-----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, PuOVRpL4d+jFu4X0R65ZD58mxbTqFtgm+9GdgPVtcFMC3Slaxig+s2IHAuLfK3bm ArNxEnoYe3FoLkCsP6xgCA== 0000930661-97-000686.txt : 19970326 0000930661-97-000686.hdr.sgml : 19970326 ACCESSION NUMBER: 0000930661-97-000686 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19970125 FILED AS OF DATE: 19970325 SROS: NYSE 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-00777 FILM NUMBER: 97562892 BUSINESS ADDRESS: STREET 1: 6501 LEGACY DR CITY: PLANO STATE: TX ZIP: 75024-3698 BUSINESS PHONE: 2144311000 10-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the 52 weeks ended January 25, 1997 Commission file number 1-777 J. C. PENNEY COMPANY, INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-5583779 ------------------------- ------------------------ (State of incorporation) (I.R.S. Employer ID 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 - -------------------------------------------------- -------------- Securities registered pursuant to Section 12(b) of the Act: - ---------------------------------------------------------- Name of each exchange on Title of each class which registered - ------------------------------- ------------------------ Common Stock of 50c par value New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None - ---------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ---. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non-affiliates of the registrant: $11,910,650,902 as of February 26, 1997. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 224,197,904 shares of Common Stock of 50c par value, as of February 26, 1997. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Documents from which portions Parts of the Form 10-K are incorporated by reference into which incorporated ----------------------------- ----------------------- 1. J. C. Penney Company, Inc. Part I, Part II, and 1996 Annual Report to Stockholders Part IV 2. J. C. Penney Company, Inc. Part III 1997 Proxy Statement 3. J. C. Penney Funding Corporation Part I and Part IV Form 10-K for fiscal year 1996 PART I ------ 1. BUSINESS. -------- J. C. Penney Company, Inc. ("Company") was founded by James Cash Penney in 1902. Incorporated in Delaware in 1924, the Company has grown to be a major retailer. The major portion of the Company's business consists of providing merchandise and services to consumers through department stores that include catalog departments. The Company markets predominantly family apparel, jewelry, shoes, accessories, and home furnishings. On February 27, 1997, the Company completed its acquisition of Eckerd Corporation ("Eckerd"), an approximately 1,748 store drugstore chain headquartered in Largo, Florida, pursuant to a cash and stock transaction valued at $3.3 billion, including the assumption of $760 million of Eckerd debt. The transaction was effected through a cash tender offer for approximately 50.1 percent of Eckerd's outstanding common stock, followed by a second-step merger, as a result of which Eckerd stockholders received 0.6604 of a share of the Company's common stock for each remaining Eckerd share not purchased in the cash tender offer. The cash tender offer was completed on December 6, 1996 and resulted in the Company acquiring approximately 35.3 million shares, or 50.1 percent, of the outstanding Eckerd common stock at that date. The merger was approved by Eckerd stockholders and completed on February 27, 1997. With the completion of its acquisition of Eckerd, the Company operates a chain of approximately 2,700 drugstores located throughout the northeast, southeast, and Sunbelt regions of the United States. The business of marketing merchandise and services is highly competitive. Although the Company is one of the largest department store and drugstore retailers in the United States, it has numerous competitors. Many factors enter into the competition for the consumer's patronage, including price, quality, style, service, product mix, convenience, and credit availability. The Company's annual earnings depend to a significant extent on the results of operations for the last quarter of its fiscal year. Sales for that period average approximately one-third of annual sales. Information about certain aspects of the business of the Company included under the captions of "Receivables" (page 24), "Properties" (page 25), "Capital Expenditures" (page 25), "Financial Instruments and Fair Value" (pages 25 and 26), and "Segment Reporting" (page 34), which appear in the section of the Company's 1996 Annual Report to Stockholders entitled "Notes to Consolidated Financial Statements", "Supplemental Information (unaudited)" (pages 36 and 37), "Five Year Financial Summary" (page -1- 38), and "Five Year Operations Summary" (page 39), which appear in the Company's 1996 Annual Report to Stockholders on the pages indicated in the parenthetical references, is incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 1 of Form 10-K. In addition, information about J. C. Penney Funding Corporation, a wholly owned consolidated subsidiary of the Company, which appears in Item 1 of its separate Annual Report on Form 10-K for the fiscal year ended January 25, 1997, is incorporated herein by reference and filed hereto as Exhibit 99(a) in response to Item 1 of Form 10-K. SUPPLIERS. The Company purchases its merchandise from approximately 6,000 --------- domestic and foreign suppliers, most of whom have done business with the Company for many years. In addition to its Plano, Texas home office, the Company, through its international purchasing subsidiary and as of January 25, 1997, maintains buying offices in Brazil, Guatemala, Hong Kong, India, Italy, Japan, Korea, Mexico, the Philippines, Singapore, Taiwan and Thailand. EMPLOYMENT. The Company and its consolidated subsidiaries employed ---------- approximately 252,000 persons as of January 25, 1997. ENVIRONMENT. While environmental protection requirements did not have a ----------- material effect upon the Company's operations during fiscal 1996, it is possible that compliance with such requirements will lengthen lead time in expansion plans and increase construction, and therefore operating costs, due, in part, to the expense and time required to conduct environmental and ecological studies. 2. PROPERTIES. ---------- At January 25, 1997, the Company operated 3,927 retail stores, comprised of 1,228 JCPenney department stores and 2,699 drugstores, in all 50 states, Puerto Rico, Mexico, and Chile, of which 275 JCPenney department stores and 17 drugstores were owned. In addition, the Company owns nine store locations that are leased to other tenants and not operated as units of the Company. The Company also operated six catalog fulfillment centers, of which four were owned, and owned one store distribution center, the insurance company corporate offices, and the Company's home office facility and approximately 244 acres of property in Plano, Texas, adjacent to the facility. Information relating to certain of the Company's facilities included under the captions of "Five Year Financial Summary" and "Five Year Operations Summary", which appear on pages 38 and 39, respectively, of the Company's 1996 Annual Report to Stockholders, is incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 2 of Form 10-K. -2- Additional information relating to certain aspects of the Company's properties included under the caption "Properties" (page 25), which appears in the section of the Company's 1996 Annual Report to Stockholders entitled "Notes to Consolidated Financial Statements", on the page indicated in the parenthetical reference, is also incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 2 of Form 10-K. 3. LEGAL PROCEEDINGS. ----------------- The Company has no material legal proceedings pending against it. 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. --------------------------------------------------- No matter was submitted to a vote of stockholders during the fourth quarter of fiscal 1996. PART II ------- 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. ------------------------------------- The Company's Common Stock is traded principally on the New York Stock Exchange, as well as on other exchanges in the United States. In addition, the Company has issued approximately 1.2 million shares of Series B ESOP Convertible Preferred Stock pursuant to a leveraged employee stock ownership plan. Additional information relating to the Common Stock and Preferred Stock of the Company included under the captions of "Preferred Stock" (pages 27 and 28), "Common Stock" (page 28), "Changes in outstanding common stock" (page 28), and "Quarterly Data (Unaudited)" (page 35), which appear in the Company's 1996 Annual Report to Stockholders on the pages indicated in the parenthetical references, is incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 5 of Form 10-K. 6. SELECTED FINANCIAL DATA. ----------------------- Information for the fiscal years 1992-1996 included in the "Five Year Financial Summary" on page 38 of the Company's 1996 Annual Report to Stockholders is incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 6 of Form 10-K. 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. --------------------------------------------- The discussion and analysis included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", which appears in the Company's 1996 Annual Report to Stockholders on pages 14 through 17 thereof, is -3- incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 7 of Form 10-K. 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ------------------------------------------- The Consolidated Balance Sheets of the Company and subsidiaries as of January 25, 1997, January 27, 1996, and January 28, 1995, and the related Consolidated Statements of Income, Reinvested Earnings, and Cash Flows for the years then ended, appearing on pages 19 through 21 of the Company's 1996 Annual Report to Stockholders, together with the Independent Auditors' Report of KPMG Peat Marwick LLP, independent certified public accountants, appearing on page 18 of the Company's 1996 Annual Report to Stockholders, the Notes to Consolidated Financial Statements on pages 22 through 34, and the quarterly financial highlights ("Quarterly Data (unaudited)") appearing on page 35 thereof, are incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 8 of Form 10-K. The Independent Auditors' Report of KPMG Peat Marwick LLP covering the aforementioned consolidated financial statements of the Company refers to the adoption by the Company (a) in 1994 of the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity ----------------------------------------------------- Securities, and (b) in 1995 of the provisions of the Financial Accounting - ---------- Standards Board's Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to - ------------------------------------------------------------------------------- Be Disposed Of. - -------------- 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. --------------------------------------- The Company has had no change in, or disagreements with, its independent certified public accountants on accounting and financial disclosure. PART III* -------- 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.* -------------------------------------------------- The following is a list, as of March 1, 1997, of the names and ages of the executive officers of the Company and of the offices and other positions held by each such person with the Company. The terms of all executive officers will expire on May 16, 1997. There is no family relationship between any of the named persons. -4-
OFFICES AND OTHER POSITIONS NAME HELD WITH THE COMPANY AGE -------- ----------------------------- --- James E. Oesterreicher...Chairman of the Board and Chief Executive Officer; Director 55 W. Barger Tygart.........President and Chief Operating Officer; Director 61 John T. Cody, Jr.........President of JCPenney Stores 57 Gary L. Davis............Senior Vice President, Director of Human Resources and Administration 54 Gale Duff-Bloom..........President of Marketing and Company Communications 57 David V. Evans...........Senior Vice President, Director of Information Systems 52 John E. Fesperman........Senior Vice President, Director of Planning, Facilities, and International Development 51 Thomas D. Hutchens.......President of Merchandising Worldwide 56 Charles R. Lotter........Executive Vice President, Secretary and General Counsel 59 William E. McCarthy......President of Catalog and Distribution 55 Donald A. McKay..........Senior Vice President and Chief Financial Officer 51 Francis A. Newman........President and Chief Executive Officer of Eckerd Corporation 48 Ted L. Spurlock..........Senior Vice President and Director of Financial Services and Government Relations 58
- ------------- Mr. Oesterreicher was elected Chairman of the Board effective January 8, 1997 and has served as Chief Executive Officer since 1995. He served as Vice Chairman of the Board from 1995 to 1997. From 1992 to 1995, he served as President of JCPenney Stores and Catalog. He was elected an Executive Vice President in 1988 and served as Director of JCPenney Stores from 1988 to 1992. Mr. Tygart was elected President and Chief Operating Officer, and a director of the Company, effective January 1, 1995. He was elected a Senior Executive Vice President and was named Director of Merchandising, Quality Assurance and Distribution in 1992. In 1993, he was appointed Director of Merchandising and Support Operations, and served in that capacity until 1995. He served as an Executive Vice President and Director of Merchandising from 1987 to 1992. He has also served as a director of Eckerd Corporation since February 1997. Mr. Cody was elected President of JCPenney Stores effective January 1, 1995. He was elected an Executive Vice President in 1992 and served as Director of JCPenney Stores from 1992 to 1995. He -5- served as a Senior Vice President and Director of Real Estate, Construction Services and Speciality Retailing from 1991 to 1992. Mr. Davis was elected Senior Vice President and Director of Personnel and Administration effective February 1, 1996, and since 1997 has served as Senior Vice President, Director of Human Resources and Administration. He was elected President of the Northwestern Region in 1992 and served in that capacity until 1996. From 1990 to 1992, he served as Director of Coordination for JCPenney Stores and Catalog. Ms. Duff-Bloom was elected President of Marketing and Company Communications effective February 1, 1996. She was elected Senior Executive Vice President and served as Director of Personnel and Company Communications from January 1, 1995 to February 1, 1996. She was elected an Executive Vice President in 1993 and served as Director of Administration from 1993 to 1995. She served as Senior Vice President and Associate Director of Merchandising from 1990 to 1993. Mr. Evans was elected a Senior Vice President and was appointed Director of Planning and Information Systems effective January 1, 1995, and since 1997 has served as Senior Vice President, Director of Information Systems. He was elected a Vice President in 1987 and served as Director of Information Systems from 1987 to 1995. Mr. Fesperman was elected Senior Vice President and Director of Support Services and Subsidiary Operations effective January 1, 1996, and since 1997 has served as Senior Vice President, Director of Planning, Facilities, and International Development. He was elected a Vice President in 1993 and served as Director of Insurance from 1991 to 1996. Mr. Hutchens was elected President of Merchandising Worldwide effective January 1, 1995. He was elected an Executive Vice President in 1992 and served as Director of Merchandising from 1992 to 1995. He served as President of the Men's Division from 1987 to 1992. Mr. Lotter was elected an Executive Vice President in 1993. He was elected Senior Vice President, General Counsel and Secretary in 1987. He has also served as a director of Eckerd Corporation since December 1996. Mr. McCarthy was elected President of Catalog and Distribution effective January 1, 1995. He was elected President, Catalog Division in 1992, and served in that capacity until 1995. He was elected President, Northwestern Region in 1991 and served in that capacity until 1992. Mr. McKay was elected Senior Vice President and Chief Financial Officer effective February 1, 1996. From 1994 to 1996, he served as the Company's Controller. He was elected Vice President and Treasurer in 1985 and served in that capacity until 1994. He has also served as a director of Eckerd Corporation since December 1996. Mr. Newman has served as Chief Executive Officer of Eckerd Corporation since February 1996. He is also President and a -6- director of Eckerd Corporation, positions he has held since July 1993. Prior to joining Eckerd, Mr. Newman served as President, Chief Executive Officer and a director of F&M Distributors, Inc. ("F&M"), a drugstore chain, since 1986. F&M filed bankruptcy under Chapter 11 of the United States Bankruptcy Code in December 1994. Prior to joining F&M, he was the Executive Vice President of Household Merchandising, Inc., a retail firm, from 1984 to 1986 and the Senior Vice President of Merchandising for F. W. Woolworth, a retail firm, from 1980 to 1984. Mr. Spurlock was elected a Senior Vice President and was named Director of Financial Services and Company Communications in 1992. He was appointed Director of Financial Services and Government Relations effective January 1, 1995. He served as Director of Credit and Financial Services from 1989 to 1992. - ------------- 11. EXECUTIVE COMPENSATION.* ---------------------- 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL ---------------------------------------- OWNERS AND MANAGEMENT.* --------------------- 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.* ---------------------------------------------- - ------------- * Pursuant to General Instruction G to Form 10-K, the information called for by Items 10, with respect to directors of the Company (to the extent not set forth herein), 11, 12, and 13 is incorporated by reference to the Company's 1997 Proxy Statement, which involves the election of directors, the final copy of which the Company will file with the Securities and Exchange Commission, pursuant to Regulation 14A, on or prior to May 25, 1997. PART IV ------- 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. ------------------- (a)(1) All Financial Statements. See Item 8 of this Annual Report on Form 10-K for financial statements incorporated by reference to the Company's 1996 Annual Report to Stockholders. (a)(2) Financial Statement Schedules. The following schedule is attached on Page F-1. II. Valuation and Qualifying Accounts and Reserves -7- See Independent Auditors' Report of KPMG Peat Marwick LLP, independent certified public accountants, appearing on page 11 of this Annual Report on Form 10-K. All other schedules have been omitted as they are inapplicable or not required under the rules, or the information has been submitted in the consolidated financial statements and related material to the Company's 1996 Annual Report to Stockholders incorporated herein by reference and filed hereto as Exhibit 13. Separate financial statements are filed for J. C. Penney Funding Corporation, a wholly owned consolidated subsidiary, in its separate Annual Report on Form 10-K for the 52 weeks ended January 25, 1997, which financial statements, together with the Independent Auditors' Report of KPMG Peat Marwick LLP thereon, are incorporated herein by reference and filed hereto as Exhibit 99(b). (a)(3) Exhibits. See separate Exhibit Index on pages G-1 through G-10. (b) Current Reports on Form 8-K. During the last quarter of the period covered by this Annual Report on Form 10-K the Company filed its Current Report on Form 8-K dated November 3, 1996. (c) Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this form is filed as part of the separate Exhibit Index on pages G-1 through G-10 and specifically identified as such beginning on page G-6. -8- SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. J. C. PENNEY COMPANY, INC. -------------------------- (Registrant) By /s/ C. R. Lotter ------------------------------- C. R. Lotter Executive Vice President, Secretary and General Counsel Dated: March 25, 1997 -9- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURES TITLE DATE ---------- ----- ---- J. E. Oesterreicher* Chairman of the Board and March 25, 1997 - ------------------- Chief Executive Officer (principal J. E. Oesterreicher executive officer); Director W. B. Tygart* President and Chief Operating March 25, 1997 - --------------------- Officer; Director W. B. Tygart D. A. McKay* Senior Vice President and March 25, 1997 - --------------------- Chief Financial Officer D. A. McKay (principal financial officer) W. J. Alcorn* Vice President and Controller March 25, 1997 - --------------------- (principal accounting officer) W. J. Alcorn M. A. Burns* Director March 25, 1997 - --------------------- M. A. Burns C. H. Chandler* Director March 25, 1997 - --------------------- C. H. Chandler V. E. Jordan, Jr.* Director March 25, 1997 - --------------------- V. E. Jordan, Jr. George Nigh* Director March 25, 1997 - --------------------- George Nigh J. C. Pfeiffer* Director March 25, 1997 - --------------------- J. C. Pfeiffer A. W. Richards* Director March 25, 1997 - --------------------- A. W. Richards C. S. Sanford, Jr.* Director March 25, 1997 - --------------------- C. S. Sanford, Jr. R. G. Turner* Director March 25, 1997 - --------------------- R. G. Turner J. D. Williams* Director March 25, 1997 - --------------------- J. D. Williams *By /s/ C. R. Lotter ------------------------- C. R. Lotter Attorney-in-fact -10- INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors of J. C. Penney Company, Inc.: Under date of February 27, 1997, we reported on the consolidated balance sheets of J. C. Penney Company, Inc. and subsidiaries as of January 25, 1997, January 27, 1996, and January 28, 1995, and the related consolidated statements of income, reinvested earnings, and cash flows for the years then ended, as contained in the 1996 Annual Report to Stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the Company's Annual Report on Form 10-K for the 1996 fiscal year. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule listed in Item 14(a)(2) of the Annual Report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick LLP Dallas, Texas February 27, 1997 -11- SCHEDULE II J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (Amounts in millions)
- --------------------------------------------------------------------------------------------- 52 Weeks Ended --------------------------------------- January 25, January 27, January 28, Description 1997 1996 1995 - --------------------------------------------------------------------------------------------- Reserves deducted from assets - ----------------------------- Allowance for doubtful accounts Balance at beginning of period $ 84 $ 74 $ 59 Additions charged to costs and expenses 267 219 177 Deductions of write-offs, less recoveries (246) (209) (162) ----- ----- ----- Balance at end of period $ 105 $ 84 $ 74 ===== ===== ===== Allowance for loan losses - JCPenney National Bank Balance at beginning of period $ 47 $ 44 $ 35 Additions charged to costs and expenses 83 45 45 Deductions of write-offs, less recoveries (79) (42) (36) ----- ----- ----- Balance at end of period $ 51 $ 47 $ 44 ===== ===== =====
F-1 EXHIBIT INDEX ------------- EXHIBIT ------- 2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION --------------------------------------------------------------------------- (a) Amended and Restated Agreement and Plan of Merger, dated as of November 2, 1996, among J.C. Penney Company, Inc., Omega Acquisition Corporation, and Eckerd Corporation (incorporated by reference to Exhibit 2.1 to Company's Registration Statement on Form S-4, SEC File No. 333-20271). (b) Amendment dated February 25, 1997 to Amended and Restated Agreement and Plan of Merger, dated as of November 2, 1996, among J.C. Penney Company, Inc., Omega Acquisition Corporation, and Eckerd Corporation. 3. (I) ARTICLES OF INCORPORATION Restated Certificate of Incorporation of ------------------------- the Company (incorporated by reference to Exhibit (3)(i) to Company's Quarterly Report on Form 10-Q for the thirteen week period ended April 27, 1996*). (II) BYLAWS Bylaws of Company, as amended to January 11, 1995 ------ (incorporated by reference to Exhibit 3(ii)(a) to Company's Annual Report on Form 10-K for the 52 week period ended January 28, 1995*) 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES ------------------------------------------------------------------------- (a) Indenture, dated as of October 1, 1982, between the Company and First Trust of California, National Association (as Successor Trustee to Bank of America National Trust and Savings Association) (incorporated by reference to Exhibit 4(a) to Company's Annual Report on Form 10-K for the 52 week period ended January 29, 1994*). (b) First Supplemental Indenture, dated as of March 15, 1983, between the Company and First Trust of California, National Association (as Successor Trustee to Bank of America National Trust and Savings Association)(incorporated by reference to Exhibit 4(b) to Company's Annual Report on Form 10-K for the 52 week period ended January 29, 1994*). (c) Second Supplemental Indenture, dated as of May 1, 1984, between the Company and First Trust of California, National Association (as Successor Trustee to Bank of America National Trust and Savings Association)(incorporated by reference to Exhibit 4(c) to Company's Annual Report on Form 10-K for the 52 week period ended January 29, 1994*). (d) Third Supplemental Indenture, dated as of March 7, 1986, between the Company and First Trust of California, National Association (as G-1 Successor Trustee to Bank of America National Trust and Savings Association (incorporated by reference to Exhibit 4(d) to Company's Registration Statement on Form S-3, SEC File No.33-3882). (e) Fourth Supplemental Indenture, dated as of June 7, 1991, between the Company and First Trust of California, National Association (as Successor Trustee to Bank of America National Trust and Savings Association)(incorporated by reference to Exhibit 4(e) to Registrant's Registration Statement on Form S-3, SEC File No. 33- 41186). (f) Indenture, dated as of April 1, 1994, between the Company and First Trust of California, National Association (as Successor Trustee to Bank of America National Trust and Savings Association) (incorporated by reference to Exhibit 4(a) to Company's Registration Statement on Form S-3, SEC File No. 33-53275). (g) Rights Agreement dated as of February 14, 1990 between Company and First Chicago Trust Company of New York, as Rights Agent (incorporated by reference to Exhibit 1 to Company's Current Report on Form 8-K, Date of Report - February 6, 1990*). (h) Amendment to Rights Agreement, dated as of February 14, 1990, between Company and First Chicago Trust Company of New York, as Rights Agent, effective as of January 13, 1992, among Company, First Chicago Trust Company of New York, and Manufacturers Hanover Trust Company of New York (now ChaseMellon Shareholder Services, L.L.C.), as successor Rights Agent (incorporated by reference to Exhibit 4(b) to Company's Annual Report on Form 10-K for the 52 week period ended January 25, 1992*). (i) Letter to Company stockholders dated May 1, 1993 explaining adjustments to Rights and to underlying Series A Junior Participating Preferred Stock, including exercise price of such Rights, and the voting rights and participating dividend on such Preferred Stock as a result of the two-for-one stock split payable May 1, 1993 to stockholders of record on April 12, 1993 (incorporated by reference to Exhibit 4(c) to G-2 Company's Annual Report on Form 10-K for the 53 week period ended January 30, 1993*). (j) Explanation of adjustments to Rights and to underlying Series A Junior Participating Preferred Stock and changes to shares of Series B Convertible Preferred Stock held by Trustee of Company's Savings, Profit-Sharing and Stock Ownership Plan on behalf of Plan participants as a result of the two-for-one stock split payable May 1, 1993 to stockholders of record on April 12, 1993 (incorporated by reference to Item 5 of Company's Current Report on Form 8-K dated March 10, 1993*). (k) Amended and Restated 364-Day Revolving Credit Agreement dated as of December 3, 1996, among J.C. Penney Company, Inc., J.C. Penney Funding Corporation, the Lenders party thereto, Morgan Guaranty Trust Company of New York, as Agent for the Lenders, and Bank of America Illinois, Bankers Trust Company, The Chase Manhattan Bank, Citibank, N.A., Credit Suisse, and NationsBank of Texas, N.A., as Co-Agents for the Lenders (incorporated by reference to Exhibit 4(d) to J.C. Penney Funding Corporation's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997, SEC File No. 1-4947-1). (l) Amended and Restated Five-Year Revolving Credit Agreement dated as of December 3, 1996, among J.C. Penney Company, Inc., J.C. Penney Funding Corporation, the Lenders party thereto, Morgan Guaranty Trust Company of New York, as Agent for the Lenders, and Bank of America Illinois, Bankers Trust Company, The Chase Manhattan Bank, Citibank, N.A., Credit Suisse, and NationsBank of Texas, N.A., as Co-Agents for the Lenders (incorporated by reference to Exhibit 4(e) to J.C. Penney Funding Corporation's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997, SEC File No. 1-4947-1). (m) 364-Day Revolving Credit Agreement dated as of December 3,1996, among J.C. Penney Company, Inc., J.C. Penney Funding Corporation, the Lenders party thereto, Bank of America Illinois, Bankers Trust Company, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York, and NationsBank of Texas, N.A., as Co- Agents for the Lenders, and Credit Suisse, as Administrative Agent for the Lenders (incorporated by reference to Exhibit 4(f) to J.C. Penney Funding Corporation's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997, SEC File No. 1-4947-1). (n) Five-Year Revolving Credit Agreement dated as of December 3, 1996, among J.C. Penney Company, Inc., J.C. Penney Funding Corporation, the Lenders party thereto, Bank of America Illinois, Bankers Trust Company, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York, and NationsBank of Texas, N.A., as Co- Agents for the Lenders and Credit Suisse, as Administrative Agent for the Lenders (incorporated by reference to Exhibit 4(g) to J.C. Penney Funding Corporation's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997, SEC File No. 1-4947-1). (o) Guaranty dated as of February 17, 1997, executed by J.C. Penney Company, Inc. (incorporated by reference to Exhibit 4(c) to J.C. Penney Funding Corporation's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997, SEC File No. 1-4947-1). (p) Guaranty dated as of December 3, 1996, executed by J.C. Penney Company, Inc. with respect to the Amended and Restated 364-Day and Five-Year Revolving Credit Agreements, each dated as of December 3, 1996 (incorporated by reference to Exhibit 4(m) to J.C. Penney Funding Corporation's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997, SEC File No. 1-4947-1). (q) Guaranty dated as of December 3, 1996, executed by J.C. Penney Company, Inc. with respect to the 364-Day and Five-Year Revolving Credit Agreements, each dated as of December 3, 1996 (incorporated by reference to Exhibit 4(n) to J.C. Penney Funding Corporation's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997, SEC File No. 1-4947-1). Other instruments evidencing long-term debt have not been filed as exhibits hereto because none of the debt authorized under any such instrument exceeds 10 percent of the total assets of the Registrant and its consolidated subsidiaries. The Registrant agrees to furnish a copy of any of its long- term debt instruments to the Securities and Exchange Commission upon request. 