as of the effective date of such change in the law without any formal action by the Board of Directors to terminate the Plan. 17 ARTICLE NINE MISCELLANEOUS 9.01 Plan Administration ___________________ The Plan shall be administered under the direction of the Personnel and Compensation Committee. Except as otherwise provided below, the Benefits Administration Committee shall be considered the Plan Administrator for purposes of ERISA. The Personnel and Compensation Committee may delegate all or some of the responsibility for the administration of the Plan to the Human Resources Committee or the Benefits Administration Committee in which case such Committee shall assume such delegated power and authority in administering the Plan to that extent; provided, however, that in no event shall the Human Resources Committee or the Benefits Administration Committee have any power or authority with respect to matters involving a Participant who is a member of the Management Committee of the Company or a Participant who is subject to Section 16(b) of the Exchange Act. The Plan Administrator has the authority and discretion to construe and interpret the Plan. As part of this authority, the Plan Administrator has the discretion to resolve inconsistencies or ambiguities in the language of the Plan, to supply omissions from or correct deficiencies in the language of the Plan, and to adopt rules for the administration of the Plan which are not inconsistent with the terms of the Plan. The Plan Administrator also has the authority and discretion to resolve all questions of fact relating to any claim for benefits as to any matter for which the Plan Administrator has responsibility. All determinations of the Plan Administrator are final and binding on all parties. Each person considered to be a fiduciary with respect to the Plan shall have only those powers and responsibilities as are specifically given that person under this Plan. It is intended that each such person shall be responsible for the proper exercise of his or her own powers and responsibilities, and shall not be responsible for any act or failure to act of any other person considered to be a fiduciary or any act or failure to act of any person considered to be a non-fiduciary. 9.02 Plan Expenses _____________ All Plan administration expenses incurred by the Company or the Plan Administrator shall be paid by the Company. 9.03 Effect on Other Benefits ________________________ Participation in the Plan shall not reduce any welfare benefits or retirement benefits offered by the Company, except that the amounts deferred under the Plan and any Plan 18 benefits shall not be considered "Compensation" for purposes of the Savings Plan. 19 9.04 No Guarantee of Employment __________________________ Neither participation in the Plan nor any action taken under the Plan shall confer upon a Participant any right to continue in the employ of an Employer or affect the right of such Employer to terminate the Participant's employment at any time. 9.05 Disclaimer of Liability _______________________ The Employer shall be solely responsible for the payment of Plan benefits hereunder. The members of the Personnel and Compensation Committee and the Human Resources Committee, and the officers, directors, employees, or agents of the Company or any other Employer, shall not be liable for such benefits. Unless otherwise required by law, no such person shall be liable for any action or failure to act, except where such act or omission constitutes gross negligence or willful or intentional misconduct. 9.06 Severability ____________ If any provision of the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall apply only to that provision, and shall not affect or render invalid or unenforceable any other provision of the Plan. In such event, the Plan shall be administered and construed as if such invalid or unenforceable provision were not contained herein. If the application of any Plan provision to any Participant or Beneficiary shall be held invalid or unenforceable, the application of such provision to any other Participant or Beneficiary shall not in any manner be affected thereby. 9.07 Successors __________ The Plan and any Election to Defer shall be binding on (i) the Company and its successors and assigns, (ii) any Employer and its successors and assigns, (iii) each Participant, (iv) each Beneficiary, and (v) the heirs, distributees, and legal representatives of each Participant and Beneficiary. 9.08 Governing Law _____________ Except to the extent that the Plan may be subject to the provisions of ERISA, the Plan shall be construed and enforced according to the laws of the State of Texas without giving effect to the conflict of laws principles thereof. In the event limitations imposed by ERISA on legal actions do not apply, the laws of the State of Texas shall apply, and a cause of action under the Plan must be brought no later than four years after the date the action accrues. 9.09 Construction ____________ As used herein, the masculine shall include the feminine, the singular shall include the plural, and vice versa, unless the context clearly indicates otherwise. Titles and headings herein are for convenience only and shall not be considered in construing the 20 Plan. The words "hereof," "hereunder", and other similar compounds of the word "here" shall mean and refer to the entire Plan and not to any particular provision or Section. 