-----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, Id6xPoDlD9p6i8SaNpM+ix7azAMFqYUfQG4ktOTGr4TPQN+NglWLBj1bGYGSpaw5 daK4kRhY/sLiSPcVkmGLFg== 0000930661-99-000963.txt : 19990429 0000930661-99-000963.hdr.sgml : 19990429 ACCESSION NUMBER: 0000930661-99-000963 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19990130 FILED AS OF DATE: 19990428 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: SEC FILE NUMBER: 001-00777 FILM NUMBER: 99603272 BUSINESS ADDRESS: STREET 1: 6501 LEGACY DR CITY: PLANO STATE: TX ZIP: 75024-3698 BUSINESS PHONE: 9724311000 10-K405 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the 52 weeks ended January 30, 1999 Commission file number 1-777 J. C. PENNEY COMPANY, INC. ------------------------------------------------------ (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 and non-voting common equity held by non-affiliates of the registrant: $10,486,998,096 as of March 22, 1999. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 252,834,719 shares of Common Stock of 50c par value, as of March 22, 1999. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Documents from which portions Parts of the Form 10-K are incorporated by reference into which incorporated ----------------------------- ----------------------- 1. J. C. Penney Company, Inc. Part I, Part II, and 1998 Annual Report to Stockholders Part IV 2. J. C. Penney Company, Inc. Part III 1999 Proxy Statement 3. J. C. Penney Funding Corporation Part I and Part IV Form 10-K for fiscal year 1998 -2- 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, operating approximately 1,150 JCPenney department stores in all 50 states, Puerto Rico, Mexico and Chile. In addition, in January 1999, the Company completed the acquisition of the majority interest in a Brazilian department store chain that operates 21 stores under the Renner name. The major portion of the Company's business consists of providing merchandise and services to consumers through department stores that include catalog departments. The Company markets predominantly family apparel, jewelry, shoes, accessories, and home furnishings. In addition, the Company, through its wholly-owned subsidiary, Eckerd Corporation ("Eckerd"), operates a chain of approximately 2,900 drugstores located throughout the northeast, southeast, and Sunbelt regions of the United States, including the Company's March 1999 acquisition of the New York-based Genovese drugstore chain. The Company also has several direct marketing subsidiaries, the principal of which is J. C. Penney Life Insurance Company, which market life, health, accident and credit insurance as well as a growing portfolio of membership services to both domestic and international customers. The business of marketing merchandise and services is highly competitive. Although the Company is one of the largest department store and drugstore retailers in the United States, it has numerous competitors. Many factors enter into the competition for the consumer's patronage, including price, quality, style, service, product mix, convenience, and credit availability. The Company's annual earnings depend to a significant extent on the results of operations for the last quarter of its fiscal year. Sales for that period average approximately 31 per cent of annual sales. In the normal course of its business, the Company accepts merchandise returns from customers. This policy, which has been in place for many years, is designed to enhance the customer's shopping experience and build customer loyalty. From time to time, the Company has analyzed the effects of its sales returns policy on its operations. Historically, sales return rates have been consistent from year to year for the Company's retail stores and catalog operations and have not had a material impact on its results of operations or financial condition. Based on its analysis, the Company does not believe that merchandise returns present material operational or financial risks. Accordingly, the Company has not established a reserve for sales returns and does not believe that any such reserve is required. On April 15, 1999, Moody's Investors Service and Fitch IBCA lowered their respective ratings of the Company's long-term debt from A2 to A3 and from A to A-, and commercial paper from P1 to P2 -3- and from F1 to F2. Information about certain aspects of the business of the Company included under the captions of "Investments and Fair Value of Financial Instruments" (pages 28 and 29) and "Segment Reporting" (page 39), which appear in the section of the Company's 1998 Annual Report to Stockholders entitled "Notes to the Consolidated Financial Statements", "Five Year Financial Summary" (page 40), "Five Year Operations Summary" (page 41), and "Supplemental Data (unaudited)" (pages 42 through 44), which appear in the Company's 1998 Annual Report to Stockholders on the pages indicated in the parenthetical references, is incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 1 of Form 10-K. In addition, information about J. C. Penney Funding Corporation, a wholly owned consolidated subsidiary of the Company, which appears in Item 1 of its separate Annual Report on Form 10-K for the fiscal year ended January 30, 1999, is incorporated herein by reference and filed hereto as Exhibit 99(a) in response to Item 1 of Form 10-K. SUPPLIERS. The Company purchases its merchandise from approximately 4,150 --------- domestic and foreign suppliers, many of whom have done business with the Company for many years. In addition, Eckerd purchases merchandise and pharmaceuticals from approximately 3,100 suppliers, substantially all of which are domestic. The majority of Eckerd's suppliers have done business with Eckerd for many years. In addition to its Plano, Texas home office, the Company, through its international purchasing subsidiary, maintained buying offices in twelve foreign countries and quality assurance inspection offices in an additional six foreign countries as of January 30, 1999. EMPLOYMENT. The Company and its consolidated subsidiaries employed ---------- approximately 262,000 persons as of January 30, 1999. ENVIRONMENT. Environmental protection requirements did not have a material ----------- effect upon the Company's operations during fiscal 1998. While management believes it unlikely, it is possible that compliance with such requirements will lengthen lead time in expansion plans and increase construction, and therefore operating costs due in part to the expense and time required to conduct environmental and ecological studies. 2. PROPERTIES. ---------- At January 30, 1999, the Company operated 3,925 retail stores, comprised of 1,148 JCPenney department stores, 21 Renner department stores and 2,756 drugstores, in all 50 states, Puerto Rico, Brazil, Mexico, and Chile, of which 288 JCPenney department stores and 16 drugstores were owned. In addition, the Company owns six store locations that are leased to other tenants and not operated as units of the Company. The Company also operated six catalog fulfillment centers, of which four were owned, and owned one store -4- distribution center, three drugstore distribution centers, J. C. Penney Direct Marketing Services, Inc. and Eckerd corporate offices, and the Company's home office facility and approximately 240 acres of property in Plano, Texas, adjacent to the facility. Information relating to certain of the Company's facilities included under the caption "Five Year Operations Summary", which appears on page 41 of the Company's 1998 Annual Report to Stockholders, is incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 2 of Form 10-K. 3. LEGAL PROCEEDINGS. ----------------- The Company has no material legal proceedings pending against it. 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. --------------------------------------------------- No matter was submitted to a vote of stockholders during the fourth quarter of fiscal 1998. -5- EXECUTIVE OFFICERS OF THE REGISTRANT. ------------------------------------ The following is a list, as of March 22, 1999, of the names and ages of the executive officers of the Company and of the offices and other positions held by each such person with the Company. The terms of all executive officers will expire on May 21, 1999. There is no family relationship between any of the named persons.
OFFICES AND OTHER POSITIONS NAME HELD WITH THE COMPANY AGE ------------ --------------------------- --- James E. Oesterreicher...Chairman of the Board and Chief Executive Officer; Director 57 Marilee J. Cumming.......President of Merchandising for JCPenney Stores and Catalog 51 Gary L. Davis............Executive Vice President, Chief Human Resources and Administration Officer 56 Gale Duff-Bloom..........President of Marketing and Company Communications 59 David V. Evans...........Senior Vice President, Chief Information Officer 53 John E. Fesperman........President and Chief Operating Officer, JCPenney Direct Marketing Services, Credit, and Facilities Services 53 Thomas D. Hutchens.......President and Chief Operating Officer, International 58 Charles R. Lotter........Executive Vice President, Secretary and General Counsel 61 Donald A. McKay..........Executive Vice President and Chief Financial Officer 53 Francis A. Newman........Chairman of the Board, President and Chief Executive Officer of Eckerd Corporation 50 Michael W. Taxter........Senior Vice President, Director of JCPenney Stores 47
_____________ Mr. Oesterreicher was elected Chairman of the Board effective January 1997 and has served as Chief Executive Officer since 1995. He served as Vice Chairman of the Board from 1995 to 1997. From 1992 to 1995, he served as President of JCPenney Stores and Catalog. Ms. Cumming was elected President of Merchandising for JCPenney Stores and Catalog, effective March 1, 1999. Prior to that, she served as President of the Women's Apparel Division from 1996 to 1999, and from 1993 to 1996, President of the Home and Leisure Division. -6- Mr. Davis, who was elected Executive Vice President, Chief Human Resources and Administration Officer, effective April 1, 1998, served as Senior Vice President, Director of Human Resources and Administration from 1997 to 1998. From 1996 to 1997, he served as Senior Vice President and Director of Personnel and Administration. He was elected President of the Northwestern Region in 1992 and served in that capacity until 1996. Ms. Duff-Bloom was elected President of Marketing and Company Communications in February 1996. She was elected Senior Executive Vice President and served as Director of Personnel and Company Communications from January 1995 to February 1996. She was elected an Executive Vice President in 1993 and served as Director of Administration from 1993 to 1995. Mr. Evans was elected Senior Vice President, Chief Information Officer, effective November 1, 1997. Prior to that, he served as Senior Vice President, Director of Information Systems and from 1995 to 1997 he served as Senior Vice President, Director of Planning and Information Systems. He was elected a Vice President in 1987 and served as Director of Information Systems from 1987 to 1995. Mr. Fesperman was elected President and Chief Operating Officer, JCPenney Direct Marketing Services, Credit, and Facilities Services, effective December 1, 1997. Prior to that, he served as Senior Vice President, Director of Planning, Facilities, and International Development and from 1996 to 1997 he served as Senior Vice President and Director of Support Services and Subsidiary Operations. He was elected a Vice President in 1993 and served as Director of Insurance from 1991 to 1996. Mr. Lotter was elected an Executive Vice President in 1993. He was elected Senior Vice President, General Counsel and Secretary in 1987. He has also served as a director of Eckerd Corporation since December 1996. Mr. McKay was elected an Executive Vice President in 1997. He was elected Senior Vice President and Chief Financial Officer in 1996. From 1994 to 1996, he served as Vice President and Controller. He was elected Vice President and Treasurer in 1985 and served in that capacity until 1994. He has also served as a director of Eckerd Corporation since December 1996. Mr. Newman was elected Chairman of the Board of Eckerd Corporation in May 1997. He has served as Chief Executive Officer of Eckerd Corporation since February 1996. He is also President and a director of Eckerd Corporation, positions he has held since July 1993. Prior to joining Eckerd, Mr. Newman served as President, Chief Executive Officer and a director of F&M Distributors, Inc. ("F&M"), a drugstore chain, since 1986. F&M filed bankruptcy under Chapter 11 of the United States Bankruptcy Code in December 1994. Prior to joining F&M, he was the Executive Vice President of Household Merchandising, Inc., a retail firm, from 1984 to 1986 and the Senior Vice President of Merchandising for F. W. Woolworth, a -7- retail firm, from 1980 to 1984. Mr. Taxter was elected Senior Vice President, Director of JCPenney Stores, effective March 1, 1999. In 1998, he was elected Senior Vice President and served as Director of Strategic Development. In 1995, he was elected Regional President and served as President of the South and Southeastern Region from 1996 to 1998. Prior to that, he served as Director of Coordination between 1993 and 1996. PART II ------- 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 authorized 25 million shares of Preferred Stock, of which 792 thousand shares of Series B ESOP Convertible Preferred Stock were issued and outstanding at January 30, 1999. Additional information relating to the Common Stock and Preferred Stock of the Company included under the captions "Consolidated Statements of Stockholders' Equity" (page 23), "Capital Stock" (page 30), and "Quarterly Data (Unaudited)" (page 40), which appear in the Company's 1998 Annual Report to Stockholders on the pages indicated in the parenthetical references, is incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 5 of Form 10-K. 6. SELECTED FINANCIAL DATA. ----------------------- Information for the fiscal years 1994-1998 included in the "Five Year Financial Summary" on page 40 of the Company's 1998 Annual Report to Stockholders is incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 6 of Form 10-K. 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF -------------------------------------------------------------------------- OPERATIONS. ---------- The discussion and analysis included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", which appears in the Company's 1998 Annual Report to Stockholders on pages 12 through 20 thereof, is incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 7 of Form 10-K. -8- 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. ---------------------------------------------------------- The Company holds an interest rate swap with a notional principal amount of $375 million entered into in connection with the issuance of asset-backed certificates in 1990. This swap presents no material risk to the Company's results of operations. 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ------------------------------------------- The Consolidated Balance Sheets of the Company and subsidiaries as of January 30, 1999 and January 31, 1998, and the related Consolidated Statements of Income, Stockholders' Equity and Cash Flows for each of the years in the three- year period ended January 30, 1999, appearing on pages 22 through 25 of the Company's 1998 Annual Report to Stockholders, together with the Independent Auditors' Report of KPMG LLP, independent certified public accountants, appearing on page 21 of the Company's 1998 Annual Report to Stockholders, the Notes to the Consolidated Financial Statements on pages 26 through 39, and the quarterly financial highlights ("Quarterly Data (unaudited)")appearing on page 40 thereof, are incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 8 of Form 10-K. 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL ------------------------------------------------------------------------- DISCLOSURE. ---------- None. PART III* -------- 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.* -------------------------------------------------- 11. EXECUTIVE COMPENSATION.* ---------------------- 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL ---------------------------------------- OWNERS AND MANAGEMENT.* --------------------- 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.* ---------------------------------------------- ____________ * Pursuant to General Instruction G to Form 10-K, the information called for by Items 10, with respect to directors of the Company (to the extent not set forth in Part I hereof), 11, 12, and 13 is incorporated by reference to the Company's 1999 Proxy Statement, which involves the election of directors, the final copy of which the Company filed with the Securities and Exchange Commission, pursuant to Regulation 14A, on April 13, 1999. -9- 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 1998 Annual Report to Stockholders. (a)(2) Financial Statement Schedules. Schedule II (Valuation and Qualifying Accounts and Reserves) is attached on Page F-1. See Independent Auditors' Report of KPMG LLP, independent certified public accountants, appearing on page 13 of this Annual Report on Form 10-K. All other schedules have been omitted as they are inapplicable or not required under the rules, or the information has been submitted in the consolidated financial statements and related financial information included in the Company's 1998 Annual Report to Stockholders incorporated herein by reference and filed hereto as Exhibit 13. Separate financial statements are filed for J. C. Penney Funding Corporation, a wholly owned consolidated subsidiary, in its separate Annual Report on Form 10-K for the 52 weeks ended January 30, 1999, which financial statements, together with the Independent Auditors' Report of KPMG LLP thereon, are incorporated herein by reference and filed hereto as Exhibit 99(b). (a)(3) Exhibits. See separate Exhibit Index on pages G-1 through G-10. (b) Current Reports on Form 8-K. During the last quarter of the period covered by this Annual Report on Form 10-K, the Company filed its Current Report on Form 8-K (Item 5 - Other Events) dated November 23, 1998. (c) Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this form is filed as part of the separate Exhibit Index on pages G-1 through G-10 and specifically identified as such beginning on page G-5. -10- 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: April 28, 1999 -11- 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 April 28, 1999 - ---------------------- J. E. Oesterreicher Chief Executive Officer (principal executive officer); Director D. A. McKay* Executive Vice President and April 28, 1999 - ---------------------- D. A. McKay Chief Financial Officer (principal financial officer) W. J. Alcorn* Vice President and Controller April 28, 1999 - ---------------------- W. J. Alcorn (principal accounting officer) M. A. Burns* Director April 28, 1999 - ---------------------- M. A. Burns T. J. Engibous* Director April 28, 1999 - ---------------------- T. J. Engibous K. B. Foster* Director April 28, 1999 - ---------------------- K. B. Foster V. E. Jordan, Jr.* Director April 28, 1999 - ---------------------- V. E. Jordan, Jr. George Nigh* Director April 28, 1999 - ---------------------- George Nigh J. C. Pfeiffer* Director April 28, 1999 - ---------------------- J. C. Pfeiffer A. W. Richards* Director April 28, 1999 - ---------------------- A. W. Richards F. Sanchez-Loaeza* Director April 28, 1999 - ---------------------- F. Sanchez-Loaeza C. S. Sanford, Jr.* Director April 28, 1999 - ---------------------- C. S. Sanford, Jr. R. G. Turner* Director April 28, 1999 - ---------------------- R. G. Turner
*By: /s/ C. R. LOTTER ------------------ C. R. Lotter Attorney-in-fact -12- INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors of J. C. Penney Company, Inc.: Under date of February 25, 1999, we reported on the consolidated balance sheets of J. C. Penney Company, Inc. and subsidiaries as of January 30, 1999 and January 31, 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended January 30, 1999, as contained in the 1998 Annual Report to Stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the Company's Annual Report on Form 10-K for the 1998 fiscal year. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule listed in Item 14(a)(2) of the Annual Report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Dallas, Texas February 25, 1999 -13- SCHEDULE II J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (Amounts in millions) - -------------------------------------------------------------------------------- 52 Weeks 53 Weeks 52 Weeks Ended Ended Ended January 30, January 31, January 25, Description 1999 1998 1997 - -------------------------------------------------------------------------------- Reserves deducted from assets - ----------------------------- Allowance for doubtful accounts (1) Balance at beginning of period $ 105 $ 77 $ 63 Additions charged to costs and expenses 241 249 196 Deductions of write-offs, less recoveries (228) (221) (182) ------ ------ ------ Balance at end of period $ 118 $ 105 $ 77 ====== ====== ====== (1) Excludes amounts related to the Company's retained interest in JCP Master Credit Card Trust. Allowance for loan losses - JCPenney National Bank Balance at beginning of period $ - $ 51 $ 47 Additions charged to costs and expenses - 8 83 Deductions of write-offs, less recoveries - (11) (79) Reduction in reserves related to the sale of the bank receivables portfolio - (48) - ------ ------ ------ Balance at end of period $ - $ - $ 51 ====== ====== ====== F-1 EXHIBIT INDEX ------------- Exhibit ------- 3. (i) ARTICLES OF INCORPORATION Restated Certificate of Incorporation of ------------------------- the Company, as amended. (ii) BYLAWS Bylaws of Company, as amended to January 11, 1995 ------ (incorporated by reference to Exhibit 3(ii)(a) to Company's Annual Report on Form 10-K for the 52 week period ended January 28, 1995*). 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES ------------------------------------------------------------------------- (a) Indenture, dated as of October 1, 1982, between the Company and U.S. Bank Trust National Association (formerly First Trust of California, National Association) (as Successor Trustee to Bank of America National Trust and Savings Association) (incorporated by reference to Exhibit 4(a) to Company's Annual Report on Form 10-K for the 52 week period ended January 29, 1994*). (b) First Supplemental Indenture, dated as of March 15, 1983, between the Company and U.S. Bank Trust National Association (formerly First Trust of California, National Association) (as Successor Trustee to Bank of America National Trust and Savings Association)(incorporated by reference to Exhibit 4(b) to Company's Annual Report on Form 10-K for the 52 week period ended January 29, 1994*). (c) Second Supplemental Indenture, dated as of May 1, 1984, between the Company and U.S. Bank Trust National Association (formerly First Trust of California, National Association)(as Successor Trustee to Bank of America National Trust and Savings Association)(incorporated by reference to Exhibit 4(c) to Company's Annual Report on Form 10-K for the 52 week period ended January 29, 1994*). (d) Third Supplemental Indenture, dated as of March 7, 1986, between the Company and U.S. Bank Trust National Association (formerly First Trust of G-1 California, National Association) (as Successor Trustee to Bank of America National Trust and Savings Association)(incorporated by reference to Exhibit 4(d) to Company's Registration Statement on Form S-3, SEC File No. 33-3882). (e) Fourth Supplemental Indenture, dated as of June 7, 1991, between the Company and U.S. Bank Trust National Association (formerly First Trust of California, National Association) (as Successor Trustee to Bank of America National Trust and Savings Association)(incorporated by reference to Exhibit 4(e) to Registrant's Registration Statement on Form S-3, SEC File No. 33-41186). (f) Indenture, dated as of April 1, 1994, between the Company and U.S. Bank Trust National Association (formerly First Trust of California, National Association) (as Successor Trustee to Bank of America National Trust and Savings Association) (incorporated by reference to Exhibit 4(a) to Company's Registration Statement on Form S-3, SEC File No. 33- 53275). (g) Rights Agreement, dated as of March 26, 1999, by and between the Company and ChaseMellon Shareholder Services L.L.C. as Rights Agent (incorporated by reference to Exhibit 4 to Company's Current Report on Form 8-K, Date of Report - March 10, 1999*). (h) Amended and Restated 364-Day Revolving Credit Agreement dated as of December 3, 1996, among J. C. Penney Company, Inc., J. C. Penney Funding Corporation, the Lenders party thereto, Morgan Guaranty Trust Company of New York, as Agent for the Lenders, and Bank of America Illinois, Bankers Trust Company, The Chase Manhattan Bank, Citibank, N.A., Credit Suisse First Boston, and NationsBank of Texas, N.A., as Co-Agents for the Lenders (incorporated by reference to Exhibit 4(d) to J. C. Penney Funding Corporation's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997, SEC File No. 1-4947-1). (i) Amended and Restated Five-Year Revolving Credit Agreement dated as of December 3, 1996, among J. C. Penney Company, Inc., J. C. Penney Funding Corporation, the Lenders party thereto, Morgan Guaranty Trust Company of New York, as Agent for the Lenders, and Bank of America Illinois, Bankers Trust Company, The Chase Manhattan Bank, Citibank, N.A., Credit Suisse G-2 First Boston, and NationsBank of Texas, N.A., as Co-Agents for the Lenders (incorporated by reference to Exhibit 4(e) to J. C. Penney Funding Corporation's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997, SEC File No. 1-4947-1). (j) Amendment and Restatement Agreement to 364-Day Revolving Credit Agreement, dated as of November 20, 1998, among J. C. Penney Company, Inc., J. C. Penney Funding Corporation, the Lenders parties thereto, Morgan Guaranty Trust Company of New York, as Agent, Citibank, N. A., Nationsbanc Montgomery Securities LLC and The Chase Manhattan Bank, as Co-Syndication Agents, and Credit Suisse First Boston and First Union National Bank, as Managing Agents (incorporated by reference to Exhibit 4(f) to J. C. Penney Funding Corporation's Annual Report on Form 10-K for the 52 weeks ended January 30, 1999, SEC File No. 1-4947-1). (k) Amendment and Restatement Agreement to Five-Year Revolving Credit Agreement, dated as of November 21, 1997, among J. C. Penney Company, Inc., J. C. Penney Funding Corporation, the Lenders party thereto, Morgan Guaranty Trust Company of New York, as Agent, and Bank of America National Trust and Savings Association, Bankers Trust Company, The Chase Manhattan Bank, Citibank, N.A., Credit Suisse First Boston and NationsBank of Texas, N.A., as Managing Agents (incorporated by reference to Exhibit 4(g) to J. C. Penney Funding Corporation's Annual Report on Form 10-K for the 53 weeks ended January 31, 1998, SEC File No. 1-4947-1). (l) Guaranty dated as of February 17, 1997, executed by J. C. Penney Company, Inc. (incorporated by reference to Exhibit 4(c) to J. C. Penney Funding Corporation's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997, SEC File No. 1-4947-1). (m) Guaranty dated as of December 3, 1996, executed by J. C. Penney Company Inc. with respect to the Amended and Restated 364-Day and Five- Year Revolving Credit Agreements, each dated as of December 3, 1996 (incorporated by reference to Exhibit 4(m) to J. C. Penney Funding Corporation's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997, SEC File G-3 No. 1-4947-1). Other instruments evidencing long-term debt have not been filed as exhibits hereto because none of the debt authorized under any such instrument exceeds 10 percent of the total assets of the Registrant and its consolidated subsidiaries. The Registrant agrees to furnish a copy of any of its long-term debt instruments to the Securities and Exchange Commission upon request. 10. MATERIAL CONTRACTS ------------------ (i) OTHER THAN COMPENSATORY PLANS OR ARRANGEMENTS --------------------------------------------- (a) Amended and Restated Receivables Agreement dated as of January 29, 1980 between Company and J. C. Penney Funding Corporation (incorporated by reference to Exhibit 10(i)(a) to Company's Annual Report on Form 10-K for the 52 week period ended January 29, 1994*). (b) Amendment No. 1 to Amended and Restated Receivables Agreement dated as of January 25, 1983 between Company and J. C. Penney Funding Corporation (incorporated by reference to Exhibit 10(i)(b) to Company's Annual Report on Form 10-K for the 52 week period ended January 29, 1994*). (c) Loan Agreement dated as of January 28, 1986 between Company and J. C. Penney Funding Corporation (incorporated by reference to Exhibit 4 to Company's Current Report on Form 8-K, Date of Report - January 28, 1986*). (d) Amendment No. 1 to Loan Agreement dated as of January 28, 1986 between Company and J. C. Penney Funding Corporation (incorporated by reference to Exhibit 1 to Company's Current Report on Form 8-K, Date of Report - December 31, 1986*). (e) Amendment No. 2 to Loan Agreement dated as of January 28, 1986 between Company and J. C. Penney Funding Corporation (incorporated by reference to Exhibit 10(i)(e) to Company's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997*). (f) Personal Services Agreement dated as of February 12, 1997 between Company and W. R. Howell G-4 (incorporated by reference to Exhibit 10(i)(f) to Company's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997*). (ii) COMPENSATORY PLANS OR ARRANGEMENTS REQUIRED TO BE FILED AS EXHIBITS TO THIS --------------------------------------------------------------------------- REPORT PURSUANT TO ITEM 14 (C) OF THIS REPORT. --------------------------------------------- (a) J. C. Penney Company, Inc. 1989 Management Incentive Compensation Program as amended through March 27, 1990 (incorporated by reference to Exhibit 10(e) to Company's Annual Report on Form 10-K for the 52 week period ended January 27, 1990*). (b) September 1995 Amendment to J. C. Penney Company, Inc. 1989 Management Incentive Compensation Program, as amended (incorporated by reference to Exhibit 10(ii)(b)to Company's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997*). (c) Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc., as amended through April 1, 1996 (incorporated by reference to Exhibit 10(ii)(c) to Company's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997*). (d) July 1997 Amendment to Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc. (incorporated by reference to Exhibit 10(b) to Company's Quarterly Report on Form 10-Q for the 13 and 39 week periods ended October 25, 1997*). (e) December 1997 Amendment to Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc. (incorporated by reference to Exhibit 10 (ii)(e) to Company's Annual Report on Form 10-K for the 53 weeks ended January 31, 1998*) (f) March 1998 Amendment to Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc. G-5 (g) January 1999 Amendment to Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc. (h) J. C. Penney Company, Inc. Retirement Plan for Non-Associate Directors (incorporated by reference to Exhibit 10(b) to Company's Quarterly Report on Form 10-Q for the 13 week period ended April 26, 1997*). (i) J. C. Penney Company, Inc. Directors' Equity Program Tandem Restricted Stock Award/Stock Option Plan (incorporated by reference to Exhibit 10(k) to Company's Annual Report on Form 10-K for the 52 week period ended January 28, 1989*). (j) J. C. Penney Company, Inc. 1989 Equity Compensation Plan (incorporated by reference to Exhibit A to Company's definitive Proxy Statement for its Annual Meeting of Stockholders held on May 19, 1989*). (k) February 1995 Amendment to J. C. Penney Company, Inc. 1989 Equity Compensation Plan (incorporated by reference to Exhibit 10(ii)(k) to Company's Annual Report on Form 10-K for the 52 week period ended January 28, 1995*). (l) February 1996 Amendment to J. C. Penney Company, Inc. 1989 Equity Compensation Plan, as amended (incorporated by reference to Exhibit 10(ii)(k) to Company's Annual Report on Form 10-K for the 52 week period ended January 27, 1996*). (m) J. C. Penney Company, Inc. 1993 Equity Compensation Plan (incorporated by reference to Exhibit A to Company's definitive Proxy Statement for its Annual Meeting of Stockholders held on May 21, 1993*). (n) February 1995 Amendment to J. C. Penney Company, Inc. 1993 Equity Compensation Plan (incorporated by reference to Exhibit 10(ii)(l) to Company's Annual Report on Form 10-K for the 52 week period ended January 28, 1995*). (o) November 1995 Amendment to J. C. Penney Company, Inc. 1993 Equity Compensation Plan, as amended (incorporated by reference to Exhibit G-6 10(ii)(n) to Company's Annual Report on Form 10-K for the 52 week period ended January 27, 1996*). (p) J. C. Penney Company, Inc. 1993 Non-Associate Directors' Equity Plan (incorporated by reference to Exhibit B to Company's definitive Proxy Statement for its Annual Meeting of Stockholders held on May 21, 1993*). (q) February 1995 Amendment to J. C. Penney Company, Inc. 1993 Non- Associate Directors' Equity Plan (incorporated by reference to Exhibit 10(ii)(m) to Company's Annual Report on Form 10-K for the 52 week period ended January 28, 1995*). (r) J. C. Penney Company, Inc. Deferred Compensation Plan as amended through July 14, 1993 (incorporated by reference to Exhibit 10(a) to Company's Report on Form 10-Q for the 13 and 26 week periods ended July 31, 1993*). (s) J. C. Penney Company, Inc. Deferred Compensation Plan for Directors, as amended effective April 9, 1997 (incorporated by reference to Exhibit 10(a) to Company's Quarterly Report on Form 10-Q for the 13 week period ended April 26, 1997*). (t) Directors' Charitable Award Program (incorporated by reference to Exhibit 10(r) to Company's Annual Report on Form 10-K for the 52 week period ended January 27, 1990*). (u) Form of Indemnification Trust Agreement between Company and The Chase Manhattan Bank (formerly Chemical Bank) dated as of July 30, 1986, as amended (incorporated by reference to Exhibit 1 to Exhibit B to Company's definitive Proxy Statement for its Annual Meeting of Stockholders held on May 29, 1987*). (v) Form of Indemnification Agreement between Company and individual Indemnitees (incorporated by reference to Exhibit B to Company's definitive Proxy Statement for its Annual Meeting of Stockholders held on May 29, 1987*). (w) J. C. Penney Company, Inc. Benefit Restoration Plan (incorporated by reference to Exhibit G-7 10(ii)(y) to Company's Annual Report on Form 10-K for the 52 week period ended January 27, 1996*). (x) February 1996 Amendment to J. C. Penney Company, Inc. Benefit Restoration Plan (incorporated by reference to Exhibit 10(ii)(z) to Company's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997*). (y) July 1997 Amendment to J. C. Penney Company, Inc. Benefit Restoration Plan (incorporated by reference to Exhibit 10(c) to Company's Quarterly Report on Form 10-Q for the 13 and 39 week periods ended October 25, 1997*). (z) December 1997 Amendment to J. C. Penney Company, Inc. Benefit Restoration Plan (incorporated by reference to Exhibit 10(ii)(ac) to Company's Annual Report on Form 10-K for the 53 weeks ended January 31, 1998*). (aa) December 1998 Amendment of J. C. Penney Company, Inc. Benefit Restoration Plan. (ab) January 1999 Amendment to J. C. Penney Company, Inc. Benefit Restoration Plan. (ac) Supplemental Term Life Insurance Plan for Management Profit-Sharing Associates of J. C. Penney Company, Inc. (incorporated by reference to Exhibit 10(ii)(aa) to Company's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997*). (ad) January 1995 Amendment to Supplemental Term Life Insurance Plan for Management Profit-Sharing Associates of J. C. Penney Company, Inc. (incorporated by reference to Exhibit 10(ii)(ab) to Company's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997*). (ae) November 1997 Amendment to Supplemental Term Life Insurance Plan for Management Profit-Sharing Associates of J. C. Penney Company, Inc. (incorporated by reference to Exhibit 10(ii)(af) to Company's Annual Report on Form 10-K for the 53 weeks ended January 31, 1998*). (af) Employment Agreement dated as of February 4, 1996 between Eckerd Corporation and Francis A. G-8 Newman (incorporated by reference to Exhibit 10.26 to Eckerd Corporation's Annual Report on Form 10-K for the fiscal year ended February 3, 1996, SEC File No. 1-4844). (ag) Amendment No. 1, dated as of November 2, 1996, to the Employment Agreement dated as of February 4, 1996, by and between Eckerd Corporation and Francis A. Newman (incorporated by reference to Exhibit (c)(3) to Company's Schedule 14D-1 dated November 2, 1996*). (ah) J. C. Penney Company, Inc. 1997 Equity Compensation Plan (incorporated by reference to Exhibit A to Company's definitive proxy statement for its Annual Meeting of Stockholders held on May 16, 1997*). (ai) J. C. Penney Company, Inc. 1998 EVA Performance Plan (incorporated by reference to Exhibit 10(ii)(aj) to Company's Annual Report on Form 10-K for the 53 weeks ended January 31, 1998*). (aj) J. C. Penney Company, Inc. Mirror Savings Plan I and II as amended through January 1, 1999. * SEC file number 1-777 11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS ----------------------------------------------- Computation of Net Income Per Common Share. 