10. MATERIAL CONTRACTS ------------------ (I) OTHER THAN COMPENSATORY PLANS OR -------------------------------- ARRANGEMENTS ------------ (a) Amended and Restated Receivables Agreement dated as of January 29, 1980 between Company and J. C. Penney Funding Corporation (incorporated by reference to Exhibit 10(i)(a) to Company's Annual Report on Form 10-K for the 52 week period ended January 29, 1994*). (b) Amendment No. 1 to Amended and Restated Receivables Agreement dated as of January 25, 1983 between Company and J. C. Penney Funding Corporation (incorporated by reference to Exhibit 10(i)(b) to Company's Annual Report on Form 10-K for the 52 week period ended January 29, 1994*). (c) Loan Agreement dated as of January 28, 1986 between Company and J. C. Penney Funding Corporation (incorporated by reference to Exhibit 4 to Company's Current Report on Form 8-K, Date of Report - January 28, 1986*). G-3 (d) Amendment No. 1 to Loan Agreement dated as of January 28, 1986 between Company and J. C. Penney Funding Corporation (incorporated by reference to Exhibit 1 to Company's Current Report on Form 8-K, Date of Report - December 31, 1986*). (e) Amendment No. 2 to Loan Agreement dated as of January 28, 1986 between Company and J. C. Penney Funding Corporation. (f) Personal Services Agreement dated as of February 12, 1997 between Company and W. R. Howell. (II) COMPENSATORY PLANS OR ARRANGEMENTS REQUIRED TO BE FILED AS EXHIBITS TO ---------------------------------------------------------------------- THIS REPORT PURSUANT TO ITEM 14 (c) OF THIS REPORT. -------------------------------------------------- (a) J. C. Penney Company, Inc. 1989 Management Incentive Compensation Program as amended through March 27, 1990 (incorporated by reference to Exhibit 10(e) to Company's Annual Report on Form 10-K for the 52 week period ended January 27, 1990*). (b) September 1995 Amendment to J.C. Penney Company, Inc. 1989 Management Incentive Compensation Program, as amended. (c) Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc., as amended through April 1, 1996. (d) J. C. Penney Company, Inc. Retirement Plan for Non-Associate Directors, as amended through July 8, 1992 (incorporated by reference to Company's Quarterly Report on Form 10-Q for the 13 and 26 week periods ended July 25, 1992*). (e) February 1996 Amendment to J. C. Penney Company, Inc. Retirement Plan for Non-Associate Directors, as amended (incorporated by reference to Exhibit 10(ii)(e) to Company's Annual Report on Form G-4 10-K for the 52 week period ended January 27, 1996*). (f) J. C. Penney Company, Inc. Directors' Equity Program Tandem Restricted Stock Award/Stock Option Plan (incorporated by reference to Exhibit 10(k) to Company's Annual Report on Form 10-K for the 52 week period ended January 28, 1989*). (g) J. C. Penney Company, Inc. 1984 Equity Compensation Plan, as amended through January 31, 1989 (incorporated by reference to Exhibit 10(l) to Company's Annual Report on Form 10-K for the 52 week period ended January 28, 1989*). (h) February 1995 Amendment to J. C. Penney Company, Inc. 1984 Equity Compensation Plan, as amended (incorporated by reference to Exhibit 10(ii)(j) to Company's Annual Report on Form 10-K for the 52 week period ended January 28, 1995*). (i) J. C. Penney Company, Inc. 1989 Equity Compensation Plan (incorporated by reference to Exhibit A to Company's definitive Proxy Statement for its Annual Meeting of Stockholders held on May 19, 1989*). (j) February 1995 Amendment to J. C. Penney Company, Inc. 1989 Equity Compensation Plan (incorporated by reference to Exhibit 10(ii)(k) to Company's Annual Report on Form 10-K for the 52 week period ended January 28, 1995*). (k) February 1996 Amendment to J. C. Penney Company, Inc. 1989 Equity Compensation Plan, as amended (incorporated by reference to Exhibit 10(ii)(k) to Company's Annual Report on Form 10-K for the 52 week period ended January 27, 1996*). (l) J. C. Penney Company, Inc. 1993 Equity Compensation Plan (incorporated by reference to Exhibit A to Company's definitive Proxy Statement for its Annual Meeting of Stockholders held on May 21, 1993*). (m) February 1995 Amendment to J. C. Penney Company, Inc. 1993 Equity Compensation Plan (incorporated by reference to Exhibit G-5 10(ii)(l) to Company's Annual Report on Form 10-K for the 52 week period ended January 28, 1995*). (n) November 1995 Amendment to J. C. Penney Company, Inc. 1993 Equity Compensation Plan, as amended (incorporated by reference to Exhibit 10(ii)(n) to Company's Annual Report on Form 10-K for the 52 week period ended January 27, 1996*). (o) J. C. Penney Company, Inc. 1993 Non-Associate Directors' Equity Plan (incorporated by reference to Exhibit B to Company's definitive Proxy Statement for its Annual Meeting of Stockholders held on May 21, 1993*). (p) February 1995 Amendment to J. C. Penney Company, Inc. 1993 Non- Associate Directors' Equity Plan (incorporated by reference to Exhibit 10(ii)(m) to Company's Annual Report on Form 10-K for the 52 week period ended January 28, 1995*). (q) J. C. Penney Company, Inc. 1984 Performance Unit Plan (incorporated by reference to Exhibit B to Company's definitive Proxy Statement for its Annual Meeting of Stockholders held on May 22, 1984*). (r) J. C. Penney Company, Inc. Deferred Compensation Plan as amended through July 14, 1993 (incorporated by reference to Exhibit 10(a) to Company's Report on Form 10-Q for the 13 and 26 week periods ended July 31, 1993*). (s) J. C. Penney Company, Inc. Deferred Compensation Plan for Directors, as amended through July 8, 1992 (incorporated by reference to Exhibit 10(c) to Company's Quarterly Report on Form 10-Q for the 13 and 26 week periods ended July 25, 1992*). (t) J. C. Penney Company, Inc. 1995 Deferred Compensation Plan (incorporated by reference to Exhibit 10 to Company's Registration Statement on Form S-8, SEC File No. 33-56993). (u) November 1995 amendment to J. C. Penney Company, Inc. 1995 Deferred Compensation Plan (incorporated by reference to Exhibit G-6 10(ii)(u) to Company's Annual Report on Form 10-K for the 52 week period ended January 27, 1996*). (v) Directors' Charitable Award Program (incorporated by reference to Exhibit 10(r) to Company's Annual Report on Form 10-K for the 52 week period ended January 27, 1990*). (w) Form of Indemnification Trust Agreement between Company and Chemical Bank dated as of July 30, 1986, as amended (incorporated by reference to Exhibit 1 to Exhibit B to Company's definitive Proxy Statement for its Annual Meeting of Stockholders held on May 29, 1987*). (x) Form of Indemnification Agreement between Company and individual Indemnitees (incorporated by reference to Exhibit B to Company's definitive Proxy Statement for its Annual Meeting of Stockholders held on May 29, 1987*). (y) J. C. Penney Company, Inc. Benefit Restoration Plan (incorporated by reference to Exhibit 10(ii)(y) to Company's Annual Report on Form 10-K for the 52 week period ended January 27, 1996*). (z) February 1996 Amendment to J.C. Penney Company, Inc. Benefit Restoration Plan. (aa) Supplemental Term Life Insurance Plan for Management Profit-Sharing Associates of J.C. Penney Company, Inc. (ab) January 1995 Amendment to Supplemental Term Life Insurance Plan for Management Profit-Sharing Associates of J.C. Penney Company, Inc. (ac) Employment Agreement dated as of February 4, 1996 between Eckerd Corporation and Francis A. Newman (incorporated by reference to Exhibit 10.26 to Eckerd Corporation's Annual Report on Form 10-K for the fiscal year ended February 3, 1996, SEC File No. 1-4844). (ad) Amendment No. 1, dated as of November 2, 1996, to the Employment Agreement dated as of February 4, 1996, by and between Eckerd Corpoation and Francis A. Newman (incorporated by reference to Exhibit (c)(3) to Company's Schedule 14D-1 dated November 2, 1996*). * SEC file number 1-777 11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS ----------------------------------------------- Computation of Net Income Per Common Share. 12. STATEMENT RE: COMPUTATION OF RATIOS ----------------------------------- (a) Computation of Ratios of Available Income to Combined Fixed Charges and Preferred Stock Dividend Requirement. (b) Computation of Ratios of Available Income to Fixed Charges. 13. ANNUAL REPORT TO SECURITY HOLDERS --------------------------------- Excerpt from Company's 1996 Annual Report to Stockholders. G-7 21. SUBSIDIARIES OF THE REGISTRANT ------------------------------ List of certain subsidiaries of the Company at March 1, 1997. 23. CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS --------------------------------------------------- 24. POWER OF ATTORNEY ----------------- 27. FINANCIAL DATA SCHEDULE ----------------------- Financial Data Schedule for the 52 week period ended January 25, 1997. 99. ADDITIONAL EXHIBITS ------------------- (a) Item 1 of J. C. Penney Funding Corporation Annual Report on Form 10- K for the 52 weeks ended January 25, 1997 (incorporated by reference to J. C. Penney Funding Corporation Annual Report on Form 10-K for the 52 weeks ended January 25, 1997 filed concurrently herewith, SEC File No. 1-4947-1). (b) Excerpt from J. C. Penney Funding Corporation Annual Report. (C) Eckerd Corporation Selected Historical Consolidated Financial Information G-8 EX-2.(B) 2 OMEGA/ECKERD LETTER Exhibit 2(b) February 25, 1997 J. C. Penney Company, Inc. 6501 Legacy Drive Plano, Texas 75024-3698 Omega Acquisition Corporation 6501 Legacy Drive Plano, Texas 75024-3698 Eckerd Corporation 8333 Bryan Dairy Road Largo, Florida 34647 Ladies and Gentlemen: Reference is hereby made to the Amended and Restated Agreement and Plan of Merger, dated as of November 2, 1996 (the "Merger Agreement"), between J. C. Penney Company, Inc., a Delaware corporation ("JCPenney"), Omega Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of JCPenney ("Omega"), and Eckerd Corporation, a Delaware corporation ("Eckerd"). Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Merger Agreement. Each of JCPenney, Omega and Eckerd hereby agree as follows: 1. Section 3.2(a) of the Merger Agreement is hereby amended to read in its entirety as follows: (a) Each holder of a then outstanding option to purchase Shares (collectively, "Options") under Company's 1993 Stock Option and Incentive Plan and 1995 Stock Option and Incentive Plan (collectively, the "Stock Option Plans"), whether or not then exercisable or fully vested, may elect, prior to the Effective Time, in settlement thereof, to February 25, 1997 Page 2 receive from Parent for each share subject to such Option an amount in cash equal to the difference between the Offer Consideration and the per share exercise price of such Option, to the extent the Offer Consideration is greater than the per share exercise price of such Option (such excess amount, the "Option Consideration"); provided, however, that with respect ----------------- to any person subject to Section 16(a) of the Exchange Act, any such amount shall be paid as soon as practicable after the first date payment can be made without liability to such person under Section 16(b) of the Exchange Act. 2. Section 3.2(c) of the Merger Agreement is hereby amended to read in its entirety as follows: (c) Not later than 30 days prior to the Effective Time, Company shall provide each holder of an Option an election form pursuant to which each such holder may make the election specified in Section 3.2(a). Company shall also use its best efforts to obtain all necessary waivers, consents or releases from holders of Options under the Stock Option Plans and take any such other action as may be reasonably necessary to give effect to the transactions contemplated by this Section 3.2 and, with respect to the Options for which an election to receive cash in settlement thereof has been made, to cause each such Option to be surrendered to Parent and cancelled, whether or not any Option Consideration is payable with respect thereto, at the Effective Time. The surrender of an Option to Parent shall be deemed a release of any and all rights the holder had or may have had in such Option, other than the right to receive the Option Consideration in respect thereof. The Merger Agreement, as amended by this letter agreement, shall remain in full force and effect in accordance with its terms. No modification of this letter agreement shall be valid unless in writing and signed by the parties hereto. In the event of any conflict between the provisions of this letter agreement and the provisions of the Merger Agreement, the provisions of this letter agreement shall control. February 25, 1997 Page 3 This letter agreement may be executed in one or more counterparts, each of which shall be an original and all of which, when taken together, shall constitute one and the same instrument. Very truly yours, J. C. PENNEY COMPANY, INC. By: /s/ JAMES E. OESTERREICHER ---------------------------------- Name: J. E. Oesterreicher Title: Chairman of the Board and Chief Executive Officer OMEGA ACQUISITION CORPORATION By: /s/ D. A. MCKAY ---------------------------------- Name: D. A. McKay Title: President ECKERD CORPORATION By: /s/ SAMUEL G. WRIGHT ---------------------------------- Name: Samuel G. Wright Title: Executive Vice President/ Chief Financial Officer EX-10.(I)(E) 3 AMD. NO. 2 TO LOAN AGMT. EXHIBIT 10(i)(e) CONFORMED COPY J. C. PENNEY FUNDING CORPORATION - -------------------------------------------------------------------------------- 6501 Legacy Drive Mail Code 1304 Plano, Texas 75024-3698 (972) 431-2011 November 22, 1996 J. C. Penney Company, Inc. 6501 Legacy Drive Mail Code 1304 Plano, Texas 75024-3698 Attention: Treasurer Re: Amendment No. 2 to Loan Agreement, dated as of January 28, 1986, as amended by Amendment No. 1, dated as of December 26, 1986 ("Agreement"), between your company and our company ------------------------------------------------------------------ Dear Sirs: You and we agree that the Agreement is amended as follows: FIRST: The name of the Corporation having been changed by filing in the State of Delaware on April 10, 1988, from "J. C. Penney Financial Corporation" ("Financial") to "J. C. Penney Funding Corporation" ("Funding"), the terms "J. C. Penney Financial Corporation" and "Financial" are deleted throughout the Agreement, and the terms, "J. C. Penney Funding Corporation" and "Funding", as the case may be, are substituted therefor and adopted in lieu thereof. SECOND: The principal place of business set forth in the preamble of the Agreement, for both Penney and Funding, is deleted in its entirety and the following substituted therefor: 6501 Legacy Drive Plano, Texas 75024-3698 The addresses for Notices set forth in Section 10 of the Agreement are deleted in their entirety and the following substituted therefor: (a) for deliveries other than by U.S. Post Office, to the principal place of business, and (b) for mailing, to the following address: P. O. Box 10001 Dallas, Texas 75301-0001 THIRD: Section 1(c) of the Agreement is deleted in its entirety and the following substituted therefor: (c) without the approval of the Board of Directors of Funding, shall not exceed in aggregate principal amount at any one time outstanding (i) $8,000,000,000, in the case of all senior loans and subordinated loans considered together, and (ii) $1,000,000,000, in the case of all subordinated loans. In the event of any conflict between the provisions of this Amendment No. 2 and those of the Agreement, the provisions of this Amendment No. 2 shall govern. Please sign the acceptance below on both counterparts and return one counterpart to us, whereupon this Amendment No. 2 will become effective as of the date set forth above. Very truly yours, J. C. PENNEY FUNDING CORPORATION By /s/ Frank N. Napoli ------------------------------- Vice President and Treasurer Accepted and agreed to: J. C. PENNEY COMPANY, INC. By /s/ Robert B. Cavanaugh ----------------------------------- Vice President and Treasurer EX-10.(I)(F) 4 PERSONAL SERVICES EXHIBIT 10(i)(f) February 12, 1997 W. R. Howell 4 Saint Andrews Court Frisco, Texas 75034 Dear W. R.: In consideration of your agreement to provide services to the Company, the Company agrees with you as follows: Services. The personal services to be provided by you shall be such -------- services as may be requested from time to time by the Chairman of the Board. In rendering such services the Company will not deem you to be an employee for any purpose, including entitlement to employment benefits, and accordingly, you shall be eligible to receive all retiree benefits to which you are entitled because of your prior employment by JCPenney. In connection with any requested services your Indemnification Agreement, dated July 29, 1986, will continue in full force and effect for the term of this agreement. Compensation. The Company will pay you an annual retainer of $300,000 for ------------ a period of five years, beginning March 1, 1997 and ending March 1, 2002, payable monthly. The Company's obligation to make these payments will terminate in the event of your death. The Company will grant you a stock award of shares of JCPenney Common Stock having a market value of $5 million with a tax gross up payment sufficient to assure that the full amount of the grant will be realized. This grant will be made from the Company's 1993 Equity Compensation Plan on the date on which the Company will make its regular 1997 stock option grants to management employees and the shares of JCPenney Common Stock granted to you on that date will fully vest immediately. The number of shares to be received by you on the grant date will be $5 million divided by the fair market value (as defined in the Company's 1993 Equity Compensation Plan) of JCPenney Common Stock on the grant date. In addition, all non-qualified stock option grants which you may hold during the term of this agreement shall be exercisable until their original expiration dates. W.R. Howell February 12, 1997 Page 2 Travel and Business Expenses. You will have the use of JCPenney's ---------------------------- corporate aircraft and car and driver when you are performing the requested services. The scheduling of this use is to be coordinated with the Chairman of the Board. You shall also be reimbursed for reasonable business expenses, including spouse's travel expenses if appropriate, when performing any requested services. Office and Secretary. You shall also be provided with an office and -------------------- secretarial services during the term of this agreement as arranged by the Chairman of the Board. Non-Competition. While you are no longer an active employee of the Company --------------- and are free to engage in other activities, you agree that so long as this agreement is in effect that you will be bound by the Company's Statement of Business Ethics on the same basis as an employee of JCPenney and that you will not engage in, or be involved with, directly or indirectly, any investments in or provide services to any person or entity which may be deemed to be a competitor of the Company as that term is defined in the Statement of Business Ethics. For the Company's records, I would appreciate your acknowledging receipt and acceptance of the terms of this agreement by signing and returning to me the enclosed duplicate copy of this letter. Warm regards, /s/ Jim Oesterreicher cc: Colby C. Chandler Accepted and agreed to this 16th day of February, 1997. /s/ W. R. Howell - --------------------------- W. R. Howell EX-10.(II)(B) 5 SEPT 1995 AMNDMNT TO 1989 MGMT INCENTIVE PLAN EXHIBIT 10(ii)(b) RESOLVED that pursuant to Section 7 of the Program, effective with incentive compensation payable with respect to the 1995 fiscal year and thereafter, the term "5%" contained in Section 5 of the Program be, and it hereby is, changed to "6%"; EX-10.(II)(C) 6 SUPPL. RETIREMENT PROGRAM EXHIBIT 10(ii)(c) SUPPLEMENTAL RETIREMENT PROGRAM FOR MANAGEMENT PROFIT-SHARING ASSOCIATES OF J. C. PENNEY COMPANY, INC. ADOPTED EFFECTIVE JANUARY 1, 1978 AS AMENDED THROUGH APRIL 1, 1996 SUPPLEMENTAL RETIREMENT PROGRAM FOR MANAGEMENT PROFIT-SHARING ASSOCIATES OF J. C. PENNEY COMPANY, INC. ADOPTED EFFECTIVE JANUARY 1, 1978 AS AMENDED THROUGH APRIL 1, 1996 TABLE OF CONTENTS Article Page - ------- ---- ARTICLE I. INTRODUCTION......................................... 1 ARTICLE II. DEFINITIONS.......................................... 1 ARTICLE III. PARTICIPATION........................................ 10 ARTICLE IV. BENEFITS............................................. 11 (1) At Early, Traditional, or Delayed Retirement Date........ 11 (2) Minimum Benefit.......................................... 14 (3) Social Security Make-up.................................. 15 (4) Death Benefit............................................ 15 (5) Life Insurance Coverage.................................. 16 (6) Effect of Certain Payments Made in December 1992......... 16 ARTICLE V. FORM AND COMMENCEMENT OF BENEFIT PAYMENTS............ 17 (1) Delayed Commencement of Benefits......................... 17 (2) Optional Forms of Benefit Payment........................ 17 (3) Small Annuities.......................................... 17 ARTICLE VI. ADMINISTRATION....................................... 18 ARTICLE VII. TYPE OF PLAN......................................... 18 ARTICLE VIII. MISCELLANEOUS........................................ 19 (1) Additional Credited Service and Other Adjustments........ 19 (2) Amendment and Termination................................ 20 (3) Rights of Associates..................................... 22 (4) Mistaken Information..................................... 23 (5) Liability................................................ 23 (6) Cessation and Recalculation of Benefits.................. 23 (7) Construction............................................. 23 (8) Non-assignability of Benefits............................ 23 (9) Governing Law............................................ 24 (10) Transferred Eligible Management Associates............... 24 ARTICLE IX. CLAIMS PROCEDURES.................................... 24 SUPPLEMENTAL RETIREMENT PROGRAM FOR MANAGEMENT PROFIT-SHARING ASSOCIATES OF J. C. PENNEY COMPANY, INC. ADOPTED EFFECTIVE JANUARY 1, 1978 AS AMENDED THROUGH APRIL 1, 1996 ARTICLE I. INTRODUCTION The Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc. is a plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated associates. This document amends and restates the Plan, originally adopted effective January 1, 1978, effective August 1, 1995. With respect to any Eligible Management Associate who terminated employment prior to August 1, 1995, benefits payable to such Eligible Management Associates are determined pursuant to the terms and conditions of the Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc. in effect as of July 31, 1995. ARTICLE II. DEFINITIONS For the purpose of this Plan the following terms shall have the following meanings: ASSOCIATE: Any person who is employed by a Controlled Group Member if the --------- relationship between a Controlled Group Member and such person would constitute the legal relationship of employer and employee, including an officer who may or may not be a director, but excluding a director serving only in that capacity, and excluding any employee of a Controlled Group Member substantially all the operations of which are outside the United States unless United States Social Security contributions are made on behalf of such employee. AVERAGE FINAL COMPENSATION: The average annual Compensation of an -------------------------- Eligible Management Associate in respect of the three calendar years of his highest Compensation determined by taking into account (a) the Compensation attributable to the Eligible Management Associate's Credited Service in the calendar year in which occurs such Early Retirement Date, Traditional Retirement Date, or Delayed Retirement Date, as the case may be, and (b) the Compensation during either of the following, whichever is appropriate: (i) the 9 full calendar years of Final Service immediately preceding the calendar year in which occurs the Eligible Management Associate's Early Retirement Date, Traditional 1 Retirement Date, or Delayed Retirement Date, as the case may be; or (ii) if such Eligible Management Associate has less than 9 full calendar years of Final Service, the entire number of full calendar years of such Final Service immediately preceding the calendar year in which occurs the Eligible Management Associate's Early Retirement Date, Traditional Retirement Date, or Delayed Retirement Date, as the case may be. If such Eligible Management Associate has less than three full calendar years of Final Service prior to the calendar year in which occurs his Early Retirement Date, Traditional Retirement Date, or Delayed Retirement Date, Average Final Compensation shall mean the aggregate Compensation earned with respect to the Eligible Management Associate's Final Service immediately preceding the calendar year in which occurs his Early Retirement Date, Traditional Retirement Date or Delayed Retirement Date, divided by the total number of full months of such Final Service, multiplied by 12. BENEFIT COMMENCEMENT DATE: The date upon which payment of a Pension Plan ------------------------- Participant's retirement benefit is scheduled to begin pursuant to the terms of the Pension Plan. BENEFIT PLANS REVIEW COMMITTEE: The Benefit Plans Review Committee of the ------------------------------ Board of Directors of the Company. BENEFIT RESTORATION PLAN: J. C. Penney Company, Inc. Benefit Restoration ------------------------ Plan, as amended from time to time. BENEFITS ADMINISTRATION COMMITTEE: The committee appointed by the --------------------------------- Personnel Committee and authorized by Article VI to administer the Plan. BOARD OF DIRECTORS: Board of Directors of the Company. ------------------ CODE: The Internal Revenue Code of 1986, as amended from time to time. ---- References to "regulations" are to regulations published by the Secretary of the Treasury under applicable provisions of the Code, unless otherwise expressly indicated. COMPANY: J. C. Penney Company, Inc., a Delaware corporation. The term ------- "Company" will also include any successor employer, if the successor employer expressly agrees in writing as of the effective date of succession to continue the Plan. COMPANY ACCOUNT(S): The account(s) of that name and any successor ------------------ account(s) and/or fund(s) established and maintained pursuant to the Savings and Profit-Sharing Retirement Plan and/or the Savings, Profit-Sharing and Stock Ownership Plan in which are reflected all Company contributions allocated to an Eligible Management Associate together with all assets attributable thereto. 2 COMPENSATION: The wages (including Profit Incentive Compensation and ------------ Performance Unit Plan payments whether received or deferred) paid to an Associate by a Participating Employer, or, for the purpose of determining Average Final Compensation only, by a Controlled Group Member, 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 a Participating Employer or other Controlled Group Member is required to furnish the Associate a written statement under Code sections 6041(d), 6051(a)(3), and 6052, reduced by the following items: (i) all expatriate and foreign service allowances, including without limitation cost-of-living adjustments, (ii) tax gross-up payments, (iii) noncash prizes, (iv) income attributable to employer-provided group term life insurance, (v) income recognized with respect to stock options and stock awards, (vi) tax equalization payments, (vii) taxable and nontaxable relocation payments, (viii) payments of deferred amounts under the Company's Deferred Performance Unit Plan, (ix) special payments made to an Associate under the Company's Performance Unit Plan in the year of death, retirement, or disability, (x) severance pay, outplacement pay, and/or critical pay, (xi) third-party disability payments, (xii) home sale bonus payments, (xiii) mortgage interest assistance payments, (xiv) senior management perquisites, tax preparation fees, and allowances for travel from Alaska and Hawaii, (xv) legal settlements constituting back pay or other wage payments, (xvi) non-Associate travel reimbursements and (xvii) clothing allowances payments. In addition, Compensation includes any contributions made by the Controlled Group Members on behalf of an Associate pursuant to a deferral election under any employee benefit plan containing a cash or deferred arrangement under Code section 401(k) 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 Code section 125 and any amounts deferred pursuant to the Deferred Compensation Plan. For purposes of the Plan, each annual Performance Unit Plan payment and Profit Incentive Compensation payment shall be deemed to have been made in the calendar year immediately preceding the year in which the payments were actually made. For all purposes of the Plan, the Benefits Administration Committee, in its discretion, may exclude additional items from "Compensation" under the Plan. An Associate who is in the service of the Armed Forces of the United States during any period in which such Associate's reemployment rights are guaranteed by law will be considered to have received the same rate of Compensation during such absence that the Associate was receiving immediately prior to such absence, provided the Associate returns to employment with a Controlled Group Member within the time such rights are guaranteed. 3 CONTROLLED GROUP: The Company and all other corporations, trades and ---------------- businesses, the employees of which, together with employees of the Company, are required by the first sentence of subsection (b), by subsection (c), by subsection (m), or by subsection (o) of Code section 414 to be treated as if they were employed by a single employer. CONTROLLED GROUP MEMBER: Each corporation or unincorporated trade or ----------------------- business that is or was a member of a Controlled Group, but only during such period as it is or was such a member. CREDITED SERVICE: The years of credited service, up to a total maximum of ---------------- 40 years, credited to an Eligible Management Associate (a) under the terms of the Pension Plan, determined without regard to any yearly limitation imposed by the terms of the Pension Plan, (excluding any periods of Disability Service), and (b) under Paragraph (1) of Article VIII. DEFERRED COMPENSATION PLAN: J. C. Penney Company, Inc. 1995 Deferred -------------------------- Compensation Plan, as amended from time to time. DEFERRED PERFORMANCE UNIT PLAN: J. C. Penney Company, Inc. Deferred ------------------------------ Compensation Plan originally effective February 1, 1985 and amended to prohibit further deferrals effective January 26, 1991. DELAYED RETIREMENT DATE: The first day of the month immediately following ----------------------- the date on which an Eligible Management Associate Separates from Service after having attained Traditional Retirement Age. DISABILITY SERVICE: The years of disability service credited to an ------------------ Eligible Management Associate under the terms of the Pension Plan. EARLY RETIREMENT AGE: The first date on which an Eligible Management -------------------- Associate has attained age 55 and has completed at least 15 years of Service. EARLY RETIREMENT DATE: The first day of the month immediately following --------------------- the date on which an Eligible Management Associate Separates from Service after having attained Early Retirement Age but before attainment of such Eligible Management Associate's Traditional Retirement Age. ELIGIBLE MANAGEMENT ASSOCIATE: An Associate (excluding an Associate who ----------------------------- retired from (i) a Participating Employer before January 1, 1978, (ii) J. C. Penney Life Insurance Company or J. C. Penney Casualty Insurance Company on or after January 1, 1990, or (iii) Thrift Drug, Inc. on or after April 1, 1991) 4 classified under the Company's personnel policy as a management associate and who is participating in a Profit Incentive Compensation program or other profit sharing compensation program (other than the Savings and Profit-Sharing Retirement Plan or the Savings, Profit-Sharing and Stock Ownership Plan) of a Participating Employer on his Traditional Retirement Date or Early Retirement Date. Notwithstanding the preceding sentence, the Benefits Administration Committee reserves the right to waive, in its discretion, one or more of the requirements of this paragraph on a case by case basis for any Associate age 55 who was participating in a Profit Incentive Compensation program on December 31, 1995. ERISA: Employee Retirement Income Security Act of 1974, as amended from ----- time to time. ESTIMATED SOCIAL SECURITY BENEFIT: (1) For purposes of the benefit --------------------------------- provided in Paragraph (3) of Article IV the monthly benefit the Eligible Management Associate would receive under the Social Security Act at age 62 based on the following assumptions: (i) All compensation earned (a) prior to the later of 1951 or the year the Eligible Management Associate attains age 22 or (b) in the year in which the Eligible Management Associate Separates from Service if such separation occurs prior to the last day of the calendar year will be disregarded; (ii) Earnings for the years prior to the Eligible Management Associate's employment with the Participating Employer are in the same proportion to the Taxable Wage Base in effect for the prior years as that which the first full year of earnings bore to the Taxable Wage Base in existence at that time; (iii) Earnings are averaged over a number of full calendar years as determined by the following: Year of Birth Number of Full ----------------- -------------- Calendar Years -------------- 1925 31 1926 32 1927 33 1928 34 After 1928 35 If the Eligible Management Associate's total calendar years of earnings determined under clauses 5 (i) and (ii) above exceed the number of full years of earnings that are to be averaged based on the year of such Eligible Management Associate's birth, one or more of the Eligible Management Associate's lowest years of earnings will be disregarded until his total years of earnings equals the number of full years of earnings that are to be averaged based on the year of such Eligible Management Associate's birth. (iv) Social Security indexing factors used are those actually used by the Social Security Administration in determining the Eligible Management Associate's social security benefit, and if those factors are not available, the latest published factors will be used. (2) For Eligible Management Associates who reach Traditional Retirement Age on or prior to August 1, 2000, for purposes of clause (iii) of Subparagraph (b) of Paragraph (1) of Article IV the lesser of the benefit determined under (A) or (B) below: (A) The product of (a) multiplied by (b) with (a) being the monthly benefit the Eligible Management Associate would receive under the Social Security Act at age 62, or if retirement is later than age 62, the benefit payable at actual retirement, based on the following assumptions: (i) The benefit is based solely on the