9.10 Taxes _____ Any taxes imposed on Plan benefits shall be the sole responsibility of the Participant or Beneficiary. The Company shall deduct from Plan benefits any federal taxes, state taxes, local taxes, or other taxes required to be withheld. The Company shall, unless the Plan Administrator elects otherwise, withhold such taxes at the applicable flat rate percentage. The Company shall also deduct from any payment of Compensation, including any cash incentive payments, on the date such payment would have been made if not deferred under this Plan Social Security and Medicare taxes or other taxes required to be withheld on such date. 9.11 Non-Assignability _________________ Unless otherwise required by law, and prior to distribution to a Participant or Beneficiary, Plan benefits shall not be subject to assignment, transfer, sale, pledge, encumbrance, alienation, or charge by such Participant or Beneficiary, and any attempt to do so shall be void. Plan benefits shall not be liable for or subject to garnishment, attachment, execution, or levy, or liable for or subject to the debts, contracts, or liabilities of the Participant or Beneficiary; provided, however, that the Company may offset from the payment of any Plan benefits to a Participant or Beneficiary amounts owed by the Participant to an Employer. 9.12 Claims Procedure ________________ If a Participant or Beneficiary ("claimant") does not receive the benefits which the claimant believes he is entitled to receive under the Plan, the claimant may file a claim for benefits with the Director of Personnel (or his successor by title or position). All claims must be made in writing and must be signed by the claimant. If the claimant does not furnish sufficient information to determine the validity of the claim, the Director of Personnel will indicate to the claimant any additional information which is required. Each claim will be approved or disapproved by the Director of Personnel within 90 days following receipt of the information necessary to process the claim. In the event the Director of Personnel denies a claim for benefits in whole or in part, the Director of Personnel will notify the claimant in writing of the denial of the claim. Such notice by the Director of Personnel will also set forth, in a manner calculated to be understood by the claimant, the specific reasons for such denial, the specific Plan provisions on which the denial is based, a description of any additional material or information necessary to perfect the claim with an explanation of why such material or information necessary, and an explanation of the Plan's claim review procedure as set forth below. If no action is taken by the Director of Personnel on or a claim within 90 days, the claim will be deemed to be denied for purposes of the review procedure below. 21 A claimant may appeal a denial of his or her claim by requesting a review of the decision by the Plan Administrator. An appeal must be submitted in writing within six months after the denial and must (i) request a review of the claim for benefits under the Plan, (ii) set forth all the grounds upon which the claimant's request for review is based and any facts in support thereof, and (iii) set forth any issues or comments which the claimant deems pertinent to the appeal. The Plan Administrator will make a full and fair review of each appeal and any written materials submitted in connection with the appeal. The Plan Administrator will act upon each appeal within 60 days after receipt thereof, unless special circumstances require an extension of the time for processing, in which case a decision will be rendered as soon as possible but not later than 120 days after the appeal is received. The claimant will be given the opportunity to review pertinent documents or materials upon submission of a written request to the Plan Administrator, provided the Plan Administrator finds the requested documents or materials pertinent to the appeal. On the basis of its review, the Plan Administrator will make an independent determination of the claimant's eligibility for benefits under the Plan. The decision of the Plan Administrator on any claim for benefits will be final and conclusive upon all parties thereto. In the event the Plan Administrator denies an appeal in whole or in part, the Plan Administrator will give written notice of the decision to the claimant, which notice will set forth, in a manner calculated to be understood by the claimant, the specific reasons for such denial and specific reference to the pertinent Plan provisions on which the decision was based. 22 EX-10.(B) 3 EMPLOYMENT AGREEMENT DATED AS OF 08/01/1999 Exhibit 10 (b) EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement"), made in the City of Plano and the State of Texas, dated as of the first day of August, 1999, between J. C. Penney Company, Inc., a Delaware corporation (hereinafter called the "Employer"), and Vanessa Castagna (hereinafter called the "Employee"). 1. Employment, Position and Duties _______________________________ 1.1 The Employer hereby agrees to employ Employee and the Employee hereby agrees to undertake employment with the Employer upon the terms and conditions herein set forth. 