12. STATEMENT RE: COMPUTATION OF RATIOS ----------------------------------- (a) Computation of Ratios of Available Income to Combined Fixed Charges and Preferred Stock Dividend Requirement. (b) Computation of Ratios of Available Income to Fixed Charges. 13. ANNUAL REPORT TO SECURITY HOLDERS --------------------------------- Excerpt from Company's 1998 Annual Report to Stockholders. G-9 21. SUBSIDIARIES OF THE REGISTRANT ------------------------------ List of certain subsidiaries of the Company at March 22, 1999. 23. INDEPENDENT AUDITORS' CONSENT ----------------------------- 24. POWER OF ATTORNEY ----------------- 27. FINANCIAL DATA SCHEDULE ----------------------- (a) Financial Data Schedule for the 52 week period ended January 30, 1999. (b) Restated Financial Data Schedule for the 53 week period ended January 31, 1998. (c) Restated Financial Data Schedule for the 52 week period ended January 25, 1997. 99. ADDITIONAL EXHIBITS ------------------- (a) Item 1 of J. C. Penney Funding Corporation Annual Report on Form 10-K for the 52 weeks ended January 30, 1999 (incorporated by reference to J. C. Penney Funding Corporation Annual Report on Form 10-K for the 52 weeks ended January 30, 1999 filed April 23, 1999, SEC File No. 1-4947-1). (b) Excerpt from J. C. Penney Funding Corporation Annual Report. G-10 EX-3.(I) 2 RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3(i) RESTATED CERTIFICATE OF INCORPORATION OF J. C. PENNEY COMPANY, INC. The present name of the corporation is J. C. Penney Company, Inc. (the "Company"). The Company was incorporated under the name of J. C. Penney Company by the filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware on December 15, 1924. This Restated Certificate of Incorporation of the Company restates and integrates but does not further amend the provisions of the Company's Certificate of Incorporation as heretofore amended and supplemented, and there is no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation. This Restated Certificate of Incorporation was duly adopted by the Board of Directors of the Company in accordance with the provisions of Section 245 of the General Corporation Law of the State of Delaware and hereby restates and integrates the provisions of the Company's Certificate of Incorporation, as heretofore amended and restated, to read in its entirety as follows: First: The name of the corporation (which is herein referred to as the Company) shall be J. C. Penney Company, Inc. Second: The address of the Company's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington, County of New Castle Delaware 19801. The name of the Company's registered agent at such address is The Corporation Trust Company. Third: The purpose of the Company is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. Fourth: The total number of shares of all classes of stock which the Company shall have authority to issue is 1,275,000,000 shares, of which 25,000,000 shares shall be shares of Preferred Stock without par value (hereinafter called Preferred Stock) and 1,250,000,000 shares shall be shares of Common Stock of 50c par value (hereinafter called Common Stock). Authority is hereby expressly granted to the Board of Directors from time to time to issue the Preferred Stock as Preferred Stock of one or more series and in connection with the creation of any such series to fix by the resolution or 1 resolutions providing for the issue of shares thereof the designation, powers, preferences, and relative, participating, optional, or other special rights of such series, and the qualifications, limitations, or restrictions thereof. Such authority of the Board of Directors with respect to each such series shall include, but not be limited to, the determination of the following: (a) the distinctive designation of, and the number of shares comprising, such series, which number may be increased (except where otherwise provided by the Board of Directors in creating such series) or decreased (but not below the number of shares thereof then outstanding) from time to time by like action of the Board of Directors; (b) the dividend rate or amount for such series, the conditions and dates upon which such dividends shall be payable, the relation which such dividends shall bear to the dividends payable on any other class or classes or any other series of any class or classes of stock, and whether such dividends shall be cumulative, and if so, from which date or dates for such series; (c) whether or not the shares of such series shall be subject to redemption by the Company and the times, prices, and other terms and conditions of such redemption; (d) whether or not the shares of such series shall be subject to the operation of a sinking fund or purchase fund to be applied to the purchase or redemption of such shares and if such a fund be established, the amount thereof and the terms and provisions relative to the application thereof; (e) whether or not the shares of such series shall be convertible into or exchangeable for shares of any other class or classes, or of any other series of any class or classes, of stock of the Company and if provision be made for conversion or exchange, the times, prices, rates, adjustments, and other terms and conditions of such conversion or exchange; (f) whether or not the shares of such series shall have voting rights, in addition to the voting rights provided by law, and if they are to have such additional voting rights, the extent thereof; (g) the rights of the shares of such series in the event of any liquidation, dissolution, or winding up of the Company or upon any 2 distribution of its assets; and (h) any other powers, preferences, and relative, participating, optional, or other special rights of the shares of such series, and qualifications, limitations, or restrictions thereof, to the full extent now or hereafter permitted by law and not inconsistent with the provisions hereof. All shares of any one series of Preferred Stock shall be identical in all respects except as to the dates from which dividends thereon shall be cumulative. All series of the Preferred Stock shall rank equally and be identical in all respects except as otherwise provided in the resolution or resolutions providing for the issue of any series of Preferred Stock. Whenever dividends upon the Preferred Stock at the time outstanding, to the extent of the preference to which such stock is entitled, shall have been paid in full or declared and set apart for payment for all past dividend periods, and after the provisions for any sinking or purchase fund or funds for any series of Preferred Stock shall have been complied with, the Board of Directors may declare and pay dividends on the Common Stock, payable in cash, stock, or otherwise, and the holders of shares of Preferred Stock shall not be entitled to share therein, subject to the provisions of the resolution or resolutions creating any series of Preferred Stock. In the event of any liquidation, dissolution, or winding up of the Company or upon the distribution of the assets of the Company, all assets and funds of the Company remaining, after the payment to the holders of the Preferred Stock of the full preferential amounts to which they shall be entitled as provided in the resolution or resolutions creating any series thereof, shall be divided and distributed among the holders of the Common Stock ratably, except as may otherwise be provided in any such resolution or resolutions. Neither the merger or consolidation of the Company with another corporation nor the sale or lease of all or substantially all the assets of the Company shall be deemed to be a liquidation, dissolution, or winding up of the Company or a distribution of its assets. Except as otherwise required by law or provided by a resolution or resolutions of the Board of Directors creating any series of Preferred Stock, the holders of Common Stock shall have the exclusive power to vote and shall have one vote in respect of each share of such stock held and the holders of Preferred Stock shall have no voting power whatsoever. Except as otherwise provided in such a resolution or resolutions, the authorized shares of any class or classes may be increased or decreased by the affirmative vote of the holders of a majority of the outstanding shares of stock of the Company entitled to vote. 3 Pursuant to the authority conferred by this Article Fourth upon the Board of Directors of the Company, the Board of Directors created a series of 1,600,000 shares of Preferred Stock designated as Series A Junior Participating Preferred Stock by filing a Certificate of Designations of the Company with the Secretary of State of the State of Delaware (the "Secretary of State") on January 29, 1986, as amended by the Amended Certificate of Designations of the Company filed with the Secretary of State on February 15, 1990, and the voting powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the Company's Series A Junior Participating Preferred Stock are set forth in Appendix A hereto and are incorporated herein by reference. Pursuant to the authority conferred by this Article Fourth upon the Board of Directors of the Company, the Board of Directors created a series of 1,400,000 shares of Preferred Stock designated as Series B ESOP Convertible Preferred Stock by filing a Certificate of Designations of the Company with the Secretary of State on August 30, 1988, and the voting powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the Company's Series B ESOP Convertible Preferred Stock are set forth in Appendix B hereto and are incorporated herein by reference. Fifth: In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized and empowered: (a) to make, alter, and repeal the Bylaws of the Company, subject to the power of the stockholders of the Company to alter or repeal any Bylaw made by the Board of Directors; (b) subject to the laws of the State of Delaware, from time to time to sell, lease, or otherwise dispose of any part or parts of the properties of the Company and to cease to conduct the business connected therewith or again to resume the same, as it may deem best; and (c) in addition to the powers and authorities hereinbefore and by the laws of the State of Delaware conferred upon the Board of Directors, to exercise all such powers and to do all such acts and things as may be exercised or done by the Company; subject, nevertheless, to the provisions of said laws, of the Certificate of Incorporation as from 4 time to time amended of the Company, and of its Bylaws. Sixth: (a) Except as otherwise provided for or fixed by or pursuant to the provisions of Article Fourth of this Certificate of Incorporation relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect additional directors under specified circumstances, the number of directors of the Company shall be fixed from time to time by or pursuant to the Bylaws of the Company. The directors, other than those who may be elected pursuant to the aforesaid provisions of said Article Fourth, shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, as shall be provided in the manner specified in the Bylaws of the Company, the first such class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1986, the second such class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1987, and the third such class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1988, with each director in each class to hold office until his or her successor is elected and qualified. At each annual meeting of stockholders beginning with the annual meeting of stockholders to be held in 1986, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders to be held in the third year following the year of their election, with each director in each such class to hold office until his or her successor is elected and qualified. (b) Advance notice of stockholder nominations for the election of directors shall be given in the manner provided by the Bylaws of the Company at the time in effect. (c) Except as otherwise provided for or fixed by or pursuant to the provisions of Article Fourth of this Certificate of Incorporation relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect additional directors under specified circumstances, newly-created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal, or other cause shall be filled only by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 5 (d) Except as otherwise provided for or fixed by or pursuant to the provisions of Article Fourth of this Certificate of Incorporation relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect additional directors under specified circumstances, any director may be removed from office, with or without cause, but only by the affirmative vote of at least 80% of the combined voting power of the then-outstanding shares of all classes and series of stock of the Company entitled to vote generally in the election of directors ("Voting Stock"), voting together as a single class (it being understood that for the purposes of this Article Sixth, each share of the Voting Stock shall have the number of votes granted to it in accordance with Article Fourth of this Certificate of Incorporation). (e) Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of at least 80% of the combined voting power of the Voting Stock, voting together as a single class, shall be required to alter, amend, or repeal, or adopt any provision inconsistent with, this Article Sixth. Seventh: Section 1. The vote of stockholders of the Company required to approve any Business Combination shall be as set forth in this Article Seventh. The term "Business Combination", as well as other capitalized terms used in this Article Seventh, shall have the respective meanings ascribed to them in Section 3 of this Article Seventh. Irrespective of any affirmative vote required by law or by this Certificate of Incorporation, and except as otherwise expressly provided in Section 2 of this Article Seventh: (i) any merger or consolidation of the Company or any Subsidiary with (a) any Interested Stockholder or (b) any other Person (whether or not itself an Interested Stockholder or an Affiliate of an Interested Stockholder) which is, or after such merger or consolidation would be, an Interested Stockholder or an Affiliate of an Interested Stockholder, (ii) any sale, lease, exchange, mortgage, pledge, transfer, or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the Company or any Subsidiary having an aggregate Fair Market Value of $100 million or more, 6 (iii) any sale, lease, exchange, mortgage, pledge, transfer, or other disposition (in one transaction or a series of transactions) to the Company or any Subsidiary of any assets of any Interested Stockholder or any Affiliate of any Interested Stockholder having an aggregate Fair Market Value of $100 million or more, (iv) any issuance or transfer by the Company or any Subsidiary (in one transaction or a series of transactions) of any securities of the Company or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities, or other property (or a combination thereof) having an aggregate Fair Market Value of $100 million or more, (v) the adoption of any plan or proposal for the liquidation or dissolution of the Company proposed by or on behalf of any Interested Stockholder or any Affiliate of any Interested Stockholder, or (vi) any reclassification of securities (including any reverse stock split), or recapitalization of the Company, or any merger or consolidation of the Company with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder), which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity, or securities convertible into any equity, securities of the Company or any Subsidiary, as the case may be, which is, directly or indirectly, owned by any Interested Stockholder or any Affiliate of any Interested Stockholder, shall require the affirmative vote of at least 80% of the combined voting power of the then-outstanding shares of all classes and series of stock of the Company entitled to vote generally in the election of directors ("Voting Stock"), voting together as a single class (it being understood that for the purposes of this Article Seventh, each share of Voting Stock shall have the number of votes granted to it in accordance with Article Fourth of this Certificate of Incorporation). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may otherwise be applicable, by law or in any agreement with any national securities exchange or otherwise. Section 2. Any Business Combination which meets all the conditions specified in either paragraph A or paragraph B below shall not be subject to the provisions of Section 1 of this Article Seventh and shall require only such affirmative 7 vote as is required by law and any other provision of this Certificate of Incorporation: A. the Business Combination shall have been approved by a majority of the Disinterested Directors; - or - B. all the following conditions with respect to such Business Combination shall have been met: (i) the aggregate amount of cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Stock in such Business Combination, shall be at least equal in value to the higher of the following: (a) if applicable, the highest per share price (including any brokerage commissions, transfer taxes, soliciting dealers' fees, and option costs) paid by the Interested Stockholder (before or after becoming an Interested Stockholder), or any Affiliate or Associate thereof, in acquiring Beneficial Ownership of any shares of Common Stock (1) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination ("Announcement Date") or (2) in the transaction in which it became an Interested Stockholder, whichever is higher; or (b) the Fair Market Value per share of Common Stock of the Company (1) on the Announcement Date, or (2) on the date on which the Interested Stockholder became an Interested Stockholder ("Determination Date"), whichever is higher; (ii) the aggregate amount of cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any class or series of outstanding Voting Stock other than Common Stock shall be at least equal to the highest of the following (it being intended that the requirements of this paragraph B(ii) of this Section 2 of Article Seventh shall be required to be met with respect to every class or series, as the case may be, of outstanding Voting Stock, whether or not the Interested Stockholder has previously acquired any shares of such class or series of Voting Stock): (a) if applicable, the highest per share price (including 8 any brokerage commissions, transfer taxes, soliciting dealers' fees, and option costs) paid by the Interested Stockholder (before or after becoming an Interested Stockholder) for any shares of such class or series of Voting Stock acquired by it (1) within the two-year period immediately prior to the Announcement Date or (2) in the transaction in which it became an Interested Stockholder, whichever is higher; (b) if applicable, the highest preferential amount per share to which the holders of shares of such class or series, as the case may be, of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Company; or (c) the Fair Market Value per share of such class or series, as the case may be, of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher; (iii) the price determined in accordance with paragraphs B(i) and B(ii) of this Section 2 of Article Seventh shall be subject to appropriate adjustment in the event of any stock dividend, stock split, combination of shares, or similar event; (iv) the consideration to be received by the holders of a specified class or series of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as that which the Interested Stockholder has previously paid for shares of such class or series of Voting Stock; if the Interested Stockholder had paid for shares of any class or series of Voting Stock with varying forms of consideration, the form of consideration for such class or series of Voting Stock shall, at the option of the Interested Stockholder, be either cash or the form used to acquire the largest number of shares of such class or series of Voting Stock previously acquired by it; (v) after such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: (a) except as approved by a majority of the Disinterested Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on the outstanding Preferred Stock; (b) there shall have been (i) no reduction in the annual rate of dividends payable or last paid, as the case may be, on the Common Stock (except as necessary to reflect any subdivision of such Common Stock) except as approved by a majority of the Disinterested Directors and (ii) an increase in the annual rate of dividends last paid on the Common Stock, as necessary to reflect any reclassification (including any reverse stock 9 split), recapitalization, reorganization, or any similar transaction which has the effect of reducing the number of outstanding shares of such Common Stock, unless the failure so to increase such annual rate shall have been approved by a majority of the Disinterested Directors; and (c) such Interested Stockholder shall not have acquired Beneficial Ownership of any additional shares of Voting Stock, except as part of the transaction which resulted in such Interested Stockholder becoming an Interested Stockholder; (vi) after such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges, or other financial assistance or any tax credits or other tax advantages provided by, or as a result of its equity position in, the Company, whether in anticipation of or in connection with such Business Combination or otherwise; and (vii) a proxy statement or information statement describing the proposed Business Combination (and including the views of the Disinterested Directors, if requested by the Disinterested Directors, and of an independent investment banker, if any, selected by such Disinterested Directors with respect to the proposed Business Combination) and complying with the disclosure and other requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such requirements of such Act, rules, or regulations) shall be mailed at least 30 days prior to the consummation of such Business Combination (whether or not such proxy statement or information statement is required to be mailed pursuant to such Act or subsequent provisions) to stockholders of the Company. Section 3. For purposes of this Article Seventh: __. A. An "Affiliate" of, or a Person "Affiliated" with, a specified Person, shall mean a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified. B. "Announcement Date" shall have the meaning set forth in paragraph B(i)(a) of Section 2 of this Article Seventh. C. The term "Associate" used to indicate a relationship with any Person shall mean (1) any corporation or organization (other than the Company or any Subsidiary), of which such Person is an officer or partner or is, directly or indirectly, the Beneficial Owner of 10% or more of any class of equity securities, (2) any trust or other estate in which such Person has a substantial beneficial interest or 10 as to which such Person serves as a trustee or in a similar fiduciary capacity, and (3) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person or who is a director or officer of the Company or any Subsidiary. D. A Person shall be a "Beneficial Owner" of any Voting Stock: (i) which such Person or any of its Affiliates or Associates owns, directly or indirectly; (ii) which such Person or any of its Affiliates or Associates has (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement, or understanding or upon the exercise of conversion rights, exchange rights, warrants, or options, or otherwise, or (b) the right to vote (whether or not irrevocable) pursuant to any agreement, arrangement, or understanding; or (iii) which is Beneficially Owned, directly or indirectly, by another Person with which such Person or any of its Affiliates or Associates has any agreement, arrangement, or understanding for the purpose of acquiring, holding, voting, or disposing of any shares of Voting Stock, and any Voting Stock of which a Person shall be the Beneficial Owner shall be "Beneficially Owned" by, or be under the "Beneficial Ownership" of, such Person. E. "Business Combination" shall mean any transaction which is referred to in any one or more of clauses (i) through (vi) of Section 1 of this Article Seventh. F. In the event of any Business Combination in which the Company survives, the phrase "consideration other than cash to be received" as used in paragraphs B(i) and (ii) of Section 2 of this Article Seventh shall include shares of Common Stock and shares of any other class or series of outstanding Voting Stock retained by the holders of such shares, or both. G. "Determination Date" shall have the meaning set forth in paragraph B(i)(b) of Section 2 of this Article Seventh. H. "Disinterested Director" shall mean any member of the Board of Directors who is not an Affiliate, an Associate, or a nominee of the Interested 11 Stockholder and who was a member of the Board of Directors prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Disinterested Director who is not an Affiliate or Associate of the Interested Stockholder and is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board of Directors. I. "Fair Market Value" shall mean: (i) in the case of stock, the highest closing sale price of a share of such stock during the 30 calendar day period immediately preceding the date in question on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such stock is not quoted on such Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30 calendar day period immediately preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Disinterested Directors; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the Disinterested Directors. J. "Interested Stockholder" shall mean any Person (other than the Company, any Subsidiary, or any employee benefit plan of the Company or any Subsidiary) who or which: (i) is the Beneficial Owner, directly or indirectly, of at least 10% of the Voting Stock; (ii) is an Affiliate of the Company and at any time within the two-year period immediately prior to the date in question was the Beneficial Owner, directly or indirectly, of at least 10% of the Voting Stock; or (iii) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question Beneficially Owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933, as amended. 12 For purposes of determining whether a person is an Interested Stockholder, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of paragraph D of this Section 3, but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement, or understanding or upon exercise of conversion rights, warrants, or options, or otherwise. K. "Person" shall mean any individual, firm, trust, partnership, association, corporation, or other entity. L. "Subsidiary" shall mean any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Company. M. "Voting Stock" shall have the meaning set forth in Section 1 of this Article Seventh. Section 4. A majority of the Disinterested Directors shall have the power and duty to determine for the purposes of this Article Seventh, on the basis of information known to them after reasonable inquiry, (A) whether a person is an Interested Stockholder, (B) the number of shares of Voting Stock beneficially owned by any person, (C) whether a Person is an Affiliate or Associate of another, and (D) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Company or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $100 million or more. A majority of the Disinterested Directors shall have the further power to interpret all the terms and provisions of this Article Seventh. Section 5. Nothing contained in this Article Seventh shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. Section 6. Notwithstanding any other provisions of this Certificate of Incorporation or the Bylaws (and notwithstanding the fact that a lesser percentage may otherwise be specified by law, this Certificate of Incorporation, or the Bylaws), the affirmative vote of at least 80% of the Voting Stock, voting together as a single class (it being understood that for the purposes of this Article Seventh, each share of the Voting Stock shall have the number of votes granted to it in accordance with Article Fourth of this Certificate of Incorporation), shall be required to alter, amend, or repeal, or adopt any provisions inconsistent with, this Article Seventh. Eighth: Any action required or permitted to be taken by the holders of the Voting Stock must be effected at a duly called annual or special meeting of such 13 holders and may not be effected by any consent in writing by such holders. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of at least 80% of the combined voting power of the then-outstanding shares of all classes and series of stock of the Company entitled to vote generally in the election of directors ("Voting Stock"), voting together as a single class (it being understood that for the purposes of this Article Eighth, each share of the Voting Stock shall have the number of votes granted to it in accordance with Article Fourth of this Certificate of Incorporation), shall be required to alter, amend, or repeal, or adopt any provisions inconsistent with, this Article Eighth. Ninth: The Board of Directors shall have the power to make, alter, amend, or repeal, or adopt any provision inconsistent with, the Bylaws (except insofar as the Bylaws adopted by the stockholders shall otherwise provide). Any Bylaws made by the directors under the powers conferred hereby may be altered, amended, or repealed, and any provisions inconsistent therewith may be adopted, by the directors or by the stockholders. Notwithstanding the foregoing and anything contained in this Certificate of Incorporation to the contrary, Section 2 of Article II, and Sections 3, 12, 13, and 15 of Article III of the Bylaws, all as in effect simultaneously with the effectiveness of this Article, shall not be altered, amended, or repealed, and no provision inconsistent therewith shall be adopted, without the affirmative vote of at least 80% of the combined voting power of the then-outstanding shares of all classes and series of stock of the Company entitled to vote generally in the election of directors ("Voting Stock"), voting together as a single class (it being understood that for the purposes of this Article Ninth, each share of the Voting Stock shall have the number of votes granted to it in accordance with Article Fourth of this Certificate of Incorporation). Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of at least 80% of the Voting Stock, voting together as a single class, shall be required to alter, amend, or repeal, or adopt any provision inconsistent with, this Article Ninth. Tenth: A director of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is hereafter amended to permit further limitation on or elimination of the personal liability of the Company's directors for breach of fiduciary duty, then a director of the Company shall be exempt from such liability for any such breach to the full extent permitted by the Delaware General Corporation Law as so amended from time to time. Any repeal or modification of the foregoing provisions of this 14 Article Tenth, or the adoption of any provision inconsistent herewith, shall not adversely affect any right or protection of a director of the Company hereunder in respect of any act or omission of such director occurring prior to such repeal, modification, or adoption of an inconsistent provision. IN WITNESS WHEREOF, the Company has caused this Restated Certificate of Incorporation to be signed in its name by its Chairman of the Board this ____ day of _______________, 1996. J. C. PENNEY COMPANY, INC. By: ---------------------------- William R. Howell Chairman of the Board 15 EXHIBIT A --------- SECOND AMENDED CERTIFICATE OF DESIGNATIONS OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK OF J. C. PENNEY COMPANY, INC. Pursuant to Section 151 of the Delaware General Corporation Law J. C. Penney Company, Inc., a company organized and existing under the laws of the State of Delaware (the "Company"), DOES HEREBY CERTIFY: 1. That by resolution of the Board of Directors of the Company dated January 28, 1986, and by a Certificate of Designations filed in the office of the Secretary of State of Delaware on January 29, 1986, the Company authorized the issuance of a series of 1,600,000 shares of Series A Junior Participating Preferred Stock of the Company (the "Series A Preferred Stock") and established the voting powers, designations, preferences and relative, participating and other rights, and the qualifications, limitations or restrictions thereof. 2. That an Amended Certificate of Designation of the Series A Preferred Stock was filed with the Secretary of State of Delaware on February 15, 1990. A-1 3. That as of the date hereof no shares of such Series A Preferred Stock are outstanding and no shares of such Series A Preferred Stock have been issued. 