compensation earned during the Eligible Management Associate's calendar years of service and disregarding the Eligible Management Associate's last calendar year of service if less than a full year and disregarding completely all other years; (ii) Earnings are averaged over the number of years of actual credited service, as defined in the Pension Plan; (iii) Social Security indexing factors used are those actually used by the Social Security Administration in determining the Eligible Management Associate's social security benefit, and if those factors are not available, the latest published factors will be used; and (b) being a fraction, not exceeding one, the numerator of which is the Eligible Management Associate's 6 years of credited service, as defined by the Pension Plan and the denominator of which is 30. (B) The monthly benefit the Eligible Management Associate would receive under the Social Security Act at age 62, or if retirement is later than age 62, the benefit payable at actual retirement, based on the following assumptions: (i) All compensation earned (a) prior to the later of 1951 or the year the Eligible Management Associate attains age 22 or (b) in the year in which the Eligible Management Associate Separates from Service if such separation occurs prior to the last day of the calendar year will be disregarded; (ii) The Eligible Management Associate earned no compensation for calendar years before the Eligible Management Associate was employed by the Participating Employer, which years will be included in the calculation as years of zero earnings; (iii) Earnings are averaged over a number of full calendar years as determined by the following: Year of Birth Number of Full ----------------- -------------- Calendar Years -------------- 1925 31 1926 32 1927 33 1928 34 After 1928 35 If the Eligible Management Associate's total calendar years of earnings determined under clauses (i) and (ii) above exceed the number of full years of earnings that are to be averaged based on year of such Eligible Management Associate's birth, one or more of the Eligible Management Associate's lowest years of earnings will be disregarded until his total years of earnings equals the number of full years of earnings that are to be averaged based on the year of such Eligible Management Associate's birth. (iv) Social Security indexing factors used are those actually used by the Social Security 7 Administration in determining the Eligible Management Associate's social security benefit, and, if those factors are not available, the latest published factors will be used. For Eligible Management Associates who reach Traditional Retirement Age after August 1, 2000, for purposes of clause (iii) of Subparagraph (b) of Paragraph (1) of Article IV, Estimated Social Security Benefit shall be determined under (B) above. FINAL SERVICE: An Eligible Management Associate's years of Credited ------------- Service plus, if he becomes an Associate of a Controlled Group Member that is not a Participating Employer, the years of Service with such Controlled Group Member that are credited to the Associate after he ceases earning Credited Service. Calendar years that include a period of Disability Service will not be included in the determination of Final Service. Calendar years of Service or of Credited Service that are interrupted by a Separation from Service or by one or more years in which the Eligible Management Associate did not receive Compensation for the entire year will be considered to be consecutive for purposes of determining consecutive years of Final Service. INTEREST INCOME ACCOUNT(S): The account(s) of that name and any successor -------------------------- account(s) and/or fund(s) established and maintained pursuant to the Savings and Profit-Sharing Retirement Plan and/or the Savings, Profit-Sharing and Stock Ownership Plan. MATCHED DEPOSITS: An Eligible Management Associate's deposits, not in ---------------- excess of 6% of his compensation (as defined in the Savings and Profit-Sharing Retirement Plan and the Savings, Profit-Sharing and Stock Ownership Plan), made pursuant to the Savings and Profit-Sharing Retirement Plan and/or the Savings, Profit-Sharing and Stock Ownership Plan. PARTICIPATING EMPLOYER: The Company and any other Controlled Group Member ---------------------- or organizational unit of the Company or a Controlled Group Member which is designated as a Participating Employer under the Plan by the Personnel Committee; provided, however, that if such designation would substantially increase the cost of the Plan to the Company, such designation shall be subject to the sole discretion of the Board of Directors. PENNEY STOCK (COMPANY) ACCOUNT: The account(s) of that name and any ------------------------------ successor account(s) and/or fund(s) established and maintained pursuant to the Savings and Profit-Sharing Retirement Plan and/or the Savings, Profit-Sharing and Stock Ownership Plan. 8 PENSION PLAN: J. C. Penney Company, Inc. Pension Plan, as amended from ------------ time to time. PENSION PLAN PARTICIPANT: An Associate or former Associate who is treated ------------------------ as a participant under the Pension Plan. PERFORMANCE UNIT PLAN: J. C. Penney Company, Inc. 1984 Performance Unit --------------------- Plan, as amended from time to time. PERSONNEL COMMITTEE: The Personnel Committee of the Management Committee ------------------- of the Company. PLAN: Supplemental Retirement Program for Management Profit-Sharing ---- Associates of J. C. Penney Company, Inc., as amended from time to time. PROFIT INCENTIVE COMPENSATION: The share of store profits to which an ----------------------------- Associate is entitled as a store manager or as a member of a store's management staff; the management incentive compensation to which a management Associate is entitled; the regional or district incentive compensation to which a regional or district office Associate is entitled; and, if so determined by the Personnel Committee, any other compensation based on profits (excluding any Company contributions to and benefits under the Savings and Profit-Sharing Retirement Plan and Savings, Profit-Sharing and Stock Ownership Plan) to which an Associate of a Participating Employer, or, for the purpose of determining Average Final Compensation only, a Controlled Group Member who is not a Participating Employer, is entitled. SAVINGS AND PROFIT-SHARING RETIREMENT PLAN: J. C. Penney Company, Inc. ------------------------------------------ Savings and Profit-Sharing Retirement Plan, as amended from time to time. SAVINGS, PROFIT-SHARING AND STOCK OWNERSHIP PLAN: J. C. Penney Company, ------------------------------------------------ Inc. Savings, Profit-Sharing and Stock Ownership Plan, as amended from time to time. SEPARATION FROM SERVICE OR SEPARATES FROM SERVICE: Termination of Service ------------------------------------------------- after having attained age 55 by reason of disability, discharge, retirement (including resignation), or death. Termination of Service due to a disability is deemed to occur upon the later of termination of the Eligible Management Associate's sick pay or at the end of any leave of absence granted the Eligible Management Associate. SERVICE: The period of time credited to an Eligible Management Associate ------- as service under the terms of the Pension Plan. 9 SPOUSE: The individual to whom an Eligible Management Associate is ------ legally married under the laws of the State (within the meaning of section 3(10) of ERISA) in which the Eligible Management Associate is domiciled, or if domiciled outside the United States, under the laws of the State of Texas. TAX DEFERRED DEPOSITS: Deposits made under the Savings and Profit-Sharing --------------------- Retirement Plan and/or the Savings, Profit-Sharing and Stock Ownership Plan which were subject to a cash or deferred election under Section 401(k) of the Code and designated as Tax Deferred Deposits pursuant to the terms of the Savings and Profit-Sharing Retirement Plan and/or the Savings, Profit-Sharing and Stock Ownership Plan. TAXED DEPOSITS: An Eligible Management Associate's after-tax deposits -------------- made under the Savings and Profit-Sharing Retirement Plan and/or the Savings, Profit-Sharing and Stock Ownership Plan and designated as Taxed Deposits pursuant to the terms of the Savings and Profit-Sharing Retirement Plan and/or the Savings, Profit-Sharing and Stock Ownership Plan. TRADITIONAL RETIREMENT AGE: The date on which an Eligible Management -------------------------- Associate attains age 60. TRADITIONAL RETIREMENT DATE: The first day of the month immediately --------------------------- following the date an Eligible Management Associate attains Traditional Retirement Age if such Eligible Management Associate Separates from Service on such date. VALUATION DATE: With respect to the Company Accounts, excluding the -------------- Penney Stock (Company) Account, each day of the calendar year. With respect to the Penney Stock (Company) Account(s), each day of a calendar year on which the New York Stock Exchange is open. If the New York Stock Exchange is closed, the Penney Stock (Company) Account(s) will have the same value as of the last immediately preceding day the Exchange was open. ARTICLE III. PARTICIPATION Each Eligible Management Associate shall participate in the Plan as of such Eligible Management Associate's Early Retirement Date, Traditional Retirement Date, or Delayed Retirement Date, as the case may be; provided, however, that such Eligible Management Associate who has a Separation from Service in December shall be entitled to participate in the Plan as of the last day of that December. Notwithstanding the preceding sentence, effective on and after January 1, 1996, any Associate who, on December 31, 1995, was not classified as management or who was not participating in a Profit Incentive Compensation program shall not be considered an 10 Eligible Management Associate and shall not participate in the Plan. ARTICLE IV. BENEFITS (1) AT EARLY, TRADITIONAL, OR DELAYED RETIREMENT DATE: The annual amount ------------------------------------------------- of benefit payable from the Plan in monthly installments to an Eligible Management Associate commencing on such Eligible Management Associate's Early Retirement Date, Traditional Retirement Date, or Delayed Retirement Date, as the case may be, and terminating with the installment payable on the first day of the month in which such Eligible Management Associate dies, shall be: (a) the sum of (i) 3% of the Eligible Management Associate's Average Final Compensation multiplied by such Eligible Management Associate's Credited Service not in excess of 10 years; plus (ii) 1% of the Eligible Management Associate's Average Final Compensation multiplied by such Eligible Management Associate's Credited Service in excess of 10 years but not in excess of 30 years; plus (iii) 1/2 of 1% of the Eligible Management Associate's Average Final Compensation multiplied by such Eligible Management Associate's Credited Service in excess of 30 years but not in excess of 40 years; less (iv) 1/3 of 1% for each month by which the Eligible Management Associate's Early Retirement Date shall precede such Eligible Management Associate's Traditional Retirement Date multiplied by the Eligible Management Associate's Average Final Compensation; LESS (b) the sum of (i) the single-life, no-death-benefit annuity equivalent of (a) the annual amount of pension payable pursuant to the Pension Plan (disregarding Disability Service) assuming that the Eligible Management Associate's Benefit Commencement Date is the first day of the month immediately following the date of 11 such Eligible Management Associate's Separation from Service, (b) the annual amount payable pursuant to the terms of a domestic relations order qualified under Code Section 414(p), (A) from the Pension Plan and (B) from benefits accrued pursuant to Paragraph (1) of Article IV of the Benefit Restoration Plan and (c) the accrued benefit payable pursuant to Paragraph (1) of Article IV of the Benefit Restoration Plan; plus (ii) the single-life, no-death-benefit annuity equivalent, as of the Valuation Date which is the Eligible Management Associate's date of Separation from Service, of (a) the value of all the assets allocated to the Eligible Management Associate in the Company Account(s) under the Savings and Profit-Sharing Retirement Plan and the Savings, Profit- Sharing and Stock Ownership Plan, (b) the value of any additional assets which would have been allocated to the Eligible Management Associate's Company Account(s) under the Savings and Profit-Sharing Retirement Plan and the Savings, Profit-Sharing and Stock Ownership Plan had such Eligible Management Associate made all further permissible Matched Deposits up to 6% of his compensation (as such term is defined in each said Plan) under each said Plan and had he not made any withdrawals of taxed Matched Deposits from the Plans prior to January 1, 1989 plus the value of any amounts paid, pursuant to the terms of a domestic relations order qualified under Code Section 414(p), (A) out of such Eligible Management Associates' Company Account(s) under the Savings and Profit-Sharing Retirement Plan and the Savings, Profit-Sharing and Stock Ownership Plan and (B) out of such Eligible Management Associates' annual benefit limit make-up account established pursuant to Paragraph (2) of Article IV of the Benefit Restoration Plan; and (c) the benefits payable to the Eligible Management Associate pursuant to Paragraph (2) of Article IV of the Benefit Restoration Plan; plus (iii) 50% (less 1/4 of 1% for each month by which the Eligible Management Associate's Early 12 Retirement Date shall precede such Eligible Management Associate's Traditional Retirement Date) of the Eligible Management Associate's Estimated Social Security Benefit; plus (iv) in the case of an Eligible Management Associate whose Credited Service is increased pursuant to Paragraph (1) of Article VIII, the amount of annual retirement benefit (or any commutations thereof or substitutions therefor) payable to an Eligible Management Associate from any other employer, but only to the extent determined by the Benefits Administration Committee, expressed in the form of a single- life, no-death-benefit annuity equivalent (as determined by the Benefits Administration Committee), commencing on such Eligible Management Associate's Separation from Service. In determining the amount referred to in clause (ii) of Subparagraph (b) of this Paragraph (1) of this Article IV, it shall be deemed that (i) an Eligible Management Associate who has not, at all times when he was eligible to participate in the Savings and Profit-Sharing Retirement Plan and the Savings, Profit-Sharing and Stock Ownership Plan, contributed an amount sufficient to share, to the maximum extent, in the Company contribution to such Plan or such predecessor plan has so contributed and that an Eligible Management Associate who did not share, to the maximum extent, in Company contributions for which he was eligible under the Savings and Profit-Sharing Retirement Plan due to any withdrawal of taxed Matched Deposits, be deemed not to have any such withdrawal; (ii) the share of any such Company contribution deemed to have been credited to an Eligible Management Associate pursuant to this Paragraph for plan years ending before January 1, 1989 shall be deemed to have experienced the same rate of dividends, earnings, and change in value as the actual rate of dividends, earnings, and change in value experienced by the Penney Stock (Company) Account under the Savings and Profit-Sharing Retirement Plan from the time such share of a Company contribution is deemed to 13 have been credited for said plan years and that the value of this said amount as of December 31, 1988 under the Savings and Profit-Sharing Retirement Plan, plus the share of any such Company contribution deemed to have been credited to an Eligible Management Associate pursuant to this Paragraph for plan years beginning after December 31, 1988 shall be deemed to have experienced the same rate of earnings and change in value experienced by the Interest Income Account under the Savings, Profit-Sharing and Stock Ownership Plan from the time such share of a Company contribution is deemed to have been credited for said plan years; (iii) the value of the amount of the Company Account(s) and annual limit make-up account paid out pursuant to a domestic relations order qualified under Section 414(p) of the Code deemed to have been credited to an Eligible Management Associate pursuant to this Paragraph shall be deemed to have experienced the same rate of earnings and change in value experienced by the Interest Income Account under the Savings, Profit-Sharing and Stock Ownership Plan from the time such amount is deemed to have been credited; and (iv) the rates used to determine the single-life, no-death-benefit annuity equivalent shall be the rates that the Benefits Administration Committee, in its discretion, shall determine. (2) MINIMUM BENEFIT: In no event will the amount payable to an Eligible --------------- Management Associate under Paragraph (1) of this Article IV at such Eligible Management Associate's Traditional Retirement Date or Delayed Retirement Date, as the case may be, be less than the difference between (A) the amount of pension payable pursuant to the early retirement pension benefit provision of the Pension Plan (determined without regard to any compensation or benefit limits imposed by the Code) that would be applicable if the Eligible Management Associate elected to receive benefits pursuant to that provision prior to such Eligible Management Associate's normal retirement date, as defined in the Pension Plan (disregarding Disability Service, if any, and including as Credited Service any increase granted under Article VIII hereof) assuming the Eligible Management Associate's Benefit Commencement Date is the first day of the month immediately following the day of such Eligible Management Associate's Separation from Service under this Plan, and (B) the amount of pension payable pursuant to the early retirement pension benefit provision of the Pension Plan (determined without regard to any compensation or benefit limits imposed by the Code) that would be applicable if the Eligible Management Associate did not elect to receive benefits pursuant to that provision prior to the Eligible Management Associate's normal retirement date, as defined in the Pension Plan (disregarding Disability Service, if any, and including as Credited Service any increase granted under Article VIII hereof). In no event will the amount payable under Paragraph (1) of this Article IV to an Eligible Management Associate who (a) Separates from Service on his Early Retirement Date within one year prior to his Traditional Retirement Date and who is granted additional Credited Service pursuant to Paragraph (1) of Article VIII at his Early Retirement Date, or (b) Separates from Service because of a reduction in force and is designated as an individual termination by the Director of Personnel in accordance with Paragraph (1) of Article VIII and who is granted deemed additional months of Credited Service thereunder be less than the difference between (A) the amount of pension that would be payable (determined 14 without regard to any compensation or benefit limits imposed by the Code) at such Eligible Management Associate's normal retirement date, as defined by the Pension Plan (disregarding Disability Service, if any, and including as Credited Service, as defined by the Pension Plan, any increase granted under Article VIII hereof) and (B) the amount of pension payable pursuant to the early retirement pension benefit provision of the Pension Plan (determined without regard to any compensation or benefit limits imposed by the Code) that would be applicable if the Eligible Management Associate elected to receive benefits pursuant to that provision prior to such Eligible Management Associate's normal retirement date, as defined by the Pension Plan (disregarding Disability Service, if any, and excluding as Credited Service any increase granted under Article VIII hereof) assuming the Eligible Management Associate's Benefit Commencement Date is the later of his Traditional Retirement Date or Delayed Retirement Date, or, alternatively, his Early Retirement Date (if within one year of his Traditional Retirement Date), and assuming the early retirement reduction under the Pension Plan is decreased or waived. (3) SOCIAL SECURITY MAKE-UP: In addition to any other benefit payable ----------------------- under this Plan, an annual benefit equal to the Estimated Social Security Benefit shall be payable in monthly installments to an Eligible Management Associate commencing on such Eligible Management Associate's Traditional Retirement Date or Delayed Retirement Date up to age 62, as the case may be, (or, for an Eligible Management Associate who Separates from Service within one year prior to his Traditional Retirement Date and who is granted any adjustment pursuant to either clause (i) or (ii) of Paragraph (1) of Article VIII, on his Early Retirement Date) and terminating with the installment payable on the first day of the month in which such Eligible Management Associate dies or with the installment payable on the first day of the month prior to the month in which the Eligible Management Associate first becomes eligible for the primary old age benefit payable under the United States Social Security laws by reason of disability or attainment of age 62, whichever comes first. An Eligible Management Associate, who, on his Separation from Service, is entitled to disability benefits under the United States Social Security laws, shall not be eligible for any Social Security make-up benefits provided for in this paragraph. (4) DEATH BENEFIT: If an Eligible Management Associate has elected a form ------------- of payment with a guaranteed number of payments and the Eligible Management Associate dies before receiving all benefits payable under that option, remaining payments will be made to the person designated by the Eligible Management Associate as his beneficiary at the time the form of payment was selected. If an Eligible Management Associate is married at the time such Eligible Management Associate Separates from Service by reason of 15 death after attaining Early Retirement Age, or if an Eligible Management Associate who has Separated from Service after attaining Early Retirement Age and who is married at the time of his death, dies before payment has begun under the Plan, such Eligible Management Associate's Spouse will receive the benefit that would have been payable if the Eligible Management Associate had a Separation from Service immediately prior to such Eligible Management Associate's death (if he was an active Associate on the date of his death), and had begun to receive benefits immediately prior to his death in the form of a 100% (75% if death occurs prior to January 1, 1996) joint and survivor annuity without payment certain with the Spouse as the beneficiary. (5) LIFE INSURANCE COVERAGE: Commencing on an Eligible Management ----------------------- Associate's Traditional Retirement Date or Delayed Retirement Date, as the case may be, and ending on such Eligible Management Associate's attainment of age 70, the Company will continue to provide an Eligible Management Associate who has at least 10 years of uninterrupted employment with a Participating Employer with term life insurance coverage at Company expense on a decreasing coverage basis. The amount of coverage to be provided into retirement shall be equal, at such Eligible Management Associate's Traditional Retirement Date, to 100% of the amount of coverage being provided to him at Company expense immediately prior to the attainment of his Traditional Retirement Age reduced to 90%, 80%, 70%, 60%, 50%, 40%, 30%, 20%, and 10% of such amount of coverage on the first day of the month following his attainment of age 61, 62, 63, 64, 65, 66, 67, 68, and 69, respectively. The amount of coverage to be provided at a Delayed Retirement Date shall be the applicable percentage based upon the Eligible Management Associate's age on such Delayed Retirement Date multiplied by the amount of coverage being provided to him at Company expense immediately prior to his Delayed Retirement Date and decreasing thereafter as provided in the preceding sentence. If, on the Eligible Management Associate's Traditional Retirement Date or Delayed Retirement Date, as the case may be, such Eligible Management Associate is already covered by term life insurance under the Company's term life insurance plan on account of the Eligible Management Associate's total disability, such Eligible Management Associate shall not be eligible for any term life insurance coverage provided for in this paragraph. Benefits payable under this Plan will be paid to the beneficiary designated by the Eligible Management Associate as soon as practicable after receipt of a properly submitted claim. (6) EFFECT OF CERTAIN PAYMENTS MADE IN DECEMBER 1992: In the event the ------------------------------------------------ Company, in its discretion, made payments to a current or former Eligible Management Associate on or before December 31, 1992 under the Company's Profit Incentive Compensation program and under the Performance Unit Plan and such payments were 16 attributable to the Company's fiscal year ending on January 30, 1993, this Paragraph shall apply. The effect of such payments on the benefits payable to such individual under the Pension Plan and under the Savings, Profit- Sharing and Stock Ownership Plan shall be determined with respect to whether an increase or decrease in benefits resulted. Benefits payable under this Plan to such current or former Eligible Management Associate shall be adjusted (a) to offset any such increase in benefits and/or (b) to restore any such decrease in benefits so that no advantage or detriment, as the case may be, shall be experienced by any such current or former Eligible Management Associate with respect to total retirement benefits under the above-referenced Plans and this Plan. ARTICLE V. FORM AND COMMENCEMENT OF BENEFIT PAYMENTS (1) DELAYED COMMENCEMENT OF BENEFITS: An Eligible Management Associate -------------------------------- may elect that the commencement of his annual benefit payable under Paragraph (1) or (2) of Article IV be delayed to the first day of any month following his Early Retirement Date, Traditional Retirement Date, or Delayed Retirement Date, as the case may be (but not beyond the first day of the month in which he attains age 70). In such a case the amount of annual benefit payable under Paragraph (1) or (2) of Article IV shall be increased by 1/2 of 1% for each month that the commencement of such benefits is delayed. (2) OPTIONAL FORMS OF BENEFIT PAYMENT: Except as otherwise provided in --------------------------------- this Plan and subject to such rules and regulations as the Benefits Administration Committee may establish from time to time with respect to time and manner of election, an Eligible Management Associate may elect, prior to the commencement of his annual benefit payable under Paragraph (1)or (2) of Article IV, to receive a benefit of equivalent actuarial value (applying factors utilized in the Pension Plan) to such benefit, which may be one of the forms of benefit options described in the Pension Plan. The Benefits Administration Committee has full authority to revise the forms of benefit options available under this Plan. (3) SMALL ANNUITIES: If the total benefit payable to an Eligible --------------- Management Associate under Paragraph (1) or (2) of Article IV, plus the accrued benefit, if any, payable pursuant to Paragraph (1) of Article IV of the Benefit Restoration Plan would not provide monthly payments exceeding $100, the benefit shall be converted into an actuarially equivalent lump sum payment (applying the actuarial factors utilized in the Pension Plan). If an Eligible Management Associate who has begun to receive payments under the Plan and who has elected a form of payment with a guaranteed number of payments dies, and if the monthly benefit that becomes payable to the beneficiaries of the Eligible Management Associate does not 17 exceed $100 per beneficiary, the monthly benefit shall be converted into an actuarially equivalent lump sum payment (applying the actuarial factors utilized in the Pension Plan). ARTICLE VI. ADMINISTRATION The Benefits Administration Committee will administer the Plan and will have the full authority and discretion to accomplish that purpose, including without limitation, the authority and discretion to (i) interpret the Plan and correct any defect, supply any omission or reconcile any inconsistency or ambiguity in the Plan in the manner and to the extent that the Benefits Administration Committee deems desirable to carry on the purpose of the Plan, (ii) resolve all questions relating to the eligibility of Associates to become Eligible Management Associates and the eligibility of Eligible Management Associates to participate in the Plan, (iii) determine the amount of benefits payable to Eligible Management Associates and authorize and direct the Company with respect to the payment of benefits under the Plan, (iv) make all other determinations and resolve all questions of fact necessary or advisable for the administration of the Plan, and (v) make, amend, and rescind such rules as it deems necessary for the proper administration of the Plan. The Benefits Administration Committee will keep a written record of its action and proceedings regarding the Plan and all dates, records, and documents relating to its administration of the Plan. Any action taken or determination made by the Benefits Administration Committee will be conclusive on all parties. No member of the Benefits Administration Committee will vote on any matter relating specifically to such member. In the event that a majority of the members of the Benefits Administration Committee will be specifically affected by any action proposed to be taken (as opposed to being affected in the same manner as each other Eligible Management Associate in the Plan), such action will be taken by the Personnel Committee. ARTICLE VII. TYPE OF PLAN The Plan is a plan which is unfunded. The Plan is maintained by the Company primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. The Plan shall be construed according to the provisions of ERISA applicable to such plans. Benefits under the Plan (other than the life insurance benefits referred to in Paragraph (5) of Article IV which may be insured) are paid from the general assets of the Company. In the event that it should subsequently be determined by statute or by regulation or ruling that the Plan is 18 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 Benefits Administration Committee to the extent necessary to assure that it will be such a plan within the meaning of such sections. ARTICLE VIII. MISCELLANEOUS (1) ADDITIONAL CREDITED SERVICE AND OTHER ADJUSTMENTS: For all purposes ------------------------------------------------- of the Plan, the Credited Service of an Eligible Management Associate may be increased, and with respect to an Eligible Management Associate whose Early Retirement Date is within one year prior to his Traditional Retirement Date, (i) the percentage reduction on account of early retirement referred to in clause (iv) of Subparagraph (a) of Paragraph (1) of Article IV may be decreased or waived, and (ii) the entitlement to and the amount of benefits or coverage referred to in Paragraphs (2), (3), and (5) of Article IV may be accelerated or increased, as the case may be, in the discretion of: (a) in the case of an Eligible Management Associate other than an officer of the Company described in Subparagraphs (b) and (c) of this Paragraph (1), the Benefits Administration Committee; (b) in the case of an Eligible Management Associate who is an officer (other than an assistant officer) but who is not a director of the Company, the Benefit Plans Review Committee; and (c) in the case of an Eligible Management Associate who is an officer and who is also a director of the Company, the Board of Directors only after considering the recommendations of the Benefit Plans Review Committee. For all purposes of the Plan, the Benefits Administration Committee in its discretion, may make adjustments in Compensation and Credited Service with respect to payments of severance pay, including, but not limited to, outplacement pay and critical pay. An Eligible Management Associate who terminates employment due to a reduction in force, as defined below, and who does not satisfy the requirements for Traditional Retirement Age on the date of termination shall receive deemed additional months of age and/or Service, based on the following: 19 Years of Service Deemed Additional Months of Age and/or Service - ---------------- ---------------------------------------------- 0 - 9 0 10-14 12 15-19 18 20 or more 24 A reduction in force shall mean the termination of employment of an Eligible Management Associate because of: (a) A partial unit closing or complete unit closing ("unit closing") as determined by the Director of Personnel of the Company in his sole discretion, or (b) Other business reasons of the Company ("individual termination") as determined by the Director of Personnel of the Company in his sole discretion. With the approval of the Benefits Administration Committee of the Company, the Director of Personnel may