1.2 During the Term (as hereafter defined), the Employee will serve in the position of Executive Vice President and Chief Operating Officer of JCPenney Stores, Catalog and Merchandising. Employee shall faithfully and in conformity with the directions of the Board of Directors of the Employer (the "Board") or its delegate perform the duties of her employment and shall devote to the performance of such duties her full time and attention. 2 Term of Employment. Employee's term of employment under this __________________ Agreement will commence on August 1, 1999 (the "Start Date") and, subject to the provisions of this Agreement, will terminate on the earlier of (i) the fifth anniversary of the Start Date or (ii) termination of Employee's employment pursuant to Section 7 of this Agreement (the "Termination Date"). Notwithstanding the termination date provided in the previous sentence, the term of this Agreement may be extended by agreement of the parties. 3 Compensation ____________ 3.1 Salary. In consideration of her services during the Term, ______ the Employer shall pay the Employee cash compensation at an annual rate of $550,000 ("Base Salary"). Employee's Base Salary shall be subject to such increases as may be approved by the Personnel and Compensation Committee of the Board (the "Committee") or its delegate. 3.2 Annual Incentive Compensation. Employee shall be eligible _____________________________ to participate in the 1989 Management Incentive Compensation Plan (the "Comp Plan"). Employee's annual target incentive shall be 48% of Base Salary unless changed by the Committee; provided however that Employee's annual incentive award for the 1999 and 2000 fiscal year will be not less than 48% of Base Salary, which amount for 1999 shall be prorated to reflect Employee's actual period of service during 1999 after the Start Date. If the Committee authorizes any annual cash incentive program or approves any other annual management incentive program or arrangement, Employee will be eligible to participate in such plan, program, or arrangement on terms commensurate with Employee's position and level of responsibility. 3.3 Long-Term Incentive Compensation. Employee shall be ________________________________ eligible to participate in the EVA Performance Plan (the "EVAPP"). Employee's annual target participation will be at a level of 23.5% of Employee's Base Salary plus annual incentive at 48% of Base Salary ("Total Earnings"), unless changed by the Committee; provided however, that Employee's long term incentive award to be credited to her EVAPP Bonus Bank for the 1999 and 2000 fiscal year will be not less than 23.5% of her Total Earnings, which amount for 1999 shall be prorated to reflect Employee's actual period of service during 1999 (Total Earnings plus EVAPP target at $1.00 per unit is defined as "Grand Total Earnings"). If the Committee authorizes any long-term incentive compensation plan, program, or arrangement, Employee will be eligible to participate in such plan, program, or arrangement on terms commensurate with her position and level of responsibility. 3.4 Supplemental Cash Payment Employee shall be entitled to _________________________ receive a supplemental cash payment of $2,000,000. This supplemental cash payment shall be payable in three installments as specified below, provided that Employee remains employed on each date of payment subject to Section 7. The supplemental cash payment shall be payable as follows: $800,000 upon the completion of an initial period of employment from Start Date to September 3, 1999, $600,000 on the first anniversary of the Start Date, and $600,000 on the second anniversary of the Start Date. 4 Expenses. During the Term the Employee shall be allowed _________ reimbursement of reasonable expenses necessary for the performance of her duties in accordance with the policies of the Employer. 5 Restricted Stock and Stock Options. __________________________________ 5.1 The Employer will grant to the Employee on the Start Date 43,000 shares of the Employer's common stock (the "Restricted Stock"). The Restricted Stock will be held in escrow and will be subject to forfeiture upon the termination of Employee's employment for any reason (subject to Section 7); provided however, that on the third, fifth, and tenth anniversary of the Start Date 14,333, 14,333, and 14,334 (respectively) shares of Restricted Stock will no longer be subject to forfeiture and will be released from escrow. 5.2 The Employer will grant to Employee on the Start Date 1,000 restricted stock units. The units will vest three years after the grant date provided the Employee remains employed by the Employer (subject to Section 7) on that date. Upon vesting, distribution of the stock units will be made in shares of J. C. Penney common stock with no restrictions on the vested shares. 