4. That pursuant to authority conferred on the Board of Directors of the Company by its Restated Certificate of Incorporation and the provisions of Section 151(g) of the General Corporation Law of the State of Delaware, the Board of Directors on March 10, 1999 adopted the following resolution amending in their entireties the voting powers, preferences, and relative, participating, optional or other special rights of the shares of the Series A Preferred Stock, and the qualifications, limitations or restrictions thereof effective upon the redemption of the rights (the "1990 Rights") issued pursuant to the Rights Agreement between the Company and ChaseMellon Shareholder Services L.L.C., as successor Rights Agent, dated February 14, 1990. RESOLVED, that effective upon the redemption of the 1990 Rights and pursuant to the authority conferred upon the Board of Directors of the Company by its Restated Certificate of Incorporation and by the provisions of Section 151(g) of the General Corporation Law of the State of Delaware, the voting powers, preferences and relative participating, optional or other special rights of the Series A Junior Preferred Stock of the Company, and the qualifications, limitations or restrictions thereof, be, and the same hereby are, amended in their entireties to be as follows: RESOLVED, that pursuant to the authority vested in the Board of Directors of the Company in accordance with the provisions of its Restated Certificate of Incorporation, a series of Preferred Stock of the Company be, and hereby is, created and that the designation and amount thereof and the voting powers, preferences and relative, A-2 participating, optional or other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: Section 1. Designation and Amount. The shares of such series shall be designated "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting such series shall be 1,600,000. Section 2. Dividends and Distributions. (A) Subject to the provisions for adjustment hereinafter set forth, the holders of shares of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, (i) cash dividends in an amount per share (rounded to the nearest cent) equal to 1,000 times the aggregate per share amount of all cash dividends declared or paid on the Common Stock, 50c par value per share, of the Company (the "Common Stock") and (ii) a preferential cash dividend ("Preferential Dividend"), if any, on the first day of February, May, August and November of each year (each a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount equal to $50.00 per share of Series A Preferred Stock less the per share amount of all cash dividends declared on the Series A Preferred Stock pursuant to clause (i) of this sentence since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Company shall, at any time after the issuance of any share or fraction of a share of Series A Preferred Stock, make any distribution on the shares of Common Stock of the Company, whether by way of a dividend or a reclassification of stock, a recapitalization, reorganization or partial liquidation of the Company or otherwise, which A-3 is payable in cash or any debt security, debt instrument, real or personal property or any other property (other than cash dividends subject to the immediately preceding sentence and other than a distribution of shares of Common Stock or other capital stock of the Company and other than a distribution of rights or warrants to acquire any such share, including any debt security convertible into or exchangeable for any such share), at a price less than the Current Market Price of such share, then, and in each such event the Company shall simultaneously pay on each then outstanding share of Series A Preferred Stock of the Company a distribution, in like kind, of 1,000 times such distribution paid on a share of Common Stock (subject to the provisions for adjustment hereinafter set forth). The dividends and distributions on the Series A Preferred Stock to which holders thereof are entitled pursuant to clause (i) of the first sentence of this paragraph and the second sentence of this paragraph are hereinafter referred to as "Participating Dividends," and the multiple of such cash and noncash dividends on the Common Stock applicable to the determination of the Participating Dividends, which shall be 1,000 initially but shall be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Dividend Multiple". In the event the Company shall at any time after March 26, 1999 (the "Effective Date") declare or pay any dividend or make any distribution on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, or issue any of its capital stock in a reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), then in each such case the Dividend Multiple thereafter applicable to the determination of the amount of Participating Dividends which holders of shares of A-4 Series A Preferred Stock shall be entitled to receive shall be the Dividend Multiple applicable immediately prior to such event multiplied by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided for or fixed by or pursuant to the provisions of Article Fourth of the Restated Certificate of Incorporation of the Company relating to the rights of holders of any class or series of stock having a preference over the Common Stock as to dividends, the Company shall declare each Participating Dividend at the same time it declares any cash or noncash dividend or distribution on the Common Stock in respect of which a Participating Dividend is required to be paid. No cash or noncash dividend or distribution on the Common Stock in respect of which a Participating Dividend is required shall be paid or set aside for payment on the Common Stock unless a Participating Dividend in respect of such dividend or distribution on the Common Stock shall be simultaneously paid or set aside for payment on the Series A Preferred Stock. (C) Preferential Dividends shall begin to accumulate on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issuance of any shares of Series A Preferred Stock. Accumulated but unpaid Preferential Dividends shall cumulate but shall not bear interest. Preferential Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accumulated and payable on such shares shall be allocated pro rata on a share- by-share basis among all such shares at the time outstanding. Section 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: A-5 (A) Subject to the provisions for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Company. The number of votes which a holder of Series A Preferred Stock is entitled to cast, as the same may be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Vote Multiple." In the event the Company shall at any time after the Effective Date declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, or issue any of its capital stock in a reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation, then in each such case the Vote Multiple thereafter applicable to the determination of the number of votes per share to which holders of shares of Series A Preferred Stock shall be entitled after such event shall be the Vote Multiple immediately prior to such event multiplied by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in the Restated Certificate of Incorporation, in any resolution or resolutions of the Board of Directors of the Company providing for the issue of any other series of Preferred Stock or by law, the holders of shares of Series A Preferred Stock, the holders of shares of Common Stock and the holders of shares of any other class or series of capital stock of the Company entitled to vote A-6 generally for the election of directors shall vote together as one class on all matters submitted to a vote of stockholders of the Company. (C) In the event that the Preferential Dividends accrued on the Series A Preferred Stock for four or more consecutive quarterly periods shall not have been declared and paid or set apart for payment, the holders of record of the Series A Preferred Stock, voting together with the holders of record of any other series of Preferred Stock of the Company which shall then have the right, expressly granted by the Restated Certificate of Incorporation of the Company or in any resolution or resolutions of the Board of Directors of the Company providing for the issue of such shares of Preferred Stock, to elect directors upon such a default in the payment of dividends by the Company shall have the right, at the next meeting of stockholders called for the election of directors, voting together as a class, to elect two members to the Board of Directors, which directors shall be in addition to the number provided for pursuant to the Company's By laws prior to such event, to serve until the next Annual Meeting and until their successors are elected and qualified or their earlier resignation, removal or incapacity or until such earlier time as all accrued and unpaid Preferential Dividends upon the outstanding shares of Series A Preferred Stock shall have been paid (or set aside for payment) in full. The holders of shares of Series A Preferred Stock shall continue to have the right to elect directors as provided by the immediately preceding sentence until all accrued and unpaid Preferential Dividends upon the outstanding shares of Series A Preferred Stock shall have been paid (or set aside for payment) in full. Such directors may be removed and replaced by such stockholders, and A-7 vacancies in such directorships may be filled only by such stockholders (or by the remaining director elected by such stockholders, if there be one) in the manner permitted by law. Subject to the foregoing, any directors elected pursuant to this paragraph 3(C) shall be elected annually and shall not constitute members of any Class of directors as contemplated by Article Sixth of the Company's Restated Certificate of Incorporation. (D) Except as otherwise required by law or set forth herein, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote as set forth herein) for the taking of any corporate action. Section 4. Certain Restrictions. (A) Whenever Preferential Dividends or Participating Dividends are in arrears or the Company shall be in default in payment thereof, thereafter and until all accrued and unpaid Preferential Dividends and Participating Dividends, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid or set aside for payment in full, and in addition to any and all other rights which any holder of shares of Series A Preferred Stock may have in such circumstances, the Company shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration, any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends or make any other distributions on any shares of stock ranking on a parity as to dividends with the Series A Preferred A-8 Stock, unless dividends are paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) except as permitted by subparagraph (iv) of this paragraph (A), redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, provided that the Company may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Company ranking junior (both as to dividends and upon liquidation, dissolution or winding up) to the Series A Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock (either as to dividends or upon liquidation, dissolution or winding up), except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. A-9 (B) The Company shall not permit any subsidiary of the Company to purchase or otherwise acquire for consideration any shares of stock of the Company ranking junior to the Series A Preferred Stock unless the Company could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. (C) The Company shall not issue any shares of Series A Preferred Stock except upon exercise of Rights issued pursuant to that certain Rights Agreement dated as of March 26, 1999 between the Company and ChaseMellon Shareholder Services L.L.C., as Rights Agent, a copy of which is on file with the Secretary of the Company at the principal executive office of the Company and shall be made available to holders of record of Common Stock or Series A Preferred Stock without charge upon written request therefor addressed to the Secretary of the Company. Notwithstanding the foregoing sentence, nothing contained in the provisions hereof shall prohibit or restrict the Company from issuing for any purpose any series of Preferred Stock with rights and privileges similar to, different from, or greater than, those of the Series A Preferred Stock. Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares upon their retirement and cancellation shall become authorized but unissued shares of Preferred Stock, without designation as to series, and such shares may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors. Section 6. Liquidation, Dissolution or Winding Up. Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, no A-10 distribution shall be made (i) to the holders of shares of stock ranking junior to the Series A Preferred Stock (either as to dividends or upon liquidation, dissolution or winding up) unless the holders of shares of Series A Preferred Stock shall have received, subject to adjustment as hereinafter provided, the greater of (A) $1,000 ($1.00 per one one-thousandth of a share) plus an amount equal to all accumulated and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, and (B) the amount equal to 1,000 times the aggregate amount to be distributed per share to holders of Common Stock, as the same may be adjusted as hereinafter provided, or (ii) to the holders of stock ranking on a parity upon liquidation, dissolution or winding up with the Series A Preferred Stock, unless simultaneously therewith distributions are made ratably on the Series A Preferred Stock and all other shares of such parity stock in proportion to the total amounts to which the holders of shares of Series A Preferred Stock are entitled under clause (i)(A) of this sentence and to which the holders of such parity shares are entitled, in each case upon such liquidation, dissolution or winding up. The amount to which holders of Series A Preferred Stock shall be entitled upon liquidation, dissolution or winding up of the Company pursuant to clause (i)(B) of the foregoing sentence is hereinafter referred to as the "Participating Liquidation Amount," and the multiple of the amount to be distributed to holders of shares of Common Stock upon the liquidation, dissolution or winding up of the Company applicable pursuant to said clause to the determination of the Participating Liquidation Amount, which shall be 1,000 but may be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Liquidation Multiple." In this event the Company shall at any time after the Effective Date declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock A-11 into a greater or lesser number of shares of Common Stock, or issue any of its capital stock in a reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), then in each such case the Liquidation Multiple thereafter applicable to the determination of the Participating Liquidation Amount to which holders of Series A Preferred Stock shall be entitled after such event shall be the Liquidation Multiple applicable immediately prior to such event multiplied by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Certain Reclassifications and Other Events. (A) In the event that holders of shares of Common Stock receive after the Effective Date, in respect of their shares of Common Stock any share of capital stock of the Company (other than any share of Common Stock of the Company), whether by way of reclassification, recapitalization, reorganization, dividend or other distribution or otherwise ("Transaction"), then in each such event the dividend rights, voting rights and rights upon the liquidation, dissolution or winding up of the Company of the shares of Series A Preferred Stock shall be adjusted so that after such event the holders of Series A Preferred Stock shall be entitled, in respect of each share of Series A Preferred Stock held, in addition to such rights in respect thereof to which such holder was entitled immediately prior to such adjustment, to (i) such additional dividends as equal the Dividend Multiple in effect immediately prior to such Transaction multiplied by the additional dividends which the holder of a share of Common Stock shall be entitled to receive by virtue of the receipt in the Transaction of such capital stock, (ii) such additional voting rights as equal the Vote A-12 Multiple in effect immediately prior to such Transaction multiplied by the additional voting rights which the holder of a share of Common Stock shall be entitled to receive by virtue of the receipt in the Transaction of such capital stock and (iii) such additional distributions upon liquidation, dissolution or winding up of the Company as equal the Liquidation Multiple in effect immediately prior to such Transaction multiplied by the additional amount which the holder of a share of Common Stock shall be entitled to receive upon liquidation, dissolution or winding up of the Company by virtue of the receipt in the Transaction of such capital stock, as the case may be, all as provided by the terms of such capital stock. (B) In the event that holders of shares of Common Stock receive after the Effective Date, in respect of their shares of Common Stock any right or warrant to purchase Common Stock (including as such a right, for all purposes of this paragraph, any security convertible into or exchangeable for Common Stock) at a purchase price per share less than the Current Market Price (as hereinafter defined) of a share of Common Stock on the date of issuance of such right or warrant, then in each such event the dividend rights, voting rights and rights upon the liquidation, dissolution or winding up of the Company of the shares of Series A Preferred Stock shall each be adjusted so that after such event the Dividend Multiple, the Vote Multiple and the Liquidation Multiple shall each be the product of the Dividend Multiple, the Vote Multiple and the Liquidation Multiple, as the case may be, in effect immediately prior to such event multiplied by a fraction the numerator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the maximum number of shares of Common Stock which could be acquired upon exercise in full of all such rights or warrants and the denominator of which shall be the number of shares of Common Stock A-13 outstanding immediately before such issuance of rights or warrants plus the number of shares of Common Stock which could be purchased, at the Current Market Price of the Common Stock at the time of such issuance, by the maximum aggregate consideration payable upon exercise in full of all such rights or warrants. (C) In the event that holders of shares of Common Stock receive after the Effective Date in respect of their shares of Common Stock any right or warrant to purchase capital stock of the Company (other than shares of Common Stock), including as such a right, for all purposes of this paragraph, any security convertible into or exchangeable for capital stock of the Company, (other than Common Stock), at a purchase price per share less than the Fair Market Value of such shares of capital stock on the date of issuance of such right or warrant, then in each such event the dividend rights, voting rights and rights upon liquidation, dissolution or winding up of the Company of the shares of Series A Preferred Stock shall each be adjusted so that after such event each holder of a share of Series A Preferred Stock shall be entitled, in respect of each share of Series A Preferred Stock held, in addition to such rights in respect thereof to which such holder was entitled immediately prior to such event, to receive (i) such additional dividends as equal the Dividend Multiple in effect immediately prior to such event multiplied, first, by the additional dividends to which the holder of a share of Common Stock shall be entitled upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction (as hereinafter defined), (ii) such additional voting rights as equal the Vote Multiple in effect immediately prior to such event multiplied, first, by the additional voting rights to which the holder of a share of Common Stock shall be entitled upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by A-14 the Discount Fraction and (iii) such additional distribution upon liquidation, dissolution or winding up of the Company as equal the Liquidation Multiple in effect immediately prior to such event multiplied, first, by the additional amount which the holder of a share of Common Stock shall be entitled to receive upon liquidation, dissolution or winding up of the Company upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction. For purposes of this paragraph, the "Discount Fraction" shall be a fraction the numerator of which shall be the difference between the Current Market Price of a share of the capital stock subject to a right or warrant distributed to holders of shares of Common Stock as contemplated by this paragraph immediately after the distribution thereof and the purchase price per share for such share of capital stock pursuant to such right or warrant and the denominator of which shall be the Current Market Price of a share of such capital stock immediately after the distribution of such right or warrant. (D) For purposes of this Second Amended Certificate of Designations, the "Current Market Price" of a share of capital stock of the Company (including a share of Common Stock) on any date shall be deemed to be the average of the daily closing price per share thereof over the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; provided, however, that, in the event that such Current Market Price of any such share of capital stock is determined during a period which includes any date that is within 30 Trading Days after (i) the ex-dividend date for a dividend or distribution on stock payable in shares of such stock or securities convertible into shares of such stock, or (ii) the effective date of any subdivision, split, combination, consolidation, reverse stock split or reclassification of such stock, then and in each such event, the Current Market Price shall be appropriately adjusted by the Board of Directors to A-15 reflect the Current Market Price of such stock to take into account ex-dividend or post-effective date trading. The closing price for any day shall be the last sale price, regular way, or, in case, no such sale takes place on such day, the average of the closing bid and asked prices, regular way (in either case, as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange), or, if the shares are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares are listed or admitted to trading or, if the shares are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or such other system then in use, or if on any such date the shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the shares selected by the Board of Directors. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the shares are listed or admitted to trading is open for the transaction of business or, if the shares are not listed or admitted to trading on any national securities exchange, on which the New York Stock Exchange or such other national securities exchange as may be selected by the Board of Directors is open. If the shares are not publicly held or not so listed or traded on any day within the period of 30 Trading Days applicable to the determination of Current Market Price thereof as aforesaid, "Current Market Price" shall mean the fair market value thereof per share as determined in good faith by the Board of Directors. In either case referred to in the foregoing sentence, A-16 the determination of Current Market Price shall be described in a statement filed with the Secretary of the Company. Section 8. Consolidation, Merger, etc. In the event that the Company shall enter into any consolidation, merger, combination or other transaction in which shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such event each outstanding share of Series A Preferred Stock shall at the same time be similarly exchanged for or changed into the aggregate amount of stock, securities, cash and other property (payable in like kind), as the case may be, for which or into which each share of Common Stock is changed or exchanged multiplied by the highest of the Dividend Multiple, the Vote Multiple or the Liquidation Multiple in effect immediately prior to such event. Section 9. Effective Time of Adjustments. (A) Adjustments to the Series A Preferred Stock required by the provisions hereof shall be effective as of the time at which the event requiring such adjustments occurs. (B) The Company shall give prompt written notice to each holder of a share of Series A Preferred Stock of the effect on any shares of any adjustment to the dividend rights, voting rights or rights upon liquidation, dissolution or winding up of the Company required by the provisions hereof. Notwithstanding the foregoing sentence, the failure of the Company to give such notice shall not affect the validity of or the force or effect of or the requirement for such adjustment. Section 10. No Redemption. The shares of Series A Preferred Stock shall not be redeemable at the option of the Company or any holder thereof. Notwithstanding the foregoing sentence of this Section, the Company may acquire shares A-17 of Series A Preferred Stock in any other manner permitted by law, the provisions of the Amended Certificate of Designations setting forth the rights, powers and preferences of the Series A Preferred Stock and the Restated Certificate of Incorporation of the Company. Section 11. Ranking. Unless otherwise provided in the Restated Certificate of Incorporation or a certificate of designations relating to a subsequent series of Preferred Stock of the Company, the Series A Preferred Stock shall rank junior to all other series of the Company's Preferred Stock as to the payment of dividends and the distribution of assets on liquidation, dissolution or winding up, and senior to the Common Stock. Section 12. Amendment. After the Distribution Date (as defined in the Rights Agreement), the provisions of the Amended Certificate of Designations setting forth the rights, powers and preferences of the Series A Preferred Stock and the Restated Certificate of Incorporation shall not be amended in any manner which would materially affect the rights, privileges or powers of the Series A Preferred Stock without, in addition to any other vote of stockholders required by law, the affirmative vote of the holders of 66 2/3% of more of the outstanding shares of Series A Preferred Stock, voting together as a single class. 5. This Amended Certificate of Designations shall become effective at 5:01 p.m. on March 26, 1999. A-18 IN WITNESS WHEREOF, J. C. Penney Company, Inc. has caused this Second Amended Certificate of Designations to be signed and attested this __ day of March, 1999. J. C. PENNEY COMPANY, INC. By ---------------------------------------------- Name: Title: ATTEST: - ----------------------------------- Name: Title: A-19 EXHIBIT B --------- CERTIFICATE OF DESIGNATIONS OF SERIES B ESOP CONVERTIBLE PREFERRED STOCK of J. C. PENNEY COMPANY, INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware I, William R. Howell, Chairman of the Board of J. C. Penney Company, Inc. ("Company"), a corporation organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Section 151 thereof, DO HEREBY CERTIFY that, pursuant to the authority conferred upon the Board of Directors by the Restated Certificate of Incorporation of the Company, the Board of Directors authorized the series of Preferred Stock hereinafter provided for and established the voting powers thereof and authorized a committee of the Board of Directors to adopt, and said committee has adopted, the following resolution creating a series of 1,400,000 shares of Preferred Stock, without par value, designated as Series B ESOP Convertible Preferred Stock: RESOLVED that, pursuant to the authority vested in the Board of Directors of the Company in accordance with the provisions of its Restated Certificate of Incorporation, a series of Preferred Stock of the Company be, and it hereby is, created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional or other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: Section 1. Designation and Amount; Special Purpose Restricted Transfer Issue. (A) The shares of this series of Preferred Stock shall be designated as Series B ESOP Convertible Preferred Stock ("Series B Preferred Stock") and the number of shares constituting such series shall be 1,400,000. (B) Shares of Series B Preferred Stock shall be issued only to a B-1 trustee acting on behalf of an employee stock ownership plan or other employee benefit plan of the Company. In the event of any transfer of shares of Series B Preferred Stock to any person other than any such plan trustee, the shares of Series B Preferred Stock so transferred, upon such transfer and without any further action by the Company or the holder, shall be automatically converted into shares of Common Stock on the terms otherwise provided for the conversion of shares of Series B Preferred Stock into shares of Common Stock pursuant to Section 5 hereof and no such transferee shall have any of the voting powers, preferences and relative, participating, optional or special rights ascribed to shares of Series B Preferred Stock hereunder but, rather, only the powers and rights pertaining to the Common Stock into which such shares of Series B Preferred Stock shall be so converted. Certificates representing shares of Series B Preferred Stock shall be legended to reflect such restrictions on transfer. Notwithstanding the foregoing provisions of this paragraph (B) of Section 1, shares of Series B Preferred Stock (i) may be converted into shares of Common Stock as provided by Section 5 hereof and the shares of Common Stock issued upon such conversion may be transferred by the holder thereof as permitted by law and (ii) shall be redeemable by the Company upon the terms and conditions provided by Sections 6, 7 and 8 hereof. Section 2. Dividends and Distributions. (A) Subject to the provisions for adjustment hereinafter set forth, the holders of shares of Series B Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available therefor, cash dividends ("Preferred Dividends") in an amount per share equal to $47.40 per share per annum, and no more, payable semi-annually, one-half on the first day of January and one-half on the first day of July of each year (each a "Dividend Payment Date") commencing on January 1, 1989, to holders of record at the start of business on such Dividend Payment Date. Preferred Dividends shall begin to accrue on outstanding shares of Series B Preferred Stock from the date of issuance of such shares of Series B Preferred Stock. Preferred Dividends shall accrue on a daily basis whether or not the Company shall have earnings or surplus at the time, but Preferred Dividends accrued after January 1, 1989 on the shares of Series B Preferred Stock for any period less than a full semi-annual period between Dividend Payment Dates shall be computed on the basis of a 360-day year of 30-day months. A full semi-annual dividend payment of $23.70 per share shall accrue for the period from the date of issuance until January 1, 1989. Accumulated but unpaid Preferred Dividends shall cumulate as of the Dividend Payment Date on which they first become payable, but no interest shall accrue on accumulated but unpaid Preferred Dividends. (B) So long as any Series B Preferred Stock shall be outstanding, no dividend shall be declared or paid or set apart for payment on any other series of B-2 stock ranking on a parity with the Series B Preferred Stock as to dividends, unless there shall also be or have been declared and paid or set apart for payment on the Series B Preferred Stock, like dividends for all dividend payment periods of the Series B Preferred Stock ending on or before the dividend payment date of such parity stock, ratably in proportion to the respective amounts of dividends accumulated and unpaid through such dividend payment period on the Series B Preferred Stock and accumulated and unpaid or payable on such parity stock through the dividend payment period on such parity stock next preceding such dividend payment date. In the event that full cumulative dividends on the Series B Preferred Stock have not been declared and paid or set apart for payment when due, the Company shall not declare or pay or set apart for payment any dividends or make any other distributions on, or make any payment on account of the purchase, redemption or other retirement of any other class of stock or series thereof of the Company ranking, as to dividends or as to distributions in the event of a liquidation, dissolution or winding-up of the Company, junior to the Series B Preferred Stock until full cumulative dividends on the Series B Preferred Stock shall have been paid or declared and provided for; provided, however, that the foregoing shall not apply to (i) any dividend payable solely in any shares of any stock ranking, as to dividends or as to distributions in the event of a liquidation, dissolution or winding-up of the Company, junior to the Series B Preferred Stock, or (ii) the acquisition of shares of any stock ranking, as to dividends or as to distributions in the event of a liquidation, dissolution or winding up of the Company, junior to the Series B Preferred Stock either (A) pursuant to any employee or director incentive or benefit plan or arrangement (including any employment, severance or consulting agreement) of the Company or any subsidiary of the Company heretofore or hereafter adopted or (B) in exchange solely for shares of any other stock ranking junior to the Series B Preferred Stock. Section 3. Voting Rights. The holders of shares of Series B Preferred Stock shall have the following voting rights: (A) The holders of Series B Preferred Stock shall be entitled to vote on all matters submitted to a vote of the holders of Common Stock of the Company, voting together with the holders of Common Stock as one class. Each share of the Series B Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such share of Series B Preferred Stock could be converted on the record date for determining the stockholders entitled to vote, rounded to the nearest one-tenth of a vote; it being understood that whenever the "Conversion Price" (as defined in Section 5 hereof) is adjusted as provided in Section 9 hereof, the voting rights of the Series B Preferred Stock shall also be similarly adjusted. (B) Except as otherwise required by law or set forth herein, holders B-3 of Series B Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for the taking of any corporate action; provided, however, that the vote of at least 66-2/3% of the outstanding shares of Series B Preferred Stock, voting separately as a series, shall be necessary to adopt any alteration, amendment or repeal of any provision of the Restated Certificate of Incorporation of the Company, as amended, or this Resolution (including any such alteration, amendment or repeal effected by any merger or consolidation in which the Company is the surviving or resulting corporation) if such amendment, alteration or repeal would alter or change the powers, preferences or special rights of the shares of Series B Preferred Stock so as to affect them adversely. Section 4. Liquidation, Dissolution or Winding Up. (A) Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of Series B Preferred Stock shall be entitled to receive out of assets of the Company which remain after satisfaction in full of all valid claims of creditors of the Company and which are available for payment to stockholders and subject to the rights of the holders of any stock of the Company ranking senior to or on a parity with the Series B Preferred Stock in respect of distributions upon liquidation, dissolution or winding up of the Company, before any amount shall be paid or distributed among the holders of Common Stock or any other shares ranking junior to the Series B Preferred