increase such award by up to 24 deemed additional months of age and/or Service for an individual termination. For the purposes of determining the benefit payable under Paragraph (1) of Article IV, such Eligible Management Associate is deemed to have attained Traditional Retirement Age. The deemed additional months of age and/or Service shall be added, but only to the extent necessary, to the Eligible Management Associate's age and/or Service, in such amounts necessary to satisfy the minimum requirements for Traditional Retirement Age or, with the approval of the Benefits Administration Committee, an Early Retirement Age on or after age 59. The deemed additional months of Service shall count as Credited Service for the purpose of entitlement to benefits under this Plan only in the event of an individual termination as described in (b) of the preceding subparagraph, and shall not count as Credited Service in the event of a unit closing described in (a) of the preceding subparagraph. (2) AMENDMENT AND TERMINATION: The Benefit Plans Review Committee may ------------------------- amend or modify the Plan at any time, without prior notice; provided, however, that any such amendment or modification which would substantially increase the cost of the Plan to the Company shall require approval of the Board of Directors of the Company. The Board of Directors of the Company may suspend, discontinue, or terminate the Plan at any time without prior notice or approval. In no event will any amendment, modification, suspension, discontinuance, or termination adversely affect existing life insurance coverage for retirees or the Plan benefit for any Eligible Management Associate for whom benefit payments have already begun in accordance with the Plan as in effect prior to the effective date of the amendment, modification, suspension, discontinuance, or termination unless otherwise required to comply with applicable law. 20 If the Plan is terminated, any Eligible Management Associate who, as of the effective date of Plan termination, has reached Traditional Retirement Age but who has not reached age 65 shall be entitled to receive, at his actual Separation from Service, the benefits, if any, to which he would have been entitled under Paragraph (1) or (2) of Article IV had he Separated from Service on the day before the effective date of Plan termination, reduced by the percentage derived by dividing the number of months of Credited Service, if any, from the Plan termination effective date to the date of actual Separation from Service by the number of months of Credited Service from the Plan termination effective date to the date the Eligible Management Associate will have reached age 65. Any such Eligible Management Associate shall also be entitled to receive at his actual Separation from Service (other than by reason of death) a benefit, if any, to which he would have been entitled under Paragraph (3) of Article IV had the Plan not been terminated. If, after Plan termination, such Eligible Management Associate Separates from Service by reason of death, Paragraph (4) of Article IV shall apply, if appropriate. If the Plan is terminated, any Eligible Management Associate who, as of the effective date of Plan termination, has reached his Early Retirement Date (assuming a Separation from Service on such date) shall be entitled to receive, at his actual Separation from Service, the benefits, if any, to which he would have been entitled under Paragraph (1) or (2) of Article IV calculated as if he had reached his Traditional Retirement Age and Separated from Service on the day before the effective date of Plan termination and disregarding the percentage reduction on account of early retirement referred to in clause (iv) of Subparagraph (a) of Paragraph (1) of Article IV, reduced by the percentage derived by dividing the number of months of Credited Service, if any, after his Traditional Retirement Date by 60. Any such Eligible Management Associate shall also be entitled to receive at his actual Separation from Service (other than by reason of death) a benefit, if any, to which he would have been entitled under Paragraph (3) of Article IV had the Plan not been terminated. If, after Plan termination, such Eligible Management Associate Separates from Service by reason of death, Paragraph (4) of Article IV shall apply, if appropriate. If the Plan is terminated, any Eligible Management Associate who, as of the effective date of Plan termination (a) has reached age 50, (b) has 10 or more years of credited service, as defined by the Pension Plan, as an Eligible Management Associate, and (c) is not otherwise eligible for benefits under this Paragraph (2) of this Article VIII, shall be entitled to receive, at his actual Separation from Service but no earlier than his Traditional Retirement Date, a benefit equal to the difference between the amount of pension which would be payable pursuant to the early 21 retirement pension benefit provision of the Pension Plan that would be applicable if the Eligible Management Associate elected to receive benefits pursuant to that provision prior to his normal retirement date, as defined in the Pension Plan (disregarding Disability Service, if any) and the amount of pension payable pursuant to the early retirement pension benefit provision of the Pension Plan that would be applicable if the Eligible Management Associate did not elect to receive benefits pursuant to that provision prior to his normal retirement date, as defined in the Pension Plan (disregarding Disability Service, if any) reduced by the percentage derived by dividing the number of months of Credited Service, if any, after Traditional Retirement Date (assuming a Separation from Service) by 60. In no event will any future amendment or modification of the Plan adversely affect the right to Plan benefits which vest on Plan termination as set forth in this Paragraph (2) without the consent of at least 75 percent of the affected Eligible Management Associates unless such amendment or modification is specifically required to comply with applicable law. Each amendment to the Plan by the Benefit Plans Review Committee or the Board of Directors will be made only pursuant to unanimous written consent or by majority vote at a meeting. Upon such action by the Benefit Plans Review Committee or the Board of Directors, the Plan will be deemed amended as of the date specified as the effective date by such action or in the instrument of amendment. The effective date of any amendment may be before, on, or after the date of such action of the Benefit Plans Review Committee or the Board of Directors. (3) RIGHTS OF ASSOCIATES: Except for the Associate's non-forfeitable -------------------- interest as set forth in Paragraph (2) of this Article VIII, neither the establishment of the Plan nor any action thereafter taken by the Company or any Controlled Group Member or by the Benefits Administration Committee shall be construed as giving to any Associate any vested right to a benefit from the Plan or a right to be retained in employment or any specific position or level of employment with the Company, or any Controlled Group Member. Moreover, no Associate shall have any right or claim to any benefits under this Plan if the Associate is summarily discharged (including resignation in lieu thereof) unless the Benefits Administration Committee, in its discretion, determines that such Associate shall be eligible for such benefits notwithstanding such summary discharge. (4) MISTAKEN INFORMATION: If any information upon which an Eligible -------------------- Management Associate's benefit under the Plan is calculated has been misstated by the Eligible Management Associate or is otherwise mistaken, such benefit shall not be invalidated 22 (unless upon the basis of the correct information the Eligible Management Associate would not have been entitled to a benefit), but the amount of the benefit shall be adjusted to the proper amount determined on the basis of the correct information and any overpayments shall be charged against future payments to the Eligible Management Associate or his beneficiary. (5) LIABILITY: Neither the Board of Directors (including any committees --------- thereof)of the Company or of any Participating Employer nor any member of the Benefits Administration Committee or the Personnel Committee nor any person to whom any of them may delegate any duty or power in connection with administering the Plan shall be personally liable for any action or failure to act with respect to the Plan. (6) CESSATION AND RECALCULATION OF BENEFITS: If a theretofore retired --------------------------------------- Eligible Management Associate again becomes an Associate of a Participating Employer and is participating in a Profit Incentive Compensation program, the payment of benefits hereunder shall cease on the date he so becomes such an Associate. Any life insurance coverage in effect pursuant to Paragraph (5) of Article IV shall cease effective on the date a rehired (whether or not participating in a Profit Incentive Compensation program) Associate becomes eligible for coverage under the Company's term life insurance plan. Upon such Associate's Separation from Service he shall be entitled to receive applicable benefits, if any, under Article IV pursuant to uniform rules approved by the Benefits Administration Committee. (7) CONSTRUCTION: In determining the meaning of any provision of the ------------ Plan, words imparting the masculine gender shall include the feminine and the singular shall include the plural, unless the context requires otherwise. Headings of paragraphs and Articles in the Plan are for convenience only and are not intended to modify or affect the meaning of the substantive provisions of the Plan. (8) NON-ASSIGNABILITY OF BENEFITS: The benefits payable hereunder or the ----------------------------- right to receive future benefits under the Plan may not be anticipated, alienated, pledged, encumbered, or subjected to any charge or legal process, and if any attempt is made to do so, or a person eligible for any benefits becomes bankrupt, the interest under the Plan of the person affected may be terminated by the Benefits Administration Committee which, in its sole discretion, may cause the same to be held or applied for the benefit of one or more of the dependents of such person or make any other disposition of such benefits that it deems appropriate. (9) GOVERNING LAW: Except to the extent that the Plan may be ------------- subject to the provisions of ERISA, the Plan will be construed 23 and enforced according to the laws of the State of Texas, without giving effect to the conflict of laws principles thereof. Except as otherwise required by ERISA, every right of action by an Associate, former Associate, or beneficiary with respect to the Plan shall be barred after the expiration of three years from the date of Separation of Service of the Eligible Management Associate or the date of receipt of the notice of denial of a claim for benefits, if earlier. In the event ERISA's limitations on legal actions do not apply, the laws of the State of Texas with respect to limitations of legal actions shall apply and the cause of action must be brought no later than four years after the date the action accrues. (10) TRANSFERRED ELIGIBLE MANAGEMENT ASSOCIATES: In the event of the ------------------------------------------ transfer of an Eligible Management Associate after December 31, 1995 from a Participating Employer to a "non-participating employer" as defined below, said Eligible Management Associate shall continue to be eligible to participate in this Plan in accordance with Article III. In the event of the transfer of an Eligible Management Associate on or after March 8, 1995 but on or before December 31, 1995 to a non-participating employer, said Eligible Management Associate will continue to be eligible to participate in this Plan in accordance with Article III provided that on December 31, 1995 the Eligible Management Associate (a) is in the employ of the non-participating employer and (b) is not eligible to participate in the Supplemental Retirement Program for Eligible Management Associates of JCPenney Financial Services, or Supplemental Retirement Program for Management Profit-Sharing Associates of Thrift Drug, Inc. The Service and Compensation of the Eligible Management Associate with the non- participating employer shall be recognized as attributable to a Participating Employer to the extent permitted by the Plan in determining benefits under the Plan. A non-participating employer shall mean a participating employer in the (a) Supplemental Retirement Program for Eligible Management Associates of JCPenney Financial Services, or (b) Supplemental Retirement Program for Management Profit-Sharing Associates of Thrift Drug, Inc. ARTICLE IX. CLAIMS PROCEDURES If an Associate does not receive the benefits which he believes he is entitled to receive under the Plan, he may file a claim for benefits with the Benefits Administration Manager. All claims will be made in writing and will be signed by the claimant. If the claimant does not furnish sufficient information to determine the validity of the claim, the Benefits Administration Manager will indicate to the claimant any additional information which is required. 24 Each claim will be approved or disapproved by the Benefits Administration Manager within 90 days following the receipt of the information necessary to process the claim. In the event the Benefits Administration Manager denies a claim for benefits in whole or in part, the Benefits Administration Manager will notify the claimant in writing of the denial of the claim. Such notice by the Benefits Administration Manager 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 the Plan's claim review procedure as set forth below. If no action is taken by the Benefits Administration Manager on a claim within 90 days, the claim will be deemed to be denied for purposes of the review procedure. A claimant may appeal a denial of his claim by requesting a review of the decision by the Benefits Administration Committee or a person designated by the Committee, which person will be a named fiduciary under Section 402(a)(2) of ERISA for purposes of this Article IX. An appeal must be submitted in writing within 60 days after the denial and must (i) request a review of the claim for benefits under the Plan, (ii) set forth all of the grounds upon which 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 Benefits Administration Committee or the named fiduciary designated by the Benefits Administration Committee will make a full and fair review of each appeal and any written materials submitted in connection with the appeal. The Benefits Administration Committee or the named fiduciary designated by the Benefits Administration Committee 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 Benefits Administration Committee or named fiduciary, provided the Benefits Administration Committee or named fiduciary finds the requested documents or materials are pertinent to the appeal. On the basis of its review, the Benefits Administration Committee or named fiduciary will make an independent determination of the claimant's eligibility for benefits under the Plan. The decision of the Benefits Administration Committee or named fiduciary on any claim for benefits will be final and conclusive upon all parties thereto. In the event the Benefits Administration Committee or named fiduciary denies an appeal in whole or in part, it 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 which will make specific 25 reference to the pertinent Plan provisions on which the decision was based. 26 APPENDIX I PARTICIPATING EMPLOYERS ----------------------- J. C. Penney Company, Inc. JCP Media Corporation JCP Overseas Services, Inc. JCP Receivables, Inc. JCPenney National Bank JCPenney Portfolio, Inc. JCPenney Puerto Rico, Inc. EX-10.(II)(Z) 7 FEB. 96 AMDMNT TO JCP CO. BEN. RES. PLAN EXHIBIT 10(ii)(z) RESOLVED that, pursuant to Article VIII, Paragraph 1 of the J. C. Penney Company, Inc. Benefit Restoration Plan, the definition of "Participating Employer" under the Benefit Restoration Plan be, and it hereby is, amended in its entirety effective February 1, 1996, to read as follows: Participating Employer: The Company and any other Controlled ---------------------- Group Member or organizational unit of the Company or a Controlled Group Member which is designated as a Participating Employer under the Plan by the Personnel Committee; provided, however, that if any such designation would substantially increase the cost of the Plan to the Company, such designation shall be subject to the sole discretion of the Board of Directors. EX-10.(II)(AA) 8 SUPPL. TERM LIFE INSURANCE PLAN EXHIBIT 10(ii)(aa) J. C. PENNEY COMPANY, INC. SUPPLEMENTAL TERM LIFE INSURANCE PLAN FOR MANAGEMENT PROFIT-SHARING ASSOCIATES ADOPTED EFFECTIVE JANUARY 1, 1995 J. C. PENNEY COMPANY, INC. SUPPLEMENTAL TERM LIFE INSURANCE PLAN FOR MANAGEMENT PROFIT-SHARING ASSOCIATES TABLE OF CONTENTS ----------------- PAGE ---- Article 1 Introduction 1 Article 2 Definitions 2 Article 3 Participation 4 Article 4 Life Insurance Benefits 5 Article 5 Funding of Benefits 6 Article 6 Administration of the Plan 7 Article 7 Adoption By Participating Employers 12 Article 8 Amendment and Termination 13 Article 9 Conversion Rights 15 Article 10 Miscellaneous Provisions 16 (i) ARTICLE 1 INTRODUCTION ------------ J. C. Penney Company, Inc., a Delaware corporation, hereby adopts the J. C. Penney Company, Inc. Supplemental Term Life Insurance Plan For Management Profit-Sharing Associates (the "Plan"), effective January 1, 1995. The Plan is an "employee welfare benefit plan" pursuant to ERISA which permits eligible retired management Associates of J. C. Penney Company, Inc. and JCPenney Financial Services to purchase group term life insurance benefits directly from the Insurer (as hereinafter defined). This document, together with the Policies (as hereinafter defined) will be construed as a single group term life insurance plan. Capitalized terms used throughout the Plan have the meanings set forth in Article 2. ARTICLE 2 DEFINITIONS ----------- 2.1 "Administrator" means the Benefits Administration Committee of the ------------- Company or such other person or committee as may be appointed from time to time by the Personnel Committee of the Management Committee of the Company (the "Personnel Committee"). 2.2 "Annual Earnings for Benefits" means the greater of (i) the ---------------------------- Participant's "Annual Earnings for Benefits" for purposes of the Company-Paid Plan on the Participant's retirement date or (ii) for a retired Participant who is reemployed by a Participating Employer and who becomes eligible for the Company-Paid Plan and later loses eligibility under the Company-Paid Plan, such retired Participant's Annual Earnings for Benefits at such time as the Participant lost eligibility under the Company-Paid Plan. 2.3 "Associate" means each individual employed by a Participating --------- Employer, other than an individual who is classified as an independent contractor by the Participating Employer for purposes of federal income tax reporting and withholding. The term "Associate" does not include any individual who performs services for a Participating Employer as a "leased employee" within the meaning of Code section 414(n), or who otherwise performs services through an agreement with a leasing organization. 2.4 "Associate-Paid Plan" means the J. C. Penney Company, Inc. Voluntary ------------------- Employees' Beneficiary Association Group Term Life Insurance Plan, as amended from time to time, and/or the J. C. Penney Company, Inc. Associate-Paid Insured Group Term Life Insurance Plan, as amended from time to time. 2.5 "Code" means the Internal Revenue Code of 1986, as amended. ---- 2.6 "Company" means J. C. Penney Company, Inc., a Delaware corporation, or ------- any successor corporation. 2.7 "Company-Paid Plan" means the J. C. Penney Company, Inc. Group Term ----------------- Life Insurance Plan, as amended from time to time. 2.8 "Date of Disability", "Disabled", and "Disability" have the meanings ------------------ -------- ---------- set forth in the Company-Paid Plan. -2- 2.9 "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended. 2.10 "Insurer" means the insurance company or companies issuing the Policy ------- or Policies. 2.11 "MSRP Retiree" means a former Associate who retired from a ------------ Participating Employer on or after age 60 and who is eligible to receive Company-paid life insurance coverage under the terms of the Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc., as amended from time to time or the Supplemental Retirement Program for Eligible Management Associates of JCPenney Financial Services, as amended from time to time. The term "MSRP Retiree" also includes any additional former Associate so designated from time to time in the discretion of the Board of Directors of the Participating Employer or the Benefits Administration Committee or the Benefit Plans Review Committee of the Company in accordance with the provisions of each such Supplemental Retirement Program. 2.12 "Participant" means an MSRP Retiree who has satisfied the eligibility ----------- reguirements of Article 3, has purchased life insurance coverage under the terms of the Plan, and whose coverage under the Plan has not terminated. 2.13 "Participating Employer" means the Company and any subsidiary or ---------------------- affiliate of the Company which is designated as a Participating Employer under the Plan by the Personnel Committee, excluding, however, any division of the Company or of a subsidiary or affiliate that is designated by the Personnel Committee as ineligible to participate in the Plan. Appendix I contains a list of the Participating Employers currently participating in the Plan. 2.14 "Plan" means the J. C. Penney Company, Inc. Supplemental Term Life ---- Insurance Plan For Management Profit Sharing Associates, as amended from time to time. 2.15 "Policy" or "Policies" means the life insurance policies through which ------ -------- Plan benefits are provided, which are incorporated by reference into the Plan. -3- ARTICLE 3 PARTICIPATION ------------- 3.1 Eligibility For Coverage. An Associate who qualifies as an MSRP ------------------------ Retiree will be eligible to purchase coverage under the Plan, effective upon retirement, provided the MSRP Retiree was a participant in the Associate-Paid Plan immediately prior to retirement, but only if the MSRP Retiree properly completes and submits all required enrollment forms within 31 days after retirement. If the MSRP Retiree has assigned his term life insurance provided by the Associate-Paid Plan, the assignee may elect the coverage provided by this Section 3.1. No late enrollment procedures are available for MSRP Retirees. Notwithstanding the foregoing, an MSRP Retiree who was receiving coverage under the Associate-Paid or the Company-Paid Plan on account of Disability on the MSRP Retiree's retirement date will not become eligible to purchase coverage under this Plan. 3.2 Termination of Coverage. A Participant's coverage under the Plan will ----------------------- terminate automatically on the earliest to occur of the following: (i) the last day of the month in which the Participant attains age 65; (ii) subject to Article 8, the last day of the month in which the Plan is terminated, or amended to terminate coverage with respect to any group or class of MSRP Retirees that includes the Participant; (iii) the last day of the month in which the Policy under which the Participant's benefits are provided is cancelled or terminated and not replaced; iv) the last day of the month in which the Participant fails to make any required premium payment; (v) the last day of the month in which the Participant becomes eligible for coverage under the Company-Paid Plan as an active Associate; or (vi) the date of the Participant's death. A Participant whose coverage is terminated pursuant to subsection (v) above, shall again become eligible to participate in the Plan on the first day of the month on or after the date he or she ceases to be an active Associate eligible for coverage under the Company-Paid Plan. 3.3 Enrollment Procedures. The Administrator may from time to time --------------------- prescribe enrollment procedures and forms that are consistent with the terms of the Plan. 3.4 Coverage Not Extended by Payment. The duration of a Participant's -------------------------------- coverage is determined solely by the terms of the Plan, and coverage which has otherwise terminated will not be extended even if premium payments for the terminated coverage continue to be made and/or processed on behalf of the Participant. -4- ARTICLE 4 LIFE INSURANCE BENEFITS ----------------------- 4.1 Amount of Life Insurance. An MSRP Retiree may purchase life insurance ------------------------ coverage under the Policies in an amount equal to 100% of the MSRP Retiree's Annual Earnings for Benefits. Coverage will be rounded to the next higher $1,000 if it is not already an even multiple of $1,000. 4.2 Evidence of Good Health. To the extent required by the applicable ----------------------- Policies and/or the Insurer, Participants will be required to provide evidence of good health as a condition to coverage. 4.3 Payment of Benefits. Benefits payable under the Plan will be paid by ------------------- the Insurer to the beneficiary or beneficiaries as soon as practicable after receipt by the Insurer of properly submitted claims. Benefits will be paid in a single lump sum payment unless the Participant (or the beneficiary, if applicable) elects a different method of payment offered by the Insurer. 4.4 Designation of Beneficiary. A Participant may designate one or more -------------------------- beneficiaries to receive the life insurance benefits under the Plan, or may change a prior beneficiary designation, by completing and delivering a written beneficiary designation form in accordance with procedures specified by the Administrator from time to time. If a Participant fails to designate a beneficiary (or no beneficiary is alive on the date of the Participant's death), benefits will be paid to the estate of the Participant. 4.5 Benefit Limitation. Benefits under the Plan are subject to the terms ------------------ of the Policies and to applicable state law. 4.6 Recovery of Overpayment. Any amounts paid to any person in excess of ----------------------- the amount to which he is entitled under the Plan will be repaid by that person to the Insurer promptly following receipt by the person of a notice of such excess payments. In the event such repayment is not made, such repayment may be made, at the discretion of the Insurer, by reducing or suspending any future payments due under the Plan to the person and by taking such other or additional action as may be permitted by applicable law. -5- ARTICLE 5 FUNDING OF BENEFITS ------------------- 5.1 Associate-Paid Premiums. The Participants will pay all or a portion of ----------------------- the cost of premiums with respect to benefits under the Policies as determined by the Administrator in its discretion from time to time. The Administrator will have full and exclusive power to determine the cost of coverage to be paid by each Participant, and to adjust the required cost from time to time. In establishing the amount of required Participant cost, the Administrator may rely on tables, appraisals, valuations, projections, opinions, and reports furnished by agents employed or engaged by the Administrator or the Company, and may take into account the projected or anticipated costs and expenses relating to the Plan, including without limitation administrative costs and insurance premiums. Premiums required of Participants will be treated as fixed premium payments, and neither the Participants nor any beneficiary will be entitled to any refund or rebate on account of actual claims experience, investment performance, or similar factors. 5.2 Participating Employer Obligations. The Participating Employers will ---------------------------------- pay the portion, if any, of the cost of premiums with respect to benefits under the Policies as determined by the Administrator in its discretion from time to time. The Participating Employers' obligations under the Plan are limited to the payment of such portion of applicable premiums due under any Policies in force, and no Participant or beneficiary will have any claim or cause of action against any Participating Employer on account of the failure of an Insurer to pay benefits due under the Policies. 5.3 Source of Benefits. Benefits under the Plan will be paid solely from ------------------ the Policies and only to the extent provided under such Policies. Any payment for the benefit of a Participant that is made in accordance with the terms of the Policies will, to the extent of the payment, be in full satisfaction of all claims under the Plan against the Participating Employers, the Administrator, and the Insurer, any of whom may require such payee, as a condition precedent to such payment, to execute a release acknowledging receipt of such payment. -6- ARTICLE 6 ADMINISTRATION OF THE PLAN -------------------------- 6.1 General Powers and Duties of the Administrator. The Administrator will ---------------------------------------------- have the full power, responsibility, and discretion to administer the Plan and to construe and apply Plan provisions, and will be the named fiduciary with respect to the operation and administration of the Plan, except with respect to the specific responsibilities performed by the Insurer pursuant to the Policies or delegated to the Insurer or another fiduciary pursuant to Section 6.3 or 6.4. The Administrator, and all other persons with discretionary control respecting the operation, administration, control, and/or management of the Plan will perform their duties under the Plan solely in the interests of Participants and their beneficiaries. 6.2 Specific Powers and Duties of the Administrator. The Administrator ----------------------------------------------- will administer the Plan and have the full authority and discretion necessary to accomplish that purpose, including without limitation the authority and discretion to: (i) resolve all questions relating to the eligibility of Associates to become or continue as Participants, (ii) engage any administrative, legal, medical, accounting, clerical, or other services it deems appropriate in administering the Plan, (iii) construe and interpret the Plan, supply omissions from, correct deficiencies in and resolve inconsistencies or ambiguities in the language of the Plan, resolve inconsistencies or ambiguities between the provisions of this Plan and the provisions of any Policy, and adopt rules for the administration of the Plan which are not inconsistent with the terms of the Plan document, (iv) compile and maintain all records it determines to be necessary, appropriate, or convenient in connection with the administration of the Plan, and (v) resolve all questions of fact relating to any matter for which it has administrative responsibility. 6.3 Authority of Insurer. The Insurer will be responsible for the initial -------------------- review, payment, and/or denial of claims for benefits under the Policies. In carrying out its responsibilities under the Policies, the Insurer will have the authority and discretion to (i) determine the amount of benefits, if any, payable to Participants and beneficiaries under the Policies and determine the time and manner in which such benefits are to be paid, (ii) construe and interpret the Policies, and (iii) compile and maintain all records it determines to be necessary, appropriate, or convenient in connection with the Policies. -7- 6.4 Allocation of Fiduciary Responsibility. The Administrator from time -------------------------------------- to time may delegate to any other persons or organizations any of its rights, powers, duties, and responsibilities with respect to the operation and administration of the Plan that are permitted to be delegated under ERISA. Any such allocation or delegation will be reviewed periodically by the Administrator, and will be terminable upon such notice as the Administrator in its discretion deems reasonable and proper under the circumstances. Whenever the Administrator delegates discretionary authority respecting the administration of the Plan to another person or organization, the Administrator's responsibility with respect to such delegation is limited to the selection of the person to whom authority is delegated and the periodic review of such person's performance and compliance with applicable law and regulations. Any breach of fiduciary responsibility by the person to whom authority has been delegated which is not proximately caused by the Administrator's failure to properly select or supervise, and in which breach the Administrator does not otherwise participate, will not be considered a breach by the Administrator. 6.5 Information to be Submitted to the Administrator. To enable the ------------------------------------------------ Administrator to perform its functions, each Participating Employer will supply full and timely information to the Administrator on all matters relating to Associates as the Administrator may require and will maintain such other records required by the Administrator to determine the benefits due under the Plan. 6.6 Expenses and Compensation. The expenses of administering the Plan, ------------------------ including without limitation the expenses of the Administrator properly incurred in the performance of its duties under the Plan, will be paid by the Company. The Administrator will not be compensated by the Plan for services as Administrator. 