5.3 The Employer will grant to Employee, on the Start Date, an option to purchase 57,000 shares of Employer's common stock. The option will have a ten-year term and an exercise price equal to the fair market value on the Start Date as defined in the 1997 Equity Compensation Plan (mean of the high and low sales prices on July 30 and August 2). The option will be exercisable on the third anniversary of the Start Date, provided the Employee remains employed by the Employer (subject to Section 7) on that date. 5.4 The Employer will grant to the Employee, on the Start Date, an option to purchase 150,000 shares of Employer's common stock. The option will have a ten-year term and an exercise price equal to the fair market value on the Start Date as defined in the 1997 Equity Compensation Plan (mean of the high and low sales prices on July 30 and August 2). The option will vest at the rate of 20% per year; beginning on the first anniversary of the Start Date, provided the Employee remains employed by the Employer (subject to Section 7) on each date. Vesting may be accelerated if the actual results for the fiscal year immediately 2 preceding the vesting date exceed Plan (as determined under the Comp Plan for all elements of Employee's responsibility) according to the following schedule: Exceed plan up to 1% 30% vesting Exceed Plan more than 1% up to 2% 40% vesting Exceed Plan more than 2% 50% vesting Total vesting percentage cannot exceed 100% 5.5 The grants of shares of Restricted Stock and Options will be made pursuant to and subject to the terms, conditions, and restrictions in the Employer's 1997 Equity Plan, as amended. The definitive terms of the grants will be set forth in agreements to be provided to Employee promptly after the Start Date. 6 Employee Benefits. __________________ 6.1 During the Term, Employer will provide Employee and her eligible dependents, subject to the terms and conditions of the applicable plans, participation in all Employer sponsored employee benefit plans. For 1999, the Employee is entitled to three weeks of vacation. For the remainder of the Term, the Employee is entitled to five weeks of vacation. 6.2 For the period from the Start Date until the Employee becomes eligible for the Employer's Health Care Plan, the Employer will reimburse the Employee for the difference between the COBRA premium charged by her former employer and the premium amount she paid while an active employee of her former employer. 6.3 Employee shall be eligible to participate in the Employer's Mirror Plan III. She will be given an opportunity to elect to defer compensation under that Plan during August, 1999 for compensation to be paid September through December, 1999; and during December, 1999, for compensation to be paid in 2000. 7 Termination of Employment _________________________ The termination of the Employee's employment will be governed by the following provisions: 7.1 Death. In the event of the Employee's death during _____ the Term, the Employer will pay to the Employee's beneficiaries or estate, as appropriate, as soon as practicable after the Executive's death, (I) unpaid Base Salary to the date of death to which the Employee is entitled and any unpaid vacation, (the "Compensation Payments"), (ii) the target bonus (at $1.00 per unit) for the Comp Plan and EVAPP for the fiscal year in which the Employee's death occurs, prorated for the actual period of service for that fiscal year, (the "Prorated Bonus"), (iii) any unpaid portion of the Supplemental Cash Payment and (iv) any other death benefits payable under any employee benefit or compensation plan that is maintained by the Employer for the Employee's benefit. Any unvested Stock Options will vest upon her death and her beneficiary will have the earlier of five years or the original expiration date of the Option to exercise all outstanding Options. All restrictions on Restricted Stock will be removed upon her death. Unless otherwise stated in this Agreement, this Section 7.1 3 will not limit the entitlement of the Employee's estate or beneficiaries to any death or other benefits then available to the Employee under any life insurance, stock ownership, stock options, or other benefit plan or policy that is maintained by the Employer for the Employee's benefit. 7.2 Permanent Disability If the Employee becomes totally and ____________________ permanently disabled (as defined in the Employer's Long-Term Disability Plan) during the Term, the Employer or Employee may terminate the Employee's employment on written notice thereof in accordance with Section 12.5, and the Employer will provide to the Employee as soon as practicable: (i) amounts payable pursuant to the terms of any applicable disability plan or program, (ii) the Prorated Bonus, (iii) the Compensation Payments, (iv) any unpaid portion of the Supplemental Cash Payment, and (v) such payments under applicable plans and programs, to which the Employee is entitled pursuant to the terms of such plans or programs. Any unvested Stock Options will vest upon her disability and she will have the earlier of five years or the original expiration date of the Option to exercise all outstanding Options. All restrictions on Restricted Stock will be removed upon her disability. 7.3 Voluntary Termination by Employee; Discharge for Cause _______________________________________________________ (i) In the event that during the Term the Employee's employment is terminated: * by the Employer for Cause (as defined below) or * by the Employee unless for Good Reason (as defined in Section 7.4) or unless as a result of the Employee's death or disability, The Company will pay the Compensation Payments as soon as practicable to the Employee and the Employee will be entitled to no other compensation, except as otherwise due her under applicable law or the terms of any applicable plan or program. Employee will not be entitled to the payment of any bonus in respect of all or any portion of the fiscal year in which such termination occurs. (ii) For purposes of this Agreement, the Employer will have "Cause" to terminate the Employee's employment upon a finding that (a) the Employee has been convicted by a court of competent jurisdiction of the commission of a felony, (b) the Employee has committed a serious breach of the Employer's Statement of Business Ethics, or (c) the Employee materially breached any of the express covenants set forth in Section 10.1 or 10.3. 