Stock in respect of distributions upon liquidation, dissolution or winding up of the Company, liquidating distributions in the amount of $600.00 per share, plus an amount equal to all accumulated and unpaid dividends thereon to the date fixed for distribution, and no more. If upon any liquidation, dissolution or winding up of the Company, the amounts payable with respect to the Series B Preferred Stock and any other stock ranking as to any such distribution on a parity with the Series B Preferred Stock are not paid in full, the holders of the Series B Preferred Stock and such other stock shall share ratably in any distribution of assets in proportion to the full respective preferential amounts to which they are entitled. After payment of the full amount to which they are entitled as provided by the foregoing provisions of this paragraph 4(A), the holders of shares of Series B Preferred Stock shall not be entitled to any further right or claim to any of the remaining assets of the Company. (B) Neither the merger or consolidation of the Company with or into any other corporation, nor the merger or consolidation of any other corporation with or into the Company, nor the sale, transfer or lease of all or any portion of the assets of the Company, shall be deemed to be a dissolution, liquidation or winding up of the affairs of the Company for purposes of this Section 4, but the holders of Series B Preferred Stock shall nevertheless be entitled in the event of any such merger or consolidation to the rights provided by Section 8 hereof. B-4 (C) Written notice of any voluntary or involuntary liquidation, dissolution or winding up of the Company, stating the payment date or dates when, and the place or places where, the amounts distributable to holders of Series B Preferred Stock in such circumstances shall be payable, shall be given by first-class mail, postage prepaid, mailed not less than twenty (20) days prior to any payment date stated therein, to the holders of Series B Preferred Stock, at the address shown on the books of the Company or any transfer agent for the Series B Preferred Stock. Section 5. Conversion into Common Stock. (A) A holder of shares of Series B Preferred Stock shall be entitled, at any time prior to the close of business on the date fixed for redemption of such shares pursuant to Section 6, 7 or 8 hereof, to cause any or all of such shares to be converted into shares of Common Stock, initially at a conversion rate equal to the ratio of $600.00 to the amount which initially shall be $60.00 and which shall be adjusted as hereinafter provided (and, as so adjusted, is hereinafter sometimes referred to as the "Conversion Price") (that is, a conversion rate initially equivalent to ten shares of Common Stock for each share of Series B Preferred Stock so converted but that is subject to adjustment as the Conversion Price is adjusted as hereinafter provided). (B) Any holder of shares of Series B Preferred Stock desiring to convert such shares into shares of Common Stock shall surrender the certificate or certificates representing the shares of Series B Preferred Stock being converted, duly assigned or endorsed for transfer to the Company (or accompanied by duly executed stock powers relating thereto), at the principal executive office of the Company or the offices of the transfer agent for the Series B Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the Series B Preferred Stock by the Company or the transfer agent for the Series B Preferred Stock, accompanied by written notice of conversion. Such notice of conversion shall specify (i) the number of shares of Series B Preferred Stock to be converted and the name or names in which such holder wishes the certificate or certificates for Common Stock and for any shares of Series B Preferred Stock not to be so converted to be issued, and (ii) the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion. (C) Upon surrender of a certificate representing a share or shares of Series B Preferred Stock for conversion, the Company shall issue and send by hand delivery (with receipt to be acknowledged) or by first-class mail, postage prepaid, to the holder thereof or to such holder's designee, at the address designated by such B-5 holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon conversion. In the event that there shall have been surrendered a certificate or certificates representing shares of Series B Preferred Stock, only part of which are to be converted, the Company shall issue and deliver to such holder or such holder's designee a new certificate or certificates representing the number of shares of Series B Preferred Stock which shall not have been converted. (D) The issuance by the Company of shares of Common Stock upon a conversion of shares of Series B Preferred Stock into shares of Common Stock made at the option of the holder thereof shall be effective as of the earlier of (i) the delivery to such holder or such holder's designee of the certificates representing the shares of Common Stock issued upon conversion thereof or (ii) the commencement of business on the second business day after the surrender of the certificate or certificates for the shares of Series B Preferred Stock to be converted, duly assigned or endorsed for transfer to the Company (or accompanied by duly executed stock powers relating thereto) as provided by this Resolution. On and after the effective day of conversion, the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock, but no allowance or adjustment shall be made in respect of dividends payable to holders of Common Stock in respect of any period prior to such effective date. The Company shall not be obligated to pay any dividends which shall have been declared and shall be payable to holders of shares of Series B Preferred Stock on a Dividend Payment Date if such Dividend Payment Date for such dividend shall coincide with or be on or subsequent to the effective date of conversion of such shares. (E) The Company shall not be obligated to deliver to holders of Series B Preferred Stock any fractional share or shares of Common Stock issuable upon any conversion of such shares of Series B Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law. (F) Whenever the Company shall issue shares of Common Stock upon conversion of shares of Series B Preferred Stock as contemplated by this Section 5, the Company shall issue together with each such share of Common Stock one right to purchase Series A Preferred Stock of the Company (or other securities in lieu thereof) pursuant to the Rights Agreement dated as of January 28, 1986 between the Company and Morgan Guaranty Trust Company as Rights Agent, as such agreement may from time to time be amended, or any rights issued to holders of Common Stock of the Company in addition thereto or in replacement therefor, whether or not such rights shall be exercisable at such time, but only if such rights are issued and outstanding and held by other holders of Common Stock of the Company at such time and have not expired. B-6 (G) The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of shares of Series B Preferred Stock as herein provided, free from any preemptive rights, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the shares of Series B Preferred Stock then outstanding. The Company shall prepare and shall use its best efforts to obtain and keep in force such governmental or regulatory permits or other authorizations as may be required by law, and shall comply with all requirements as to registration or qualification of the Common Stock, in order to enable the Company lawfully to issue and deliver to each holder of record of Series B Preferred Stock such number of shares of its Common Stock as shall from time to time be sufficient to effect the conversion of all shares of Series B Preferred Stock then outstanding and convertible into shares of Common Stock. Section 6. Redemption At the Option of the Company. (A) The Series B Preferred Stock shall be redeemable, in whole or in part, at the option of the Company at any time after July 1, 1991, or on or before July 1, 1991 if permitted by paragraph (C) or (D) of this Section 6, at the following redemption prices per share: During the Twelve- Month Period Price Per Beginning July 2, Share ------------------ --------- 1988. . . . . . . . . . . $ 647.40 1989. . . . . . . . . . . $ 642.66 1990. . . . . . . . . . . $ 637.92 1991. . . . . . . . . . . $ 633.18 1992. . . . . . . . . . . $ 628.44 1993. . . . . . . . . . . $ 623.70 1994. . . . . . . . . . . $ 618.96 1995. . . . . . . . . . . $ 614.22 1996. . . . . . . . . . . $ 609.48 1997. . . . . . . . . . . $ 604.74 and thereafter at $600.00 per share, plus, in each case, an amount equal to all accumulated and unpaid dividends thereon to the date fixed for redemption. Payment of the redemption price shall be made by the Company in cash or shares of Common Stock, or a combination thereof, as permitted by paragraph (E) of this Section 6. From and after the date fixed for redemption, dividends on shares of B-7 Series B Preferred Stock called for redemption will cease to accrue, such shares will no longer be deemed to be outstanding and all rights in respect of such shares of the Company shall cease, except the right to receive the redemption price. If less than all of the outstanding shares of Series B Preferred Stock are to be redeemed, the Company shall either redeem a portion of the shares of each holder determined pro rata based on the number of shares held by each holder or shall select the shares to be redeemed by lot, as may be determined by the Board of Directors of the Company. (B) Unless otherwise required by law, notice of redemption will be sent to the holders of Series B Preferred Stock at the address shown on the books of the Company or any transfer agent for the Series B Preferred Stock by first class mail, postage prepaid, mailed not less than twenty (20) days nor more than sixty (60) days prior to the redemption date. Each such notice shall state: (i) the redemption date; (ii) the total number of shares of the Series B Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; (v) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (vi) the conversion rights of the shares to be redeemed, the period within which conversion rights may be exercised, and the Conversion Price and number of shares of Common Stock issuable upon conversion of a share of Series B Preferred Stock at the time. Upon surrender of the certificates for any shares so called for redemption and not previously converted (properly endorsed or assigned for transfer, if the Board of Directors of the Company shall so require and the notice shall so state), such shares shall be redeemed by the Company at the date fixed for redemption and at the redemption price set forth in this Section 6. (C) In the event of a change in the federal tax law of the United States of America which has the effect of precluding the Company from claiming any of the tax deductions for dividends paid on the Series B Preferred Stock when such dividends are used as provided under Section 404(k)(2) of the Internal Revenue Code of 1986, as amended and in effect on the date shares of Series B Preferred Stock are initially issued, the Company may, in its sole discretion and notwithstanding anything to the contrary in paragraph (A) of this Section 6, elect to redeem such shares for the amount payable in respect of the shares upon liquidation of the Company pursuant to Section 4 hereof. (D) Notwithstanding anything to the contrary in paragraph (A) of this Section 6, the Company may elect to redeem any or all of the shares of Series B Preferred Stock at any time on or prior to July 1, 1991 on the terms and conditions set forth in paragraphs (A) and (B) of this Section 6, if the last reported sales price, B-8 regular way, of a share of Common Stock, as reported on the New York Stock Exchange Composite Tape or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which such stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or, if the Common Stock is not quoted on such National Market System, the average of the closing bid and asked prices in over-the-counter market as reported by NASDAQ, for at least twenty (20) trading days within a period of thirty (30) consecutive trading days ending within five (5) days of the notice of redemption equals or exceeds one hundred fifty percent (150%) of the Conversion Price (giving effect equitably in making such calculation to any adjustments required by Section 9 hereof). (E) The Company, at its option, may make payment of the redemption price required upon redemption of shares of Series B Preferred Stock in cash or in shares of Common Stock, or in a combination of such shares and cash, any such shares to be valued for such purpose at their Fair Market Value (as defined in paragraph (G) of Section 9 hereof, provided, however, that in calculating their Fair Market Value the Adjustment Period shall be deemed to be the five (5) consecutive trading days preceding, and including, the date of redemption). B-9 Section 7. Other Redemption Rights. Shares of Series B Preferred Stock shall be redeemed by the Company for cash or, if the Company so elects, in shares of Common Stock, or a combination of such shares and cash, any such shares of Common Stock to be valued for such purpose as provided by paragraph (E) of Section 6, at a redemption price of $600.00 per share plus accumulated and unpaid dividends thereon to the date fixed for redemption, at the option of the holder, at any time and from time to time upon notice to the Company given not less than five (5) business days prior to the date fixed by the holder in such notice for such redemption, when and to the extent necessary (i) for such holder to provide for distributions required to be made under, or to satisfy an investment election provided to participants in accordance with, the J. C. Penney Company, Inc. Savings, Profit-Sharing and Stock Ownership Plan, dated and effective as of August 22, 1988, as the same may be amended, or any successor plan (the "Plan") to participants in the Plan or (ii) for such holder to make payment of principal, interest or premium due and payable (whether as scheduled or upon acceleration) on the 8.17% ESOP Notes Due July 1, 1998 of the trust under the Plan or any indebtedness incurred by the holder for the benefit of the Plan. Section 8. Consolidation, Merger, etc. B-10 (A) In the event that the Company shall consummate any consolidation or merger or similar transaction, however named, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged solely for or changed, reclassified or converted solely into stock of any successor or resulting company (including the Company) that constitutes "qualifying employer securities" with respect to a holder of Series B Preferred Stock within the meaning of Section 409(e) of the Internal Revenue Code of 1986, as amended, and Section 407(c)(5) of the Employee Retirement Income Security Act of 1974, as amended, or any successor provisions of law, and, if applicable, for a cash payment in lieu of fractional shares, if any, the shares of Series B Preferred Stock of such holder shall be assumed by and shall become preferred stock of such successor or resulting company, having in respect of such company insofar as possible the same powers, preferences and relative, participating, optional or other special rights (including the redemption rights provided by Sections 6, 7 and 8 hereof), and the qualifications, limitations or restrictions thereon, that the Series B Preferred Stock had immediately prior to such transaction, except that after such transaction each share of the Series B Preferred Stock shall be convertible, otherwise on the terms and conditions provided by Section 5 hereof, into the qualifying employer securities so receivable by a holder of the number of shares of Common Stock into which such shares of Series B Preferred Stock could have been converted immediately prior to such transaction if such holder of Common Stock failed to exercise any rights of election to receive any kind or amount of stock, securities, cash or other property (other than such qualifying employer securities and a cash payment, if applicable, in lieu of fractional shares) receivable upon such transaction (provided that, if the kind or amount of qualifying employer securities receivable upon such transaction is not the same for each non-electing share, then the kind and amount of qualifying employer securities receivable upon such transaction for each non-electing share shall be the kind and amount so receivable per share by a plurality of the non-electing shares). The rights of the Series B Preferred Stock as preferred stock of such successor or resulting company shall successively be subject to adjustments pursuant to Section 9 hereof after any such transaction as nearly equivalent to the adjustments provided for by such section prior to such transaction. The Company shall not consummate any such merger, consolidation or similar transaction unless all then outstanding shares of the Series B Preferred Stock shall be assumed and authorized by the successor or resulting company as aforesaid. (B) In the event that the Company shall consummate any consolidation or merger or similar transaction, however named, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged for or changed, reclassified or converted into other stock or securities or cash or any other property, or any combination thereof, other than any such consideration which is constituted solely of qualifying employer securities (as referred to in paragraph (A) of this Section 8) and cash payments, if applicable, in lieu of fractional shares, B-11 outstanding shares of Series B Preferred Stock shall, without any action on the part of the Company or any holder thereof (but subject to paragraph (C) of this Section 8), be deemed converted by virtue of such merger, consolidation or similar transaction immediately prior to such consummation into the number of shares of Common Stock into which such shares of Series B Preferred Stock could have been converted at such time and each share of Series B Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in like kind) receivable by a holder of the number of shares of Common Stock into which such shares of Series B Preferred Stock could have been converted immediately prior to such transaction if such holder of Common Stock failed to exercise any rights of election as to the kind or amount of stock, securities, cash or other property receivable upon such transaction (provided that, if the kind or amount of stock, securities, cash or other property receivable upon such transaction is not the same for each non-electing share, then the kind and amount of stock, securities, cash or other property receivable upon such transaction for each non-electing share shall be the kind and amount so receivable per share by a plurality of the non-electing shares). B-12 (C) In the event the Company shall enter into any agreement providing for any consolidation or merger or similar transaction described in paragraph (B) of this Section 8, then the Company shall as soon as practicable thereafter (and in any event at least ten (10) business days before consummation of such transaction) give notice of such agreement and the material terms thereof to each holder of Series B Preferred Stock and each such holder shall have the right to elect, by written notice to the Company, to receive, upon consummation of such transaction (if and when such transaction is consummated), from the Company or the successor of the Company, in redemption and retirement of such Series B Preferred Stock, a cash payment equal to the amount payable in respect of shares of Series B Preferred Stock upon liquidation of the Company pursuant to Section 4 hereof. No such notice of redemption shall be effective unless given to the Company prior to the close of business on the fifth business day prior to consummation of such transaction, unless the Company or the successor of the Company shall waive such prior notice, but any notice of redemption so given prior to such time may be withdrawn by notice of withdrawal given to the Company prior to the close of business on the fifth business day prior to consummation of such transaction. Section 9. Anti-dilution Adjustments. (A) In the event the Company shall, at any time or from time to time while any of the shares of the Series B Preferred Stock are outstanding, (i) pay a dividend or make a distribution in respect of the Common Stock in shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, in each case whether by reclassification of shares, recapitalization of the Company (including a recapitalization effected by a merger or consolidation to which Section 8 hereof does not apply) or otherwise, the Conversion Price in effect immediately prior to such action shall be adjusted by multiplying such Conversion Price by the fraction the numerator of which is the number of shares of Common Stock outstanding immediately before such event and the denominator of which is the number of shares of Common Stock outstanding immediately after such event. An adjustment made pursuant to this paragraph 9(A) shall be given effect, upon payment of such a dividend or distribution, as of the record date for the determination of shareholders entitled to receive such dividend or distribution (on a retroactive basis) and in the case of a subdivision or combination shall become effective immediately as of the effective date thereof. (B) In the event that the Company shall, at any time or from time to time while any of the shares of Series B Preferred Stock are outstanding, issue to holders of shares of Common Stock as a dividend or distribution, including by way of a reclassification of shares or a recapitalization of the Company, any right or B-13 warrant to purchase shares of Common Stock (but not including as such a right or warrant any security convertible into or exchangeable for shares of Common Stock) at a purchase price per share less than the Fair Market Value (as hereinafter defined) of a share of Common Stock on the date of issuance of such right or warrant, then, subject to the provisions of paragraphs (E) and (F) of this Section 9, the Conversion Price shall be adjusted by multiplying such Conversion Price by the fraction the numerator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the number of shares of Common Stock which could be purchased at the Fair Market Value of a share of Common Stock at the time of such issuance for the maximum aggregate consideration payable upon exercise in full of all such rights or warrants and the denominator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the maximum number of shares of Common Stock that could be acquired upon exercise in full of all such rights and warrants. (C) In the event the Company shall, at any time or from time to time while any of the shares of Series B Preferred Stock are outstanding, issue, sell or exchange shares of Common Stock (other than pursuant to any right or warrant to purchase or acquire shares of Common Stock (including as such a right or warrant any security convertible into or exchangeable for shares of Common Stock) and other than pursuant to any employee or director incentive or benefit plan or arrangement, including any employment, severance or consulting agreement, of the Company or any subsidiary of the Company heretofore or hereafter adopted) for a consideration having a Fair Market Value on the date of such issuance, sale or exchange less than the Fair Market Value of such shares on the date of such issuance, sale or exchange, then, subject to the provisions of paragraphs (E) and (F) of this Section 9, the Conversion Price shall be adjusted by multiplying such Conversion Price by the fraction the numerator of which shall be the sum of (i) the Fair Market Value of all the shares of Common Stock outstanding on the day immediately preceding the first public announcement of such issuance, sale or exchange plus (ii) the Fair Market Value of the consideration received by the Company in respect of such issuance, sale or exchange of shares of Common Stock, and the denominator of which shall be the product of (i) the Fair Market Value of a share of Common Stock on the day immediately preceding the first public announcement of such issuance, sale or exchange multiplied by (ii) the sum of the number of shares of Common Stock outstanding on such day plus the number of shares of Common Stock so issued, sold or exchanged by the Company. In the event the Company shall, at any time or from time to time while any shares of Series B Preferred Stock are outstanding, issue, sell or exchange any right or warrant to purchase or acquire shares of Common Stock (including as such a right or warrant any security convertible into or exchangeable for shares of Common Stock), other than any such issuance to holders of shares of Common Stock as a B-14 dividend or distribution (including by way of a reclassification of shares or a recapitalization of the Company) and other than pursuant to any employee or director incentive or benefit plan or arrangement (including any employment, severance or consulting agreement) of the Company or any subsidiary of the Company heretofore or hereafter adopted, for a consideration having a Fair Market Value on the date of such issuance, sale or exchange less than the Non- Dilutive Amount (as hereinafter defined), then, subject to the provisions of paragraphs (E) and (F) of this Section 9, the Conversion Price shall be adjusted by multiplying such Conversion Price by a fraction the numerator of which shall be the sum of (i) the Fair Market Value of all the shares of Common Stock outstanding on the day immediately preceding the first public announcement of such issuance, sale or exchange plus (ii) the Fair Market Value of the consideration received by the Company in respect of such issuance, sale or exchange of such right or warrant plus (iii) the Fair Market Value at the time of such issuance of the consideration which the Company would receive upon exercise in full of all such rights or warrants, and the denominator of which shall be the product of (i) the Fair Market Value of a share of Common Stock on the day immediately preceding the first public announcement of such issuance, sale or exchange multiplied by (ii) the sum of the number of shares of Common Stock outstanding on such day plus the maximum number of shares of Common Stock which could be acquired pursuant to such right or warrant at the time of the issuance, sale or exchange of such right or warrant (assuming shares of Common Stock could be acquired pursuant to such right or warrant at such time). (D) In the event the Company shall, at any time or from time to time while any of the shares of Series B Preferred Stock are outstanding, make an Extraordinary Distribution (as hereinafter defined) in respect of the Common Stock, whether by dividend, distribution, reclassification of shares or recapitalization of the Company (including a recapitalization or reclassification effected by a merger or consolidation to which Section 8 hereof does not apply) or effect a Pro Rata Repurchase (as hereinafter defined) of Common Stock, the Conversion Price in effect immediately prior to such Extraordinary Distribution or Pro Rata Repurchase shall, subject to paragraphs (E) and (F) of this Section 9, be adjusted by multiplying such Conversion Price by the fraction the numerator of which is (i) the product of (x) the number of shares of Common Stock outstanding immediately before such Extraordinary Distribution or Pro Rata Repurchase multiplied by (y) the Fair Market Value (as herein defined) of a share of Common Stock on the record date with respect to an Extraordinary Distribution, or on the applicable expiration date (including all extensions thereof) of any tender offer which is a Pro Rata Repurchase, or on the date of purchase with respect to any Pro Rata Repurchase which is not a tender offer, as the case may be, minus (ii) the Fair Market Value of the Extraordinary Distribution or the aggregate purchase price of the Pro Rata Repurchase, as the case may be, and the denominator of which shall be the B-15 product of (A) the number of shares of Common Stock outstanding immediately before such Extraordinary Dividend or Pro Rata Repurchase minus, in the case of a Pro Rata Repurchase, the number of shares of Common Stock repurchased by the Company multiplied by (B) the Fair Market Value of a share of Common Stock on the record date with respect to an Extraordinary Distribution or on the applicable expiration date (including all extensions thereof) of any tender offer which is a Pro Rata Repurchase or on the date of purchase with respect to any Pro Rata Repurchase which is not a tender offer, as the case may be. The Company shall send each holder of Series B Preferred Stock (i) notice of its intent to make any dividend or distribution and (ii) notice of any offer by the Company to make a Pro Rata Repurchase, in each case at the same time as, or as soon as practicable after, such offer is first communicated (including by announcement of a record date in accordance with the rules of any stock exchange on which the Common Stock is listed or admitted to trading) to holders of Common Stock. Such notice shall indicate the intended record date and the amount and nature of such dividend or distribution, or the number of shares subject to such offer for a Pro Rata Repurchase and the purchase price payable by the Company pursuant to such offer, as well as the Conversion Price and the number of shares of Common Stock into which a share of Series B Preferred Stock may be converted at such time. (E) Notwithstanding any other provisions of this Section 9, the Company shall not be required to make any adjustment of the Conversion Price unless such adjustment would require an increase or decrease of at least one percent (1%) in the Conversion Price. Any lesser adjustment shall be carried forward and shall be made no later than the time of, and together with, the next subsequent adjustment which, together with any adjustment or adjustments so carried forward, shall amount to an increase or decrease of at least one percent (1%) in the Conversion Price. (F) If the Company shall make any dividend or distribution on the Common Stock or issue any Common Stock, other capital stock or other security of the Company or any rights or warrants to purchase or acquire any such security, which transaction does not result in an adjustment to the Conversion Price pursuant to the foregoing provisions of this Section 9, the Board of Directors of the Company shall consider whether such action is of such a nature that an adjustment to the Conversion Price should equitably be made in respect of such transaction. If in such case the Board of Directors of the Company determines that an adjustment to the Conversion Price should be made, an adjustment shall be made effective as of such date, as determined by the Board of Directors of the Company. The determination of the Board of Directors of the Company as to whether an adjustment to the Conversion Price should be made pursuant to the foregoing provisions of this paragraph 9(F), and, if so, as to what adjustment should be made and when, shall be final and binding on the Company and all stockholders of the B-16 Company. The Company shall be entitled to make such additional adjustments in the Conversion Price, in addition to those required by the foregoing provisions of this Section 9, as shall be necessary in order that any dividend or distribution in shares of capital stock of the Company, subdivision, reclassification or combination of shares of stock of the Company or any recapitalization of the Company shall not be taxable to holders of the Common Stock. (G) For purposes of this Resolution, the following definitions shall apply: "Extraordinary Distribution" shall mean any dividend or other distribution (effected while any of the shares of Series B Preferred Stock are outstanding) (i) of cash, where the aggregate amount of such cash dividend or distribution together with the amount of all cash dividends and distributions made during the preceding period of 12 months, when combined with the aggregate amount of all Pro Rata Repurchases (for this purpose, including only that portion of the aggregate purchase price of such Pro Rata Repurchase which is in excess of the Fair Market Value of the Common Stock repurchased as determined on the applicable expiration date (including all extensions thereof) of any tender offer or exchange offer which is a Pro Rata Repurchase, or the date of purchase with respect to any other Pro Rata Repurchase which is not a tender offer or exchange offer made during such period ), exceeds twelve and one-half percent (12-1/2%) of the aggregate Fair Market Value of all shares of Common Stock outstanding on the record date for determining the shareholders entitled to receive such Extraordinary Distribution and (ii) any shares of capital stock of the Company (other than shares of Common Stock), other securities of the Company (other than securities of the type referred to in paragraph (B) of this Section 9), evidences of indebtedness of the Company or any other person or any other property (including shares of any subsidiary of the Company), or any combination thereof. The Fair Market Value of an Extraordinary Distribution for purposes of paragraph (D) of this Section 9 shall be the sum of the Fair Market Value of such Extraordinary Distribution plus the amount of any cash dividends which are not Extraordinary Distributions made during such twelve month period and not previously included in the calculation of an adjustment pursuant to paragraph (D) of this Section 9. "Fair Market Value" shall mean, as to shares of Common Stock or any other class of capital stock or securities of the Company or any other issuer which are publicly traded, the average of the Current Market Prices (as hereinafter defined) of such shares or securities for each day of the Adjustment Period (as hereinafter defined). "Current Market Price" of publicly traded shares of Common Stock or any other class of capital stock or other security of the Company or any other issuer for a day shall mean the last reported sales price, regular way, or, in case no sale takes place on such day, the average of the reported closing bid and B-17 asked prices, regular way, in either case as reported on the New York Stock Exchange Composite Tape or, if such security is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which such security is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the NASDAQ National Market System or, if such security is not quoted on such National Market System, the average of the closing bid and asked prices on each such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for such security on each such day shall not have been reported through NASDAQ, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm regularly making a market in such security selected for such purpose by the Board of Directors of the Company or a committee thereof on each trading day during the Adjustment Period. "Adjustment Period" shall mean the period of five (5) consecutive trading days, selected by the Board of Directors of the Company or a committee thereof, during the 20 trading days preceding, and including, the date as of which the Fair Market Value of a security is to be determined. The "Fair Market Value" of any security which is not publicly traded or of any other property shall mean the fair