6.7 Reporting and Disclosure. The Company will be the "administrator" of ------------------------ the Plan as defined in ERISA section 3(16) (A) for purposes of the reporting and disclosure requirements imposed by ERISA and the Code. The Administrator will assist the Company, as requested, in complying with such reporting and disclosure requirements. 6.8 Claims Procedure. Participants and beneficiaries must apply for Plan ---------------- benefits in writing on a form provided by the Administrator and must supply any supplemental information required by the Administrator or the Insurer. Following completion of the claim form, the form may be returned to the Administrator for submission to the Insurer, or may be submitted directly to the Insurer if so specified by the Administrator. -8- All claims will be made in writing and will be signed by the claimant. If the claimant does not furnish sufficient information to determine the validity of the claim, the Administrator will indicate to the claimant any additional information which is required. Each claim will be approved or disapproved by the Insurer within 90 days following the receipt of the information necessary to process the claim. In the event the Insurer denies a claim for benefits in whole or in part, the Insurer will notify the claimant in writing of the denial of the claim. Such notice by the Insurer will also set forth, in a manner calculated to be understood by the claimant, the specific reason 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 is necessary, and an explanation of the Plan's claim review procedure as set forth below. If no action is taken by the Insurer on a claim within 90 days, the claim will be deemed to be denied for purposes of the review procedure. 6.9 Appeals Procedure. A claimant may appeal a denial of his claim with ----------------- respect to "Procedural Issues" (as hereinafter defined) by requesting a review of the decision by the Administrator or a person designated by the Administrator, which person will be a named fiduciary under ERISA section 402(a)(2) for purposes of this Section. A claimant may appeal a denial of his claim with respect to "Coverage Issues" (as hereinafter defined) by requesting a review of the decision by the Insurer, which will be a named fiduciary under ERISA section 402(a)(2) for purposes of this Section. An appeal must be submitted in writing within one year after the notice of denial is received (or within 60 days if the notice of denial is received after December 31, 1995) and must (i) request a review of the claim for benefits under the Plan, (ii) set forth all of 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 Administrator, Insurer, or other applicable named fiduciary will make a full and fair review of each appeal and any written materials submitted in connection with the appeal. The Administrator, Insurer, or other applicable named fiduciary 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 Administrator, Insurer, or other named fiduciary, provided the Administrator, Insurer, or other named fiduciary finds the requested documents or materials are pertinent to the appeal. On the basis of its -9- review, the Administrator, Insurer, or other named fiduciary will make an independent determination of the claimant's eligibility for benefits under the Plan. The decision of the Administrator, Insurer, or other named fiduciary on any claim for benefits will be final and conclusive upon all parties thereto. In the event the Administrator, Insurer, or other named fiduciary denies an appeal in whole or in part, it 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 which will make specific reference to the pertinent Plan provisions on which the decision was based. For purposes of this Section, the term "Procedural Issues" means issues concerning (i) an Associate's eligibility to become or continue as a Participant, (ii) an Associate's employment status at the time of the claim or when the claim arose, (iii) a determination of a Participant's Annual Earnings for Benefits, and (iv) other procedural issues that do not require interpretation of the Policies. For purposes of this Section, the term "Coverage Issues" means issues concerning (i) whether death is covered under the Policy, (ii) the documentation required by the Insurer, (iii) conversion rights under Article 9, (iv) the validity of beneficiary designations, (v) determinations regarding Disability, and (vi) other questions concerning the extent of Plan coverage under the terms of the Policies. 6.10 Uniform Application of Rules and Policies. The Administrator in ----------------------------------------- exercising its discretion granted under any of the provisions of the Plan will do so only in accordance with rules and policies that it establishes, which rules and policies will be uniformly applicable to all Associates, MSRP Retirees and their beneficiaries. 6.11 Reliance Upon Information. The Administrator is entitled to rely upon ------------------------- all tables, valuations, certificates, and reports furnished by any duly appointed actuary, upon all certificates and reports made by any duly appointed independent qualified public accountant and upon all opinions given by legal counsel. The Administrator will be fully protected in respect of any action taken or suffered by the Administrator in good faith reliance upon all such tables, valuations, certificates, reports, opinions, or other advice. The Administrator is also entitled to rely upon any data or information furnished by a Participating Employer or by an Associate, MSRP Retiree, or beneficiary as to the age or Annual Earnings for Benefits of any person, or as to any other information pertinent to any calculation or determination to be made under the provisions of the Plan, and, as a condition to payment of any benefit under the Plan, may -10- request an Associate, MSRP Retiree, or beneficiary to furnish such information as the Administrator deems necessary or desirable in administering the Plan. If an Associate, MSRP Retiree, or beneficiary does not provide accurate information in connection with enrollment or coverage under the Plan, the Administrator may, in its discretion, delay or deny the affected coverage. If any relevant facts regarding an Associate, MSRP Retiree, or beneficiary are inaccurate or misstated, the Administrator may make an equitable adjustment of contributions, and the true facts will be used by the Administrator to determine whether, and in what amount, coverage is in effect. -11- ARTICLE 7 ADOPTION BY PARTICIPATING EMPLOYERS ----------------------------------- 7.1 Adoption Procedure. Any subsidiary or affiliate of the Company may ------------------ become a Participating Employer under the Plan provided that (i) the Personnel Committee approves the adoption of the Plan by the subsidiary or affiliate and designates the subsidiary or affiliate as a Participating Employer in the Plan, and (ii) by appropriate resolutions of the board of directors or other governing body of the subsidiary or affiliate, the subsidiary or affiliate agrees to become a Participating Employer under the Plan and also agrees to be bound by any other terms and conditions which may be required by the Personnel Committee or the Administrator, provided that such terms and conditions are not inconsistent with the purposes of the Plan. A Participating Employer may withdraw from participation in the Plan by providing written notice to the Administrator that withdrawal has been approved by the board of directors or other governing body of the Participating Employer. The Personnel Committee may at any time remove a Participating Employer from participation in the Plan by providing written notice to the Participating Employer that removal has been approved by the Personnel Committee. The Personnel Committee will act in accordance with this Article pursuant to unanimous written consent or by majority vote at a meeting. -12- ARTICLE 8 AMENDMENT AND TERMINATION ------------------------- 8.1 Right to Suspend Premium Payments. It is the expectation of the --------------------------------- Participating Employers that they will continue to pay any employer portion of premium payments as determined under Article 5, but they do not assume an individual or collective contractual obligation to do so, and the right is reserved by the Personnel Committee at any time to reduce, suspend, or discontinue any such premium payments. 8.2 Right to Amend. The right to amend the Plan at any time in any respect -------------- is reserved to the Company as provided herein, without prior notice to or approval by Participants or beneficiaries, provided that no amendment will adversely affect individuals who are Participants on the effective date of the amendment unless otherwise required to comply with applicable law. The Personnel Committee may amend the Plan at any time and from time to time to the extent it may deem advisable or appropriate. In addition, the Administrator may amend the Plan at any time and from time to time to the extent the Administrator deems it advisable or appropriate, provided that such amendment would not significantly increase the cost of the Plan to the Participating Employers. 8.3 Amendment Procedure. Each amendment to the Plan by the Personnel ------------------- Committee or the Administrator will be made only pursuant to unanimous written consent or by majority vote at a meeting, and a copy of any amendment adopted by the Personnel Committee will be delivered to the Administrator. Upon such action by the Personnel Committee or the Administrator, the Plan will be deemed amended as of the date specified as the effective date by such action or in the instrument of amendment. The effective date of any amendment may be before, on, or after the date of such action of the Personnel Committee or the Administrator. 8.4 Termination of the Plan. The Participating Employers expect to ----------------------- continue the Plan indefinitely, but they do not assume an individual or collective contractual obligation to do so, and the right is reserved to the Company, acting through the Personnel Committee, to terminate the Plan or to completely discontinue premium payments with respect to any Policy at any time, without prior notice to or approval by Participants or beneficiaries. Notwithstanding the foregoing, in no event will termination of the Plan adversely affect individuals who are Participants on the effective date of the amendment unless otherwise required to comply with applicable law. The authority -13- of the Personnel Committee will be exercised by unanimous written consent or by majority vote at a meeting. -14- ARTICLE 9 CONVERSION RIGHTS ----------------- 9.1 Conversion to Individual Policy. A Participant whose coverage under ------------------------------- the Plan terminates under Section 3.2 will have the right to convert his or her group term life insurance coverage to an individual policy to the extent, and only to the extent, permitted under the group Policy applicable to the Participant. Any election to convert to individual coverage must be made within 31 days after the Participant's coverage under the Plan terminates, and must be made in accordance with all requirements specified in such Policy. 9.2 Death During Conversion Period. If a Participant dies within 31 days ------------------------------ after coverage has terminated under the Plan and while the Participant is entitled to convert his or her group coverage to an individual policy under the terms of the applicable Policy, the Participant's beneficiary will be entitled to a death benefit from the Policy in an amount equal to the amount of term life insurance the Participant was entitled to convert immediately prior to death. Any benefit payable during the conversion period will be paid solely from the Policy and will not constitute a benefit under the Plan. -15- ARTICLE 10 MISCELLANEOUS PROVISIONS ------------------------ 10.1 Plan Year. The period with respect to which the records of the Plan --------- are maintained will be the 12-month period beginning on January 1 and ending on December 31. 10.2 Alienation and Assignment. The interests of the Participants and their ------------------------- beneficiaries under the Plan are not in any way subject to their debts or other obligations, and may be transferred or assigned only to the extent permitted by the applicable Policy. 10.3 No Right of Employment. Participation in the Plan will not give any ---------------------- Associate or Participant the right to be retained in the employment of the Company. 10.4 Gender and Number. Whenever used in this Plan, unless the the context ----------------- indicates otherwise, words in the masculine gender will include the feminine gender, and words in the plural will include the singular, and the singular will include the plural. 10.5 Notices. Any notice or document required to be given to a Participant ------- or beneficiary will be properly given if mailed, postage prepaid, to the Participant or beneficiary at his last known address as set forth in the Participating Employer's records. All notices required to be given or any document required to be filed with the Administrator will be properly given or filed if mailed postage prepaid, certified mail, to the Administrator at the addresses as set forth in the Summary Plan Descriptions of the Plan furnished to Associates or MSRP Retirees from time to time. 10.6 Section Headings. The section headings or head notes are inserted only ---------------- as a matter of convenience and for reference and in no way define, limit, or describe the scope or intent of the Plan. 10.7 Officers. Any reference to a particular officer of the Company will -------- also refer to the functional equivalent of such officer in the event the title or responsibilities of that office change. -16- 10.8 Consent to Terms of Plan. By enrolling for coverage under the Plan, a ------------------------ Participant agrees that the terms and conditions of the Plan will be binding on the Participant and the Participant's beneficiaries. 10.9 Governing Law. Except to the extent that the Plan may be subject to ------------- the provisions of ERISA, the Plan will be construed and enforced according to the laws of the State of Texas, without giving effect to the conflict of laws principles thereof. Except as otherwise required by ERISA, every right of action by a Participant, former Participant, or beneficiary with respect to the Plan shall be barred after the expiration of three years from the date of separation from service of the Participant or the date of receipt of the notice of denial of a claim for benefits, if earlier. In the event ERISA's limitations on legal actions do not apply, the laws of the State of Texas with respect to limitations of legal actions shall apply and the cause of action must be brought no later than four years after the date the action accrues. -17- APPENDIX I Participating Employers ----------------------- J.C. Penney Company, Inc. JCPenney Business Services, Inc. J.C. Penney Casualty Insurance Company J.C. Penney Life Insurance Company JCPenney National Bank JCPenney Puerto Rico, Inc. JCP Receivables, Inc. JCPenney Portfolio, Inc. EX-10.(II)(AB) 9 AMD. TO JCP CO. SUPPL. TERM LIFE PLAN EXHIBIT 10(ii)(ab) AMENDMENT TO J. C. PENNEY COMPANY, INC. SUPPLEMENTAL TERM LIFE INSURANCE PLAN FOR MANAGEMENT PROFIT-SHARING ASSOCIATES Effective as of January 1, 1995, the last sentence of Section 5.1 of the J. C. Penney Company, Inc. Supplemental Term Life Insurance Plan for Management Profit-Sharing Associates is deleted in its entirety and the following two sentences are substituted in its stead: Premiums required of Participants will be treated as fixed premium payments, and neither the Participants nor any beneficiary will be entitled to any dividend, credit, refund, or rebate under any Policy on account of actual claims experience, investment performance, or similar factors, but all such dividends, credits, refunds, and rebates shall be the sole property of the Company, except to the extent that the aggregate amount of such dividends, credits, refunds, or rebates exceeds the aggregate payments made by the Participating Employers for the employer portion of the cost of premiums under the Policies. The amount of any such excess shall be applied by the Administrator in its discretion from time to time for the benefit of Participants or their beneficiaries. EX-11 10 COMPUTATION OF PER SHARE EARNIGNS 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)
52 Weeks Ended -------------------------------------------------------------------------- January 25, 1997 January 27, 1996 January 28, 1995 -------------------------------------------------------------------------- Shares Income Shares Income Shares Income -------- -------- -------- -------- -------- -------- Primary: - ------- Net income $ 565 $ 838 $ 1,057 Dividend on Series B ESOP convertible preferred stock (after-tax) (40) (41) (40) ------ ------ -------- Adjusted net income 525 797 1,017 Weighted average number of shares outstanding 226.4 226.1 233.9 Common stock equivalents: Stock options and other dilutive effect 2.7 2.6 3.2 ------- ------ -------- ------ -------- -------- 229.1 $ 525 228.7 $ 797 237.1 $ 1,017 ======== ====== ======== ====== ======== ======== Net income per common share $2.29 $3.48 $4.29 ===== ===== ===== Fully diluted: - ------------- Net income $ 565 $ 838 $ 1,057 Tax benefit differential on ESOP dividend assuming stock is fully converted (2) (2) (3) Assumed additional contribution to ESOP if preferred stock is fully converted (3) (6) (9) ------ ------ -------- Adjusted net income 560 830 1,045 Weighted average number of shares outstanding (primary) 229.1 228.7 237.1 Maximum dilution 0.0 0.2 0.0 Convertible preferred stock 19.4 20.6 21.3 -------- ------ -------- ------ -------- 248.5 $ 560 249.5 $ 830 258.4 $ 1,045 ======== ====== ======== ====== ======== ======== Net income per common share $2.25 $3.33 $4.05 ===== ===== =====
EX-12.(A) 11 COMPUTATION OF RATIOS EXHIBIT 12 (a) J. C. Penney Company, Inc. and Consolidated Subsidiaries Computation of Ratios of Available Income to Combined Fixed Charges and Preferred Stock Dividend Requirement
53 Weeks 52 Weeks Ended Ended ---------------------------------------------------------------------------- ($ Millions) 01/25/97 01/27/96 01/28/95 01/29/94 01/30/93 ------------- -------------- ------------- ------------- --------------- Income from continuing operations $ 853 $ 1,285 $ 1,646 $ 1,498 $ 1,192 (before income taxes, before capitalized interest, but after preferred stock dividend) Fixed charges Interest (including capitalized interest) on: Operating leases 110 102 95 97 96 Short term debt 102 129 92 43 43 Long term debt 312 254 225 246 281 Capital leases 6 6 7 9 10 Other, net 14 1 (1) 0 16 ------- ------- ------- ------- ------- Total fixed charges 544 492 418 395 446 Preferred stock dividend, before taxes 46 48 50 52 53 Combined fixed charges and preferred ------- ------- ------- ------- ------- stock dividend requirement 590 540 468 447 499 Total available income $ 1,443 $ 1,825 $ 2,114 $ 1,945 $ 1,691 ======= ======= ======= ======= ======= Ratio of available income to combined fixed charges and preferred stock dividend requirement 2.4 3.4 4.5 4.3 3.4 ======= ======= ======= ======= =======
The interest cost of the LESOP notes guaranteed by the Company is not included in fixed charges above. EX-12.(B) 12 COMPUTATION OF RATIOS EXHIBIT 12 (b) J. C. Penney Company, Inc. and Consolidated Subsidiaries Computation of Ratios of Available Income to Fixed Charges
53 Weeks 52 Weeks Ended Ended ---------------------------------------------------------------------------- ($ Millions) 01/25/97 01/27/96 01/28/95 01/29/94 01/30/93 ------------- -------------- ------------- ------------- --------------- Income from continuing operations $ 899 $ 1,333 $ 1,696 $ 1,550 $ 1,245 (before income taxes and capitalized interest) Fixed charges Interest (including capitalized interest) on: Operating leases 110 102 95 97 96 Short term debt 102 129 92 43 43 Long term debt 312 254 225 246 281 Capital leases 6 6 7 9 10 Other, net 14 1 (1) 0 16 ------- ------- ------- ------- ------- Total fixed charges 544 492 418 395 446 ------- ------- ------- ------- ------- Total available income $ 1,443 $ 1,825 $ 2,114 $ 1,945 $ 1,691 ======= ======= ======= ======= ======= Ratio of available income to combined fixed charges and preferred stock dividend requirement 2.7 3.7 5.1 4.9 3.8 ======= ======= ======= ======= =======
The interest cost of the LESOP notes guaranteed by the Company is not included in fixed charges above. EX-13 13 ANNUAL REPORT TO SECURITY HOLDERS EXHIBIT 13 [MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS] JCPenney's financial strength has enabled the Company to continue to seek out opportunities to enhance stockholder value. In 1996 the Company used its financial strength to acquire two drugstore operations. Eckerd Corporation (Eckerd) and Fay's Incorporated (Fay's), which makes the Company a stronger and more effective competitor in the rapidly consolidating drugstore industry. In December 1996 JCPenney acquired for cash a 50.1 per cent stake in Eckerd, a drugstore chain with 1,748 stores operating primarily in the Sunbelt. The Eckerd acquisition was completed at the end of February 1997, when the Company exchanged approximately 23 million shares of its common stock for the remaining 49.9 per cent of Eckerd's outstanding common stock. The Company's investment, including Eckerd debt assumed by the Company, was $3.3 billion. Additionally, the Company purchased Fay's Incorporated, a chain of 272 drugstores operating principally in New York state markets not previously served by the Company. The Company's investment in Fay's was $353 million. These acquisitions were accounted for by the purchase method of accounting for business combinations, and accordingly their results of operations are included as of their respective acquisition date. The Company also continues to be a leader in the department store segment of the retail industry. In 1996, the Company opened seven Washington, D. C. stores acquired in late 1995 from Woodward and Lothrop. In addition, the Company committed $598 million in capital expenditures to build, modernize, and expand other JCPenney store locations. In 1996 the Company added approximately three million square feet of gross selling space. Over the next three years capital expenditures of $1 billion per year are currently expected to be used to continue to build and modernize JCPenney stores, and to aggressively grow our drugstore operations. The Company was disappointed with 1996 operating results, particularly in the first half of the year when retail sales in department stores and catalog were flat with the comparable period of the prior year. However, in the second half of the year retail sales rebounded, posting an increase of seven per cent. In support of second half sales, the Company stepped up its marketing programs and raised the level of its merchandise inventory. This combination led to increased markdowns and a decline in gross margin, especially in the fourth quarter of the year. While gross margin suffered in 1996, the Company continued to manage and leverage its expense structure. Selling, general and administrative (SG&A) expenses declined as a per cent of sales by 70 basis points. SG&A expenses were well managed across all operating divisions and support functions. Over the last five years, the SG&A ratio has declined 250 basis points. JCPenney's insurance operations posted another record year for the Company, marking the seventh consecutive year of increasing premiums and profits. Over the last five years, both revenue and pre-tax operating earnings have increased at an annual rate of approximately 20 per cent. The remainder of Management's Discussion and Analysis will discuss in more detail the results of operations by business segment - Stores and Catalog, Drugstores and Insurance. The Company is committed to maintaining a leadership position in the businesses it operates, improving its operating performance, and maintaining its financial strength.
RESULTS OF OPERATIONS ($ in millions) 1996 1995 1994 - --------------------------------------------------------- Earnings before business acquisition and consolidation expenses, net of tax $ 793 $ 838 $1,057 Net income 565 838 1,057 - ---------------------------------------------------------
Earnings before business acquisition and consolidation expenses declined to $793 million compared with $838 million in 1995 and $1,057 million in 1994. Business acquisition and consolidation expenses recorded in 1996 totaled $354 million pre-tax and reduced net income by $228 million. These expenses were principally related to the integration of drugstore acquisitions, costs associated with closing drugstores and certain support functions, and the write-down of assets. See footnote 18 for more details. Net income in 1996 was $565 million. While sales rebounded in the second half of 1996, results were negatively impacted by softness in gross margins in the Company's retail segments, resulting primarily from aggressive marketing programs. In addition, the Company experienced higher costs associated with net interest and credit operations as a result of higher Company 14 [MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS] continued debt levels and high levels of bad debt losses. Income in 1995 declined from 1994 levels and was negatively impacted by softness in consumer demand and the continuing consolidation within the retail industry.
SALES ($ in millions) 1996 1995 1994 - ---------------------------------------------------------------------- Stores and Catalog $19,506 $18,711 $18,840 % inc/(dec) 4.2% (0.7%) 7.2% Comp store % inc/(dec) 3.4% (1.4%) 6.8% Drugstores $ 3,147 $ 1,851 $ 1,540 % increase 70.0% 20.2% 9.0% Comp store % inc 7.7% 5.5% 5.5% - ----------------------------------------------------------------------
Sales in JCPenney stores were soft in the first half of 1996 and accelerated in the second half. The Company's strategy was to regain market share lost in 1995 and the first half of 1996. The sales increase in 1996 was primarily driven by a more fashionable mix of merchandise, particularly Men's and Women's, and aggressive marketing programs. For 1996 the strongest sales gains were reported in Children's and Men's, followed by Home and Women's. Men's and Women's had strong recoveries during the second half of 1996. The best merchandise sales were experienced in athletic apparel, children's apparel and shoes, furniture, and cosmetics. The Company's ten largest geographic markets led the sales performance, partly as a result of new stores in Washington, D. C. and Dallas which helped to generate sales increases. The West, South and Northeast regions followed in sales gains. In Catalog, sales were generally weak through November. In December and January sales accelerated and Catalog recorded a small sales gain for the year. Catalog's strengths were principally in the specialty media, led by apparel. Soft sales were recorded by Catalog in the hard line areas, particularly in electronics and toys. Sales in 1995 were weak after a very strong sales performance in both Stores and Catalog in 1994 reflecting continuing pressure in the retail sector of the economy. Drugstore sales for 1996 showed strong growth, consistent with the overall results in the drugstore industry. In 1996, total drugstore sales reflect the addition of the Fay's and Eckerd drugstores in October and December 1996, respectively, and in 1995, reflect the February acquisition of the Kerr drugstores. FIFO GROSS MARGIN
1996 1995 1994 - ---------------------------------------------------------------------- Stores and Catalog 30.1% 30.8% 31.9% Drugstores 22.5% 23.3% 23.5% - ----------------------------------------------------------------------
Gross margin dollars for Stores and Catalog increased to $5,872 million in 1996 compared with $5,758 million in 1995, an increase of 2.0 per cent. As a per cent of sales, margins declined 70 basis points primarily as a result of strong marketing programs designed to boost sales volume and reduce higher levels of inventory. Gross margin dollars in 1995 declined from $6,001 in 1994, a decrease of 4.0 per cent. During 1995, margin ratios in Stores and Catalog also declined primarily as a result of promotional markdowns. Drugstore gross margin dollars increased to $708 million in 1996 compared with $431 million in 1995. The majority of the increase was related to the acquisition of Fay's and Eckerd. Gross margin dollars in 1995 increased from $362 million in 1994, with both sales and margins increasing about 20 per cent. Gross margin as a per cent of sales declined in 1996 and 1995. The decline was a result of increases in managed care prescription drug sales which generally have lower margins than non-managed care sales. SELLING, GENERAL, AND ADMINISTRATIVE (SG&A) EXPENSES
1996 1995 1994 - ---------------------------------------------------------------------- Stores and Catalog 24.0% 24.4% 23.8% Drugstores 18.2% 19.6% 20.0% - ----------------------------------------------------------------------
SG&A for Stores and Catalog were well managed in 1996, and as a per cent of sales declined by 40 basis points. SG&A expenses totaled $4,689 million in 1996 compared with $4,560 million in 1995 and $4,492 million in 1994. Expenses in both 1996 and 1995 increased modestly despite higher paper and postage costs in both 1995 and most of 1996. As a 15 [MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS] continued per cent of sales, SG&A expenses increased bv 60 basis points in 1995 compared with 1994, primarily as a result of declines in sales. Drugstores SG&A expenses totaled $573 million in 1996 compared to $364 million in 1995 and $308 million in 1994. The increases in both years were primarily related to drugstore acquisitions which occurred in those years. As a per cent of sales, SG&A expenses were well leveraged, decreasing by 140 basis points in 1996 and 40 basis points in 1995. Drugstores have achieved improvement in SG&A ratios through increased store productivity and management of expense levels. The Company expects further improvement in the SG&A ratio in future periods as the recently acquired drugstores are fully integrated into the drugstore operation. The Company expects those savings to come from areas such as reduction of duplicate facilities and consolidation of support activities. NET INTEREST AND CREDIT OPERATIONS
($ in millions) 1996 1995 1994 - ---------------------------------------------------------------------- Finance charge revenue $(641) $(631) $(624) Credit costs 560 489 447 Interest expense, net 359 325 270 -------------------------------------- Net interest and credit costs $ 278 $ 183 $ 93 - ----------------------------------------------------------------------
Net interest and credit costs have increased over the past three years principally as a result of higher bad debt write-offs and interest expense. Finance charge revenue has remained relatively constant. Net bad debt losses and increases in provisions established for future losses totaled $267 million in 1996 compared with $219 million in 1995, and $177 million in 1994. The increase in both years is primarily related to continued high levels of delinquencies and consumer bankruptcies. Increases in 1996 interest expense are generally related to higher debt levels required to finance increases in working capital, the drugstore acquisitions, and capital spending. Increases in 1995 interest expense were primarily related to capital spending and debt associated with the Company's stock purchase program. JCPENNEY INSURANCE GROUP
1996 1995 1994 - ---------------------------------------------------------------------- Revenue increase 20.1% 22.9% 22.3% Profit increase 18.5% 23.6% 18.7% - ----------------------------------------------------------------------
JCPenney's Insurance group continues to contribute strong growth in revenue and operating profits. In 1996, revenues grew to $832 million compared with $693 million in 1995 and $564 million in 1994. The growth is primarily attributable to continued success in developing marketing relationships with third party businesses throughout North America, principally banks, oil companies, and retailers. Pre-tax operating profits increased to $186 million in 1996 compared with $157 million in 1995 and $127 million in 1994. The increase in operating profits has been driven by the strong growth in revenues. Income taxes. The effective income tax rate was 37.9 per cent in 1996 compared with 37.5 per cent in 1995 and 37.8 per cent in 1994. Tax rates will be increasing to about 39 per cent beginning in 1997. The increase is a result of the amortization of goodwill associated with the drugstore acquisitions which provides no tax benefit. FINANCIAL CONDITION
Financial measures ($ in millions except per share data) 1996 1995 1994 - ---------------------------------------------------------------------- Cash flow from operations $ 382 $1,403 $ 738 Capital expenditures (cash) 704 717 550 Debt to capital 60.1%* 52.6% 53.1% Dividends per share 2.08 1.92 1.68 - ---------------------------------------------------------------------- *Assumes the completion of the Eckerd transaction.