7.4 Involuntary Termination _______________________ (i) In any case of involuntary termination under this section, Employee will be entitled to payment as described in Section 7.5. (ii) During the Term, the Employee's employment may be terminated by the Employer for any reason other than for Cause by delivery in accordance with Section 12.5 to the Employee of a notice of termination. The Employee will be treated for the purposes of this Agreement as having been involuntarily terminated other than for Cause if, during the Term the Employee terminates her employment with the Employer prior to termination for Cause for any of the following reasons (each, a "Good 4 Reason"): without the Employee's written consent, (a) the Employer has breached any material provision of this Agreement and within 30 days after notice thereof from the Employee, the Employer fails to cure such breach; or (b) a successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Employer fails to assume liability under the Agreement. 7.5 Termination Payments and Benefits _________________________________ (i) Form and Amount. Upon the Employee's involuntary _______________ termination other than for Cause; (a) the Employer will pay or provide as soon as practicable to the Employee (1) the Prorated Bonus, (2) the Compensation Payments, (3) such payments under applicable plans or programs to which the Employee is entitled pursuant to the terms of such plans and programs, (4) a payment equal to two times Grand Total Earnings, (5) for 24 months (the "Continuation Period") the continuation of employee welfare benefits set forth in Section 6 except as offset by benefits paid or provided by other sources as set forth in Section 8, or as prohibited by law, and (6) outplacement services by a firm selected by the Employee at the expense of the Employer, in an amount up to $30,000, and (b) notwithstanding any provision to the contrary in the applicable award agreement or in any plan, (i) all restrictions pertaining to the shares of Restricted Stock will lapse, (ii) all Options granted shall become vested and fully exercisable, and (iii) any portion of the Supplemental Cash Payment not yet paid will be paid. For purposes of determining the period of continuation coverage to which the Employee or any of her dependents is entitled under section 4980B of the Internal Revenue Code of 1986, as amended, (or any successor provision thereto), under any group health plan maintained by the Employer or its affiliates, the Employee will be deemed to have remained employed until the end of the Continuation Period. (ii) Time and Manner of Payment. The cash amounts due to the __________________________ Employee pursuant to Section 7.5(i)(a) will be paid by the Employer within 20 business days after the Employee's Termination Date by check payable to the order of the Employee or by wire transfer to an account specified by the Employee; provided however, that any earned bonus included in the Compensation Payment and any payment due under Section 7.5(i)(a)(3) will be paid in accordance with the terms of the applicable plan or program. (iii) Maintenance of Benefits. During the Continuation ________________________ Period, the Employer will use its best efforts to maintain in full force and effect for the continued benefit of the Employee all benefits referenced in Section 7.5(i)(a)(3) or will arrange to make available to the Employee benefits substantially similar to those that the Employee would otherwise have been entitled to receive if her employment had not been terminated. Such benefits will be provided on the same terms and conditions 5 (including employee contributions toward the premium payments) under which the Employee was entitled to participate immediately prior to her termination. (iv) Forfeiture. Notwithstanding the foregoing provisions of __________ Section 7.5, any right of the Employee to receive termination payments and benefits under Section 7.5 will be forfeited to the extent of any amounts payable or benefits to be provided after a material breach of the covenants set forth in Section 10.1, 10.2, or 10.3. 7.6 Nonduplication of Benefits. To the extent, and only to the _____________________________ extent, a payment or benefit that is paid or provided under this Section 7 would also be paid or provided under the terms of any applicable plan, program, or arrangement, including, without limitation, any severance program, such applicable plan, program, agreement or arrangement will be deemed to have been satisfied by the payment made or benefit provided under this Agreement. 