value thereof as determined by an independent investment banking or appraisal firm experienced in the valuation of such securities or property selected in good faith by the Board of Directors of the Company or a committee thereof, or, if no such investment banking or appraisal firm is in the good faith judgment of the Board of Directors or such committee available to make such determination, as determined in good faith by the Board of Directors of the Company or such committee. "Non-Dilutive Amount" in respect of an issuance, sale or exchange by the Company of any right or warrant to purchase or acquire shares of Common Stock (including any security convertible into or exchangeable for shares of Common Stock) shall mean the remainder of (i) the product of the Fair Market Value of a share of Common Stock on the day preceding the first public announcement of such issuance, sale or exchange multiplied by the maximum number of shares of Common Stock which could be acquired on such date upon the exercise in full of such rights and warrants (including upon the conversion or exchange of all such convertible or exchangeable securities), whether or not exercisable (or convertible or exchangeable) at such date, minus (ii) the aggregate amount payable pursuant to such right or warrant to purchase or acquire such maximum number of shares of Common Stock; provided, however, that in no event shall the Non-Dilutive Amount be less than zero. For purposes of the foregoing sentence, in the case of a security convertible into or exchangeable for shares of Common Stock, the amount payable pursuant to a right or warrant to purchase or acquire shares of Common Stock shall be the Fair Market Value of such security on the date of the issuance, sale or exchange of such security by the Company. B-18 "Pro Rata Repurchase" shall mean any purchase of shares of Common Stock by the Company or any subsidiary thereof, whether for cash, shares of capital stock of the Company, other securities of the Company, evidences of indebtedness of the Company or any other person or any other property (including shares of a subsidiary of the Company), or any combination thereof, effected while any of the shares of Series B Preferred Stock are outstanding, pursuant to any tender offer or exchange offer subject to Section 13(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor provision of law, or pursuant to any other offer available to substantially all holders of Common Stock; provided, however, that no purchase of shares by the Company or any subsidiary thereof made in open market transactions shall be deemed a Pro Rata Repurchase. For purposes of this paragraph 9(G), shares shall be deemed to have been purchased by the Company or any subsidiary thereof "in open market transactions" if they have been purchased substantially in accordance with the requirements of Rule 10b-18 as in effect under the Exchange Act, on the date shares of Series B Preferred Stock are initially issued by the Company or on such other terms and conditions as the Board of Directors of the Company or a committee thereof shall have determined are reasonably designed to prevent such purchases from having a material effect on the trading market for the Common Stock. (H) Whenever an adjustment to the Conversion Price and the related voting rights of the Series B Preferred Stock is required pursuant to this Resolution, the Company shall forthwith place on file with the transfer agent for the Common Stock and the Series B Preferred Stock if there be one, and with the Secretary of the Company, a statement signed by two officers of the Company stating the adjusted Conversion Price determined as provided herein and the resulting conversion ratio, and the voting rights (as appropriately adjusted), of the Series B Preferred Stock. Such statement shall set forth in reasonable detail such facts as shall be necessary to show the reason and the manner of computing such adjustment, including any determination of Fair Market Value involved in such computation. Promptly after each adjustment to the Conversion Price and the related voting rights of the Series B Preferred Stock, the Company shall mail a notice thereof and of the then prevailing conversion ratio to each holder of shares of the Series B Preferred Stock. Section 10. Ranking; Attributable Capital and Adequacy of Surplus; Retirement of Shares. B-19 (A) The Series B Preferred Stock shall rank senior to the Series A Preferred Stock and the Common Stock as to the payment of dividends and the distribution of assets on liquidation, dissolution and winding up of the Company, and, unless otherwise provided in the Restated Certificate of Incorporation of the Company, as amended, or a Certificate of Designations relating to a subsequent series of Preferred Stock, without par value, of the Company, the Series B Preferred Stock shall rank junior to all other series of the Company's Preferred Stock, without par value, as to the payment of dividends and the distribution of assets on liquidation, dissolution or winding up. (B) The capital of the Company allocable to the Series B Preferred Stock for purposes of the Delaware General Corporation Law (the "Corporation Law") shall be $600.00 per share. In addition to any vote of stockholders required by law, the vote of the holders of a majority of the outstanding shares of Series B Preferred Stock shall be required to increase the par value of the Common Stock or otherwise increase the capital of the Company allocable to the Common Stock for the purpose of the Corporation Law if, as a result thereof, the surplus of the Company for purposes of the Corporation Law would be less than the amount of Preferred Dividends that would accrue on the then outstanding shares of Series B Preferred Stock during the following three years. (C) Any shares of Series B Preferred Stock acquired by the Company by reason of the conversion or redemption of such shares as provided by this Resolution, or otherwise so acquired, shall be retired as shares of Series B Preferred Stock and restored to the status of authorized but unissued shares of preferred stock, without par value, of the Company, undesignated as to series, and may thereafter be reissued as part of a new series of such preferred stock as permitted by law. Section 11. Miscellaneous. (A) All notices referred to herein shall be in writing, and all notices hereunder shall be deemed to have been given upon the earlier of receipt thereof or three (3) business days after the mailing thereof if sent by registered mail (unless first-class mail shall be specifically permitted for such notice under the terms of this Resolution) with postage prepaid, addressed: (i) if to the Company, to its office at 14841 North Dallas Parkway, Dallas Texas 75240 (Attention: Secretary) or to the transfer agent for the Series B Preferred Stock, or other agent of the Company designated as permitted by this Resolution or (ii) if to any holder of the Series B Preferred Stock or Common Stock, as the case may be, to such holder at the address of such holder as listed in the stock record books of the Company (which may include the records of any transfer agent for the Series B Preferred Stock or Common Stock, as the case may be) or (iii) to such other address as the Company B-20 or any such holder, as the case may be, shall have designated by notice similarly given. (B) The term "Common Stock" as used in this Resolution means the Company's Common Stock of 50c par value, as the same exists at the date of filing of a Certificate of Designations relating to Series B Preferred Stock or any other class of stock resulting from successive changes or reclassification of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that, at any time as a result of an adjustment made pursuant to Section 9 of this Resolution, the holder of any share of the Series B Preferred Stock upon thereafter surrendering such shares for conversion shall become entitled to receive any shares or other securities of the Company other than shares of Common Stock, the Conversion Price in respect of such other shares or securities so receivable upon conversion of shares of Series B Preferred Stock shall thereafter be adjusted, and shall be subject to further adjustment from time to time, in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in Section 9 hereof, and the provisions of Sections 1 through 8 and 10 and 11 of this Resolution with respect to the Common Stock shall apply on like or similar terms to any such other shares or securities. (C) The Company shall pay any and all stock transfer and documentary stamp taxes that may be payable in respect of any issuance or delivery of shares of Series B Preferred Stock or shares of Common Stock or other securities issued on account of Series B Preferred Stock pursuant hereto or certificates representing such shares or securities. The Company shall not, however, be required to pay any such tax which may be payable in respect of any transfer involved in the issuance or delivery of shares of Series B Preferred Stock or Common Stock or other securities in a name other than that in which the shares of Series B Preferred Stock with respect to which such shares or other securities are issued or delivered were registered, or in respect of any payment to any person with respect to any such shares or securities other than a payment to the registered holder thereof, and shall not be required to make any such issuance, delivery or payment unless and until the person otherwise entitled to such issuance, delivery or payment has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid or is not payable. (D) In the event that a holder of shares of Series B Preferred Stock shall not by written notice designate the name in which shares of Common Stock to be issued upon conversion of such shares should be registered or to whom payment upon redemption of shares of Series B Preferred Stock should be made or the address to which the certificate or certificates representing such shares, or such payment, should be sent, the Company shall be entitled to register such shares, and B-21 make such payment, in the name of the holder of such Series B Preferred Stock as shown on the records of the Company and to send the certificate or certificates representing such shares, or such payment, to the address of such holder shown on the records of the Company. (E) Unless otherwise provided in the Restated Certificate of Incorporation, as amended, of the Company, all payments in the form of dividends, distributions on voluntary or involuntary dissolution, liquidation or winding-up or otherwise made upon the shares of Series B Preferred Stock and any other stock ranking on a parity with the Series B Preferred Stock with respect to such dividend or distribution shall be made pro rata, so that amounts paid per share on the Series B Preferred Stock and such other stock shall in all cases bear to each other the same ratio that the required dividends, distributions or payments, as the case may be, then payable per share on the shares of the Series B Preferred Stock and such other stock bear to each other. (F) The Company may appoint, and from time to time discharge and change, a transfer agent for the Series B Preferred Stock. Upon any such appointment or discharge of a transfer agent, the Company shall send notice thereof by first-class mail, postage prepaid, to each holder of record of Series B Preferred Stock. - -------------------- B-22 EX-10.(II)(F) 3 SUPPLEMENTAL RETIREMENT PROGRAM Exhibit 10(ii)(f) AMENDMENTS TO J. C. PENNEY COMPANY, INC. SUPPLEMENTAL RETIREMENT PROGRAM 1. Paragraph (7) (Special Rules for VERP Plan Participants) of Article IV (Benefits) is amended effective September 15, 1997 to add a subparagraph (h) to read as follows: (h) Notwithstanding any other provision of the Plan, an Eligible Management Associate (excluding Officers of the Company) who is entitled to receive a benefit under the Plan pursuant to the formula described in Paragraph (1) of Article IV and who retires as part of the Voluntary Early Retirement Program announced in 1997 shall receive the greater of: (i) The amount payable under the Plan pursuant to Paragraph (1) of Article IV as of his Early Retirement Date, Traditional Retirement Date, or Delayed Retirement Date, as the case may be (the "Plan Benefit"), or (ii) The amount derived by subtracting the aggregate benefit payable to the Associate from the Pension Plan and, if applicable, the Benefit Restoration Plan from the benefit communicated to the Associate in the personalized VERP communication materials as the aggregate benefit earned as of January 1, 1998, from the Plan, the Pension Plan and, if applicable, the Benefit Restoration Plan. 2. Paragraph (1) (Additional Credited Service and Other Adjustments) of Article VIII (miscellaneous) is amended, effective September 15, 1997 to add at the end the following subparagraph: Notwithstanding any other provision of the Plan, an Eligible Management Associate (excluding Officers of the Company) who is entitled to a benefit pursuant to the formula described in paragraph (1) of Article IV as of the Associate's Early Retirement Date, Traditional Retirement Date or Delayed Retirement Date, as the case may be ("formula benefit"), (i) who received from the Company as part of the Company's offer in 1997 to participate in the Voluntary Early Retirement Program, a personalized statement showing the aggregate benefits earned as of January 1, 1998, from the Plan, the Pension Plan and, if applicable, the Benefit Restoration Plan, ("earned benefit") and (ii) who retires from the Company prior to January 1, 1999, shall receive the greater of: (a) the formula benefit, or (b) an amount derived by subtracting the aggregate benefit payable to the Associate from the Pension Plan and, if applicable, the Benefit Restoration Plan from the earned benefit. EX-10.(II)(G) 4 SUPPLEMENTAL RETIREMENT PROGRAM Exhibit 10(ii)(g) AMENDMENTS TO J. C. PENNEY COMPANY, INC. SUPPLEMENTAL RETIREMENT PROGRAM RESOLVED that pursuant to Paragraph (2) (Amendment and Termination) of Article VIII (Miscellaneous) of the Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc. ("Program"), the Program shall be amended effective January 13, 1999 to add a new Paragraph (11) to Article VIII to read as follows: (11) Change of Control: Solely for the purposes of this Paragraph (11), the ----------------- term Eligible Management Associate shall include all active associates who upon their retirement would qualify as an Eligible Management Associate as of the date of a "Change of Control" (as hereinafter defined). Upon a Change of Control, assets of the Company in an amount sufficient to pay benefits that have accrued under the Plan up to that date shall immediately be transferred to a grantor trust to be established by the Company for the purpose of paying benefits hereunder. Each Eligible Management Associate's vested benefits shall thereafter be paid to him from such trust in accordance with the terms of the Plan; provided that at the time of such Change of Control, the Eligible Management Associate may take an irrevocable election to have his Plan benefits paid in a single-sum immediately upon the later of (i) the date of the Change of Control, or (ii) the Eligible Management Associate's retirement date; in which event his benefits shall be reduced by 10% as a penalty for early payment. The amount transferred to the grantor trust shall include the amount necessary to pay benefits for Eligible Management Associates who have not yet retired, determined as if they retired on the date of the Change of Control. On each anniversary date of the date of a Change of Control, the Company shall transfer to the grantor trust an amount necessary to pay all benefits that have accrued under the Plan during the preceding twelve months. For purposes of this Paragraph (11), a Change of Control shall be deemed to have occurred if: (1) at any time during any 24-month period, at least a majority of the Board of Directors of the Company does not consist of Continuing Directors (meaning directors of the Company at the beginning of such 24-month period and directors who subsequently became such, and whose election, or nomination for election, by the Company's stockholders, was approved by a majority of the then Continuing Directors); or (2) at any time during any 12-month period, the Company's directors in office at the beginning of such 12-month period cease to constitute at least a majority of the Board of Directors (disregarding any vacancy occurring during such period by reason of 1 death or disability, but deeming any individual whose election, or nomination for election, by the Company's stockholders, to fill such vacancy was approved by a majority of the directors in office immediately prior to such vacancy, to have been in office at the beginning of such 12-month period); or (3) any person or "group" (as determined for purposes of Rule 13D-G under the Securities Exchange Act of 1934, as amended, or any successor regulation), except any majority-owned subsidiary or any Company employee benefit plan or any trust or investment manager thereunder, shall have acquired "beneficial ownership" (as determined for purposes of Rule 13D-G under the Securities Exchange Act of 1934, as amended, or any successor regulation) of shares of Company common stock having 20% or more of the voting power of all outstanding shares of Company capital stock, unless such acquisition is approved in advance by a majority of the Board of Directors in office immediately preceding such acquisition; or (4) a merger or consolidation occurs to which the Company is a party, whether or not the Company is the surviving corporation, in which outstanding shares of Company common stock are converted into shares of stock or securities of another company, partnership, or other entity (other than a conversion into shares of voting common stock of the successor corporation or a holding company or entity thereof) or other securities (of either the Company or another company) or cash or other property (excluding payments made solely for fractional shares); or, (5) the sale of all, or substantially all, of the Company's assets occurs. RESOLVED that the Human Resources Committee be, and hereby is, authorized in the name and on behalf of the Company, to adopt, execute, and deliver, or cause to be adopted, executed, and delivered any amendments to the Plan and Program, and any instruments and documents as may be necessary to effectuate the purposes and intent of the foregoing resolutions and each of them; and RESOLVED that the officers of the Company and its counsel be, and they hereby are, authorized to take all such further actions, and to effectuate and deliver all such further instruments and documents in the name and on behalf of the Company, and under its corporate seal or otherwise, and to pay all such expenses as shall in their judgment be necessary, proper, or advisable in order fully to carry out the intent and effectuate the purposes and intent of the foregoing resolutions and each of them. 2 EX-10.(II)(AA) 5 DEC. 1998 BENEFIT RESTORATION PLAN EXHIBIT 10(ii)(aa) AMENDMENTS TO J. C. PENNEY COMPANY, INC. BENEFIT RESTORATION PLAN ------------------------ Adopted December 11, 1998 1. Article I (Introduction) is amended effective January 1, 1999 to add the following paragraphs: Effective January 1, 1999, amounts credited to the Annual Benefit Limit Make-Up Account as of December 31, 1998 of each Participant were transferred into the J. C. Penney Company, Inc. Mirror Savings Plan II and therefore were no longer payable under the J. C. Penney Company, Inc. Benefit Restoration Plan after December 31, 1998. Effective January 1, 1999, the Thrift Drug, Inc. Benefit Restoration Plan was merged into the J. C. Penney Company, Inc. Benefit Restoration Plan. 2. Article II (Definitions) is amended effective January 1, 1999 (a) to delete the definitions entitled Annual Benefit Limit Make-Up Account, Beneficiary, ------------------------------------ ----------- Company Account(s), Compensation, Earnings Dollar Limit, Interest Income ------------------ ------------ --------------------- --------------- Account, Performance Unit Plan, Profit Incentive Compensation, Savings, ------- --------------------- ----------------------------- -------- Profit-Sharing and Stock Ownership Plan, and (b) to delete the definition --------------------------------------- entitled Personnel Committee and to substitute therefor the definition ------------------- entitled Human Resources Committee. ------------------------- 3. The Benefit Restoration Plan is amended effective January 1, 1999 to delete the words "Personnel Committee" in each place they appear and to substitute therefore the words "Human Resources Committee" in each such place. 4. Article III (Participation) is amended effective January 1, 1999 to delete Paragraph (2) (Annual Benefit Limit Make-Up Account Benefit) in its entirety. 5. Article IV (Benefits) is amended effective January 1, 1999 to delete (a) Paragraph (2) (Annual Benefit Limit Make-Up Account) in its entirety, (b) unnumbered subparagraph two of Paragraph (3) (Death Benefit) in its entirety, and (c) unnumbered subparagraph two of Paragraph (4) (Vesting) in its entirety. 6. Article IV (Benefits is amended effective August 1, 1995 to add to Paragraph (3) (Death Benefit) the following sentence: If a Participant has elected an optional form of payment and dies while in pay status but before receiving all benefits payable under that option, the remaining payments, if any, will be made to the person designated by the Participant as his beneficiary at the time the optional form of payment was elected. 7. Article V (Form and Commencement of Benefit Payments) is amended effective January 1, 1999 to delete unnumbered subparagraph two of Paragraph (1) (Optional Forms and Commencement of Benefit Payments) in its entirety. 8. Article VII (Type of Plan) is amended effective January 1, 1999 to delete sentence three in its entirety and to substitute therefor the following sentence three: The portion of this Plan in Paragraph (1) of Article IV, which comprises the benefit determined due to the limit on annual benefits under the Pension Plan imposed by Section 415 of the Code, constitutes a separable part of this Plan which is maintained by the Company solely for the purpose of providing benefits for certain Associates in excess of the limitations on benefits imposed by Section 415 of the Code. 9. Article VIII (Miscellaneous) is amended effective January 1, 1999 to delete unnumbered subparagraph two of Paragraph (1) (Amendment and Termination) in its entirety and to substitute therefor the following subparagraph two: In no event will any amendment, modification, suspension, discontinuance, or termination adversely affect the Plan benefit payable pursuant to Paragraph (1) of Article IV for any Participant for whom benefit payments have already begun in accordance with the Plan as in effect prior to the effective date of the amendment, modification, suspension, discontinuance, or termination unless otherwise required to comply with applicable law. 10. Article VIII (Miscellaneous) is amended effective January 1, 1999 to delete the words in sentence one of Paragraph (2) (Rights of Associates) "Except for the Associate's nonforfeitable interest in the value of the Annual Benefit Limit Make-Up Account established in accordance with Paragraph (2) of Article IV," and to capitalize the next following word "Neither" as the new first word of sentence one. 11. Article VIII (Miscellaneous) is amended effective January 1, 1998 to delete the title of Paragraph (5) (Cessation and Recalculation of Benefits) and sentence one in their entirety and to substitute therefor the following title and sentence one: (5) Reemployed Participants: If a retired Participant again becomes an --- ----------------------- Associate of a Participating Employer, the payment of benefits hereunder shall continue. 12. Article IX (Claims Procedures) is amended to delete the words "Benefits Administration Manager" in each place they appear and to substitute therefor the words "Benefits Administration Committee or its delegate" in each such place. 13. Appendix I (Participating Employers) is amended effective January 1, 1999 in its entirety as follows. APPENDIX I Participating Employers ----------------------- J. C. Penney Company, Inc. JCPenney Business Services, Inc. (until January 24, 1996) J. C. Penney Casualty Insurance Company J. C. Penney Funding Corporation J. C. Penney Life Insurance Company J. C. Penney National Bank J. C. Penney Media Corporation (from and after April 3, 1996) J. C. Penney Overseas Services, Inc. (from and after July 1, 1996) J. C. Penney Receivables, Inc. JCPenney Puerto Rico, Inc. Eckerd Corporation (from and after January 1, 1999) EDC Drug Stores, Inc. (formerly Kerr Drug Stores, Inc.) (from and after January 1, 1999) Fay's Incorporated (from and after January 1, 1999) Quest Membership Services, Inc. (from and after January 1, 1999) TDI Managed Care Services, Inc. (from and after January 1, 1999) Thrift Drug, Inc. (from and after January 1, 1999) Thrift Drug Services, Inc. (from and after January 1, 1999) EX-10.(II)(AB) 6 JAN. 1999 BENEFIT RESTORATION PLAN Exhibit 10(ii)(ab) AMENDMENTS TO J. C. PENNEY COMPANY, INC. BENEFIT RESTORATION PLAN RESOLVED that pursuant to Paragraph (1) (Amendment and Termination) of Article VIII (Miscellaneous) of the J. C. Penney Company, Inc. Benefit Restoration Plan ("Plan"), the Plan shall be amended effective January 13, 1999 to add a new Paragraph (9) to Article VIII to read as follows: (9) Change of Control: Upon a Change of Control (as hereinafter defined), ----------------- assets of the Company in an amount sufficient to pay benefits that have accrued under the Plan up to that date shall immediately be transferred to a grantor trust to be established by the Company for the purpose of paying benefits hereunder, and the Participant's vested benefits shall thereafter be paid to the Participant from such trust in accordance with the terms of the Plan; provided that at the time of such Change of Control, the Participant may make an irrevocable election to have his Plan benefits paid in a single-sum immediately upon the later of (i) the date of the Change of Control, or (ii) the participant's retirement date, in which his benefits shall be reduced by 10% as a penalty for early payment. On each anniversary date of the date of a Change of Control, the Company shall transfer to the grantor trust an amount necessary to pay all benefits accrued under the Plan during the preceding twelve months. For purposes of this paragraph (9), a Change of Control shall be deemed to have occurred if: (1) at any time during any 24-month period, at least a majority of the Board of Directors of the Company does not consist of Continuing Directors (meaning directors of the Company at the beginning of such 24-month period and directors who subsequently became such, and whose election, or nomination for election, by the Company's stockholders, was approved by a majority of the then Continuing Directors); or (2) at any time during any 12-month period, the Company's directors in office at the beginning of such 12-month period cease to constitute at least a majority of the Board of Directors (disregarding any vacancy occurring during such period by reason of death or disability, but deeming any individual whose election, or nomination for election, by the Company's stockholders, to fill such vacancy was approved by a majority of the directors in office immediately prior to such vacancy, to have been in office at the beginning of such 12-month period); or (3) any person or "group" (as determined for purposes of Rule 13D-G under the Securities Exchange Act of 1934, as amended, or any successor regulation), except 1 any majority-owned subsidiary or any Company employee benefit plan or any trust or investment manager thereunder, shall have acquired "beneficial ownership" (as determined for purposes of Rule 13D-G under the Securities Exchange Act of 1934, as amended, or any successor regulation) of shares of Company common stock having 20% or more of the voting power of all outstanding shares of Company capital stock, unless such acquisition is approved in advance by a majority of the Board of Directors in office immediately preceding such acquisition; or (4) a merger or consolidation occurs to which the Company is a party, whether or not the Company is the surviving corporation, in which outstanding shares of Company common stock are converted into shares or securities of another company, partnership, or other entity (other than a conversion into shares of voting common stock of the successor corporation or a holding company or entity thereof) or other securities (of either the Company or another company) or cash or other property (excluding payments made solely for fractional shares); or, (5) the sale of all, or substantially all, of the Company's assets occurs. 2 EX-10.(II)(AJ) 7 MIRROR SAVINGS PLAN II, ADOPTED 01-01-1999 EXHIBIT 10(ii)(aj) J. C. PENNEY COMPANY, INC. MIRROR SAVINGS PLAN II Adopted effective January 1, 1999 J. C. PENNEY COMPANY, INC. MIRROR SAVINGS PLAN I (or II) INTRODUCTION ------------ The J. C. Penney Company, Inc. Mirror Savings Plan I (or II) ("Plan") was adopted effective January 1, 1999 as part of a program to redesign the Company's qualified and non-qualified savings plans to optimize the retirement savings opportunities for Associates. The Plan is maintained by the Company on an unfunded basis primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees. Merged into the Plan effective January 1, 1999 were the J. C. Penney Company, Inc. 1995 Deferred Compensation Plan and the Annual Benefit Limit Make- Up Accounts as of December 31, 1998 under the J. C. Penney Company, Inc. Benefit Restoration Plan and the Thrift Drug, Inc. Benefit Restoration Plan. On and after January 1, 1999 the J. C. Penney Company, Inc. 1995 Deferred Compensation Plan is no longer in existence. (Plan II) J. C. PENNEY COMPANY, INC. MIRROR SAVINGS PLAN I (or II) TABLE OF CONTENTS ----------------- Article Page - ------- ---- ARTICLE ONE DEFINITIONS..................................... 1 ARTICLE TWO ELIGIBILITY AND PARTICIPATION................... 4 2.01 Eligibility Determined for Each Plan Year........... 4 2.02 Eligible Associate.................................. 4 2.03 Participation....................................... 4 2.04 Election to Defer................................... 5 2.05 Deferral Amounts.................................... 5 2.06 Investment Elections................................ 6 ARTICLE THREE BENEFITS........................................ 7 3.01 Establishment of Accounts........................... 7 3.02 Personal Accounts................................... 7 3.03 Company Accounts.................................... 7 3.04 Mirror Company Matching Contributions............... 8 3.05 Partial-Year Mirror Company Matching Contributions.. 9 ARTICLE FOUR TRANSFERS....................................... 10 4.01 Personal Accounts................................... 10 4.02 Company Accounts.................................... 10 ARTICLE FIVE VESTING......................................... 11 5.01 Personal Accounts................................... 11 5.02 Company Accounts.................................... 11 5.03 Forfeitures......................................... 11 ARTICLE SIX TYPE OF PLAN.................................... 12 6.01 Top Hat Plan........................................ 12 6.02 No Funding.......................................... 12 ARTICLE SEVEN DISTRIBUTIONS................................... 13 7.01 Normal Form of Payment.............................. 13 7.02 Separation from Service............................. 13 7.03 Death............................................... 13 7.04 Alternate Form of Payment........................... 13 7.05 Hardship Distribution............................... 14 7.06 Fund-Specific Installments or Hardship Distributions.15 7.07 Form of Payments.................................... 15 7.08 Change of Control................................... 15 7.09 Reemployed Participants............................. 16 ARTICLE EIGHT AMENDMENT AND TERMINATION....................... 18 8.01 Plan Amendment...................................... 18 8.02 Plan Termination.................................... 18 8.03 Automatic Plan Termination.......................... 18 ARTICLE NINE MISCELLANEOUS................................... 19 9.01 Plan Administration................................. 19 9.02 Plan Expenses....................................... 19 9.03 Effect on Other Benefits............................ 20 9.04 No Guarantee of Employment.......................... 20 9.05 Disclaimer of Liability............................. 20 9.06 Severability........................................ 20 9.07 Successors.......................................... 20 9.08 Governing Law....................................... 20 9.09 Construction........................................ 21 9.10 Taxes............................................... 21 9.11 Non-Assignability................................... 21 9.12 Claims Procedure.................................... 21 ARTICLE ONE DEFINITIONS As used herein, the following words and phrases have the following respective meanings unless the context clearly indicates otherwise: 1.01 Active Participant: A Participant who defers part of his Compensation for a ------------------ Plan Year (or part thereof) pursuant to an Election to Defer that satisfies the requirements of Section 2.04. 1.02 Associate: Any person who is classified as an associate and employed by an --------- Employer if the relationship between the Employer and such person constitutes the legal relationship of employer and employee. 1.03 Beneficiary: The person or persons designated by the Participant on a ----------- beneficiary form required by the Company for this purpose to receive benefits payable under the Plan because of the Participant's death. 1.04 Code: The Internal Revenue Code of 1986, as amended from time to time. ---- 1.05 Company: J. C. Penney Company, Inc., a Delaware corporation, or its ------- successor(s). 1.06 Company Account: A phantom account established in accordance with Article --------------- Three to which Mirror Company Matching Contributions plus earnings are credited. 1.07 Compensation: The total cash remuneration paid to an Associate by his ------------ Employer, that qualifies as wages as the term wages is defined in Code section 3401(a), determined without regard to any reduction for workers' compensation and state disability insurance reimbursements, and all other compensation payments for which his Employer is required to furnish the Associate a written statement under Code sections 6041(d), 6051(a)(3) and 6052, reduced by any extraordinary items of special pay. In addition, Compensation includes any contributions made by the Associate's Employer on behalf of the Associate pursuant to a deferral election under any employee benefit plan containing a cash or deferred arrangement under Section 401(k) of the Code, and any amounts that would have been received as cash but for an election to receive benefits under a cafeteria plan meeting the requirements of Section 125 of the Code. Compensation also includes eligible cash incentive payments in the year paid to the Associate, and amounts deferred by the Active Participant pursuant to Section 2.05 of the Plan. 1 Compensation for a Plan Year shall be determined without regard to the limitations on annual compensation under Section 401(a)(17) of the Code. An Associate who is in the service of the armed forces of the United States during any period in which his reemployment rights are guaranteed by law will be considered to have received the same rate of Compensation during his absence that he was receiving immediately prior to his absence, provided he returns to employment with an Employer within the time such rights are guaranteed. 