16 [MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS] continued The Company's goal is to maintain a strong balance sheet to provide financial flexibility and to increase stockholder value. On February 20, 1997, the Company completed a public offering of $500 million of 100-year, 7 5/8 per cent Debentures due March 1, 2097. The Debentures were priced at par. The sale of these Debentures was the first step in the Company's plan to convert short term acquisition debt to longer term maturities. Financial flexibility has permitted the Company to capitalize on attractive opportunities for growth, as demonstrated by the recent acquisition of Eckerd, to modernize and update JCPenney retail stores, and to open 20 new large department stores in 1996 in premier shopping centers across the country. The Board of Directors increased the dividend on the Company's common stock to an indicated annual rate of $2.14 from $2.08 per share in March 1997. Including this increase, the dividend on common stock has risen in excess of 60 per cent over the last five years. Dividends on common shares were paid at a quarterly rate of 52 cents per share in 1996, 48 cents per share in 1995, and 42 cents per share in 1994. Merchandise inventory in 1996 increased to $5,722 million compared with $3,935 million in 1995 and $3,876 million in 1994 due primarily to the drugstore acquisitions. In addition, inventory for Department Stores and Catalog increased by approximately 15 per cent in 1996. This increase is principally due to the addition of three million square feet of gross selling space, low inventory levels entering the year, and an acceleration of a marketing program earlier in 1997. Inventory position, however, was above the Company's plan in Department Stores and Catalog at the end of 1996. Intangible assets consist principally of intangible assets acquired in the 1996 drugstore acquisitions, comprised of favorable lease rights, prescription files, software, and trade name, as well as goodwill representing the excess of purchase price over the fair value of assets acquired. Debt to capital. The Company's strong balance sheet enabled the strategic acquisition of Eckerd. As a result of the first step of the acquisition, the debt to capital ratio, including both on and off-balance-sheet debt, increased to 64.5 per cent at year end 1996 compared with 52.6 per cent in 1995 and 53.1 per cent in 1994. Upon completion of the acquisition in February 1997, the debt to capital ratio decreased to 60.1 per cent as a result of the issuance of 23.2 million shares of common stock. In addition to its drugstore acquisitions, the Company purchased 7.5 million shares of its common stock in 1996 for $366 million. Over the past three years, the Company has purchased 25 million shares of its common stock at an aggregate purchase price of $1,176 million. Total debt, both on and off-balance-sheet, was $10,807 million at January 25, 1997 compared with $6,542 million at January 27, 1996, and $6,366 million at January 28, 1995. The increase in 1996 included $1,235 million related to the acquisition of 50.1 per cent of the outstanding common stock of Eckerd, the assumption of $760 million of Eckerd debt, $366 million related to the purchase of 7.5 million shares of JCPenney common stock, the assumption of $700 million of Eckerd operating lease obligations, and approximately $500 million related to working capital requirements. During 1996, the Company issued $600 million of long term debt with an average coupon rate of approximately 7.3 per cent. The Company's long term debt is rated A by Standard and Poor's Corporation, A2 by Moody's Investors Service, and A by Fitch Investors Service, Inc., which continue to be among the highest in the retail industry. The Company's commercial paper is rated Al, P1, and Fl by the three organizations, respectively. Short term debt ratings were left unchanged by each of the rating agencies. Cash flow. The Company expects to generate sufficient cash flow internally to meet substantially all of its cash requirements for working capital, capital expenditures, and dividends in the future. Inflation and changing prices have not had a significant impact on the Company in recent years due to low levels of inflation. 17 [INDEPENDENT AUDITOR'S REPORT] To the Stockholders and Board of Directors of J.C. Penney Company, Inc.: We have audited the accompanying consolidated balance sheets of J.C. Penney Company, Inc. and Subsidiaries as of January 25, 1997, January 27, 1996, and January 28, 1995, and the related consolidated statements of income, reinvested earnings, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of J.C. Penney Company, Inc. and Subsidiaries as of January 25, 1997, January 27, 1996, and January 28, 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. The Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, in 1994, and Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of, in 1995. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Dallas, Texas February 27, 1997 [COMPANY STATEMENT ON FINANCIAL INFORMATION] The Company is responsible for the information presented in this Annual Report. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and are considered to present fairly in all material respects the Company's results of operations, financial position, and cash flows. Certain amounts included in the consolidated financial statements are estimated based on currently available information and judgment as to the outcome of future conditions and circumstances. Financial information elsewhere in this Annual Report is consistent with that in the consolidated financial statements. The Company's system of internal controls is supported by written policies and procedures and supplemented by a staff of internal auditors. This system is designed to provide reasonable assurance, at suitable costs, that assets are safeguarded and that transactions are executed in accordance with appropriate authorization and are recorded and reported properly. The system is continually reviewed, evaluated, and where appropriate, modified to accommodate current conditions. Emphasis is placed on the careful selection, training, and development of professional managers. An organizational alignment that is premised upon appropriate delegation of authority and division of responsibility is fundamental to this system. Communication programs are aimed at assuring that established policies and procedures are disseminated and understood throughout the Company. The consolidated financial statements have been audited by independent auditors whose report appears to the left. This audit was conducted in accordance with generally accepted auditing standards, which include the consideration of the Company's internal controls to the extent necessary to form an independent opinion on the consolidated financial statements prepared by management. The Audit Committee of the Board of Directors is composed solely of directors who are not officers or employees of the Company. The Audit Committee's responsibilities include recommending to the Board for stockholder approval the independent auditors for the annual audit of the Company's consolidated financial statements. The Committee also reviews the independent auditors' audit strategy and plan, scope, fees, audit results, and non-audit services and related fees; internal audit reports on the adequacy of internal controls; the Company's ethics program; status of significant legal matters; the scope of the internal auditors' plans and budget and results of their audits; and the effectiveness of the Company's program for correcting audit findings. The independent auditors and Company personnel, including internal auditors, meet periodically with the Audit Committee to discuss auditing and financial reporting matters. /s/ Donald A. McKay Donald A. McKay Senior Vice President and Chief Financial Officer 18 [CONSOLIDATED STATEMENTS OF INCOME] J.C. Penney Company, Inc. and Subsidiaries
FOR THE YEAR ($ in millions except per share data) 1996 1995 1994 - -------------------------------------------------------------------------------- Revenue Retail sales $22,653 $20,562 $20,380 Revenue of insurance and bank 996 857 702 -------------------------- Total revenue 23,649 21,419 21,082 -------------------------- Costs and expenses Cost of goods sold, occupancy, buying, and warehousing costs 16,043 14,333 13,970 Selling, general, and administrative expenses 5,239 4,895 4,783 Costs and expenses of insurance and bank 803 667 537 Net interest expense and credit operations 278 183 93 Minority interest and amortization of intangibles 23 -- -- Business acquisition and consolidation expenses 354 -- -- -------------------------- Total costs and expenses 22,740 20,078 19,383 -------------------------- Income before income taxes 909 1,341 1,699 Income taxes 344 503 642 -------------------------- Net income $ 565 $ 838 $ 1,057 -------------------------- Earnings per common share Primary $ 2.29 $ 3.48 $ 4.29 Fully diluted $ 2.25 $ 3.33 $ 4.05
See Notes to Consolidated Financial Statements on pages 22 through 34 [CONSOLIDATED STATEMENTS OF REINVESTED EARNINGS]
($ in millions) 1996 1995 1994 - -------------------------------------------------------------------------------- Reinvested earnings at beginning of year $ 4,397 $ 4,262 $ 4,093 Net income 565 838 1,057 Net unrealized change in debt and equity securities and currency translation adjustments (21) 72 (21) Retirement of common stock (320) (301) (435) Common stock dividends declared (471) (434) (392) Preferred stock dividends declared, net of taxes (40) (40) (40) -------------------------- Reinvested earnings at end of year $ 4,110 $ 4,397 $ 4,262 ==========================
See Notes to Consolidated Financial Statements on pages 22 through 34. 19 [CONSOLIDATED BALANCE SHEETS] J.C. Penney Company, Inc. and Subsidiaries
ASSETS ($ in millions) 1996 1995 1994 - ------------------------------------------------------------------------------------- Current assets Cash (including short term investments of $131, $173, and $207) $ 131 $ 173 $ 261 Receivables, net 5,757 5,207 5,159 Merchandise inventory (LIFO reserves of $265, $226, and $247) 5,722 3,935 3,876 Prepaid expenses 102 94 73 -------------------------- Total current assets 11,712 9,409 9,369 Properties, net 5,014 4,281 3,954 Investments, primarily insurance operations 1,605 1,651 1,359 Deferred insurance policy acquisition costs 666 582 482 Goodwill and other intangible assets 1,861 -- -- Other assets 1,230 1,179 1,038 -------------------------- $22,088 $17,102 $16,202 ========================== LIABILITIES AND STOCKHOLDERS' EQUITY ($ in millions) - -------------------------------------------------------------------------------------- Current liabilities Accounts payable and accrued expenses $ 3,738 $ 2,404 $ 2,274 Short term debt 3,950 1,509 2,092 Current maturities of long term debt 250 -- -- Deferred taxes 28 107 115 -------------------------- Total current liabilities 7,966 4,020 4,481 Long term debt 4,565 4,080 3,335 Deferred taxes 1,362 1,188 1,039 Insurance policy and claims reserves 781 691 568 Other liabilities (including bank deposits of $724, $767, and $702) 1,383 1,239 1,164 Minority interest in Eckerd 79 -- -- Stockholders' equity Preferred stock, without par value: Authorized, 25 million shares - issued, 1 million shares of Series B LESOP convertible preferred 568 603 630 Guaranteed LESOP obligation (142) (228) (307) Common stock, par value 50 cents: Authorized, 1,250 million shares - issued, 224, 224, and 227 million shares 1,416 1,112 1,030 Reinvested earnings 4,110 4,397 4,262 -------------------------- Total stockholders' equity 5,952 5,884 5,615 -------------------------- $22,088 $17,102 $16,202 ==========================
See Notes to Consolidated Financial Statements on pages 22 through 34. 20 CONSOLIDATED STATEMENTS OF CASH FLOWS J.C. Penney Company. Inc. and Subsidiaries
FOR THE YEAR ($ in millions) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------ Operating activities Net income $ 565 $ 838 $1,057 Business acquisition and consolidation expenses 310 -- -- Depreciation and amortization, including intangibles 381 341 323 Deferred taxes (18) 144 29 Change in cash from: Customer receivables (297) 73 (326) Inventory, net of trade payables (521) (55) (352) Other assets and liabilities, net (38) 62 7 ---------------------------- 382 1,403 738 ---------------------------- Investing activities Capital expenditures (704) (717) (550) Eckerd acquisition (1,776) -- -- Purchases of investment securities (471) (583) (476) Proceeds from sales of investment securities 493 420 287 ---------------------------- (2,458) (880) (739) ---------------------------- Financing activities Change in short term debt 2,401 (583) 808 Issuance of long term debt 596 991 500 Payments of long term debt (133) (244) (350) Common stock issued, net 68 50 45 Common stock purchased and retired (366) (335) (475) Preferred stock retired (35) (27) (18) Dividends paid, preferred and common (497) (463) (421) ---------------------------- 2,034 (611) 89 ---------------------------- Net increase/(decrease) in cash and short term investments (42) (88) 88 Cash and short term investments at beginning of year 173 261 173 ---------------------------- Cash and short term investments at end of year $ 131 $ 173 $ 261 ============================ Supplemental cash flow information Interest paid $ 390 $ 355 $ 301 Interest received 60 54 55 Income taxes paid 356 409 509
Non-Cash Transactions. In October 1996, the Company acquired all of the assets and liabilities of Fay's Incorporated in a transaction valued at approximately $353 million. The transaction was accomplished through an exchange of common stock valued at approximately $278 million and the assumption of approximately $75 million of Fay's Incorporated debt. In February 1995, the Company acquired all of the assets and liabilities of Kerr Drug Stores, Inc. The transaction was accomplished through an exchange of common stock valued at approximately $74 million. Pro forma effects of these acquisitions would not differ significantly from historical results. See Notes to Consolidated Financial Statements on pages 22 through 34. 21 [NOTES TO CONSOLIDATED FINANCIAL STATEMENTS] - -------------------------------------------------------- 1. Nature of Operations 2. Summary of Accounting Policies 3. Business Acquisitions 4. Receivables 5. Properties 6. Capital Expenditures 7. Financial Instruments and Fair Value 8. Accounts Payable and Accrued Expenses 9. Short Term Debt 10. Long Term Debt 11. Preferred Stock 12. Common Stock 13. Stock-Based Compensation 14. Interest Expense, Net 15. Rent Expense 16. Advertising Costs 17. Retirement Plans 18. Business Acquisition and Consolidation Expenses 19. Taxes 20. Segment Reporting - -------------------------------------------------------- [1] NATURE OF OPERATIONS The Company operates: Retail Department Stores and Catalog (Stores and Catalog), Drugstores, and Insurance. Stores and Catalog is comprised of retail stores located in all 50 states, Puerto Rico, two stores in Mexico, and one store in Chile, as well as six catalog fulfillment centers which together provide the consumer multiple shopping formats. The major portion of the Company's business is conducted domestically, and consists of providing merchandise and services to consumers through department stores that include catalog departments. The Company's merchandise offerings consist predominantly of family apparel, jewelry, shoes, accessories, and home furnishings. Drugstores include the Company's former Thrift drugstore operations, and all of the Eckerd, Fay's, and Kerr drugstores acquired in 1996 and 1995. The drugstore segment operates 2,699 store locations primarily in the Northeast, Southeast, and Sunbelt regions of the United States which sell pharmaceuticals and related products as well as general merchandise. The Insurance segment consists of several insurance companies, the principal of which is J.C. Penney Life Insurance Company (collectively, JCPenney Insurance). JCPenney Insurance markets life, health, accident, and credit policies through direct response solicitations throughout the United States and Canada to JCPenney customers and customers of third party credit card issuers. [2] SUMMARY OF ACCOUNTING POLICIES Basis of presentation. Certain prior year amounts may have been reclassified to conform with the current year presentation. Basis of consolidation. The consolidated financial statements present the results of J. C. Penney Company, Inc. and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Definition of fiscal year. The Company's fiscal year ends on the last Saturday in January. Fiscal year 1996 ended January 25, 1997, 1995 ended January 27, 1996, and 1994 ended January 28, 1995. The accounts of JCPenney Insurance are on a calendar year basis. Retail sales. Retail sales include merchandise and services, net of returns, and exclude all taxes. Earnings per common share. Primary earnings per share are computed by dividing net income less dividend requirements on the Series B LESOP convertible preferred stock, net of tax, by the weighted average common stock and common stock equivalents outstanding. Fully diluted earnings per share also assume conversion of the Series B LESOP convertible preferred stock into the Company's common stock. Additionally, it assumes adjustment of net income for the additional cash requirements, net of tax, needed to fund the LESOP debt service resulting from the assumed replacement of the preferred dividends with common stock dividends. Cash and short term investments. Cash invested in instruments with remaining maturities of three months or less from time of investment is reflected as short term investments. Merchandise inventory. Substantially all merchandise inventory is valued at the lower of cost (last-in, first-out) or 22 [NOTES TO CONSOLIDATED FINANCIAL STATEMENTS] continued market, determined by the retail method. The Company applies internally developed indices to measure increases and decreases in its own retail prices. Depreciation and amortization. The cost of buildings and equipment is depreciated on a straight line basis over the estimated useful lives of the assets. The principal annual rates of depreciation are two to 10 per cent for buildings and building improvements, five per cent for warehouse fixtures and equipment, 10 per cent for selling fixtures and equipment, and 20 to 33 per cent for computer equipment. Improvements to leased premises are amortized on a straight line basis over the expected term of the lease or their estimated useful lives, whichever is shorter. Intangible assets, other than trade name, are being amortized over periods ranging from five to seven years. Trade name and goodwill are amortized over 40 years. Deferred charges. Expenses associated with the opening of new stores are written off in the year of the store opening, except those of stores opened in January, which are written off in the following fiscal year. Deferred policy acquisition costs, principally marketing costs and commissions incurred by JCPenney Insurance to secure new insurance policies, are amortized over the expected premium-paying period of the related policies. Investments. The Company's investments are classified as available-for-sale and are carried at fair value. Changes in unrealized gains and losses are recorded directly to stockholders' equity, net of applicable income taxes. Realized gains and losses are determined on a first-in, first-out basis. Insurance policy and claims reserves. Liabilities established by JCPenney Insurance for future policy benefits are computed using a net level premium method including assumptions as to investment yields, mortality, morbidity, and persistency based on the Company's experience. Liabilities for unpaid claims are charged to expense in the period that the claims are incurred. Advertising. Costs for newspaper, television, radio, and other media advertising are expensed as incurred. Catalog book preparation and printing costs, which are considered direct response advertising, are charged to expense over the life of the catalog, not to exceed six months. Derivative financial instruments. The Company's current derivative positions consist of non-leveraged off-balance-sheet interest rate swaps which are accounted for by recording the net interest received or paid as an adjustment to interest expense on a current basis. Gains or losses resulting from market movements are not recognized. Stock-based compensation. The Company elected to continue accounting for stock options under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Use of estimates. The Company's consolidated financial statements have been prepared in conformity with generally accepted accounting principles. Certain amounts included in the consolidated financial statements are estimated based on currently available information and management's judgment as to the outcome of future conditions and circumstances. While every effort is made to ensure the integrity of such estimates, including the use of third party specialists where appropriate, actual results could differ from these estimates. New accounting rule. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, in June 1996. This standard was effective for transactions occurring after December 31, 1996, and did not have a material impact on the Company. [3] BUSINESS ACQUISITIONS In November 1996 the Company entered into a definitive agreement to acquire Eckerd Corporation (Eckerd), a 1,748 store drugstore chain with stores located in 13 states primarily in the Southeast and Sunbelt, in a two-step cash and stock transaction. The aggregate transaction value, including the assumption of $760 million of Eckerd debt, was $3.3 billion. The transaction was effected through a two-step process consisting of: i) a cash tender offer, which was completed in December 1996, at $35.00 per share for 35.3 million shares of Eckerd common stock, or 50.1 per cent of the total number of outstanding shares, for a total consideration of $1,235 million, and ii) the exchange of 23.2 million shares of JCPenney common stock for the remaining 35.1 million shares of Eckerd common stock at a conversion rate of 0.6604 of a share of JCPenney common stock for each Eckerd share of common stock, for a consideration valued at $1,311 million, including the cash out of certain outstanding Eckerd employee 23 [NOTES TO CONSOLIDATED FINANCIAL STATEMENTS] continued stock options, in a transaction which was completed in February 1997. The purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair value, and accordingly, the Company recognized intangible assets consisting of favorable lease rights, prescription files, computer software, and trade name. The excess of the purchase price over the estimated fair value of assets acquired and liabilities assumed is classified as goodwill and totaled $2.3 billion at the conclusion of the acquisition, of which $1.2 billion is reflected in the consolidated balance sheet. In October 1996 the Company completed the acquisition of Fay's Incorporated (Fay's), a drugstore chain with 272 stores located primarily in New York state. The transaction was effected through the issuance of 5.2 million shares of common stock valued at $278 million, and assumption of $75 million of Fay's debt. The excess of the purchase price over the estimated fair value of assets acquired and liabilities assumed totaled $220 million, and is classified as goodwill. Both the Eckerd and Fay's acquisitions are being accounted for under the purchase method of accounting for business combinations, and accordingly, the results of operations of both Eckerd and Fay's are included in the Company's results of operations since the respective dates of acquisition. The following unaudited pro forma condensed statements of operations give effect to the Eckerd and Fay's acquisitions as if the transactions occurred at the beginning of each of the periods presented.
52 Weeks Ended ------------------------------------------ Jan. 25, 1997 Jan. 27, 1996 ($ in millions except share data) Reported Pro forma Reported Pro forma - ------------------------------------------------------------------------------ Retail sales $22,653 $28,028 $20,562 $26,442 Earnings before extraordinary items 565 519 838 766 Earnings per share before extraordinary items: Primary 2.29 1.92 3.48 2.88 Fully diluted 2.25 1.91 3.33 2.78
Pro forma earnings do not reflect cost savings which the Company believes should be at least $100 million per year once drugstore operations are fully integrated. See footnote 18 for a discussion of business acquisition and consolidation expenses related to these acquisitions. [4] RECEIVABLES
($ in millions) 1996 1995 1994 - ------------------------------------------------------------------ Customer receivables serviced $ 5,006 $ 4,688 $ 4,751 Customer receivables sold (725) (725) (725) ------------------------- Customer receivables owned 4,281 3,963 4,026 Less allowance for doubtful accounts (105) (84) (74) ------------------------- Customer receivables, net 4,176 3,879 3,952 Consumer banking receivables 735 776 729 Other receivables 846 552 478 ------------------------- Receivables, net $ 5,757 $ 5,207 $ 5,159 =========================
The Company's policy is to write off accounts when the scheduled minimum payment has not been received for six consecutive months, if any portion of the balance is more than 12 months past due, or if it is otherwise determined that the customer is unable to pay. Collection efforts continue subsequent to write off, and recoveries are applied as a reduction of bad debt losses. During the period 1988 to 1990, the Company transferred portions of its customer receivables to a trust which, in turn, sold certificates representing undivided interests in the trust in public offerings. Certificates sold during this period totaled $1,400 million. As of January 25, 1997, $725 million of the certificates were outstanding and the balance of the receivables in the trust was $1,869 million. The Company owns the remaining undivided interest in the trust not represented by the certificates and will continue to service all receivables for the trust. Cash flows generated from receivables in the trust are dedicated to payment of interest on the outstanding certificates with stated rates of 8.95 per cent and 9.625 per cent, absorption of defaulted accounts in the trust, and payment of servicing fees to the Company. Reserve funds (fully funded at $91 million) are available if cash flows from the receivables become insufficient to make such payments. None of the reserve funds has been utilized as of January 25, 1997. Additionally, the Company has made available to the trust irrevocable letters of credit of $87 million that may be drawn upon should the reserve funds be exhausted. None of the letters of credit was in use as of January 25, 1997. 24 [NOTES TO CONSOLIDATED FINANCIAL STATEMENTS] continued [5] PROPERTIES
($ in millions) 1996 1995 1994 - -------------------------------------------------------- Land $ 265 $ 216 $ 213 Buildings Owned 2,666 2,410 2,178 Capital leases 159 182 186 Fixtures and equipment 3,710 2,978 2,763 Leasehold improvements 915 622 611 ------------------------- 7,715 6,408 5,951 Less accumulated depreciation and amortization 2,701 2,127 1,997 ------------------------- Properties, net $ 5,014 $ 4,281 $ 3,954 =========================
1996 includes $431 million, net, related to the 1996 acquisitions. At January 25, 1997, the Company owned 301 retail stores and other units, four catalog distribution centers, one store merchandise distribution center, its home office facility, and the JCPenney Insurance corporate offices. [6] CAPITAL EXPENDITURES Capital expenditures, primarily for new and relocated JCPenney stores and for modernizations and updates of existing stores, were as follows:
($ in millions) 1996 1995 1994 - ---------------------------------------------------- JCPenney stores: New and relocated stores* $ 296 $ 399 $ 197 Modernizations and updates 219 134 136 Technology and other store improvements 83 54 78 --------------------- 598 587 411 Catalog 38 28 21 Drugstores 103 53 59 Other 51 81 53 --------------------- Total capital expenditures $ 790 $ 749 $ 544 =====================
* 1995 total includes $173 million for the purchase of seven Woodward and Lothrop stores in the Washington, D.C., area. [7] FINANCIAL INSTRUMENTS AND FAIR VALUE Financial Assets. The Company's financial assets are recorded at fair value based on quoted market prices, and consist principally of fixed income and equity securities, the majority of which are held by JCPenney Insurance, and which had a fair value of $1,138 million, $995 million, and $758 million at the end of 1996, 1995, and 1994, respectively, and asset-backed certificates. Unrealized gains and losses are included in stockholders' equity, net of tax, and consisted of net unrealized gains of $52 million on investments having a fair value of $1,605 million and an amortized cost of $1,523 million at January 25, 1997, net unrealized gains of $70 million on investments having a fair value of $1,651 million and an amortized cost of $1,540 million at January 27, 1996, and net unrealized losses of $12 million on investments having a fair value of $1,359 million and an amortized cost of $1,378 at January 28, 1995. The scheduled maturities for fixed income securities at year end 1996 were as follows:
Amortized Fair ($ in millions) Cost Value - ------------------------------------------------------------------- Due in one year or less $ 12 $ 12 Due after one year through five years 632 673 Due after five years through 10 years 240 243 Due after 10 years 162 174 --------------------- 1,046 1,102 Mortgage-backed securities 359 356 Equity securities 95 124 Other 23 23 --------------------- Total $1,523 $1,605 =====================
Financial Liabilities are recorded in the consolidated balance sheets at historical cost which approximate fair value. These values are not necessarily indicative of actual market transactions. 25 [NOTES TO CONSOLIDATED FINANCIAL STATEMENTS] continued The fair value of long term debt, excluding capital leases, is based on the interest rate environment and the Company's credit rating. Derivative Financial Instruments. The Company selectively uses non-leveraged, off-balance-sheet derivative instruments to manage its market and interest rate risk, and does not hold derivatives for trading purposes. Current derivative positions consist of two offsetting interest rate swaps, each with a notional principal amount of $375 million which were entered into in connection with the sale of asset-backed certificates in 1990. The impact of these interest rate swaps on both interest expense and the Company's average long term borrowing rates for 1996, 1995, and 1994 was not material. These swaps help to protect certificate holders by reducing the possibility of an early amortization of the principal. The counterparty to these contracts is a high credit quality commercial bank. Consequently, credit risk, which is inherent in all swaps, has been minimized to a large extent. Concentrations of Credit Risk. The Company has no significant concentrations of credit risk. Individual accounts comprising accounts receivable are widely dispersed and investments are well diversified. [8] ACCOUNTS PAYABLE AND ACCRUED EXPENSES
($ in millions) 1996 1995 1994 - ---------------------------------------------------------------------------- Trade payables $1,558 $ 979 $1,014 Accrued salaries, vacations, profit-sharing, and bonuses 419 309 336 Taxes, including income taxes 376 362 358 Workers' compensation and public liability insurance 208 132 123 Common dividend payable 121 107 96 Other 1,056 515 347 ------------------------------------ Total $3,738 $2,404 $2,274 ====================================
1996 total includes $835 million related to the 1996 acquisitions.
[9] SHORT TERM DEBT ($ in millions) 1996 1995 1994 - ---------------------------------------------------------------------------- Commercial paper $ 2,050 $ 1,482 $ 2,074 Bank debt 1,900 - - Other - 27 18 ------------------------------------ Total $ 3,950 $ 1,509 $ 2,092 Average interest rate at year end 5.5% 5.7% 5.9% ====================================
Committed bank credit facilities available to the Company as of January 25, 1997, amounted to $6.0 billion. In 1996, the Company amended its two existing syndicated revolving credit facilities and entered into two new syndicated revolving credit facilities totaling $6.0 billion with a group of domestic and international banks. The "Existing" facilities support the Company's short term borrowing program, and are comprised of a $1.5 billion 364-day revolver, and a $1.5 billion, five-year revolver. The 364-day revolver includes a $750 million seasonal credit line for the August to January period, thus allowing the Company to match its seasonal borrowing requirements. The "Acquisition" facilities provided short term funding for the Company's acquisition of Eckerd and are also comprised of a $1.5 billion, 364-day revolver, and a $1.5 billion, five-year revolver. As of January 25, 1997, $1.5 billion was borrowed under the five-year "Acquisition" facility and $400 million was borrowed under the 364-day "Acquisition" facility. Subsequent to year end, the Company initiated a new commercial paper program to refinance the total amounts outstanding under the bank lines at a lower cost. Also, the Company had $945 million of uncommitted credit lines in the form of letters of credit with seven banks to support its direct import merchandise program. At January 25, 1997, $282 million of letters of credit issued by the Company were outstanding. 26 [NOTES TO CONSOLIDATED FINANCIAL STATEMENTS] continued [10] LONG TERM DEBT
($ in millions) 1996 1995 1994 - -------------------------------------------------------------------------- Original issue discount 6% debentures, due 2006, $200 at maturity, effective rate 13.2% $ 112 $ 108 $ 104 Debentures and notes 5.375% to 7.650%, due 1998 to 2026 3,100 2,500 1,500 8.25%, due 2002 250 250 250 9% to 10%, due 1997 to 2021* 1,045 835 1,000 Guaranteed LESOP notes, 8.17%, due 1998** 142 228 307 Present value of commitments under capital leases 127 91 104 Other 39 68 70 ------------------------------- Long term debt $4,815 $4,080 $3,335 Average long term debt outstanding $4,053 $3,241 $2,754 Average interest rates 7.7% 7.9% 8.2% ===============================
1996 includes $278 million related to the 1996 acquisitions. *Includes current maturities of $250 million. **For further discussion, see footnote 17.