8 Mitigation and Offset. The Employee is under no obligation to ______________________ mitigate damages or the amount of any payment or benefit provided for hereunder by seeking other employment or otherwise; no amounts earned by the Employee after her termination date, whether from self- employment, as common law employee, or otherwise, will reduce the amount of any payment or benefit under any provision of this Agreement; provided however, the Employee's coverage under the Employer's welfare benefits as provided in Section 7.5(i)(a)(3) will terminate as soon as the Employee becomes covered under any comparable employee benefit plan made available by another employer and covering the same type of benefits. The Employee will report to the Employer any such benefits actually earned or received by her. 9 Change-In Control Provisions. _____________________________ 9.1 The Employee will be offered any and all change in control protections found in any plan, program or agreement maintained by the Employer as of the Start Date or as adopted at a subsequent date during the Term. 9.2 If the Employee becomes entitled to payments under Section 7.5 because of a change in control of the Employer and it is determined that those payments would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, then the Employee shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that, after payment of all taxes (including any interest or penalties imposed with respect to such taxes), including any excise tax imposed on the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the excise tax imposed on the payments. 9.3 The agreements evidencing the grants of the shares of Restricted Stock and the Options will provide that upon the occurrence of a Change in Control (as defined in the agreements), all restrictions pertaining to the shares of Restricted Stock will lapse and all of the Options will become fully vested and exercisable. 6 10 Covenants _________ 10.1 Confidentiality. During the Term, the Employer agrees that _______________ it will disclose to Employee its confidential or proprietary information to the extent necessary for Employee to carry out her obligations under this Agreement. The Employee hereby covenants and agrees that she will not, without the prior written consent of the Employer, during the Term or thereafter disclose to any person not employed by the Employer, or use in connection with engaging in competition with the Employer, any confidential or proprietary information of the Employer. 10.2 Nonsolicitation. The Employee hereby covenants and agrees ________________ that during the Term and for two years thereafter, she will not, without the prior written consent of the Employer, on her own behalf or on the behalf of any person, firm or company, directly or indirectly, attempt to influence, persuade or induce, or assist any other person in so persuading or inducing, any employee of Employer or its affiliates to give up, or to not commence, employment or a business relationship with the Employer. 10.3 Noncompetition. It is recognized by the Employee and _______________ Employer that the Employee's duties hereunder will entail the receipt of trade secrets and confidential information, which include not only information concerning the Employer's current operations, procedures, suppliers, and other contacts, but also its short-range and long-range plans, and that such trade secrets and confidential information has been developed by the Employer and its affiliates at substantial cost and constitute valuable and unique property of the Employer. Accordingly, the Employee acknowledges that the foregoing makes it reasonably necessary for the protection of the Employer's business interests that the Employee not compete with the Employer or any of its affiliates during the Term and for a reasonable and limited period thereafter. Therefor, during the Term and for a period of one year thereafter, the Employee shall not acquire an additional direct investment of $100,000 or more in a Competing Business (as hereinafter defined) and shall not render personal services to any such Competing Business in any manner, including, without limitation, as owner, partner, director, trustee, officer, employee, consultant, or advisor thereof. If the Employee shall breach the covenants contained in this Section 10, the Employer shall have no further obligation to make any payment to the Employee pursuant to this Agreement and may recover from the Employee all such damages as it may be entitled to at law or in equity. In addition, the Employee acknowledges that any such breach is likely to result in immediate and irreparable harm to the Employer for which money damages are likely to be inadequate. Accordingly, the Employee consents to injunctive and other appropriate equitable relief upon the institution of proceedings therefor by the Employer in order to protect Employer's rights hereunder. As used in this Agreement, the term "Competing Business" shall mean any business which: 7 (a) at the time of the determination, is substantially similar to the whole or a substantial part of the business conducted by the Employer or any of its divisions or affiliates; (b) at the time of determination, is operating a store or stores which, during its or their fiscal year preceding the determination, had aggregate net sales, including sales in leased and licensed departments, in excess of $250,000,000, if such store or any of such stores is or are located in a city or within a radius of 25 miles from the outer limits of a city where the Employer, or any of its division's or affiliates, is operating a store or stores which, during its or their fiscal year preceding the determination, had aggregate net sales, including sales in leased and licensed departments, in excess of $250,000,000; and (c) had aggregate net sales at all its locations, including sales in leased and licensed departments and sales by its divisions and affiliates, during its fiscal year preceding that in which the Employee made such an investment therein, or first rendered personal services thereto, in excess of $500,000,000. 