1.08 Eligible Associate: An Associate who has satisfied the eligibility ------------------ requirements of the Plan for a Plan Year in accordance with Section 2.02. 1.09 Employer: The Company and any subsidiary company or affiliate of the -------- Company that is a Participating Employer as defined in Article I of the Savings Plan. 1.10 ERISA: The Employee Retirement Security Act of 1974, as amended from time ----- to time. 1.11 Exchange Act: The Securities Exchange Act of 1934, as amended from time to ------------ time. 1.12 Human Resources Committee: The Human Resources Committee of the Management ------------------------- Committee of the Company. 1.13 Mirror Company Matching Contributions: The phantom amounts deemed to be ------------------------------------- contributed by the Company for each Plan Year as determined under Section 3.04. 1.14 Mirror Investment Funds: Phantom funds established as book reserve entries ----------------------- in the books and records of the Company to which a Participant's deferral amounts under the Plan are credited based on the investment elections of the Participant. The investment returns of such funds shall be assumed to match the returns of the same investment funds available to participants under the Savings Plan which are currently: (1) Interest Income Fund; (2) Conservative Fund; (3) Moderate Fund; (4) Aggressive Fund; and (5) Penney Common Stock Fund. 1.15 Participant: An Eligible Associate who participates in the Plan in ----------- accordance with Article Two, and who has not yet received a distribution of the entire amount of his vested benefits under the Plan. 1.16 Personal Account: A phantom account established in accordance with Article ---------------- Three to which a Participant's deferral amounts plus earnings are credited. 2 1.17 Benefit Plans Review Committee: The Benefit Plans Review Committee of the ------------------------------ Board of Directors of the Company. 1.18 Plan: The J. C. Penney Company, Inc. Mirror Savings Plan I (or II), ---- effective January 1, 1999, as amended from time to time. 1.19 Savings Plan: The J. C. Penney Company, Inc. Savings, Profit-Sharing and ------------ Stock Ownership Plan, as amended from time to time. 1.20 Separation from Service: The termination of employment of an Eligible ----------------------- Associate or a Participant because of retirement, resignation, discharge, disability or death. 1.21 Valuation Date: With respect to all Mirror Investment Funds, each day of a -------------- calendar year on which the New York Stock Exchange is open. With respect to transactions or distributions initiated by a Participant or Beneficiary, (a) the date of receipt by the Plan Administrator of the request if it is received prior to the close of the New York Stock Exchange, or (b) the next trading day if the request is received after the close of the New York Stock Exchange. With respect to distributions not initiated by a Participant, the date the distribution is processed. 3 ARTICLE TWO ELIGIBILITY AND PARTICIPATION 2.01 Eligibility Determined for Each Plan Year ----------------------------------------- The eligibility of each Associate to participate in the Plan as an Active Participant is determined for each Plan Year based on the preceding Plan Year in accordance with Section 2.02 below. Eligibility for, or participation in, the Plan for a Plan Year does not give an Associate the right to defer part of his Compensation under the Plan for any other Plan Year. 2.02 Eligible Associate ------------------ An Associate shall be eligible to participate in the Plan as an Active Participant for a Plan Year if the Associate for the preceding Plan Year had: (1) Satisfied the eligibility requirements of the Savings Plan; and (2) Earnings in excess of $80,000 (as adjusted in accordance with Section 414(q)(1) of the Code) and less than $100,000 based on his actual Compensation through October 31 of such year plus his projected earnings from November 1 through December 31 of such year determined by using his Base Salary (as defined below) in effect on October 31 of such year. (Plan I) (3) Earnings of at least $100,000 based on his actual Compensation through October 31 of such year plus his projected earnings from November 1 through December 31 of such year determined by using his Base Salary (as defined below) in effect on October 31 of such year. (Plan II) Base Salary shall mean the aggregate amount of regular wages due and payable to an Eligible Associate in that Plan Year or calendar year designated by his Employer as the Eligible Associate's monthly pay as reflected on the Employer's personnel records, including any such amounts otherwise due and payable with respect to which his Election to Defer applies hereunder. 2.03 Participation ------------- An Eligible Associate for a Plan Year shall participate in the Plan for that Plan Year as an Active Participant by making a timely Election to Defer in accordance with Section 2.04 below. An Eligible Associate who fails to satisfy the requirements of Section 2.04 below shall not be allowed to make an Election to Defer and shall not be an Active Participant for that Plan Year. 4 A Participant who is not an Active Participant for a Plan Year shall continue to participate in the Plan in all respects except that such Participant shall not have the right to defer part of his Compensation under the Plan for that Plan Year, and shall not be entitled to a Mirror Company Matching Contribution (as determined under Section 3.04) for that Plan Year. 2.04 Election to Defer ----------------- An Eligible Associate for a Plan Year may elect to defer a percentage (as described in Section 2.05 below) of his Compensation for such Plan Year. The Election to Defer for a Plan Year must be made in a manner approved by the Plan Administrator and must be received by the Plan Administrator by December 31 of the preceding Plan Year (or, in the case of the first Plan Year, received by December 31, 1998). An Eligible Associate may change his Election to Defer by filing a new Election to Defer with the Plan Administrator by the applicable deadline. An Active Participant cannot change his Election to Defer during a Plan Year for that Plan Year. An Active Participant may terminate his Election to Defer during a Plan Year for that Plan Year but shall not be permitted to make another Election to Defer for that Plan Year. Such termination shall be effective as of the next available payroll period following receipt of the termination by the Plan Administrator. An Election to Defer also shall terminate if: (1) the Eligible Associate or Participant has a Separation from Service with an Employer, or (2) the Plan is terminated, or (3) upon a Change of Control that occurs before the date that payment of Compensation would have been made if not deferred. 2.05 Deferral Amounts ---------------- An Active Participant for a Plan Year may defer up to 14% of his Compensation for that Plan Year. All deferral amounts shall be in whole percentages and made by payroll deduction. (Plan I) An Active Participant for a Plan Year may defer (a) up to 14% of his Compensation in that Plan Year up to the Earnings Dollar Limit (as defined below), and (b) up to 75% of his Compensation in that Plan Year that exceeds the Earnings Dollar Limit. All deferral amounts shall be in whole percentages and made by payroll deduction. 5 (Plan II) The Earnings Dollar Limit of an Active Participant for a Plan Year shall be $160,000, as adjusted for cost-of-living increases in accordance with Section 401(a)(17) of the Code. (Plan II) 2.06 Investment Elections -------------------- A Participant shall complete an election, in the manner determined by the Plan Administrator, requesting that all of his future deferral amounts (in whole percentages) be applied to the purchase for him, as of the earliest practicable Valuation Date after such amounts are deferred, of units in his Personal Accounts within any one or more of the Mirror Investment Funds in each case at a price equal to the value of such units as of such Valuation Date. Such election initially must be made prior to the commencement of his participation in the Plan and may be changed at any time during the Plan Year. Each such election or change in election shall be effective as soon as administratively feasible following receipt by the Plan Administrator or its delegate of the Participant's election. In the event that no timely investment election by the Participant is on file with the Plan Administrator, such Participant shall be deemed to have elected that all deferral amounts shall be applied to the purchase for him of units in the Personal Account within the Mirror Investment Fund that is the Interest Income Fund. 6 ARTICLE THREE BENEFITS 3.01 Establishment of Accounts ------------------------- A Personal Account and a Company Account within each Mirror Investment Fund shall be established for each Participant in the Plan as if assets were invested in a trust. All amounts credited to the Personal Accounts and Company Accounts of a Participant shall at all times be held in the Company's general funds as part of the Company's general assets, unless a trust is established pursuant to Section 7.08. The value, including gains and losses, of such accounts and funds shall be determined by the Plan Administrator in the same manner that the value is determined under the Savings Plan. As of each Valuation Date, the net asset value of a unit shall equal the net asset value of a unit as determined under the Savings Plan. No funds shall be allocated by the Company to any Personal Account, Company Account, Mirror Investment Fund, Mirror Company Matching Contribution, or Partial-Year Mirror Company Matching Contribution under the Plan. 3.02 Personal Accounts ----------------- All amounts deferred by an Active Participant pursuant to Article Two shall be credited to his Personal Accounts within his Mirror Investment Funds specified in his investment election. All phantom amounts credited to a Participant in his account as of December 31, 1998 under the J. C. Penney Company, Inc. 1995 Deferred Compensation Plan shall be transferred and credited as of January 1, 1999 to his Personal Account within the Mirror Investment Fund that is the Interest Income Fund. (Plan II) 3.03 Company Accounts ---------------- An amount deemed to be a Mirror Company Matching Contribution for a full year (as determined under Section 3.04 below) shall be credited to the Company Account of each Active Participant for a Plan Year as of the date a Company matching contribution is allocated to the accounts of participants under the Savings Plan for that Plan Year. An Active Participant must be in the active employ of an Employer on December 31 of the Plan Year to receive credit for a Mirror Company Matching Contribution for that Plan Year; provided, however, that an Active Participant who had a Separation from Service before December 31 of said year shall receive credit for a Partial-Year Mirror Company Matching Contribution (as determined under Section 3.05 below) if he qualified 7 for a partial-year Company matching contribution under the Savings Plan for such year. A Mirror Company Matching Contribution for a full year shall be deemed to be invested in his Company Account within the Mirror Investment Fund that is the Penney Common Stock Fund. A Partial-Year Mirror Company Matching Contribution shall be deemed to be invested in his Company Accounts within his Mirror Investment Funds in accordance with the Participant's investment election for his Personal Accounts under this Plan. All phantom amounts credited to a Participant in his Annual Benefit Limit Make-Up Account as of December 31, 1998 under the J. C. Penney Company, Inc. Benefit Restoration Plan or the Thrift Drug, Inc. Benefit Restoration Plan shall be transferred and credited as of January 1, 1999 to his Company Account within the Mirror Investment Fund that is the Interest Income Fund. (Plan II) Any amount of Company contributions credited to the Participant's Company account under the Savings Plan and subsequently cancelled so that said plan could satisfy the average contribution percentage test (as described in the Savings Plan) shall be credited to his Company Account within the Mirror Investment Fund that is the Penney Common Stock Fund in the year paid. All amounts credited to the Company Accounts of a Participant shall be subject to the vesting provisions of Article Five. 3.04 Mirror Company Matching Contribution ------------------------------------ The Mirror Company Matching Contribution for an Active Participant is an amount determined by subtracting (b) from (a) below where: (a) Is the lesser of (c) or (d) below multiplied by the Company matching contribution rate as determined under the Savings Plan for such year; (b) Is the amount of the Company's matching contribution for a full year actually allocated to the Active Participant's account under the Savings Plan for such year; (c) Is 6% multiplied by the Active Participant's Compensation for such year determined without regard to the limitations (i) on annual additions under Section 415(c)(1) of the Code, and (ii) on annual compensation under Section 401(a)(17) of the Code; (d) Is the amount of the Active Participant's deposits under the Savings Plan for the Plan Year plus the amounts deferred by the Active Participant pursuant to Article Two for such year. 8 3.05 Partial-Year Mirror Company Matching Contribution ------------------------------------------------- The Partial-Year Mirror Company Matching Contribution is an amount determined by subtracting (b) from (a) below where: (a) Is the lessor of 50% of (c) below or 50% of (d) below multiplied by the Company matching contribution rate as determined under the Savings Plan for such year; (b) Is the amount of the Company's matching contribution for a partial year actually allocated to the Active Participant's account under the Savings Plan for such year; (c) Is 6% multiplied by the Active Participant's Compensation (as determined below) for such year determined without regard to the limitations on (i) annual additions under Section 415 (c)(i) of the Code, and (ii) annual compensation under Section 401(a)(17) of the Code; (d) Is the amount of the Active Participant's deposits under the Savings Plan for the Plan Year plus the amounts deferred by the Active Participant pursuant to Article Two for such year. Compensation for the purpose of (c) above shall mean the Active Participant's actual Compensation (other than eligible cash incentive payments) received during the Plan Year plus 1/12 of such eligible cash incentive payments received during the Plan Year multiplied by the number of months (including partial months) during which the Active Participant was in the active employ of his Employer. 9 ARTICLE FOUR TRANSFERS 4.01 Personal Accounts ----------------- A Participant may elect, once in each calendar month of the Plan Year, to transfer an amount (in whole percentages) equal to the value of all or part of his units in his Personal Accounts within any one or more of the Mirror Investment Funds to another one or more of his Personal Accounts within the Mirror Investment Funds. The value of such units shall be determined as of the Valuation Date. A transfer is effective only if made in the manner determined by the Plan Administrator. 4.02 Company Accounts ---------------- A Participant who has attained age 55 and is 100% vested in his Company Accounts under the Plan may elect, once in each calendar month of the Plan Year, to transfer an amount (in whole percentages) equal to the value of all or part of his units in his Company Accounts within any one or more of the Mirror Investment Funds to another one or more of his Company Accounts within the Mirror Investment Funds. The value of such units shall be determined as of the Valuation Date. A transfer is effective only if made in the manner determined by the Plan Administrator. Notwithstanding any other provision of the Plan, a Participant who wishes to make transfers from both his Personal Accounts and Company Accounts during the same month, must do so as part of the same transaction. 10 ARTICLE FIVE VESTING 5.01 Personal Accounts ----------------- A Participant shall be 100% vested in the value of his Personal Accounts within his Mirror Investment Funds at all times without regard to whether he is a Participant in the Plan for any future Plan Year. 5.02 Company Accounts ---------------- A Participant shall be vested in the value of his Company Accounts within his Mirror Investment Funds in the same vesting percentage attributable to the value of his Company accounts under the Savings Plan based on his full years of service (as defined in the Savings Plan) in accordance with the following table: Full years of service Vested Percentage --------------------- ----------------- Less than 1 0% 1 20% 2 40% 3 60% 4 80% 5 or more 100% 5.03 Forfeitures ----------- A Participant who is less than 100% vested in the value of his Company Accounts as of his Separation from Service shall forfeit the non-vested value of his Company Accounts. In the event the Participant subsequently is reemployed by an Employer within 5 years, the amount forfeited (without earnings) hereunder shall be restored to his Company Accounts only if his amount forfeited under the Savings Plan is restored to his Savings Plan Company accounts. The restoration of forfeitures under the Plan shall be made in the same manner as the restoration of forfeitures under the Savings Plan. 11 ARTICLE SIX TYPE OF PLAN 6.01 Top Hat Plan ------------ The Plan is intended to be a "pension plan" as defined in ERISA and is maintained by the Company on an unfunded basis primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees. As such, the Plan is intended to be construed so as not to provide income to any Participant or Beneficiary for purposes of the Internal Revenue Code prior to actual receipt of benefit payments under the Plan. In the event that it should subsequently be determined by statute or by regulation or ruling that the Plan is not "a plan which is unfunded and is maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees" within the meaning of sections 201(2), 301(a)(3), 401(a)(1), and 4021(b)(6) of ERISA and section 2520.104-24 of Chapter 29 of the Code of Federal Regulations, participation in the Plan shall be restricted by the Plan Administrator to the extent necessary to assure that it will be such a plan within the meaning of such sections. Notwithstanding any other provision of the Plan, if the benefits of a Participant become taxable prior to distribution from the Plan, such amounts shall be distributed as soon as practicable to the affected Participant. 6.02 No Funding ---------- Plan benefits shall be payable solely from the general assets of the Company. The Company shall not be required to, but may at its discretion, segregate or physically set aside any funds or assets attributable to Plan benefits. The Company shall retain title to and beneficial ownership of all assets of the Company, including any assets which may be used to pay Plan benefits. The cost of the Plan shall be expensed and a book reserve shall be maintained on the Company's financial statements. No Participant or Beneficiary shall be deemed to have, pursuant to the Plan, any legal or equitable interest in any specific assets of the Company. To the extent that any Participant or Beneficiary acquires any right to receive Plan benefits, such right shall arise merely as a result of a contractual obligation and shall be no greater than, nor have any preference or priority over, the rights of any general unsecured creditor of the Company. 12 ARTICLE SEVEN DISTRIBUTIONS 7.01 Normal Form of Payment ---------------------- The normal form of payment of benefits under the Plan shall be 5 substantially equal installments payable in accordance with Section 7.02 below. 7.02 Separation from Service ----------------------- A Participant who has a Separation from Service for a reason other than death shall be entitled to receive the vested benefits in his Personal Accounts and Company Accounts in 5 substantially equal annual installments. The first annual installment shall be paid in January following the year in which occurs his Separation from Service. Each annual installment thereafter shall be paid in January of each year. Payment dates shall be determined by the Plan Administrator. 7.03 Death ----- The Beneficiary of a Participant who (1) has a Separation from Service because of death, or (2) dies while receiving Plan benefits shall be entitled to receive the remaining annual installments to which the Participant was entitled as of the date of death. The first annual installment payable to the Beneficiary shall be paid in January following the Participant's date of death, or, if later, after satisfactory proof of death is received by the Plan Administrator. Each annual installment thereafter shall be paid in January of each year. Payment dates shall be determined by the Plan Administrator. A single-sum distribution shall be paid to the estate of the Participant if as of the date of death (1) no valid beneficiary designation by the Participant is on file with the Plan Administrator, or (2) the Beneficiary has predeceased the Participant. A single-sum distribution shall be paid to the estate of the Beneficiary if the Beneficiary dies before receiving all benefits to which he was entitled under the Plan. 7.04 Alternate Form of Payment ------------------------- A Participant entitled to receive benefits under Section 7.02 above may make an irrevocable election to receive (1) not more than 15 substantially equal annual installments, or (2) a single-sum distribution. The election must be made prior to the Participant's Separation from Service in a manner authorized by the Plan Administrator. If no election 13 has been made by the Participant, benefits shall be paid in the normal form of payment in accordance with Section 7.02 above. The first annual installment or single-sum distribution shall be paid in January following the year in which occurs his Separation from Service; provided, however, that the first annual installment or single-sum distribution shall not be paid until the January following the expiration of at least one calendar year after the year in which the Participant's election is made. Each annual installment thereafter shall be paid in January of each year. A Participant also may make an irrevocable election to defer payment of the first installment or single-sum distribution to January of a later year provided the election is made prior to the Participant's Separation from Service in a manner authorized by the Plan Administrator. If no election has been made by the Participant, benefits shall commence in accordance with Section 7.02 or Section 7.04 above, whichever is applicable. A Participant who elects both to change the normal form of payment and to defer payment must make the elections at the same time. 7.05 Hardship Distribution --------------------- A Participant or Beneficiary entitled to vested benefits under the Plan may request a single-sum distribution to satisfy a severe financial hardship resulting from an unforseen event or emergency (as defined below) beyond his control. The distribution shall be limited to the amount necessary to satisfy the severe financial hardship (including any applicable federal, state or local taxes attributable to such distribution), and shall not exceed the current value of vested benefits payable to or on behalf of the Participant or Beneficiary. An unforseen event or emergency may include, but is not limited to, a sudden and unexpected illness or accident of the Participant or Beneficiary or his dependent, loss of his property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as the result of events beyond his control, but shall not include the purchase of his home or the college expenses of his child. The determination of the existence of a severe financial hardship and the approval of a hardship distribution shall be made by the Director of Personnel (or his successor by title or position) or his delegate except as provided below. Approval shall be given only if, taking into account all of the facts and circumstances, continued deferral of benefits or adherence to the Plan's payment schedule would result in a severe financial hardship to the Participant or Beneficiary. Approval shall not be granted if such hardship is or may be relieved through insurance, by liquidation of his assets (to the extent such liquidation would not itself cause severe financial hardship), or by terminating his Election to Defer. 14 With respect to a Participant who is a member of the Management Committee of the Company or a Participant who is subject to Section 16(b) of the Exchange Act, the determination of the existence of a severe financial hardship and the approval of the hardship distribution shall be made by the Benefit Plans Review Committee. In the case of a Participant or Beneficiary who receives a partial hardship distribution while receiving benefit payments, the regular payment schedule of the Participant or Beneficiary shall continue following such distribution. 7.06 Fund-Specific Installments or Hardship Distributions ---------------------------------------------------- The payment to a Participant or Beneficiary of installments or a hardship distribution shall reduce the value of his accounts in his Mirror Investment Fund(s) as designated by the Participant or Beneficiary. In the event the Participant or Beneficiary fails to designate the Mirror Investment Funds from which payment is to be made, the value of his Mirror Investment Funds shall be reduced on a pro-rata basis. 7.07 Form of Payments ---------------- Payment of all benefits from the Plan shall be made only by check. No payments of Company stock shall be permitted. 7.08 Change of Control ----------------- At the time of commencement of participation in the Plan, a Participant may make an irrevocable election to have his Plan benefits paid in a single-sum immediately upon a Change of Control (as hereafter defined). If the Participant makes such an election as described above, his vested Plan benefits shall be paid in a single-sum upon a Change of Control. If the Participant does not make such an election, then, upon a Change of Control, assets of the Company in an amount sufficient to pay benefits then due under the Plan shall immediately be transferred to a grantor trust to be established by the Company for the purpose of paying benefits hereunder, and the Personal Account and Company Account shall thereafter be paid to the Participant from such trust in accordance with the terms of the Plan; provided that at the time of such Change of Control, the Participant may make an irrevocable election to have his Plan benefits paid in a single-sum immediately, in which event the Participant's benefits shall be reduced by 10% as a penalty for early withdrawal, and the Participant shall receive a single-sum payment of only 90% of his benefits otherwise payable under the Plan. On each anniversary date of the date of a Change of Control, the Company shall transfer to the grantor trust an amount necessary to pay all benefits accrued under the Plan during the preceding twelve months. 15 For purposes of this Section 7.08, a Change of Control shall be deemed to have occurred if: (1) at any time during any 24-month period, at least a majority of the Board of Directors of the Company does not consist of Continuing Directors (meaning directors of the Company at the beginning of such 24-month period and directors who subsequently became such, and whose election, or nomination for election, by the Company's stockholders, was approved by a majority of the then Continuing Directors); or (2) at any time during any 12-month period, the Company's directors in office at the beginning of such 12-month period cease to constitute at least a majority of the Board of Directors (disregarding any vacancy occurring during such period by reason of death or disability, but deeming any individual whose election, or nomination for election, by the Company's stockholders, to fill such vacancy was approved by a majority of the directors in office immediately prior to such vacancy, to have been in office at the beginning of such 12-month period); or (3) any person or "group" (as determined for purposes of Rule 13D-G under the Exchange Act or any successor regulation), except any majority-owned subsidiary or any Company employee benefit plan or any trust or investment manager thereunder, shall have acquired "beneficial ownership" (as determined for purposes of Rule 13D-G under the Exchange Act or any successor regulation) of shares of Company common stock having 20% or more of the voting power of all outstanding shares of Company capital stock, unless such acquisition is approved in advance by a majority of the Board of Directors in office immediately preceding such acquisition; or (4) a merger or consolidation occurs to which the Company is a party, whether or not the Company is the surviving corporation, in which outstanding shares of Company common stock are converted into shares of stock or securities of another company, partnership, or other entity (other than a conversion into shares of voting common stock of the successor corporation or a holding company or entity thereof) or other securities (of either the Company or another company) or cash or other property (excluding payments made solely for fractional shares); or, (5) the sale of all, or substantially all, of the Company's assets occurs. 7.09 Reemployed Participants ----------------------- If the Participant is reemployed, his scheduled payments under Section 7.02 or Section 7.04 shall cease and his election, if any, under Section 7.04 shall be void. The Participant may make a new election under Section 7.04 prior to his subsequent Separation from Service that shall apply to any unpaid benefits and to any additional benefits payable to or on behalf of the Participant because of a subsequent Separation from Service. 16 If no new election is made by the Participant, benefits shall be paid in the normal form of payment in accordance with Section 7.02 above. 17 ARTICLE EIGHT AMENDMENT AND TERMINATION 8.01 Plan Amendment -------------- The Benefit Plans Review Committee may amend the Plan at any time and from time to time, without prior notice to any Participant or Beneficiary; provided, however, that the Human Resources Committee also may make amendments that relate primarily to the administration of the Plan, are applied in a uniform and consistent manner to all Participants, and are reported to the Benefit Plans Review Committee. 8.02 Plan Termination ---------------- The Board of Directors of the Company may terminate or discontinue the Plan at any time. If the Plan is terminated, it shall be on such terms and conditions as the Board of Directors of the Company shall deem appropriate. 8.03 Automatic Plan Termination -------------------------- This Plan is expressly conditioned on the continued deferral of income tax on amounts deferred by a Participant under the Plan until such amounts are actually distributed to the Participant. If, as a result of an adverse determination by the Internal Revenue Service or a change in the tax laws or applicable income tax regulations, amounts deferred by Participants under the Plan become subject to income tax prior to the actual distribution of such amounts, the Plan and each Election to Defer hereunder shall automatically terminate as of the effective date of such change in the law without any formal action by the Board of Directors to terminate the Plan. 18 ARTICLE NINE MISCELLANEOUS 9.01 Plan Administration ------------------- The Plan shall be administered under the direction of the Benefit Plans Review Committee. Except as otherwise provided below, the Benefits Administration Committee shall be considered the Plan Administrator for purposes of ERISA. The Benefit Plans Review Committee may delegate all or some of the responsibility for the administration of the Plan to the Human Resources Committee or the Benefits Administration Committee in which case such Committee shall assume such delegated power and authority in administering the Plan to that extent; provided, however, that in no event shall the Human Resources Committee or the Benefits Administration Committee have any power or authority with respect to matters involving a Participant who is a member of the Management Committee of the Company or a Participant who is subject to Section 16(b) of the Exchange Act. The Plan Administrator has the authority and discretion to construe and interpret the Plan. As part of this authority, the Plan Administrator has the discretion to resolve inconsistencies or ambiguities in the language of the Plan, to supply omissions from or correct deficiencies in the language of the Plan, and to adopt rules for the administration of the Plan which are not inconsistent with the terms of the Plan. The Plan Administrator also has the authority and discretion to resolve all questions of fact relating to any claim for benefits as to any matter for which the Plan Administrator has responsibility. All determinations of the Plan Administrator are final and binding on all parties. Each person considered to be a fiduciary with respect to the Plan shall have only those powers and responsibilities as are specifically given that person under this Plan. It is intended that each such person shall be responsible for the proper exercise of his or her own powers and responsibilities, and shall not be responsible for any act or failure to act of any other person considered to be a fiduciary or any act or failure to act of any person considered to be a non-fiduciary. 9.02 Plan Expenses ------------- All Plan administration expenses incurred by the Company or the Plan Administrator shall be paid by the Company. 19 9.03 Effect on Other Benefits ------------------------ Participation in the Plan shall not reduce any welfare benefits or retirement benefits offered by the Company, except that the amounts deferred under the Plan and any Plan benefits shall not be considered "Compensation" for purposes of the Savings Plan. 9.04 No Guarantee of Employment -------------------------- Neither participation in the Plan nor any action taken under the Plan shall confer upon a Participant any right to continue in the employ of an Employer or affect the right of such Employer to terminate the Participant's employment at any time. 9.05 Disclaimer of Liability ----------------------- The Employer shall be solely responsible for the payment of Plan benefits hereunder. The members of the Benefit Plans Review Committee and the Human Resources Committee, and the officers, directors, employees, or agents of the Company or any other Employer, shall not be liable for such benefits. Unless otherwise required by law, no such person shall be liable for any action or failure to act, except where such act or omission constitutes gross negligence or willful or intentional misconduct. 