Changes in long term debt ($ in millions) 1996 1995 1994 - -------------------------------------------------------------------------- Increases 5.375% to 7.650% notes, due 1998 to 2026 $ 600 $1,000 $ 500 Amortization of original issue discount 4 4 3 Eckerd debt outstanding at end of year 278 -- -- ------------------------------- 882 1,004 503 ------------------------------- Decreases 9.375% notes due 1998, retired in 1995 -- 165 -- Transfers to current maturities 250 -- -- Other, including LESOP amortization 147 94 97 ------------------------------- 397 259 97 ------------------------------- Net increase in long term debt $ 485 $ 745 $ 406 ===============================
Maturities of long term debt Long Capital ($ in millions) Term Debt Leases - --------------------------------------------------- 1997 $ 252 $ 17 1998 403 29 1999 228 13 2000 303 12 2001 252 13 2002 to 2006 1,711 12 Thereafter 1,485 46 ------ ------ Total $4,634 $ 142 ====== Less future interest and executory expenses 15 ------ Present value $ 127 ======
[11] PREFERRED STOCK In 1988, a leveraged employee stock ownership plan (LESOP) was adopted (see footnote 17). The LESOP purchased approximately 1.2 million shares of a new issue of Series B convertible preferred stock from the Company. These shares are convertible into shares of the Company's common stock at a conversion rate equivalent to 20 shares of common stock for each share of preferred stock. The conversion price is $30 per common share. The convertible preferred stock may be redeemed at the option of the Company or the LESOP, under certain limited circumstances. The redemption price may be satisfied in cash or 27 [NOTES TO CONSOLIDATED FINANCIAL STATEMENTS] continued common stock or a combination of both at the Company's sole discretion. The dividends are cumulative, are payable semi-annually on January 1 and July 1, and yield 7.9 per cent. The convertible preferred stock issued to the LESOP has been recorded in the stockholders' equity section of the consolidated balance sheets, and the "Guaranteed LESOP obligation," representing borrowings by the LESOP, has been recorded as a reduction of stockholders' equity. As of January 25, 1997, approximately 946 thousand shares had been allocated to participants' accounts since 1988, and approximately 231 thousand shares were committed to be released in the next two years. Preferred stock dividends. The preferred dividend is payable semi-annually at an annual rate of $2.37 per common equivalent share. Preferred dividends declared were $46 million in 1996, $48 million in 1995, and $50 million in 1994; on an after tax basis, the dividends amounted to $28 million in 1996, $29 million in 1995, and $31 million in 1994. Preferred stock purchase rights. In 1990, the Board of Directors declared a dividend distribution of one new preferred stock purchase right on each outstanding share of common stock and authorized the redemption of the old preferred stock purchase rights for five cents per share, totaling $12 million. The preferred stock purchase rights, in accordance with the rights agreement, entitle the holder to purchase, for each right held, 1/400 of a share of Series A junior participating preferred stock at a price of $140. The rights are exercisable upon the occurrence of certain events and are redeemable by the Company under certain circumstances, all as described in the rights agreement.
Shares Paid-in Capital (In thousands) ($ in millions) Changes in outstanding --------------------------------------------------------------- common stock 1996 1995 1994 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------- Balance at beginning of year 223,925 227,441 236,086 $ 1,112 $ 1,030 $ 1,003 Common stock issued 7,463 3,858 1,455 350 113 70 Common stock purchased and retired (7,500) (7,374) (10,100) (46) (31) (43) --------------------------------------------------------------- Balance at end of year 223,888 223,925 227,441 $ 1,416 $ 1,112 $ 1,030 ===============================================================
[12] COMMON STOCK The quarterly common dividend was 52 cents per share in 1996, 48 cents per share in 1995, and 42 cents per share in 1994, or an indicated annual per share rate of $2.08 in 1996, $1.92 in 1995, and $1.68 in 1994. Common dividends declared were $471 million in 1996, $434 million in 1995, and $392 million in 1994. The Company issued 1.8 million shares of its common stock in February 1995, in connection with the Kerr Drug acquisition and 5.2 million shares in October 1996, in connection with the Fay's acquisition. In addition, the Company issued 23.2 million shares of its common stock in connection with the Eckerd acquisition which will be recorded in the 1997 fiscal year. Over the past three years the Board has authorized three share purchase programs. Their status as of January 25, 1997 is as follows: Common Shares Purchases ------------------------------- (in millions) Shares Cost - ------------------------------------------------------- 1994 10.0 $ 475 1995 7.5 335 1996 7.5 366 ----------------------- Total 25.0 $1,176 ======================= There were approximately 59,000 stockholders of record at year end 1996. In addition, the Company's savings plans, including the LESOP, had approximately 117,000 participants and held 34.1 million shares of the Company's common stock. The savings plans also held 0.9 million shares of preferred stock, convertible into 18.9 million shares of common stock. On a combined basis, these plans held approximately 22 per cent of the Company's common shares after giving effect to the conversion of the preferred stock at the end of fiscal year 1996. 28 [NOTES TO CONSOLIDATED FINANCIAL STATEMENTS] continued [13] STOCK-BASED COMPENSATION At January 25, 1997, the Company had two stock-based compensation plans: the 1993 Equity Compensation Plan (Plan) and the 1993 Non-Associate Directors' Equity Plan (Directors' Plan), both of which were approved by stockholders in May 1993. Under the Plan, 11.6 million shares of common stock were reserved for issuance upon the exercise of options and for the payment of stock awards over the five-year term of the Plan. Shares acquired through exercise of options generally have a two year retention requirement. Participants in the Plan are generally to be selected management associates of the Company and its subsidiaries and affiliates as determined by the committee administering the Plan. Approximately 2,000 associates are eligible to participate. No awards may be made under the Plan after May 31, 1998. Under the Directors' Plan, 90,000 shares of common stock were reserved for issuance upon the exercise of stock options and the payment of stock awards over its five-year term. Each director who is presently not an active employee of the Company will automatically be granted annually an option to purchase 800 shares, in tandem with an award of 200 restricted shares of common stock. An initial grant/award in this same amount will also automatically be made to each new Non-Associate Director upon his or her first being elected as a director. Such stock options will become exercisable six months from the date of grant, but shares acquired upon such exercise will not be transferable until a director terminates service. Under the plans, both the number of shares and the exercise price, which is based on the average market price, are fixed at the date of grant and have a maximum term of 10 years. The Board of Directors has approved a new 1997 Equity Compensation Plan (1997 Plan) subject to stockholder approval at the annual meeting which will be held May 16, 1997. The 1997 Plan will initially reserve 14 million shares for issuance, which number may be increased in certain circumstances as set forth in the 1997 Plan, as more fully described in the Company's 1997 Proxy Statement. The 1997 Plan also provides for grants of stock options and stock awards to members of the Board of Directors not otherwise employed by the Company. If the 1997 Plan is approved, no future grants will be made under the existing Plan or the Directors' Plan. The Company has elected to continue accounting for stock-based compensation under the provisions of APB No. 25, Accounting for Stock Issued to Employees. Accordingly, net income and earnings per share shown in the consolidated statements of income appearing on page 19 do not reflect any compensation cost for the Company's fixed stock options. In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the fair value of each fixed option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
1996 1995 - -------------------------------------------------------------- Dividend yield 3.9% 3.9% Expected volatility 22.3% 21.9% Risk-free interest rate 5.6% 7.0% Expected option term 5 years 5 years Fair value per share of options granted $ 8.88 $ 8.20 SFAS 123 compensation expense (millions) $ 11 $ 11
The effect on earnings per share of recording compensation expense under SFAS No. 123 was a reduction of about four cents per share in 1996 and 1995. For stock and restricted stock awards granted under the Plan, the Company records compensation expense at the date of grant or over the vesting period. In 1996 and 1994 stock awards were not material. In 1995, the Company issued 531 thousand shares of its common stock in connection with its Shareholder Value Award (SVA) program, which was a performance-based stock award plan. The SVA program awarded shares to approximately 2,000 management associates and vested over the 1993 to 1995 period. Compensation expense was recorded over the vesting period based on the end of the year market price, and accordingly the Company recorded compensation expense of $6 million in 1995 and $25 million in 1994. The following table summarizes the status of the Company's fixed stock option plans as of January 25, 1997, January 27, 1996, and January 28, 1995, and changes for the years then ended: 29 [NOTES TO CONSOLIDATED FINANCIAL STATEMENTS] continued
1996 1995 1994 ----------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Shares Option Shares Option Shares Option Stock options (In thousands) Price (In thousands) Price (In thousands) Price - ---------------------------------------------------------------------------------------------------------------------------- Balance at beginning of year 8,867 $33.40 8,347 $ 3l.36 8,235 $27.96 Granted 1,266 47.51 1,230 43.00 997 55.31 Exercised (1,427) 27.39 (689) 25.67 (865) 26.51 Expired and cancelled (73) 42.49 (21) 38.63 (20) 32.68 ----------------------------------------------------------------------------------------- Balance at end of year 8,633 $36.39 8,867 $ 33.40 8,347 $31.36 Options exercisable at year-end 7,419 34.54 7,637 31.87 7,354 28.13 =========================================================================================
[14] INTEREST EXPENSE, NET
($ in millions) 1996 1995 1994 - ----------------------------------------------------------------------- Short term debt $ 102 $ 129 $ 92 Long term debt 312 254 225 Income on short term investments (22) (18) (16) Interest capitalized (10) (8) (3) Other, net* (23) (32) (28) ---------------------------- Interest expense, net $ 359 $ 325 $ 270 ============================
* Includes $34 million in each year for interest income from the Company's investment in asset-backed certicates. [15] RENT EXPENSE The Company conducts the major part of its operations from leased premises which include retail stores, distribution centers, warehouses, offices, and other facilities. Almost all leases will expire during the next 20 years; however, most leases will be renewed or replaced by leases on other premises. Rent expense for real property operating leases was:
($ in millions) 1996 1995 1994 - --------------------------------------------------------------------- Minimum rents $ 285 $ 245 $ 235 Contingent rents based on sales 48 36 37 ---------------------------------- Total $ 333 $ 281 $ 272 ==================================
The Company also leases data processing equipment and other personal property under operating leases of primarily three to five years. Rent expense for personal property leases was $106 million in 1996, $106 million in 1995, and $92 million in 1994. Future minimum lease payments for noncancelable real and personal property operating leases and subleases as of January 25, 1997 were:
($ in millions) Operating Leases - ----------------------------------------------------- 1997 $ 394 1998 356 1999 308 2000 279 2001 232 Thereafter 1,508 ------- Total minimum lease payments $ 3,077 ======= Present value $ 1,800 Weighted average interest rate 10% =======
1996 drugstore acquisitions account for $1,458 million of minimum rents having a present value of $700 million. The minimum lease payments are shown net of estimated executory costs, which are principally real estates taxes, maintenance, and insurance. 30 [NOTES TO CONSOLIDATED FINANCIAL STATEMENTS] continued [16] ADVERTISING COSTS Advertising costs consist principally of newspaper, television, radio, and catalog book costs. In 1996, the total cost of advertising was $988 million, compared with $969 million in 1995, and $912 million in 1994. The consolidated balance sheets included deferred catalog book costs of $98 million at January 25, 1997, $111 million at January 27, 1996, and $99 million at January 28, 1995, and are included in other assets. [17] RETIREMENT PLANS
($ in millions) 1996 1995 1994 - --------------------------------------------------------------- Pension Service cost $ 69 $ 44 $ 57 Interest cost 165 148 134 Actual return on assets (386) (464) (22) Net amortization and deferral 179 302 (181) ----------------------------- Pension charge/(credit) 27 30 (12) ----------------------------- Post-retirement health care Service cost 4 3 3 Interest cost 21 23 25 Net amortization and deferral (5) (2) -- ----------------------------- Post-retirement health care charge 20 24 28 LESOP expense 56 53 53 ----------------------------- Total retirement plans $ 103 $ 107 $ 69 =============================
Pension plan. JCPenney's principal pension plan, which is noncontributory, covers substantially all United States employees who have completed 1,000 or more hours of service within a period of 12 consecutive months and have attained 21 years of age. In addition, the Company has an unfunded, noncontributory, supplemental retirement program for certain management employees. In general, benefits payable under the principal pension plan are determined by reference to a participant's final average earnings and years of credited service up to 35 years. Eckerd has a pension plan which is noncontributory and covers its employees who have completed 12 consecutive months of service and have attained age 21. In 1996, the Company increased its discount rate to 8.0 per cent, reflecting a higher interest rate environment. The impact of this change decreased the Company's obligation at year end 1996. Pension plan assumptions are reviewed and modified as necessary on an annual basis. The Company made contributions to the plan in 1996, 1995, and 1994 in the amounts of $119, $104, and $99 million, respectively. Benefits paid were $110 million in 1996, $101 million in 1995, and $96 million in 1994. Post-retirement health care benefits. The Company's retiree health care plan (Retiree Plan) covers medical and dental services, and eligibility for benefits is based on age and years of service. The Retiree Plan is contributory and the amounts paid by retired employees have increased in recent years and are expected to continue to do so. For certain group of employees, Company contributions toward the cost of retiree coverage will be based on a fixed dollar amount which will vary with years of service, age, and dependent coverage. The Retiree Plan is funded on a pay-as-you-go basis by the Company and retiree contributions. The Company uses the same discount rate for both its pension plan and Retiree Plan. The health care trend rate was lowered to 7.0 per cent for 1997 with gradual reductions to five per cent over the next several years. A one per cent increase in the health care trend rate would increase the amount reported for the accumulated obligation by $22 million and would result in $2 million additional expense for 1996. LESOP. The Company's LESOP, adopted in 1988, is a defined contribution plan which covers substantially all United States employees who have completed at least 1,000 hours of service within a period of 12 consecutive months, and if hired on or after January 1, 1988, have attained 21 years of age. The LESOP borrowed $700 million at an interest rate of 8.17 per cent through a 10 year loan guaranteed by the Company. The LESOP used the proceeds of the loan to purchase a new issue of convertible preferred stock from the Company. As the Company makes contributions to the LESOP, these contributions, plus the dividends paid on the Company's preferred stock held by the LESOP, will be used to repay the loan. As the principal amount of the loan is repaid, the "Guaranteed LESOP obligation" is reduced accordingly. The loan will be fully paid in January 1998. [NOTES TO CONSOLIDATED FINANCIAL STATEMENTS] continued
December 31 -------------------------------- Retirement plans ($ in millions) 1996 1995 1994 - -------------------------------------------------------------------------------- Pension Present value of accumulated benefits Vested $ 1,836 $ 1,817 $ 1,368 Non-vested 59 94 75 ---------------------------- $ 1,895 $ 1,911 $ 1,443 ============================ Present value of projected benefit obligation $(2,187) $(2,183) $(1,661) Net assets at fair market value 2,735 2,292 1,825 Unrecognized transition asset, net of unrecognized losses 23 345 200 ---------------------------- Net prepaid pension cost $ 571 $ 454 $ 364 ============================ Post-retirement health care benefits Accumulated benefit obligations Retirees $ 232 $ 249 $ 217 Fully eligible active participants 27 30 43 Other active participants 32 39 40 ---------------------------- 291 318 300 Unrecognized net gains 45 19 32 ---------------------------- Net liability $ 336 $ 337 $ 332 ============================ Key assumptions Rate of return on pension plan assets 9.5% 9.5% 9.5% Discount rate 8.0% 7.25% 8.75% Salary progression rate 4.0% 4.0% 4.0% ============================
[18] BUSINESS ACQUISITION AND CONSOLIDATION EXPENSES During the third and fourth quarters of 1996, the Company recorded costs totaling $354 million on a pre-tax basis, or 92 cents per share, which are principally related to drugstore acquisitions, and are reported as Business Acquisition and Consolidation Expenses on the consolidated income statement. The largest component of such costs are related to the Company's agreement with the Federal Trade Commission (FTC) to divest certain drugstores in North Carolina and South Carolina. These expenses consisted of the following:
Drugstore closings* $ 188 Asset write-downs 104 Other integration costs 62 ----- Total $ 354 Income taxes (126) ----- Business acquisition and consolidation expenses, net $ 228
* Includes the effects of the FTC agreement as well as other overlap and unproductive stores. 32 [NOTES TO CONSOLIDATED FINANCIAL STATEMENTS] continued [19] TAXES Deferred tax assets and liabilities reflected on the Company's consolidated balance sheet at January 25, 1997 were measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In addition to the amounts shown in the table, the Company recognized a $48 million deferred tax asset related to Eckerd operating loss carryforwards for which an offsetting valuation reserve of an equal amount has been established. No other valuation allowances have been considered necessary for any year. The major components of deferred tax (assets)/liabilities at January 25, 1997, January 27, 1996, and January 28, 1995 were as follows:
Income tax expense ($ in millions) 1996 1995 1994 - -------------------------------------------------------------------- Current Federal $ 321 $ 306 $ 521 State and local 43 56 92 ---------------------------- 364 362 613 ---------------------------- Deferred Federal (19) 124 25 State and local (l) 17 4 ---------------------------- (20) 141 29 ---------------------------- Total $ 344 $ 503 $ 642 Effective tax rate 37.9% 37.5% 37.8% ============================
Per Cent of Amounts ($ in millions) Pre-tax income ----------------------------------------------- Reconciliation of tax rates 1996 1995 1994 1996 1995 1994 - -------------------------------------------------------------------------------- Federal income tax at statutory rate $318 $469 $594 35.0 35.0 35.0 State and local income taxes, less federal income tax benefit 27 49 65 3.0 3.6 3.8 Tax effect of dividends on allocated LESOP shares (12) (11) (9) (1.3) (.8) (.5) Tax credits and other 11 (4) (8) 1.2 (.3) (.5) -------------------------------------------- Total $344 $503 $642 37.9 37.5 37.8 ============================================
Temporary differences ($ in millions) 1996 1995 1994 - --------------------------------------------------------------------------- Assets: Workers' compensation/ public liability $ (92) $ (101) $ (100) Accounts receivable (44) (33) (29) Business acquisition and consolidation expenses (73) -- -- Vacation pay (55) (11) (9) Other (19) -- (69) Liabilities: Retirement plans 93 51 12 Leases 318 332 338 Merchandise inventories 138 104 94 Depreciation and amortization 932 774 757 Deferred acquisition costs 192 174 160 Other -- 5 -- ---------------------------------- Total* $1,390 $1,295 $1,154 ==================================
*1996 deferred taxes include amounts related to the Fay's and Eckerd drugstore acquisitions totaling $115 million. 33 [NOTES TO CONSOLIDATED FINANCIAL STATEMENTS] continued [20] SEGMENT REPORTING The Company operates in three business segments: Stores and Catalog, Drugstores, and Insurance. Other items are shown in the table below for purposes of reconciling to total Company consolidated amounts.
Depreciation Operating Total Capital and ($ in millions) Year Revenue Earnings Assets Expenditures Amortization - ----------------------------------------------------------------------------------------------------------- Stores and Catalog 1996 $19,506 $1,183 $14,754 $680 $325 1995 18,711 1,199 13,744 689 308 1994 18,840 1,508 13,381 475 298 Drugstores 1996 3,147 135 4,389 103 41 1995 1,851 68 618 53 26 1994 1,540 54 469 59 18 Insurance 1996 832 186 1,986 7 5 1995 693 157 1,741 7 3 1994 564 127 1,360 10 3 Total Segments 1996 23,485 1,504 21,129 790 371 1995 21,255 1,424 16,103 749 337 1994 20,944 1,689 15,210 544 319 Business Acquisition and Consolidation Expenses 1996 (354) Net Interest and Credit Operations 1996 (278) 1995 (183) 1994 (93) Other 1996 164 37 959 10 1995 164 100 999 4 1994 138 103 992 4 Total Company 1996 23,649 909 22,088 790 381 1995 21,419 1,341 17,102 749 341 1994 21,082 1,699 16,202 544 323
(1) Total Company operating earnings equals income before income taxes as shown on the Company's consolidated statements of income. (2) Other revenue includes bank and insurance capital gains. (3) Other operating income includes the banking and business services operations, insurance capital gains, real estate operations, LIFO adjustments, amortization of goodwill and other intangible assets, and minority interest. 34 [QUARTERLY DATA] unaudited
First Second Third Fourth -------------------------------------------------------------------------------------------- ($ in millions except per share data) 1996 1995 1994 1996 1995 1994 1996 1995 1994 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Retail sales 4,452 4,367 4,350 4,507 4,435 4,242 5,537 5,128 5,149 8,157 6,632 6,639 per cent inc/(dec) 1.9 0.4 9.7 1.6 4.6 7.1 8.0 (0.4) 8.7 23.0 (0.1) 5.0 Total revenue 4,692 4,564 4,519 4,753 4,643 4,412 5,788 5,352 5,328 8,416 6,860 6,823 per cent increase 2.8 1.0 10.0 2.4 5.3 7.4 8.1 0.4 9.0 22.7 0.5 5.3 LIFO gross margin 1,355 1,370 1,395 1,312 1,292 1,282 1,701 1,592 1,661 2,242 1,975 2,072 per cent of retail sales 30.4 31.4 32.1 29.1 29.1 30.2 30.7 31.0 32.2 27.5 29.8 31.2 FIFO gross margin per cent of retail sales 30.4 31.4 32.1 29.1 29.1 30.2 30.7 31.0 32.2 27.3 29.5 31.2 Selling, general, and administrative expenses 1,154 1,148 1,092 1,150 1,107 1,079 1,247 1,201 1,204 1,688 1,439 1,408 per cent of retail sales 25.9 26.3 25.1 25.5 25.0 25.5 22.5 23.4 23.4 20.7 21.7 21.2 Net income 142 156 223 93 116 132 236 240 274 94 326 428 Net income per common share Primary 0.58 0.63 0.88 0.37 0.46 0.52 0.98 1.00 1.11 0.36 1.39 1.78 Fully diluted 0.57 0.61 0.84 0.37 0.46 0.51 0.95 0.95 1.04 0.36 1.31 1.66 Dividends per common share 0.52 0.48 0.42 0.52 0.48 0.42 0.52 0.48 0.42 0.52 0.48 0.42 Common stock price range High 52 47 59 53 50 54 57 50 54 54 49 52 Low 46 41 50 47 43 47 49 43 47 46 42 39 Close 50 44 54 50 49 49 53 44 51 48 46 41
35 [SUPPLEMENTAL INFORMATION] unaudited General. The following information is provided as a supplement to the Company's audited financial statements. Its purpose is to facilitate an understanding of the Company's credit operations, capital structure, and cash flows. Credit Operations. The following presents the results of the Company's proprietary credit card operation and shows both the net cost of credit in support of the Company's retail businesses and the net cost of credit measured on an all-inclusive, economic basis. The "economic basis" of the cost of credit includes the cost of equity capital in addition to debt used to finance accounts receivable balances. The cost of equity capital is based on the Company's minimum return on equity objective of 16 per cent. The results presented below cover all JCPenney credit card accounts receivable, both owned and those sold under securitization transactions.
Pre-tax cost of JCPenney credit card ($ in millions) 1996 1995 1994 - -------------------------------------------------------------------------------- Finance charge revenue On receivables owned $(641) $(631) $(624) On receivables sold (118) (112) (105) ---------------------------------- Total (759) (743) (729) ---------------------------------- Bad debt expense 311 256 208 Operating expenses (including in-store costs) 251 255 268 Interest expense on debt financing 281 278 269 ---------------------------------- Total costs 843 789 745 ---------------------------------- Pre-tax cost of credit - retail operations 84 46 16 Pre-tax cost of equity capital 138 137 135 ---------------------------------- Pre-tax cost of credit - economic basis 222 183 151 ---------------------------------- Per cent of JCPenney credit sales 2.4% 2.0% 1.6% ==================================
Credit Sales 1996 1995 1994 - ------------------------------------------------------------------------------------------------------ Per cent Per cent Per cent (Stores and Amounts of Eligible Amounts of Eligible Amounts of Eligible Catalog) (In billions) Sales (In billions) Sales (In billions) Sales - ------------------------------------------------------------------------------------------------------ JCPenney credit card $ 9.1 46.9 $ 9.0 48.4 $ 9.4 49.6 Third party credit cards 4.1 21.2 3.7 19.8 3.4 17.9 --------------------------------------------------------------------------------- Total $13.2 68.1 $12.7 68.2 $12.8 67.5 =================================================================================
Key JCPenney credit card information ($ in millions) 1996 1995 1994 - --------------------------------------------------------------------------- Number of accounts serviced with balances 17.0 17.0 17.6 Total customer receivables serviced $5,006 $4,688 $4,751 Average customer receivables financed 4,322 4,258 4,197 Average account balances (in dollars) 295 275 269 Average account maturity (months) 4.5 4.3 4.2 9O-day delinquencies 3.7% 3.3% 2.5% =================================
Capital structure. The Company's objective is to maintain a capital structure that will assure continuing access to financial markets so that it can, at reasonable cost, provide for future needs and capitalize on attractive opportunities for growth. The debt to capital ratio shown in the table below includes both debt recorded on the Company's consolidated balance sheet as well as off-balance-sheet debt related to operating leases and the securitization of a portion of the Company's customer accounts receivable (asset-backed certificates).
Debt to capital ($ in millions) 1996 1995 1994 - ---------------------------------------------------------------------------- Short term debt, net of cash investments $ 3,818 $ 1,168 $ 1,737 Long term debt, including current maturities 4,815 4,080 3,335 ----------------------------- 8,633 5,248 5,072 Off-balance-sheet debt Present value of operating leases 1,800 1,000 1,000 Securitization of accounts receivable, net 374 294 294 ----------------------------- Total debt 10,807 6,542 6,366 Consolidated equity 5,952 5,884 5,615 ----------------------------- Total capital $16,759 $12,426 $11,981 Per cent of total debt to capital 64.5% 52.6% 53.1% After completion of the Eckerd transaction 60.1% =============================
The Company builds its capital base according to the different needs and credit characteristics of its customer receivables and its other core retail assets. Customer receivables are highly diversified and predictable financial assets, very different from the core assets of a retailer, which include fixed assets and merchandise inventories for stores 36 [SUPPLEMENTAL INFORMATION] unaudited, continued and catalog. Accordingly, the Company finances receivables with more leverage, much like a finance company. The standards for these assets are a debt ratio of approximately 88 per cent, and interest coverage of about 1.5 times. Core assets are financed with less leverage and are more comparable to the leverage of non- retail industrial companies with strong credit ratings. The Company's capital structure after completion of the Eckerd transaction in February 1997 was:
Customer Core ($ in millions) Receivables Assets Combined - ------------------------------------------------------------------------- Debt $4,288 $ 6,519 $10,807 Equity 613 6,569 7,182 ---------------------------------------- Total capital $4,901 $13,088 $17,989 Debt to capital per cent 87.5% 49.8%* 60.1% ========================================
* Includes acquisition capital. Excluding such capital would reduce the ratio to 37.1 per cent. The historical debt to capital per cent and fixed charge coverage for the prior three years, on a separate and combined basis, was:
Debt to capital per cent 1996 1995 1994 - ------------------------------------------------------------------------- Combined 60.1 52.6 53.1 Core assets 49.8 32.1 31.1 Customer receivables 87.5 87.5 87.5 ===========================================
Fixed charge coverage 1996 1995 1994 - ------------------------------------------------------------------------- Combined 2.4 3.4 4.5 Core assets 3.8 6.0 9.1 Customer receivables 1.5 1.5 1.5 ===========================================
Financing costs incurred by the Company to finance its operations, including those costs related to off-balance-sheet liabilities, were as follows:
($ in millions) 1996 1995 1994 - ------------------------------------------------------------------------- Interest expense, net $359 $325 $270 Interest portion of LESOP debt payment 17 23 30 Off-balance-sheet financing costs Interest imputed on operating leases 110 102 95 Asset-backed certificates interest 68 68 68 ---------------------------------------- Total $554 $518 $463 ========================================
Earnings before interest, taxes, depreciation, and amortization (EBITDA). Management believes that a key measure of cash flow generated is EBITDA. The following schedule shows the calculation of EBITDA and EBITDA as a per cent of total revenue.