11 Survival. The expiration or termination of the Term will not _________ impair the rights or obligations of any party hereto that accrue hereunder prior to such expiration or termination, except to the extent specifically stated herein. In addition to the foregoing, the Employee's covenants contained in Section 10 and 12.1 and the Employer's obligations under Section 7 and 12.1 will survive the expiration or termination of Employee's employment. 12 Miscellaneous Provisions. _________________________ 12.1 Dispute Resolution. Any dispute between the parties under __________________ this Agreement will be resolved (except as provided below) through informal arbitration by an arbitrator selected under the rules of the American Arbitration Association (located in the city in which the Employer's principal executive offices are based) and the arbitration will be conducted in that location under the rules of said Association. Each party will be entitled to present evidence and argument to the arbitrator. The arbitrator will have the right only to interpret and apply the provisions of this Agreement and may not change any of its provisions. The arbitrator will permit reasonable pre-hearing discovery of facts, to the extent necessary to establish a claim or a defense to a claim, subject to supervision by the arbitrator. The determination of the arbitrator will be conclusive and binding upon the parties and judgment upon the same may be entered in any court having jurisdiction thereof. The arbitrator will give written notice to the parties stating his or their determination, and will furnish to each party a signed copy of such determination. The expenses of arbitration will be borne equally by the Employer and Employee or as the arbitrator otherwise equitably determines. Notwithstanding the foregoing, the Employer will not be required to seek or participate in arbitration regarding any breach of the Employee's covenants in Section 10, but may pursue its remedies for such breach in a court of competent jurisdiction in the city in which the Employer's principal executive offices are based. Any arbitration or action pursuant to this Section 12.1 will be 8 governed by and construed in accordance with the substantive laws of the State of Texas, without giving effect to the principles of conflict of laws of such State. 12.2 Binding on Successors; Assignment. This Agreement will be _________________________________ binding upon and inure to the benefit of the Employer, Employee and each of their respective successors, assigns, personal and legal representatives, executors, administrators, heirs, distributees, devisees, and legatees, as applicable; provided however, that neither this Agreement nor any rights or obligations hereunder will be assignable or otherwise subject to hypothecation by Employee (except by will or by operation of the laws of intestate succession) or by the Employer, except that the Employer may assign this Agreement to any successor (whether by merger, purchase or otherwise) to all or substantially all of the stock, assets or businesses of the Employer, if such successor expressly agrees to assume the obligations of the Employer hereunder. 12.3 Governing Law. This Agreement will be governed, construed, _____________ interpreted, and enforced in accordance with the substantive law of the State of Texas, without regard to conflicts of laws principles. 12.4 Severability. Any provision of this Agreement that is ____________ deemed invalid, illegal or unenforceable in any jurisdiction will, as to that jurisdiction, be ineffective, to the extent of such invalidity, illegality or unenforceability, without effecting in any way the remaining provisions hereof in such jurisdiction or rendering that or any other provisions of this Agreement invalid, illegal or unenforceable in any other jurisdiction. If any covenant should be deemed invalid, illegal or unenforceable because its scope is considered excessive, such covenant will be modified so that the scope of the covenant is reduced only to the minimum extent necessary to render the modified covenant valid, legal and enforceable. 12.5 Notices. For all purposes of this Agreement, all _______ communications required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof confirmed), or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or three business days after having been sent by a nationally recognized overnight courier service, addressed to the Employer at its principal executive office and to the Employee at her principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of change of address will be effective only upon receipt. 12.6 Entire Agreement. The terms of this Agreement are intended ________________ by the parties to be the final expression of their Agreement with respect to the Employee's employment and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Agreement will constitute the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced in any judicial, administrative, or other legal proceedings to vary the terms of this Agreement. 