9.06 Severability ------------ If any provision of the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall apply only to that provision, and shall not affect or render invalid or unenforceable any other provision of the Plan. In such event, the Plan shall be administered and construed as if such invalid or unenforceable provision were not contained herein. If the application of any Plan provision to any Participant or Beneficiary shall be held invalid or unenforceable, the application of such provision to any other Participant or Beneficiary shall not in any manner be affected thereby. 9.07 Successors ---------- The Plan and any Election to Defer shall be binding on (i) the Company and its successors and assigns, (ii) any Employer and its successors and assigns, (iii) each Participant, (iv) each Beneficiary, and (v) the heirs, distributees, and legal representatives of each Participant and Beneficiary. 9.08 Governing Law ------------- Except to the extent that the Plan may be subject to the provisions of ERISA, the Plan shall be construed and enforced according to the laws of the State of Texas without giving effect to the conflict of laws principles thereof. In the event limitations imposed by ERISA on legal actions do not apply, the laws of the State of Texas shall apply, and a 20 cause of action under the Plan must be brought no later than four years after the date the action accrues. 9.09 Construction ------------ As used herein, the masculine shall include the feminine, the singular shall include the plural, and vice versa, unless the context clearly indicates otherwise. Titles and headings herein are for convenience only and shall not be considered in construing the Plan. The words "hereof," "hereunder", and other similar compounds of the word "here" shall mean and refer to the entire Plan and not to any particular provision or Section. 9.10 Taxes ----- Any taxes imposed on Plan benefits shall be the sole responsibility of the Participant or Beneficiary. The Company shall deduct from Plan benefits any federal taxes, state taxes, local taxes, or other taxes required to be withheld. The Company shall, unless the Plan Administrator elects otherwise, withhold such taxes at the applicable flat rate percentage. The Company shall also deduct from any payment of Compensation, including any cash incentive payments, on the date such payment would have been made if not deferred under this Plan Social Security and Medicare taxes or other taxes required to be withheld on such date. 9.11 Non-Assignability ----------------- Unless otherwise required by law, and prior to distribution to a Participant or Beneficiary, Plan benefits shall not be subject to assignment, transfer, sale, pledge, encumbrance, alienation, or charge by such Participant or Beneficiary, and any attempt to do so shall be void. Plan benefits shall not be liable for or subject to garnishment, attachment, execution, or levy, or liable for or subject to the debts, contracts, or liabilities of the Participant or Beneficiary; provided, however, that the Company may offset from the payment of any Plan benefits to a Participant or Beneficiary amounts owed by the Participant to an Employer. 9.12 Claims Procedure ---------------- If a Participant or Beneficiary ("claimant") does not receive the benefits which the claimant believes he is entitled to receive under the Plan, the claimant may file a claim for benefits with the Director of Personnel (or his successor by title or position). All claims must be made in writing and must be signed by the claimant. If the claimant does not furnish sufficient information to determine the validity of the claim, the Director of Personnel will indicate to the claimant any additional information which is required. Each claim will be approved or disapproved by the Director of Personnel within 90 days following receipt of the information necessary to process the claim. In the event the Director of Personnel denies a claim for benefits in whole or in part, the Director of 21 Personnel will notify the claimant in writing of the denial of the claim. Such notice by the Director of Personnel will also set forth, in a manner calculated to be understood by the claimant, the specific reasons for such denial, the specific Plan provisions on which the denial is based, a description of any additional material or information necessary to perfect the claim with an explanation of why such material or information necessary, and an explanation of the Plan's claim review procedure as set forth below. If no action is taken by the Director of Personnel on or a claim within 90 days, the claim will be deemed to be denied for purposes of the review procedure below. A claimant may appeal a denial of his or her claim by requesting a review of the decision by the Plan Administrator. An appeal must be submitted in writing within six months after the denial and must (i) request a review of the claim for benefits under the Plan, (ii) set forth all the grounds upon which the claimant's request for review is based and any facts in support thereof, and (iii) set forth any issues or comments which the claimant deems pertinent to the appeal. The Plan Administrator will make a full and fair review of each appeal and any written materials submitted in connection with the appeal. The Plan Administrator will act upon each appeal within 60 days after receipt thereof, unless special circumstances require an extension of the time for processing, in which case a decision will be rendered as soon as possible but not later than 120 days after the appeal is received. The claimant will be given the opportunity to review pertinent documents or materials upon submission of a written request to the Plan Administrator, provided the Plan Administrator finds the requested documents or materials pertinent to the appeal. On the basis of its review, the Plan Administrator will make an independent determination of the claimant's eligibility for benefits under the Plan. The decision of the Plan Administrator on any claim for benefits will be final and conclusive upon all parties thereto. In the event the Plan Administrator denies an appeal in whole or in part, the Plan Administrator will give written notice of the decision to the claimant, which notice will set forth, in a manner calculated to be understood by the claimant, the specific reasons for such denial and specific reference to the pertinent Plan provisions on which the decision was based. 22 EX-11 8 COMPUTATION OF NET INCOME PER COMMON SHARE Exhibit 11 J. C. PENNEY COMPANY, INC. and Consolidated Subsidiaries Computation of Net Income Per Common Share ------------------------------------------ (Amounts in millions except per common share data)
52 Weeks Ended 53 Weeks Ended 52 Weeks Ended January 30, 1999 January 31, 1998 January 25, 1997 ------------------------ ------------------------ ------------------------ Shares Income Shares Income Shares Income ---------- ---------- ---------- ---------- ---------- ---------- Basic - ----- Net income $ 594 $ 566 $ 565 Dividend on Series B ESOP convertible preferred stock (aftertax) (38) (40) (40) ---------- ---------- ---------- Adjusted net income 556 526 525 Weighted average number of shares outstanding 252.8 247.4 226.4 ---------- ---------- ---------- ---------- ---------- ---------- 252.8 $ 556 247.4 $ 526 226.4 $ 525 ========== ========== ========== ========== ========== ========== Net income per common share $2.20 $2.13 $2.32 ===== ===== ===== Diluted - ------- Net income $ 594 $ 566 $ 565 Tax benefit differential on ESOP dividend assuming stock is fully converted - (1) (2) Assumed additional contribution to ESOP if preferred stock is fully converted (1) (3) (3) ---------- ---------- ---------- Adjusted net income 593 562 560 Weighted average number of shares outstanding (basic) 252.8 247.4 226.4 Stock options and other 1.8 2.5 2.7 Convertible preferred stock 16.6 18.2 19.4 ---------- ---------- ---------- ---------- ---------- ---------- 271.2 $ 593 268.1 $ 562 248.5 $ 560 ========== ========== ========== ========== ========== ========== Net income per common share $2.19 $2.10 $2.25 ===== ===== =====
EX-12.(A) 9 COMP. RATIOS OF AVAIL. INCOME Exhibit 12 (a) J. C. Penney Company, Inc. and Consolidated Subsidiaries Computation of Ratios of Available Income to Combined Fixed Charges and Preferred Stock Dividend Requirement
52 Weeks 53 Weeks 52 Weeks Ended Ended Ended -------------------------------------------- ($ Millions) 01/30/99 01/31/98 01/25/97 01/27/96 01/28/95 ------------- ------------- ------------- -------------- ------------- Income from continuing operations $ 914 $ 882 $ 853 $ 1,285 $ 1,646 (before income taxes, before capitalized interest, but after preferred stock dividend) Fixed charges Interest (including capitalized interest) on: Operating leases 225 180 110 102 95 Short term debt 106 121 102 129 92 Long term debt 557 527 312 254 225 Capital leases 4 7 6 6 7 Other, net 1 (5) 14 1 (1) ------------- ------------- ------------- -------------- ------------- Total fixed charges 893 830 544 492 418 Preferred stock dividend, before taxes 37 40 46 48 50 ------------- ------------- ------------- -------------- ------------- Combined fixed charges and preferred stock dividend requirement 930 870 590 540 468 Total available income $ 1,844 $ 1,752 $ 1,443 $ 1,825 $ 2,114 ============= ============= ============= ============== ============= Ratio of available income to combined fixed charges and preferred stock dividend requirement 2.0 2.0 2.4 3.4 4.5 ============= ============= ============= ============== =============
The interest cost of the LESOP notes guaranteed by the Company is not included in fixed charges above. The LESOP notes were repaid in July 1998. EX-12.(B) 10 COMP. RATIOS AVAIL. INCOME TO FIXED CHARGES Exhibit 12 (b) J. C. Penney Company, Inc. and Consolidated Subsidiaries Computation of Ratios of Available Income to Fixed Charges
52 Weeks 53 Weeks 52 Weeks Ended Ended Ended -------------------------------------------- ($ Millions) 01/30/99 01/31/98 01/25/97 01/27/96 01/28/95 ------------- ------------- ------------- -------------- ------------- Income from continuing operations $ 951 $ 922 $ 899 $ 1,333 $ 1,696 (before income taxes and capitalized interest) Fixed charges Interest (including capitalized interest) on: Operating leases 225 180 110 102 95 Short term debt 106 121 102 129 92 Long term debt 557 527 312 254 225 Capital leases 4 7 6 6 7 Other, net 1 (5) 14 1 (1) ------------- ------------- ------------- -------------- ------------- Total fixed charges 893 830 544 492 418 ------------- ------------- ------------- -------------- ------------- Total available income $ 1,844 $ 1,752 $ 1,443 $ 1,825 $ 2,114 ============= ============= ============= ============== ============= Ratio of available income to combined fixed charges and preferred stock dividend requirement 2.1 2.1 2.7 3.7 5.1 ============= ============= ============= ============== =============
The interest cost of the LESOP notes guaranteed by the Company is not included in fixed charges above. The LESOP notes were repaid in July 1998. EX-13 11 EXCERPT FROM 1998 A/R Exhibit 13 M a n a g e m e n t 's D i s c u s s i o n a n d A n a l y s i s of Financial Condition and Results of Operations
J. C. Penney Company, Inc. - -------------------------------------------------- 52 Weeks 53 Weeks 52 Weeks ($ in millions) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- Segment operating profit Department stores and catalog (LIFO) $ 1,013 $ 1,368 $ 1,183 Eckerd drugstores (LIFO) 254 347 99 Direct marketing 233 214 186 - ---------------------------------------------------------------------------------------------------------- Total segments 1,500 1,929 1,468 Other unallocated 26 39 45 Net interest expense and credit operations (480) (547) (278) Amortization of intangible assets (113) (117) (23) Other charges, net 22 (379)(1) (303)(2) ---------------------------------------------- Income before income taxes 955 925 909 Income taxes (361) (359) (344) - ---------------------------------------------------------------------------------------------------------- Net income $ 594 $ 566 $ 565 - ----------------------------------------------------------------------------------------------------------
(1) The Company previously reported $447 million (pre-tax) of other charges, net (formerly labeled as restructuring and business integration expenses, net), in 1997. $45 million of this amount has been reclassified as a reduction to drugstore gross margin and $23 million has been reclassified as an increase to department stores and catalog SG&A. (2) The Company previously reported $354 million (pre-tax) of other charges, net, in 1996. $31 million of this amount has been reclassified as a reduction to drugstore gross margin and $20 million has been reclassified as an increase to department stores and catalog SG&A. 12 R e s u l t s o f O p e r a t i o n s Net income in 1998 totaled $594 million, or $2.19 per share, compared with $566 million, or $2.10 per share, in 1997 and $565 million, or $2.25 per share, in 1996. Operating results for 1998 include credits of $13 million, net of tax, or five cents per share, related to the reversal of reserves established in 1997. Operating results for 1997 include $231 million in other charges, net of tax, or 86 cents per share, related principally to an early retirement program, closing of underperforming department stores, and drugstore integration activities. Operating results for 1996 include $196 million in other charges, net of tax, or 79 cents per share, related primarily to drugstore integration activities (see Note 13 to the consolidated financial statements on page 33 for further discussion of the 1997 and 1996 charges). Excluding these items, earnings per share totaled $2.14 in 1998 compared with $2.96 in 1997 and $3.04 in 1996. All references to earnings per share are on a diluted basis. Certain amounts reported as other charges (formerly labeled as restructuring and business integration expenses), net, have been reclassified in this year's report. Charges related to one-time start-up activities have been reclassified to department stores and catalog selling, general, and administrative (SG&A) expenses, and inventory integration losses associated with the Company's drugstore operations have been reclassified to drugstore gross margin. Following is a summary of the reclassifications and their effects on reported earnings per share before other charges: - ------------------------------------------- 1997 1996 ($ in millions, except per share data) $ EPS $ EPS - -------------------------------------------------------------------------------- As previously reported Net income $ 566 $ 2.10 $ 565 $ 2.25 Other charges, net 273 1.02 228 0.92 ----------------------------------------- Earnings before other charges, net $ 839 $ 3.12 $ 793 $ 3.17 Reclassifications (net of tax) to: Drugstore gross margin (28) (0.11) (19) (0.08) Department stores and catalog SG&A (14) (0.05) (13) (0.05) ----------------------------------------- Total reclassifications (42) (0.16) (32) (0.13) Revised Net income $ 566 $ 2.10 $ 565 $ 2.25 Other charges, net 231 0.86 196 0.79 ----------------------------------------- Earnings before other charges, net $ 797 $ 2.96 $ 761 $ 3.04 - -------------------------------------------------------------------------------- The following discussion addresses results of operations on a segment basis. The discussion addresses changes in comparable store sales (those open for more than a year) where appropriate, and changes in costs and expenses as a per cent of sales because 1997 included an extra week. 13 Department stores and catalog - ------------------------------------- 52 Weeks 53 Weeks 52 Weeks ($ in millions) | 1998 1997 1996 - -------------------------------------|------------------------------------------ | Retail sales, net | | Department stores | $ 15,402 $ 16,047 $ 15,734 | Catalog | 3,929 3,908 3,772 |------------------------------------------ | Total retail sales, net | 19,331 19,955 19,506 - -------------------------------------|------------------------------------------ | FIFO gross margin | 5,697 6,152 5,872 | LIFO credit | 35 20 20 |------------------------------------------ | Total gross margin | 5,732 6,172 5,892 | SG&A expenses | (4,719) (4,804) (4,709) - -------------------------------------|------------------------------------------ | Operating profit | $ 1,013 $ 1,368 $ 1,183 - -------------------------------------|------------------------------------------ | Sales per cent inc/(dec) | | Department stores(1) | (2.8)% 0.7% 5.1% | Comparable stores | (1.9)% (0.3)% 3.4% | Catalog(1) | 1.5% 2.7% 0.9% | Ratios as a per cent of sales | | FIFO gross margin | 29.5% 30.8% 30.1% | LIFO gross margin | 29.7% 30.9% 30.2% | SG&A expenses | 24.4% 24.1% 24.1% | LIFO operating profit | 5.3% 6.8% 6.1% | LIFO EBITDA(2) | 8.6% 9.7% 9.0% - -------------------------------------------------------------------------------- (1) Sales comparisons are shown on a 52-week basis for all periods presented. Including 1997's 53rd week, department stores sales declined by 3.9 per cent in 1998 and increased 2.0 per cent in 1997, while catalog sales increased by 0.6 per cent and 3.6 per cent for 1998 and 1997, respectively. (2) Earnings before interest, including interest on operating leases, income taxes, depreciation, and amortization. EBITDA includes finance revenue net of credit operating costs and bad debt. EBITDA is provided as an alternative assessment of operating performance and is not intended to be a substitute for GAAP measurements. Calculations may vary for other companies. 1998 compared with 1997. Operating profit totaled $1,013 million in 1998 compared with $1,368 million in 1997. The decline for the year was primarily attributable to lower sales coupled with lower gross margins. Sales in comparable department stores declined by 1.9 per cent and were especially soft in the fourth quarter. Department store sales were strongest in women's apparel, while athletic apparel and footwear were particularly hard hit by softening sales throughout 1998. Sales were weak across all regions of the country. Catalog sales increased by 1.5 per cent on a 52-week basis and were strongest in the third quarter when they increased by 8.0 per cent. Third quarter catalog sales benefited from participation in department store promotional programs which may have shifted buying patterns for catalog shoppers from the fourth quarter to third quarter. Both department stores and catalog results, although not readily quantifiable, were impacted by disruptions caused by the many organizational and process changes initiated in 1997 and completed in 1998. These changes impacted both the flow of merchandise and store personnel serving customers. LIFO gross margin as a per cent of sales for department stores and catalog declined by 120 basis points compared with 1997, principally as a result of aggressive promotional programs during the fourth quarter. As the fourth quarter progressed, the Company increased promotions to stimulate sales. While this generated unit sales and helped manage inventory levels, it had a negative impact on gross margin as a per cent of sales. Markup improved in 1998 as the Company continued to drive down its merchandise sourcing costs and improved efficiencies with its supplier base. The improvement in markup partially offset the effects of the higher markdowns. Gross margin includes a LIFO credit of $35 million in 1998 and $20 million in 1997. The LIFO credits for both years are generally the result of a combination of flat to declining retail 14 prices as measured by the Company's internally developed inflation index, and improving markup. The Company continued to control its SG&A expense levels throughout 1998. However, they were not leveraged as a per cent of sales due to sales declines, increasing by 30 basis points from prior year levels. In 1998 the Company realized savings of approximately $95 million related to the early retirement and reduction in force programs as well as other cost-saving initiatives. These savings were reinvested in programs designed to enhance customer service in the stores and into advertising and promotional programs. 1997 compared with 1996. Operating profit for department stores and catalog was $1,368 million in 1997, an increase of $185 million, or 15.6 per cent, compared with 1996. The increase in operating profit was principally related to improvements in gross margin and well-managed expense levels. Comparable store sales declined 0.3 per cent for the year compared with 1996. Department store sales were strongest in the first half of the year as the Company emphasized promotional programs designed to reduce its inventory levels. Sales performance in department stores was led by the women's apparel division, particularly dresses and career and casual wear, and the children's and shoe division. Catalog sales for the year increased by 2.7 per cent compared with 1996 on a 52-week basis, and were led by women's and men's apparel as well as the home division. Gross margin for department stores and catalog increased by 70 basis points in 1997 compared with 1996, and included a LIFO credit of $20 million in both 1997 and 1996. SG&A expenses were well managed across all areas, particularly advertising, and were flat as a percentage of sales as compared with 1996. Eckerd drugstores
52 Weeks 53 Weeks 52 Weeks - -------------------------------- 1996(1) ($ in millions) 1998 1997(1) Pro Forma Historical - --------------------------------------------------------------------------------------------------- Retail sales, net $ 10,325 $ 9,663 $ 8,526 $ 3,147 ----------------------------------------------------------------- FIFO gross margin 2,208 2,093 1,870 708 LIFO charge (45) (32) (23) (5) Inventory integration losses (98) (45) (31) (31) ----------------------------------------------------------------- Total gross margin 2,065 2,016 1,816 672 SG&A expenses (1,811) (1,669) (1,510) (573) - --------------------------------------------------------------------------------------------------- Operating profit $ 254 $ 347 $ 306 $ 99 - --------------------------------------------------------------------------------------------------- Sales per cent increase Total sales(2) 8.9% 11.2%(3) 10.3% 100.0+% Comparable stores 9.2% 7.4% 7.8% 7.7% Ratios as a per cent of sales FIFO gross margin 20.4% 21.2% 21.6% 21.5% LIFO gross margin 20.0% 20.9% 21.3% 21.3% SG&A expenses 17.5% 17.3% 17.7% 18.2% LIFO operating profit 2.5% 3.6% 3.6% 3.1% LIFO EBITDA(4) 5.1% 5.8% 5.7% 5.4% -----------------------------------------------------------------
(1) 1997 and 1996 gross margin, operating profit, and EBITDA have been restated to reflect inventory integration charges that were previously reported as part of the Company's other charges. The inventory charges were primarily related to the liquidation of nonconforming merchandise that resulted from conversion of all drugstores to the Eckerd name and format. (2) Sales comparisons are shown on a 52-week basis for all periods presented. Including 1997's 53rd week, drugstore sales increased by 6.9 per cent and 13.3 per cent for 1998 and 1997, respectively. (3) 1997 sales increase is calculated based upon 1996 pro forma sales. (4) Earnings before interest, including interest on operating leases, income taxes, depreciation, and amortization. EBITDA is provided as an alternative assessment of operating performance and is not intended to be a substitute for GAAP measurements. Calculations may vary for other companies. 15 1998 compared with 1997. Operating profit for the Company's drugstore segment totaled $254 million in 1998 compared with $347 million for the prior year. Sales grew at a strong pace throughout the year, increasing by 9.2 per cent for comparable stores. Sales growth was fueled by a 15.0 per cent gain in comparable pharmacy sales, which account for approximately 60 per cent of total store sales. Non-pharmacy merchandise sales increased 1.5 per cent for the year, and strengthened as the year progressed. Sales also benefited from the relocation of 175 stores to more convenient free-standing locations during the year; these relocated stores typically generate sales growth of over 30 per cent. Both 1998 and 1997 included charges related to the liquidation of nonconforming merchandise resulting from the conversion of the former Thrift, Fay's, Kerr, and certain acquired Rite Aid and Revco drugstores into the Eckerd name and format. These charges totaled $98 million in 1998 and $45 million in 1997. Excluding these charges, gross margin declined by 40 basis points in 1998. Gross margin declines were principally attributable to a higher percentage of pharmacy sales, especially managed care sales, which carry lower margins. Approximately 85 per cent of pharmacy sales are processed through managed care providers. Gross margin for non-pharmacy merchandise improved for the year. Gross margin includes a LIFO charge of $45 million in 1998 compared with a $32 million charge last year as a result of continuing inflation in drugstore merchandise, particularly pharmaceuticals. SG&A expenses as a per cent of sales increased by 20 basis points for the year, and were negatively impacted by additional staffing costs in connection with the integration of the various drugstore formats during the first half of the year. In the second half, expenses were leveraged. 1997 compared with 1996. The acquisition of Eckerd Corporation (Eckerd), which was completed in February 1997, transformed the Company's drugstores from a $3 billion to a $9 billion operation. Due to the dramatic increase in the size of the combined operation, management believes that it is more meaningful to compare 1997 operating results to 1996 pro forma operating results, assuming the acquisitions had occurred at the beginning of 1996. The following comments are based upon such a comparison. Historical information is provided in the table on the previous page for reference purposes only. During 1997, Eckerd was heavily involved in the integration of the Company's former drugstore operations into the Eckerd organization. Despite the significant integration activities that were occurring throughout 1997, operating profit increased to $347 million from $306 million in 1996, an increase of $41 million. The improvement was principally related to increased sales volumes and reduced SG&A expenses from the combined operations. Sales growth was strong the entire year, increasing by 11.2 per cent on a 52-week basis and 7.4 per cent on a comparable store basis. Sales improvement was driven by increases in pharmacy sales. Pharmacy sales continue to be positively impacted by growth in managed care sales, which account for approximately 80 per cent of the prescription business. Both 1997 and 1996 included charges related to the liquidation of nonconforming merchandise resulting from the conversion of drugstores to the Eckerd name and format. These charges totaled $45 million in 1997 and $31 million in 1996. Excluding these charges, gross margin declined by 40 basis points as a per cent of sales. The decline in gross margin per cent was primarily attributable to grand reopening promotional activities for the converted regions and growth in the managed care prescription business, which carries lower margins. Gross margin included a $32 million LIFO charge compared with a $23 million charge in 1996, reflecting continued inflation in prescription drug prices. SG&A expenses were well leveraged as a result of higher sales volumes and the elimination of duplicate support functions. For the year, SG&A expenses improved by 40 basis points as a per cent of sales. 16 Direct Marketing - -------------------------------------- ($ in millions) 1998 1997 1996 - -------------------------------------------------------------------------------- Operating revenue Insurance premiums, net $ 872 $ 800 $ 711 Membership fees 65 50 37 Investment income 85 78 70 ------------------------------------------ Total revenue 1,022 928 818 Claims and benefits (340) (332) (298) Other operating expenses(1) (449) (382) (334) - -------------------------------------------------------------------------------- Operating profit $ 233 $ 214 $ 186 - -------------------------------------------------------------------------------- Revenue increase 10.1% 13.4% 20.3% Operating profit increase 8.9% 15.1% 18.5% Operating profit as a per cent of revenue 22.8% 23.1% 22.7% - -------------------------------------------------------------------------------- (1) Includes amortization of deferred acquisition costs of $195 million, $170 million, and $149 million, respectively. In 1998, JCPenney Insurance Group changed its name to J. C. Penney Direct Marketing Services, Inc. (Direct Marketing) to more properly reflect the nature of its business - marketing both insurance and membership services. Direct Marketing's operating profit has been consistently strong, totaling $233 million in 1998 compared with $214 million in 1997 and $186 million in 1996, representing approximately 23 per cent of revenues in each year. Both revenue and operating profit for Direct Marketing improved in 1998 for the eleventh consecutive year. Total revenue exceeded $1 billion for the first time in 1998, increasing from $928 million in 1997 and $818 million in 1996. The increase during both 1998 and 1997 was principally related to health insurance premiums, which account for approximately 70 per cent of total premiums, and which increased by 11.7 per cent and 17.6 per cent, respectively. Revenue growth for the three-year period is attributable to successfully maintaining and enhancing marketing relationships with businesses for the sale of insurance products throughout the United States and Canada, principally banks, oil companies, and retailers. In 1998, Direct Marketing expanded its international operations when it began marketing through business relationships in the United Kingdom and initiated activity in Australia. Membership services, which consist principally of benefits for dental, pharmacy, vision and hearing, as well as services for travelers and motorists represent a small but growing component of the Direct Marketing business. Net interest expense and credit operations - ---------------------------- ($ in millions) 1998 1997 1996 - ------------------------------------------------------------- Revenue $ (702) $ (675) $ (650) Bad debt expense 229 307 238 Operating expenses 342 334 331 Interest expense, net 611 581 359 - ------------------------------------------------------------- Net interest expense and credit operations $ 480 $ 547 $ 278 90-day delinquency rate 3.0% 3.9% 3.7% - ------------------------------------------------------------- Includes amounts related to the Company's retained interest in JCP Master Credit Card Trust. See page 42 for additional information. Net interest expense and credit operations improved by $67 million in 1998 compared with 1997, principally as a result of declines in bad debt expenses. Bad debt expense declined by $78 million for the year as a result of favorable credit industry trends as well as the Company's efforts to tighten credit underwriting standards to improve portfolio performance and reduce risk. At the end of fiscal 1998, 90-day delinquencies were 3.0 per cent of receivables compared with 3.9 per cent at the end of 1997. Higher revenues in 1998 reflect the increase in owned customer receivables from $2,956 million to $3,406 million. Interest expense, net, including financing costs for receivables, inventory, and capital, increased to $611 million from $581 million last year due to higher borrowing levels. Net interest expense and credit operations increased in 1997 compared to 1996, principally as a result of rising bad debt on customer receivables and interest expense on debt related to the drugstore acquisitions. While revenue increased in 1997, primarily as a result of modifications that were made to credit terms in selected states, it was more than offset by an increase of $69 million in bad debt expense. Bad debt expense in both 1997 and 1996 was negatively impacted by high delinquency rates and high levels of personal bankruptcies that were affecting the entire credit industry. The 90-day delinquency rate was 3.9 per cent at the end of 1997 compared with 3.7 per cent at the end of 1996. Interest expense increased in 1997 primarily as a result of $3.0 billion of debt that was issued in connection with the Eckerd acquisition. 17 The Company has experienced a migration of credit sales from its proprietary credit card to third-party cards over the past several years (see Supplemental Data on page 42). The Company has not experienced any significant adverse effects on total credit sales from the decline in proprietary card usage and continues to successfully manage both its proprietary card levels and its relationships with bankcard providers. The decline in receivable balances, however, has had a positive impact on the Company's cash flow. Income taxes. The effective income tax rate in 1998 decreased to 37.8 per cent compared with 38.8 per cent in 1997 and 37.9 per cent in 1996. F I N A N C I A L C O N D I T I O N Cash flow from operating activities was $1,058 million in 1998 compared with $1,218 million in 1997 and $382 million in 1996. Declines in receivable and inventory levels had a positive impact on cash flow for the year. While net income has remained relatively flat in recent years, cash flow has remained strong as a result of the increases in non-cash charges, primarily related to the Eckerd acquisition. 1998 cash flow from operations, adjusted for the effects of receivables financing, was sufficient to fund substantially all of the Company's operating needs - working capital, capital expenditures, and dividends. Management expects cash flow to cover the Company's operating needs for the foreseeable future. Merchandise inventory. Total LIFO inventory was $6,031 million in 1998 compared with $6,162 million in 1997 and $5,722 million in 1996. The increase in 1997 was related to growth within Eckerd drugstores. FIFO merchandise inventory for department stores and catalog was $4,082 million, a decrease of 3.7 per cent on an overall basis and approximately two per cent for comparable stores compared with 1997 levels as the Company continued to focus on improving its merchandise procurement processes and increasing inventory turnover. Eckerd FIFO merchandise inventory was $2,176 million, an increase of 1.3 per cent compared with the prior year. It is anticipated that Eckerd inventories will grow as a result of its store expansion plans and its strategy to relocate older strip center stores to free-standing locations. Properties. Property, plant, and equipment, net of accumulated depreciation, totaled $5,458 million at January 30, 1999, compared with $5,329 million and $5,014 million at the ends of fiscal 1997 and 1996, respectively. At the end of 1998, the Company operated 1,148 JCPenney department stores, comprising 115.3 million gross square feet. The decline in the store count over the past two years was principally related to the closing of underperforming stores that was a component of the Company's 1997 other charges. All stores slated for closing had closed by the end of fiscal 1998. In addition, the Company operated 2,756 Eckerd drugstores as of the end of fiscal 1998, comprising 27.6 million square feet. Eckerd store counts have declined as a result of closing underperforming and overlapping stores during the conversion of former drugstore formats to Eckerd. Capital expenditures - ------------------------ ($ in millions) 1998 1997 1996 - ------------------------------------------------------ Department stores and catalog $ 420 $ 443 $ 636 Eckerd drugstores 256 341 103 Other corporate 20 26 51 ------------------------------ Total $ 696 $ 810 $ 790 - ------------------------------------------------------ 1998 capital spending levels for property, plant, and equipment declined for both department stores and catalog and Eckerd drugstores. In 1998, the Company spent approximately $150 million on existing department store locations compared with approximately $200 million in both 1997 and 1996. It is expected that capital spending for department stores and catalog will total approximately $300 million in 1999. Capital spending for drugstores declined in 1998 by $85 million. Capital spending levels in 1997 included additional capital requirements needed to support the conversion of drugstores to the Eckerd name and format. During 1998, Eckerd added 256 new, relocated, and acquired stores and expects to add an additional 275 in 1999, excluding the Genovese acquisition. Capital spending in 1999 is projected at approximately $300 million, with the majority of the spending related to the new and relocated stores. Total capital spending for 1999 is currently projected at approximately $650 million. 