($ in millions) 1996 1995 1994 - ------------------------------------------------------------------------- Earnings before business acquisition and consolidation expenses and income taxes $ 1,263 $ 1,341 $ 1,699 Financing costs 554 518 463 Depreciation and amortization 381 341 323 ----------------------------------------- EBITDA $ 2,l98 $ 2,200 $ 2,485 Total revenue $23,649 $21,419 $21,082 EBITDA as a per cent of total revenue 9.3% 10.3% 11.8% =========================================
EBITDA by operating segment *
($ in millions) 1996 1995 1994 - ------------------------------------------------------------------------- Stores and Catalog EBITDA $1,754 $1,820 $2,161 as a per cent of sales 9.0% 9.7% 11.5% Drugstores EBITDA $ 206 $ 116 $ 87 as a per cent of sales 6.5% 6.3% 5.6% Insurance EBITDA $ 191 $ 160 $ 130 as a per cent of revenue 23.0% 23.1% 23.0% =========================================
* EBITDA for the operating segments differs from operating earnings by depreciation, amortization, off-balance-sheet financing, and net credit costs. Credit ratings. Over the years, the Company has maintained one of the highest credit ratings in the retail industry. The Company's objective is to maintain a strong investment grade rating on its senior long term debt and commercial paper. Currently, the credit ratings for the Company are as follows:
Long Term Commercial Debt Paper - -------------------------------------------------------------------------------- Standard & Poor's Corporation A Al Moody's Investors Service A2 P1 Fitch Investors Service, Inc. A F1 ============================
37 [FIVE YEAR FINANCIAL SUMMARY] J.C. Penney Company, Inc. and Subsidiaries
($ in millions except per share data) 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------- Results for the year Total revenue $23,649 $21,419 $21,082 $19,578 $18,515 Retail sales 22,653 20,562 20,380 18,983 18,009 per cent increase 10.2 0.9 7.4 5.4 11.2 FIFO gross margin as a per cent of retail sales 29.1 30.2 31.5 31.3 31.5 LIFO gross margin as a per cent of retail sales 29.2 30.3 31.5 31.5 31.7 Selling, general, and administrative expenses as a per cent of retail sales 23.1 23.8 23.5 23.7 24.7 Depreciation and amortization 381 341 323 316 310 Income taxes 344 503 642 610 482 Earnings before business acquisition and consolidation expenses, net of tax 793 838 1,057 944 777 Return on stockholders' equity 13.5 14.9 19.7 20.1 18.6 Net income 565 838 1,057 940 777 per cent to total revenue per common share 2.4 3.9 5.0 4.8 4.2 Per common share: Earnings before business acquisition and consolidation expenses, net of tax Primary 3.29 3.48 4.29 3.79 3.15 Fully diluted 3.17 3.33 4.05 3.55 2.95 Net income Primary 2.29 3.48 4.29 3.77 3.15 Fully diluted 2.25 3.33 4.05 3.53 2.95 Dividends 2.08 1.92 1.68 1.44 1.32 Stockholders' equity 25.67 24.76 23.45 21.53 19.17 Financial position Receivables, net 5,757 5,207 5,159 4,679 3,750 Merchandise inventories 5,722 3,935 3,876 3,545 3,258 Properties, net 5,014 4,281 3,954 3,818 3,755 Capital expenditures 790 749 544 459 494 Total assets 22,088 17,102 16,202 14,788 13,467 Total debt 8,765 5,589 5,427 4,561 4,078 Stockholders' equity 5,952 5,884 5,615 5,365 4,705 Number of common shares outstanding at year end 224 224 227 236 235 Weighted average common shares Primary 229 229 237 239 236 Fully diluted 248 249 258 261 258 Number of employees at year end (In thousands) 252 205 202 193 192
38 [FIVE YEAR OPERATIONS SUMMARY] J.C. Penney Company, Inc. and Subsidiaries
1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------- JCPenney stores Number of stores Beginning of year 1,238 1,233 1,246 1,266 1,283 Openings 36 43 29 24 33 Closings (46) (38) (42) (44) (50) ------------------------------------------------------------------ End of year 1,228 1,238 1,233 1,246 1,266 Gross selling space (In million sq.ft.) 117.2 114.3 113.0 113.9 114.4 Sales (In millions) $15,734 $14,973 $15,023 $14,056 $13,460 Sales including catalog desks (In millions) 18,694 17,930 18,048 16,846 15,698 Sales per gross square foot 159 156 159 146 137 Catalog Number of catalog units JCPenney stores l,226 1,228 1,233 1,246 1,266 Freestanding sales centers and merchants 552 548 552 543 640 Drugstores 107 106 94 101 128 Other, principally outlet stores 17 17 16 14 14 ------------------------------------------------------------------ Total 1,902 1,899 1,895 1,904 2,048 Number of fulfillment centers 6 6 6 6 6 Distribution space (In millions sq.ft.) 11.4 11.4 11.4 11.4 11.4 Sales (In millions) $ 3,772 $ 3,738 $ 3,817 $ 3,514 $ 3,166 Drugstores Number of stores Beginning of year 645 526 506 548 530 Openings 47 37 46 35 30 Drugstore acquisitions 2,020 97 -- -- -- Closings (13) (15) (26) (77) (12) ------------------------------------------------------------------ End of year 2,699 645 526 506 548 Gross selling space (In millions) 26.4 6.2 4.5 4.6 5.2 Sales (In millions) $ 3,147 $ 1,851 $ 1,540 $ 1,413 $ 1,383 Sales per gross square foot 261 253 243 235 211 JCPenney Insurance (In millions) Revenue $ 832 $ 693 $ 564 $ 461 $ 376 Policies and certificates in force 10.4 9.0 7.5 5.8 4.6 Amount of life insurance in force 9,990 9,559 8,780 7,627 6,552 Total assets 1,986 1,741 1,360 1,246 1,033
39 EX-21 14 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT ------------------------------ Set forth below is a list of certain subsidiaries of the Company at March 1, 1997. All of the voting securities of each named subsidiary are owned by the Company or by another subsidiary of the Company. SUBSIDIARIES - ------------ Eckerd Corporation (Delaware) Fay's Incorporated (New York) J. C. Penney Insurance Group, Inc.(Delaware) J. C. Penney Funding Corporation (Delaware) J. C. Penney Life Insurance Company (Vermont) JCPenney National Bank (National Association) JCPenney Card Bank (National Association) J. C. Penney Properties, Inc. (Delaware) JCP Realty, Inc. (Delaware) JCP Receivables, Inc. (Delaware) Thrift Drug, Inc. (Delaware) Separate financial statements are filed for J. C. Penney Funding Corporation, a consolidated subsidiary, in its separate Annual Report on Form 10-K. The names of other subsidiaries have been omitted because these unnamed subsidiaries, considered in the aggregate as a single subsidiary, do not constitute a significant subsidiary. EX-23 15 CONSENT OF INDEPENDENT CERT. PUBLIC ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS --------------------------------------------------- The Board of Directors of J. C. Penney Company, Inc.: We consent to incorporation by reference in: (1) the Registration Statement (No. 33-28390) on Form S-8;(2) the Registration Statement (No. 33-59666) on Form S-8; (3)the Registration Statement (No. 33-59668) on Form S-8; (4) the Registration Statement (No. 33-66070) on Form S-8; (5) the Registration Statement (No. 33-66072) on Form S-8; (6) the Registration Statement (No. 33- 56993) on Form S-8;(7) the Registration Statement (No. 33-56995) on Form S-8; (8) the Registration Statement (No. 333-13949) on Form S-8; (9) the Registration Statement (No. 333-13951) on Form S-8; (10) the Registration Statement (No. 333- 22627) on Form S-8; (11) the Registration Statement (No. 333-22607) on Form S-8; (12) the Registration Statement (No. 333-23339) on Form S-3; and (13) the Registration Statement (No. 333-06883) on Form S-3 of J. C. Penney Company, Inc. of our report dated February 27, 1997, relating to the consolidated balance sheets of J. C. Penney Company, Inc. and subsidiaries as of January 25, 1997, January 27, 1996, and January 28, 1995, and the related consolidated statements of income, reinvested earnings, and cash flows for the years then ended, which report appears in the 1996 Annual Report to Stockholders of J. C. Penney Company, Inc., which Annual Report is incorporated by reference in the Annual Report on Form 10-K of J. C. Penney Company, Inc. for the year ended January 25, 1997, and to our report dated February 27, 1997, relating to the financial statement schedule of J. C. Penney Company, Inc. and subsidiaries for each of the years in the three-year period ended January 25, 1997, which report appears in the Annual Report on Form 10-K of J. C. Penney Company, Inc. for the year ended January 25, 1997. Our report refers to the adoption of (1) the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 121, Accounting for the ------------------ Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of in - --------------------------------------------------------------------------- 1995 and (2) the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and ---------------------------------------------- Equity Securities, in 1994. - ----------------- /s/ KPMG Peat Marwick LLP Dallas, Texas March 24, 1997 EX-24 16 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, THAT each of the undersigned directors and officers of J. C. PENNEY COMPANY, INC., a Delaware corporation ("Company") , which will file with the Securities and Exchange Commission, Washington, D.C.("Commission"), (i) under the provisions of the Securities Act of 1933, as amended, a Registration Statement on Form S-3 (or any appropriate form then in effect) for the registration of the Company's debt securities (which may include debt securities, together with warrants or other rights to purchase or otherwise acquire debt securities), and (ii) under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the 52 weeks ended January 25, 1997, hereby constitutes and appoints W. J. Alcorn, R. B. Cavanaugh, C. R. Lotter, and D. A. McKay, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power to each of them to act without the others, for him or her and in his or her name, place, and stead, in any and all capacities, to sign (x) said Registration Statement and Prospectus and Prospectus Supplements, which are about to be filed, and any and all subsequent amendments thereto (including, without limitation, any and all post- effective amendments thereto ("Registration Statement")), and (y) said Annual Report, which is about to be filed, and any and all subsequent amendments to said Annual Report ("Annual Report"), and to file said Registration Statement and Annual Report so signed, with all exhibits thereto, and any and all documents in connection therewith, and to appear before the Commission in connection with any matter relating to said Registration Statement and Annual Report and any subsequent amendments, hereby granting unto said attorneys-in- fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises as fully and to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney as of the 12th day of March, 1997. /s/ J. E. Oesterreicher /s/ W. B. Tygart - ------------------------------ --------------------------- Chairman of the Board and W. B. Tygart Chief Executive Officer (principal President and Chief Operating executive officer); Director Officer; Director /s/ D. A. McKay /s/ W. J. Alcorn - ----------------------------- ---------------------------- D. A. McKay W. J. Alcorn Senior Vice President and Vice President and Controller Chief Financial Officer (principal accounting officer) (principal financial officer) /s/ M. A. Burns /s/ C. H. Chandler - ---------------------------- --------------------------- M. A. Burns C. H. Chandler Director Director /s/ V. E. Jordan, Jr. /s/ George Nigh - ------------------------------ --------------------------- V. E. Jordan, Jr. George Nigh Director Director /s/ J. C. Pfeiffer /s/ A. W. Richards - ------------------------------ --------------------------- J. C. Pfeiffer A. W. Richards Director Director /s/ C. S. Sanford, Jr. /s/ R. G. Turner - --------------------------- ----------------------------- C. S. Sanford, Jr. R. G. Turner Director Director /s/ J. D. Williams - --------------------------- J. D. Williams Director EX-27 17 FINANCIAL DATA SCHEDULE
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 JANUARY 25, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS JAN-25-1997 JAN-25-1997 131 0 5,862 105 5,722 11,712 7,715 2,701 22,088 7,966 4,565 0 568 1,416 3,968 22,088 22,653 23,649 16,043 21,282 832 267 359 909 344 565 0 0 0 565 2.29 2.25
EX-99.(B) 18 FUNDING CORP. ANNUAL REPORT EXHIBIT 99(b) MANAGEMENT'S DISCUSSION AND ANALYSIS OF 1996 ANNUAL REPORT FINANCIAL CONDITION AND RESULTS OF OPERATIONS J. C. Penney Funding Corporation ("Funding") is a wholly-owned consolidated subsidiary of J. C. Penney Company, Inc. ("JCPenney"). The business of Funding consists of financing a portion of JCPenney's operations through loans to JCPenney, the purchase of customer receivable balances that arise from the retail credit sales of JCPenney, or a combination of both. No receivables have been purchased by Funding since 1985. The loan agreement between Funding and JCPenney provides for unsecured loans to be made by Funding to JCPenney. Each loan is evidenced by a revolving promissory note and is payable upon demand in whole or in part as may be required by Funding. Copies of Funding's loan and receivables agreements with JCPenney are available upon request. Funding issues commercial paper through Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc., Merrill Lynch Money Markets Inc., and Morgan Stanley & Co. Incorporated to corporate and institutional investors in the domestic market. The commercial paper is guaranteed by JCPenney on a subordinated basis. The commercial paper is rated "A1" by Standard & Poor's Corporation, "P1" by Moody's Investors Service, Inc., and "F1" by Fitch Investors Service L.P. Income is derived primarily from earnings on loans to JCPenney and is designed to produce earnings sufficient to cover interest expense at a coverage ratio of at least one and one-half times. In 1996, net income decreased to $38 million from $43 million in 1995 which increased from $32 million in 1994. The decrease in 1996 is attributed to lower borrowing levels and lower interest rates. The increase in 1995 is attributed to higher borrowing levels and higher interest rates. Interest expense was $111 million in 1996 compared with $128 million in 1995 and $94 million in 1994. Interest earned from JCPenney was $169 million in 1996 compared to $194 million in 1995 and $143 million in 1994. Commercial paper borrowings averaged $1,827 million in 1996 compared to $2,145 million in 1995 and $1,990 million in 1994. The average interest rate on commercial paper was 5.4 per cent in 1996, down from 5.9 per cent in 1995 and up from 4.6 percent in 1994. Committed bank credit facilities available to Funding and JCPenney as of January 25, 1997, amounted to $6 billion. In 1996, JCPenney and Funding amended the two existing syndicated revolving credit facilities and entered into two new syndicated revolving credit facilities with a group of domestic and international banks. The "Existing" facilities support JCPenney's short term borrowing program, and are comprised of a $1.5 billion, 364-day revolver, and a $1.5 billion, five-year revolver. The 364-day revolver includes a $750 million seasonal credit line for the August to January period thus allowing JCPenney to match its seasonal borrowing requirements. The "Acquisition" facilities provided short term funding for JCPenney's acquisition of Eckerd Corporation and are also comprised of a $1.5 billion, 364-day revolver, and a $1.5 billion, five-year revolver. As of January 25, 1997, $1.5 billion was borrowed under the five-year "Acquisition" facility and $400 million was borrowed under the 364-day "Acquisition" facility. See page 8 for a complete list of committed bank credit facilities. 1996 total short term debt, including commercial paper and the credit facility borrowings, averaged $2,041 million in 1996 compared to $2,145 million in 1995, and $1,990 million in 1994. The average interest rate on the total short term debt was 5.5 per cent in 1996, down from 5.9 per cent in 1995, and up from 4.6 per cent in 1994. The $1.9 billion credit line debt under the "Acquisition" facilities was paid off on February 18, 1997. Subsequent to year end Funding established a new Commercial Paper program. We would like to express our appreciation to the institutional investment community, as well as to our credit line participants and commercial paper dealers for their continued support during 1996. /s/ Robert B. Cavanaugh Robert B. Cavanaugh Chairman of the Board February 27, 1997 2 STATEMENTS OF INCOME J. C. PENNEY FUNDING CORPORATION ($ in millions)
FOR THE YEAR 1996 1995 1994 ----------------------- INTEREST INCOME FROM JCPENNEY.............. $ 169 $ 194 $ 143 INTEREST EXPENSE........................... 111 128 94 ----- ----- ----- INCOME BEFORE INCOME TAXES................. 58 66 49 Income taxes............................ 20 23 17 ----- ----- ----- NET INCOME................................. $ 38 $ 43 $ 32 ===== ===== ===== STATEMENTS OF REINVESTED EARNINGS ($ in millions) 1996 1995 1994 ------------------------ BALANCE AT BEGINNING OF YEAR............... $ 926 $ 883 $ 851 NET INCOME................................. 38 43 32 ----- ----- ----- BALANCE AT END OF YEAR..................... $ 964 $ 926 $ 883 ===== ===== =====
________ See Notes to Financial Statements on page 6 3 BALANCE SHEETS J. C. PENNEY FUNDING CORPORATION (In millions except share data)
1996 1995 1994 ------------------------ ASSETS Loans to JCPenney.............................. $5,062 $2,563 $3,114 ====== ====== ====== LIABILITIES AND EQUITY OF JCPENNEY CURRENT LIABILITIES Short term debt................................ $3,952 $1,482 $2,074 Due to JCPenney................................ 1 10 12 ------ ------ ------ TOTAL CURRENT LIABILITIES................. 3,953 1,492 2,086 EQUITY OF JCPENNEY Common stock (including contributed capital), par value $100: Authorized, 750,000 shares - issued and outstanding, 500,000 shares.... 145 145 145 Reinvested earnings............................ 964 926 883 ------ ------ ------ TOTAL EQUITY OF JCPENNEY.................. 1,109 1,071 1,028 ------ ------ ------ TOTAL LIABILITIES AND EQUITY OF JCPENNEY.. $5,062 $2,563 $3,114 ====== ====== ======
________ See Notes to Financial Statements on page 6 4 STATEMENTS OF CASH FLOWS J. C. PENNEY FUNDING CORPORATION ($ In millions)
FOR THE YEAR 1996 1995 1994 ------------------------ OPERATING ACTIVITIES Net income.................................... $ 38 $ 43 $ 32 (Increase)Decrease in loans to JCPenney....... (2,499) 551 (791) Increase(Decrease) in amount due to JCPenney.. (9) (2) (31) ------- ----- ----- $(2,470) $ 592 $(790) FINANCING ACTIVITIES Increase(Decrease) in short term debt......... $ 2,470 $(592) $ 790 SUPPLEMENTAL CASH FLOW INFORMATION Interest paid................................. $ 111 $ 128 $ 94 Income taxes paid............................. $ 28 $ 26 $ 10
________ See Notes to Financial Statements on page 6 5 INDEPENDENT AUDITORS' REPORT J. C. PENNEY FUNDING CORPORATION To the Board of Directors of J. C. Penney Funding Corporation: We have audited the accompanying balance sheets of J. C. Penney Funding Corporation as of January 25, 1997, January 27, 1996, and January 28, 1995, and the related statements of income, reinvested earnings, and cash flows, appearing on pages 3 through 5 for the years then ended. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of J. C. Penney Funding Corporation as of January 25, 1997, January 27, 1996, and January 28, 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP KPMG Peat Marwick LLP Dallas, Texas February 27, 1997 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS NATURE OF OPERATIONS - -------------------- J. C. Penney Funding Corporation ("Funding") is a wholly-owned consolidated subsidiary of J. C. Penney Company, Inc. ("JCPenney"). The principal business of Funding consists of financing a portion of JCPenney's operations through loans to JCPenney. To finance its operations, Funding issues commercial paper, which is guaranteed by JCPenney on a subordinated basis, to corporate and institutional investors in the domestic market. Funding has, from time to time, issued long term debt in public and private markets in the United States and abroad. DEFINITION OF FISCAL YEAR Funding's fiscal year ends on the last Saturday in January. Fiscal year 1996 ended January 25, 1997, 1995 ended January 27, 1996, and 1994 ended January 28, 1995. COMMERCIAL PAPER PLACEMENT Funding places commercial paper solely through dealers. The average interest rate on commercial paper at year end 1996, 1995, and 1994 was 5.5%, 5.7%, and 5.9%, respectively. SUMMARY OF ACCOUNTING POLICIES - ------------------------------ INCOME TAXES Funding's taxable income is included in the consolidated federal income tax return of JCPenney. Income taxes in Funding's statement of income are computed as if Funding filed a separate federal income tax return. USE OF ESTIMATES Funding's financial statements have been prepared in conformity with generally accepted accounting principles. Certain amounts included in the financial statements are estimated based on currently available information and management's judgment as to the outcome of future conditions and circumstances. While every effort is made to ensure the integrity of such estimates, including the use of third party specialists where appropriate, actual results could differ from these estimates. LOANS TO JCPENNEY - ----------------- Funding and JCPenney are parties to a Loan Agreement which provides for unsecured loans, payable on demand, to be made from time to time by Funding to JCPenney for the general business purposes of JCPenney, subject to the terms and conditions of the Loan Agreement. Under the terms of the Loan Agreement, Funding and JCPenney agree upon a mutually-acceptable earnings coverage of Funding's interest and other fixed charges. The earnings to fixed charges ratio has historically been at least one and one-half times. COMMITTED BANK CREDIT FACILITIES - -------------------------------- Committed bank credit facilities available to Funding and JCPenney as of January 25, 1997, amounted to $6 billion. In 1996, JCPenney and Funding amended the two existing syndicated revolving credit facilities and entered into two new syndicated revolving credit facilities with a group of domestic and international banks. The "Existing" facilities support JCPenney's short term borrowing program, and are comprised of a $1.5 billion, 364-day revolver, and a $1.5 billion, five-year revolver. The 364-day revolver includes a $750 million seasonal credit line for the August to January period thus allowing JCPenney to match its seasonal borrowing requirements. The "Acquisition" facilities provided short term funding for JCPenney's acquisition of Eckerd Corporation and are also comprised of a $1.5 billion, 364-day revolver, and a $1.5 billion, five-year revolver. As of January 25, 1997, $1.5 billion was borrowed under the five-year "Acquisition" facility and $400 million was borrowed under the 364-day "Acquisition" facility. FAIR VALUE OF FINANCIAL INSTRUMENTS - ----------------------------------- The fair value of short term debt (commercial paper) at January 25, 1997, January 27, 1996, and January 28, 1995, approximates the amount as reflected on the balance sheet due to its short average maturity. The fair value of loans to JCPenney at January 25, 1997, January 27, 1996, and January 28, 1995, also approximates the amount reflected on the balance sheet because the loan is payable on demand and the interest charged on the loan balance is adjusted to reflect current market interest rates. ________ 6 FIVE YEAR FINANCIAL SUMMARY J. C. PENNEY FUNDING CORPORATION ($ In millions)
AT YEAR END 1996 1995 1994 1993 1992 ----------------------------------------- CAPITALIZATION Short term debt Commercial paper............ $2,049 $1,482 $2,074 $1,284 $ 887 Credit line advance......... 1,903 - - - - ------ ------ ------ ------ ------ Total short term debt..... 3,952 1,482 2,074 1,284 887 Equity of JCPenney............. 1,109 1,071 1,028 996 980 ------ ------ ------ ------ ------ TOTAL CAPITALIZATION.............. $5,061 $2,553 $3,102 $2,280 $1,867 ====== ====== ====== ====== ====== COMMITTED BANK CREDIT FACILITIES.. $6,000 $3,000 $2,500 $1,250 $1,250 FOR THE YEAR INCOME............................ $ 169 $ 194 $ 143 $ 71 $ 77 EXPENSES.......................... $ 111 $ 128 $ 94 $ 47 $ 51 NET INCOME........................ $ 38 $ 43 $ 32 $ 16 $ 17 FIXED CHARGES - TIMES EARNED...... 1.52 1.52 1.52 1.52 1.52 PEAK SHORT TERM DEBT.............. $4,010 $2,771 $2,649 $2,327 $1,665 AVERAGE DEBT...................... $2,041 $2,145 $1,990 $1,347 $1,185 AVERAGE INTEREST RATES............ 5.5% 5.9% 4.6% 3.2% 3.9%
________ 7 QUARTERLY DATA J. C. PENNEY FUNDING CORPORATION ($ in millions) (Unaudited)
FIRST SECOND THIRD FOURTH ----------------- ---------------- ---------------- ---------------- 1996 1995 1994 1996 1995 1994 1996 1995 1994 1996 1995 1994 ----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Income....................... $ 32 48 24 33 48 32 36 52 38 68 46 49 Expenses..................... $ 21 31 16 22 32 21 24 34 25 44 31 32 Income before taxes.......... $ 11 17 8 11 16 11 12 18 13 24 15 17 Net income................... $ 7 11 5 7 10 7 8 12 9 16 10 11 Fixed charges - times earned............... 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52
COMMITTED REVOLVING CREDIT FACILITIES AS OF JANUARY 25, 1997 Bank of America NT & SA Bank of Hawaii Bank of New York Bank One, Texas, N.A. Bankers Trust Company The Bank of Tokyo-Mitsubishi, Ltd. Banque Nationale de Paris Barclays Bank PLC Caisse Nationale de Credit Agricole Canadian Imperial Bank of Commerce The Chase Manhattan Bank Citibank, N.A. Compagnie Financiere de CIC et de l'Union Europeenne CoreStates Bank, N.A. Credit Suisse First Boston Dai-Ichi Kangyo Bank The First National Bank of Boston The First National Bank of Chicago First Security Bank of Utah, N.A. First Union National Bank of North Carolina Firstar Bank Milwaukee, N.A. Fleet National Bank The Fuji Bank, Limited Hibernia National Bank The Hong-Kong Shanghai Banking Corporation, Ltd. The Industrial Bank of Japan Trust Company The Long Term Credit Bank of Japan, Ltd. Mellon Bank, N.A. Morgan Guaranty Trust Company of New York National Australia Bank, Limited NationsBank of Texas, N.A. The Northern Trust Company Norwest Bank Minnesota, N.A. PNC Bank, N.A. The Royal Bank of Canada The Sanwa Bank, Limited Sakura Bank, Limited San Paolo Bank The Sumitomo Bank, Limited SunBank, N.A. Union Bank of Switzerland United Missouri Bank, N.A. United States National Bank of Oregon Wachovia Bank of North Carolina, N.A. Wells Fargo Bank (Texas), N.A. Yasuda Trust & Banking Company, Ltd. __________ 8 EX-99.(C) 19 ECKERD SELECTED HISTORICAL TERM INFO EXHIBIT 99(c) Selected Consolidated Financial Information Set forth below is certain selected historical consolidated financial data with respect to Eckerd Corporation. As it relates to 1992 through 1995, such information was excerpted or derived from financial information contained in Eckerd's Annual Report on Form 10-K for the year ended February 3, 1996 ("Eckerd's Form 10-K"). Regarding fiscal 1996, such information, which is unaudited, is excerpted from Eckerd's financial information for such fiscal year. The information below represents Eckerd's continuing operations, and excludes the results of Insta-Care Holdings, Inc. (sold November 15, 1994), the Vision Group Operations (sold effective January 30, 1994) and any reserves established for future store closings. In addition, the financial information for fiscal 1995 is presented on a comparable 52-week basis. More comprehensive financial information is included in Eckerd's Form 10-K and other documents filed by Eckerd with the Securities and Exchange Commission. The financial information that follows is qualified in its entirety by reference to Eckerd's Form 10-K and such other documents, including the financial statements and related notes therein. ECKERD CORPORATION AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL INFORMATION
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (in thousands, except percentages) Statement of Operations Data: Sales and other operating revenue.... $5,376,221 $4,902,789 $4,446,728 $4,060,614 $3,770,879 Gross profit......................... 1,183,373 1,101,174 1,020,868 955,880 935,478 Earnings before interest expense and taxes........................ 213,950 196,441 171,615 150,277 128,063 Other Operating and Drugstore Data: EBITDA(1)............................ 308,136 279,592 247,985 231,280 216,695 Comparable drugstore sales growth.... 7.8% 8.8% 8.1% 6.1% 3.1% Average sales per selling square foot (in dollars)................ 383 336 325 302 283 - ---------------------------
(1) EBITDA represents earnings before interest, taxes, depreciation and amortization. While the Company believes that EBITDA is a key measure of assessing operating performance and cash flow, EBITDA is not intended as a substitute for other statement of operations data prepared in accordance with generally accepted accounting principles. -----END PRIVACY-ENHANCED MESSAGE-----