9 12.7 Amendments; Waivers. This Agreement may not be modified, ____________________ amended, or terminated except by an instrument in writing, approved by the Employer and signed by the Employee and the Employer. Failure on the part of either party to complain of any action or omission, breach or default on the part of the other party, no matter how long the same may continue, will never be deemed to be a waiver of any rights or remedies hereunder, at law or in equity. The Employee or Employer may waive compliance by the other party with any provision of this Agreement that such other party was or is obligated to comply with or perform only through an executed writing; provided however, that such waiver will not operate as a waiver of, or estoppel with respect to, any other or subsequent failure. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. /s/ James E. Oesterreicher ___________________________________ J. C. Penney Co., Inc. By James E. Oesterreicher Its Chairman and Chief Executive Officer /s/ Vanessa Castagna ________________________________ Vanessa Castagna EX-11 4 COMPUTATION OF NET INCOME PER COMMON SHARE Exhibit 11 J. C. PENNEY COMPANY, INC. and Consolidated Subsidiaries Computation of Net Income Per Common Share __________________________________________ (Amounts in millions except per common share data) 39 Weeks Ended ________________________________________________ October 30, 1999 October 31, 1998 Shares Income Shares Income ______ ______ ______ ______ Basic _____ Net income $ 348 $ 387 Dividend on Series B ESOP convertible preferred stock (after-tax) (27) (28) _______ _______ Adjusted net income 321 359 Weighted average number of shares outstanding 259.0 253.3 ______ ______ ______ _______ 259.0 $ 321 253.3 $ 359 ====== ====== ====== ====== Net income per common share $ 1.24 $ 1.42 ====== ====== Diluted Net income $ 348 $ 387 Dividend on Series B ESOP convertible preferred stock (after-tax) (27) Assumed additional contribution to ESOP if preferred stock is fully converted - (1) _______ ______ Adjusted net income 321 386 Weighted average number of shares outstanding (basic) 259.0 253.3 Dilutive common stock equivalents: Stock options and other dilutive effect 0.5 2.0 Convertible preferred stock - 16.7 ______ _______ ______ ______ 259.5 $ 321 272.0 $ 386 ====== ====== ====== ====== Net income per common share $ 1.24 $ 1.42 ===== ====== EX-12.(A) 5 COMP.RATIOS - AVAIL. INC. TO FI & PREF.STCK. DIV. Exhibit 12 (a) J. C. Penney Company, Inc. and Consolidated Subsidiaries Computation of Ratios of Available Income to Combined Fixed Charges and Preferred Stock Dividend Requirement 52 weeks 53 weeks ended ended Oct. 30, Oct. 31, ($ Millions) 1999 1998 ________ ________ Income from continuing operations $ 827 $ 963 (before income taxes, before capitalized interest, but after preferred stock dividend) Fixed charges Interest (including capitalized interest) on: Operating leases 225 180 Short term debt 133 106 Long term debt 551 555 Capital leases 2 6 Credit facility - - Other, net (3) - _________ ________ Total fixed charges 908 847 Preferred stock dividend, before taxes 36 38 Combined fixed charges and preferred _________ ________ stock dividend requirement 944 885 Total available income $ 1,771 $ 1,848 ======== ======== Ratio of available income to combined fixed charges and preferred stock dividend requirement 1.9 2.1 ======== ======== The interest cost of the LESOP notes guaranteed by the Company is not included in fixed charges above. The Company believes that, due to the seasonal nature of its business, ratios for a period of time other than a 52 week period are inappropriate. EX-12.(B) 6 COMP. RATIO OF AVAIL. INCOME TO FIXED CHARGES Exhibit 12 (b) J. C. Penney Company, Inc. and Consolidated Subsidiaries Computation of Ratios of Available Income to Fixed Charges 52 weeks 53 weeks ended ended Oct. 30, Oct. 31, ($ Millions) 1999 1998 _________ _________ Income from continuing operations $ 863 $ 995 (before income taxes and capitalized interest) Fixed charges Interest (including capitalized interest) on: Operating leases 225 180 Short term debt 133 106 Long term debt 551 555 Capital leases 2 6 Credit facility - - Other, net (3) - _________ ________ Total fixed charges 908 847 -------- -------- Total available income $ 1,771 $ 1,842 ======== ======== Ratio of available income to combined fixed charges and preferred stock dividend requirement 2.0 2.2 ======== ======== The interest cost of the LESOP notes guaranteed by the Company is not included in fixed charges above. The Company believes that, due to the seasonal nature of its business, ratios for a period of time other than a 52 week period are inappropriate. EX-27.(A) 7 FINANCIAL DATA SCHEDULE - 10/30/1999
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENT OF INCOME OF J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES AS OF OCTOBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS JAN-29-2000 OCT-30-1999 392 461 4,539 84 6,971 12,430 8,586 3,152 25,112 7,787 6,504 0 457 3,236 3,674 25,112 22,024 22,856 16,245 21,359 415 66 470 546 198 348 0 0 0 348 1.24 1.24
EX-27.(B) 8 RESTATED FINANCIAL DATA SCHEDULE - 10/30/1998
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENT OF INCOME OF J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES AS OF OCTOBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS JAN-30-1999 OCT-31-1998 552 1,032 3,658 85 7,017 12,321 8,599 3,267 24,529 7,169 6,737 0 483 2,877 4,061 24,529 20,613 21,362 15,065 19,745 365 167 452 633 246 387 0 0 0 387 1.42 1.42
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