18 Acquisitions. The Company completed the acquisition of a majority interest in Lojas Renner S.A. (Renner), a 21-store Brazilian department store chain, in January 1999. The total purchase price of $139 million is being allocated to assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over fair value is expected to be $58 million and is included in intangible assets in the consolidated balance sheets. The acquisition is being accounted for under the purchase method. Renner is a calendar year company, and therefore their results will be included with Company results of operations beginning in fiscal 1999. During fiscal 1998, Direct Marketing formed Quest Membership Services, Inc. and acquired certain assets to expand its membership services operation to include travel services. In addition, Direct Marketing acquired Insurance Consultants, Inc. which strengthens its access to other business relationships. The total purchase price for the two acquisitions was approximately $72 million. Intangible assets. At the end of 1998, goodwill and other intangible assets, net, totalled $2,933 million compared with $2,940 million in 1997 and $1,861 million in 1996. Intangible assets consist principally of favorable lease rights, prescription files, software, trade name, and goodwill. They represent the excess of the purchase price over the fair value of assets received in the Company's drugstore acquisitions. The increase in 1997 was related to the completion of the Eckerd acquisition in February 1997. Reserves. At the end of 1998, the consolidated balance sheet included reserves totaling $110 million which are included as a component of accounts payable and accrued expenses and $25 million in receivables, net. These reserves were established in connection with 1996 and 1997 restructuring charges, principally those related to drugstore integration activities and the closing of underperforming department stores. The reserves consisted principally of the present value of future lease obligations for closed stores and for severance and outplacement costs related to a reduction in force program. Reserve balances were calculated based upon estimated costs to complete the various programs. Actual costs were below the original estimates for the reduction in force program and closing of underperforming stores. Consequently, reserves were adjusted in the fourth quarter of 1998, resulting in a pre-tax credit of $22 million that is reported as other charges, net. Reserve balances were reduced by $84 million in 1998 for cash payments made during the year. Also, in connection with the Company's early retirement program, reserves were established for the periodic future payments to be made under the Company's pension plans. These reserves are included in pension liabilities which are discussed in Note 12 to the consolidated financial statements, Retirement Plans, on page 32. Payments for both lease obligations and pension benefits will be paid out over an extended period of time. See Note 13, Other Charges, Net, on page 33 for additional information. Debt to capital 1998 1997 1996 - --------------------------------------------------------------- Debt to capital per cent 62.7%* 60.4% 64.5%** - --------------------------------------------------------------- * Upon completion of the Genovese Drug Stores, Inc. acquisition, the debt to capital ratio declined to 61.9 per cent. ** Upon completion of the Eckerd acquisition, the debt to capital ratio declined to 60.1 per cent. The Company's debt to capital per cent, assuming completion of the drugstore acquisitions, has increased over the past three years. The Company expects the debt to capital ratio to improve over the next several years. During the fourth quarter of 1998, JCP Receivables, Inc., an indirect wholly owned special purpose subsidiary of the Company, completed a public offering of $650 million aggregate principal amount of 5.5 per cent Series E asset-backed securities of the JCP Master Credit Card Trust. In addition, the Company retired $449 million of debt at the normal maturity date during the year, including the debt associated with the Company's ESOP. In 1997's first quarter, the Company issued $3.0 billion of long-term debt, which principally represented a conversion of short-term debt that had been issued in 1996 in connection with the initial phase of the Eckerd acquisition. The average effective interest rate on the debt issued in 1997 was 7.5 per cent and the average maturity was 30 years. Total debt, both on and off-balance-sheet, was $12,044 million at the end of 1998 compared with $11,237 million in 1997 and $10,807 million in 1996. During the past three years, the Company has issued 28.4 million shares of common stock related to its drugstore acquisitions. The Company repurchased 5.0 million shares of its common stock in the fourth quarter of 1998 for $270 million and 7.5 million shares in 1996 for $366 million as part of previously approved share repurchase programs. The Company has the authority to repurchase an additional 5.0 million shares under these programs. 19 Year 2000 readiness. The Year 2000 issue exists because many computer systems store and process dates using only the last two digits of the year. Such systems, if not changed, may interpret "00" as "1900" instead of the year "2000." The Company has been working to identify and address Year 2000 issues since January 1995. The scope of this effort includes internally developed information technology systems, purchased and leased software, embedded systems, and electronic data interchange transaction processing. In October 1996, a companywide task force was formed to provide guidance to the Company's operating and support departments and to monitor the progress of efforts to address Year 2000 issues. The Company has also consulted with various third parties, including, but not limited to, outside consultants, outside service providers, infrastructure suppliers, industry groups, and other retail companies and associations to develop industrywide approaches to the Year 2000 issue, to gain insights to problems, and to provide additional perspectives on solutions. Year 2000 readiness work was more than 90 per cent complete as of January 30, 1999. Since January 1999, the Company has been retesting all systems critical to the Company's core businesses. The Company has also focused on the Year 2000 readiness of its suppliers and service providers, both independently and in conjunction with the National Retail Federation. Despite the significant efforts to address Year 2000 concerns, the Company could potentially experience disruptions to some of its operations, including those resulting from noncompliant systems used by third-party business and governmental entities. The Company has developed contingency plans to address potential Year 2000 disruptions. These plans include business continuity plans that address accessibility and functionality of Company facilities as well as steps to be taken if an event causes failure of a system critical to the Company's core business activities. Through the end of fiscal 1998, the Company had incurred approximately $32 million to achieve Year 2000 compliance, including approximately $9 million related to capital projects. The Company's projected cost for Year 2000 remediation is currently estimated to be $46 million. Total costs have not had, and are not expected to have, a material impact on the Company's financial results. Inflation and changing prices. Inflation and changing prices have not had a significant impact on the Company in recent years due to low levels of inflation. Subsequent events. In February 1999, the Company redeemed approximately $199 million principal amount of 9.25 per cent of Eckerd notes that had an original maturity date in 2004. On March 1, 1999, the Company completed the acquisition of Genovese Drug Stores, Inc. (Genovese), a 141-drugstore chain with locations in New York, New Jersey, and Connecticut, with 1998 sales of approximately $800 million. The acquisition was accomplished through an exchange of approximately 9.6 million shares of JCPenney common stock for the outstanding shares of Genovese, and the conversion of outstanding Genovese stock options into approximately 550 thousand common stock options of the Company. The total value of the transaction, including the assumption of approximately $65 million of debt, was approximately $420 million. The purchase price will be allocated to assets acquired and liabilities assumed based on their estimated fair values, as well as intangible assets acquired, primarily prescription files and favorable lease rights. The excess purchase price over the fair value of assets acquired and liabilities assumed will be classified as goodwill and amortized over 40 years. The acquisition will be accounted for under the purchase method. 20 COMPANY STATEMENT ON FINANCIAL INFORMATION The Company is responsible for the information presented in this Annual Report. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and present fairly, in all material respects, the Company's results of operations, financial position, and cash flows. Certain amounts included in the consolidated financial statements are estimated based on currently available information and judgment as to the outcome of future conditions and circumstances. Financial information elsewhere in this Annual Report is consistent with that in the consolidated financial statements. The Company's system of internal controls is supported by written policies and procedures and supplemented by a staff of internal auditors. This system is designed to provide reasonable assurance, at suitable costs, that assets are safeguarded and that transactions are executed in accordance with appropriate authorization, and are recorded and reported properly. The system is continually reviewed, evaluated, and where appropriate, modified to accommodate current conditions. Emphasis is placed on the careful selection, training, and development of professional managers. An organizational alignment that is premised upon appropriate delegation of authority and division of responsibility is fundamental to this system. Communication programs are aimed at assuring that established policies and procedures are disseminated and understood throughout the Company. The consolidated financial statements have been audited by independent auditors whose report appears to the right. Their audit was conducted in accordance with generally accepted auditing standards, which include the consideration of the Company's internal controls to the extent necessary to form an independent opinion on the consolidated financial statements prepared by management. The Audit Committee of the Board of Directors is composed solely of directors who are not officers or employees of the Company. The Audit Committee's responsibilities include recommending to the Board for stockholder approval the independent auditors for the annual audit of the Company's consolidated financial statements. The Committee also reviews the independent auditors' audit strategy and plan, scope, fees, audit results, and non-audit services and related fees; internal audit reports on the adequacy of internal controls; the Company's ethics program; status of significant legal matters; the scope of the internal auditors' plans and budget and results of their audits; and the effectiveness of the Company's program for correcting audit findings. The independent auditors and Company personnel, including internal auditors, meet periodically with the Audit Committee to discuss auditing and financial reporting matters. /s/ Donald A. McKay Donald A. McKay Executive Vice President and Chief Financial Officer INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of J. C. Penney Company, Inc.: We have audited the accompanying consolidated balance sheets of J. C. Penney Company, Inc. and Subsidiaries as of January 30, 1999, and January 31, 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended January 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of J. C. Penney Company, Inc. and Subsidiaries as of January 30, 1999, and January 31, 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended January 30, 1999, in conformity with generally accepted accounting principles. KPMG LLP KPMG LLP Dallas, Texas February 25, 1999 21 CONSOLIDATED STATEMENTS OF INCOME J. C. Penney Company, Inc. and Subsidiaries
- ------------------------------------------------------ ($ in millions) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------- Revenue Retail sales, net $ 29,656 $ 29,618 $ 22,653 Direct marketing revenue 1,022 928 818 -------------------------------------------------- Total revenue 30,678 30,546 23,471 Costs and expenses Cost of goods sold 21,761 21,385 16,058 Drugstore inventory integration losses 98 45 31 -------------------------------------------------- Total cost of goods sold 21,859 21,430 16,089 Selling, general, and administrative expenses 6,530 6,473 5,282 Costs and expenses of Direct Marketing 789 714 632 Other unallocated (26) (39) (45) Net interest expense and credit operations 480 547 278 Amortization of intangible assets 113 117 23 Other charges, net (22) 379 303 -------------------------------------------------- Total costs and expenses 29,723 29,621 22,562 -------------------------------------------------- Income before income taxes 955 925 909 Income taxes 361 359 344 - --------------------------------------------------------------------------------------------------------- Net income $ 594 $ 566 $ 565 - --------------------------------------------------------------------------------------------------------- Earnings per common share - ------------------------------------------------------ Average (in millions, except per share data) Income Shares EPS - --------------------------------------------------------------------------------------------------------- 1998 Net income $ 594 Less preferred stock dividends (38) --------------------------------------------------- Basic EPS 556 253 $ 2.20 Stock options and convertible preferred stock 37 18 - --------------------------------------------------------------------------------------------------------- Diluted EPS $ 593 271 $ 2.19 - --------------------------------------------------------------------------------------------------------- 1997 Net income $ 566 Less preferred stock dividends (40) --------------------------------------------------- Basic EPS 526 247 $ 2.13 Stock options and convertible preferred stock 36 21 - --------------------------------------------------------------------------------------------------------- Diluted EPS $ 562 268 $ 2.10 - --------------------------------------------------------------------------------------------------------- 1996 Net income $ 565 Less preferred stock dividends (40) --------------------------------------------------- Basic EPS 525 226 $ 2.32 Stock options and convertible preferred stock 35 22 - --------------------------------------------------------------------------------------------------------- Diluted EPS $ 560 248 $ 2.25 - ---------------------------------------------------------------------------------------------------------
See Notes to the Consolidated Financial Statements on pages 26 through 39. 22 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY J. C. Penney Company, Inc. and Subsidiaries
Accumulated Guaranteed Other Total - ----------------------- Common Preferred LESOP Reinvested Comprehensive Stockholders' ($ in millions) Stock Stock Obligation Earnings Income/(Loss)(1) Equity - ------------------------------------------------------------------------------------------------------------ January 27, 1996 $ 1,112 $ 603 $ (228) $ 4,339 $ 58 $ 5,884 - ------------------------------------------------------------------------------------------------------------ Net income 565 565 Net unrealized change in investments (18) (18) Currency translation adjustments (3) (3) ----------------------------------------------------------------------------------- Total comprehensive income 565 (21) 544 Dividends declared (511) (511) Common stock issued 350 350 Common stock retired (46) (320) (366) Preferred stock retired (35) (35) LESOP payment 86 86 - ------------------------------------------------------------------------------------------------------------ January 25, 1997 1,416 568 (142) 4,073 37 5,952 - ------------------------------------------------------------------------------------------------------------ Net income 566 566 Net unrealized change in investments 14 14 Currency translation adjustments (3) (3) ----------------------------------------------------------------------------------- Total comprehensive income 566 11 577 Dividends declared (573) (573) Common stock issued 1,350 1,350 Preferred stock retired (42) (42) LESOP payment 93 93 - ------------------------------------------------------------------------------------------------------------ January 31, 1998 2,766 526 (49) 4,066 48 7,357 - ------------------------------------------------------------------------------------------------------------ Net income 594 594 Net unrealized change in investments (1) (1) Currency translation adjustments(2) (61) (61) ----------------------------------------------------------------------------------- Total comprehensive income 594 (62) 532 Dividends declared (588) (588) Common stock issued 140 140 Common stock retired (56) (214) (270) Preferred stock retired (51) (51) LESOP payment 49 49 - ------------------------------------------------------------------------------------------------------------ January 30, 1999 $ 2,850 $ 475 $ - $ 3,858 $ (14) $ 7,169 - ------------------------------------------------------------------------------------------------------------
(1) Net unrealized changes in investment securities are shown net of deferred taxes of $36 million, $39 million, and $30 million, respectively. A deferred tax asset has not been established for currency translation adjustments. (2) 1998 currency translation adjustments include $(49) million associated with assets acquired and liabilities assumed in the purchase of Renner. See Notes to the Consolidated Financial Statements on pages 26 through 39. 23 CONSOLIDATED BALANCE SHEETS J. C. Penney Company, Inc. and Subsidiaries
- ---------------------------------------------------------------------- ($ in millions) 1998 1997 - --------------------------------------------------------------------------------------------------------- Assets Current assets Cash (including short-term investments of $95 and $208) $ 96 $ 287 Retained interest in JCP Master Credit Card Trust 415 1,073 Receivables, net (bad debt reserve of $149 and $135) 4,415 3,819 Merchandise inventory (including LIFO reserves of $227 and $225) 6,031 6,162 Prepaid expenses 168 143 ---------------------------------- Total current assets 11,125 11,484 Property, plant, and equipment Land and buildings 3,109 2,993 Furniture and fixtures 4,045 4,089 Leasehold improvements 1,179 1,192 Accumulated depreciation (2,875) (2,945) ---------------------------------- Property, plant, and equipment, net 5,458 5,329 Investments, principally held by Direct Marketing 1,961 1,774 Deferred policy acquisition costs 847 752 Goodwill and other intangible assets, net (accumulated amortization of $221 and $108) 2,933 2,940 Other assets 1,314 1,214 - --------------------------------------------------------------------------------------------------------- Total Assets $ 23,638 $ 23,493 - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities Accounts payable and accrued expenses $ 3,465 $ 4,059 Short-term debt 1,924 1,417 Current maturities of long-term debt 438 449 Deferred taxes 143 116 ---------------------------------- Total current liabilities 5,970 6,041 Long-term debt 7,143 6,986 Deferred taxes 1,517 1,325 Insurance policy and claims reserves 946 872 Other liabilities 893 912 ---------------------------------- Total Liabilities 16,469 16,136 Stockholders' Equity Preferred stock: authorized, 25 million shares; issued and outstanding, 0.8 million and 0.9 million shares Series B ESOP Convertible Preferred 475 526 Guaranteed LESOP obligation - (49) Common stock, par value 50 cents: authorized, 1,250 million shares; issued and outstanding 250 million and 251 million shares 2,850 2,766 Reinvested earnings 3,858 4,066 Accumulated other comprehensive income/(loss) (14) 48 ---------------------------------- Total Stockholders' Equity 7,169 7,357 - --------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 23,638 $ 23,493 - ---------------------------------------------------------------------------------------------------------
See Notes to the Consolidated Financial Statements on pages 26 through 39. 24 CONSOLIDATED STATEMENTS OF CASH FLOWS J. C. Penney Company, Inc. and Subsidiaries
- ---------------------------------------------------- ($ in millions) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 594 $ 566 $ 565 Gain on the sale of banking assets - (52) - Other charges, net (22) 371 310 Depreciation and amortization, including intangible assets 637 584 381 Deferred taxes 219 1 (18) Change in cash from: Customer receivables 258 215 (172) Inventory, net of trade payables 64 (395) (521) Current taxes payable (171) 116 31 Other assets and liabilities, net (521)(1) (188) (194) ----------------------------------------------------- 1,058 1,218 382 - --------------------------------------------------------------------------------------------------------- Investing Activities Capital expenditures (744) (824) (704) Proceeds from the sale of banking assets, net - 276 - Acquisitions(2) (247) - (1,776) Purchase of investment securities (611) (401) (471) Proceeds from the sale of investment securities 447 252 493 ----------------------------------------------------- (1,155) (697) (2,458) - --------------------------------------------------------------------------------------------------------- Financing Activities Change in short-term debt 507 (2,533) 2,401 Proceeds from the issuance of long-term debt 644 2,990 596 Payment of long-term debt (478) (343) (133) Common stock issued, net 89 79 33 Common stock purchased and retired (270) - (366) Dividends paid, preferred and common (586) (558) (497) ----------------------------------------------------- (94) (365) 2,034 - --------------------------------------------------------------------------------------------------------- Net Increase/(Decrease) in Cash and Short-Term Investments (191) 156 (42) Cash and short-term investments at beginning of year 287 131 173 - --------------------------------------------------------------------------------------------------------- Cash and Short-Term Investments at End of Year $ 96 $ 287 $ 131 - --------------------------------------------------------------------------------------------------------- Supplemental Cash Flow Information Interest paid $ 649 $ 571 $ 390 Interest received 45 71 60 Income taxes paid 307 225 356 - ---------------------------------------------------------------------------------------------------------
(1) The increase in other assets and liabilities, net, is principally related to increases in Eckerd receivables and payments related to reserves established in 1997. (2) Reflects total cash changes related to acquisitions. Non-cash transactions: In 1997, the Company issued 23.2 million shares of common stock having a value of $1.3 billion to complete the acquisition of Eckerd. In 1996, the Company issued 5.2 million shares of common stock having a value of $278 million for the acquisition of Fay's Incorporated. See Notes to the Consolidated Financial Statements on pages 26 through 39. 25 Notes to the Consolidated Financial Statements 1 Summary of Accounting Policies 2 Retained Interest in JCP Master Credit Card Trust 3 Investments and Fair Value of Financial Instruments 4 Accounts Payable and Accrued Expenses 5 Short-Term Debt 6 Long-Term Debt 7 Capital Stock 8 Stock-Based Compensation 9 Interest Expense, Net 10 Lease Commitments 11 Advertising Costs 12 Retirement Plans 13 Other Charges, Net 14 Taxes 15 Segment Reporting 26 1 SUMMARY OF ACCOUNTING POLICIES Basis of presentation. Certain prior year amounts have been reclassified to conform to the current year presentation. Basis of consolidation. The consolidated financial statements present the results of J. C. Penney Company, Inc. and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Definition of fiscal year. The Company's fiscal year ends on the last Saturday in January. Fiscal 1998 ended January 30, 1999; fiscal 1997 ended January 31, 1998; and fiscal 1996 ended January 25, 1997. Fiscal 1997 was a 53-week year; fiscal 1998 and 1996 were 52-week years. The accounts of Direct Marketing and Renner are on a calendar-year basis. Retail sales, net. Retail sales include merchandise and services, net of returns, and exclude all taxes. Direct marketing revenue. Premium income for life insurance contracts is recognized as income when due. Premium income for accident and health, and credit insurance and membership services income is reported as earned over the coverage period. Premiums and fees paid in advance are deferred and recognized as income over the coverage period. Earnings per common share. Basic earnings per share is computed by dividing net income less dividend requirements on the Series B ESOP convertible preferred stock, net of tax, by the weighted average common stock outstanding. Diluted earnings per share assumes the exercise of stock options and the conversion of the Series B ESOP convertible preferred stock into the Company's common stock. Additionally, it assumes adjustment of net income for the additional cash requirements, net of tax, needed to fund the ESOP debt service resulting from the assumed replacement of the preferred dividends with common stock dividends. Cash and short-term investments. The Company's short-term investments are comprised principally of commercial paper which has a maturity at the acquisition date of less than three months. All other securities are classified as investments on the consolidated balance sheets. Accounts receivable. The Company's policy is to write off accounts when the scheduled minimum payment has not been received for six consecutive months, if any portion of the balance is more than 12 months past due, or if it is otherwise determined that the customer is unable to pay. Collection efforts continue subsequent to write-off, and recoveries are applied as a reduction of bad debt losses. Merchandise inventory. Substantially all merchandise inventory is valued at the lower of cost (last-in, first-out) or market, determined by the retail method. The Company determines the lower of cost or market on an aggregated basis for similar types of merchandise. The Company applies internally developed indices to measure increases and decreases in its own retail prices. Depreciation and amortization. All long-lived assets are amortized on a straight-line basis over their respective useful lives. The primary useful life for buildings is 50 years, and ranges from three to 20 years for furniture and equipment. Improvements to leased premises are amortized over the expected term of the lease or their estimated useful lives, whichever is shorter. Trade name and goodwill are generally amortized over 40 years. Other intangible assets, whose fair value is determined at the date of acquisition, are amortized over periods ranging from five to seven years. Impairment of assets. The Company assesses the recoverability of asset values, including goodwill and other intangible assets, on a periodic basis by comparing expected cash flows to net book value. Impaired assets are written down to estimated fair value. Deferred charges. Deferred policy acquisition and advertising costs, principally solicitation and marketing costs and commissions, incurred by Direct Marketing to secure new business are amortized over the expected premium-paying period of the related policies and over the expected period of benefits for memberships. Capitalized software costs. Costs associated with the acquisition or development of software for internal use are capitalized and amortized over the expected useful life of the software. The amortization period generally ranges from three to 10 years. Investments. The Company's investments are classified as available-for-sale and are carried at fair value. Changes in unrealized gains and losses are included in other comprehensive income, net of applicable income taxes. Insurance policy reserves. Liabilities established by Direct Marketing for future policy benefits are computed using a net level premium method including assumptions as to investment yields, mortality, morbidity, and persistency based on the Company's experience. Advertising. Costs for newspaper, television, radio, and other media advertising are expensed as incurred. Catalog book preparation and printing costs, which are considered direct response advertising, are charged to expense over the life of the catalog, not to exceed six months. 27 Pre-opening expenses. Costs associated with the opening of new stores are expensed in the period incurred. Derivative financial instruments. The Company selectively uses non-leveraged, off-balance-sheet derivative instruments to manage its market and interest rate risk, and does not hold derivative positions for trading purposes. The current derivative position consists of a non-leveraged, off-balance-sheet interest rate swap which is accounted for by recording the net interest received or paid as an adjustment to interest expense on a current basis. Gains or losses resulting from market movements are not recognized. Use of estimates. Certain amounts included in the Company's consolidated financial statements are based upon estimates. Actual results may differ from these estimates. New accounting rules. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (FAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, in June 1998. The new rules are effective for quarters beginning after June 15, 1999. The Company has a limited exposure to derivative products and does not expect these new rules to have a material impact on reported results. The American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, in March 1998. The Company adopted the new rules in 1998 and capitalized approximately $20 million of software development costs during the year. Due to the significance of systems development costs, it is expected that capitalized software costs will increase over the next several years. The AICPA also issued SOP No. 98-5, Reporting on the Costs of Start-Up Activities, in April 1998. The Company adopted the new accounting rules in 1998. The new rules require that start-up costs, including store pre-opening expenses, be expensed as incurred. The Company's existing accounting policy conforms with the new rules; accordingly, there was no impact on the Company's results of operation. 2 RETAINED INTEREST IN JCP MASTER CREDIT CARD TRUST The Company has transferred portions of its customer receivables to a trust which, in turn, has sold certificates in public offerings representing undivided interests in the trust. As of January 30, 1999, $1,143 million of the certificates were outstanding and the balance of the receivables in the trust was $1,578 million. The Company owns the remaining undivided interest in the trust not represented by the certificates. The retained interest in the trust is accounted for as an investment in accordance with FAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The carrying value of $415 million in 1998 and $1,073 million in 1997 includes a valuation reserve of $15 million and $40 million, respectively. Due to the short-term nature of this investment, the carrying value approximates fair value. 3 INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS 1998 1997 - ----------------------------------------------------------------------------- Amortized Fair Amortized Fair ($ in millions) Cost Value Cost Value - ----------------------------------------------------------------------------- Fixed income securities $ 1,269 $ 1,322 $ 1,126 $ 1,167 Asset-backed certificates 431 449 431 459 Equity securities 159 190 113 148 - ----------------------------------------------------------------------------- Total $ 1,859 $ 1,961 $ 1,670 $ 1,774 - ----------------------------------------------------------------------------- Investments. The Company's investments are recorded at fair value based on quoted market prices and consist principally of fixed income and equity securities, substantially all of which are held by Direct Marketing, and asset-backed certificates. The majority of the fixed income securities mature during the next ten years. Unrealized gains and losses are included in stockholders' equity, net of tax, and are shown as a component of other comprehensive income. Financial liabilities. Financial liabilities are recorded in the consolidated balance sheets at historical cost, which approximates fair value. Such fair values are not necessarily indicative of actual market transactions. The fair value of long-term debt, excluding capital leases, is based on the interest rate environment and the Company's credit rating. All long-term debt is fixed rate and therefore the Company is not exposed to fluctuations in market rates except to the extent described in the following paragraph. Derivative financial instruments. The Company's current derivative position consists of one interest rate swap which was entered into in connection with the issuance of asset-backed certificates in 1990. This swap helps to protect certificate holders by reducing the effects of an early amortization of the 28 principal. According to the terms of the swap, the Company pays fixed interest at 9.625 per cent and receives variable interest based on floating commercial paper rates. The Company's total exposure resulting from the swap is not material. As discussed in Note 1, the net amount paid or received is included in interest expense. Concentrations of credit risk. The Company has no significant concentrations of credit risk. Individual accounts comprising accounts receivable are widely dispersed and investments are well diversified. 4 ACCOUNTS PAYABLE AND ACCRUED EXPENSES - ------------------------------------------------- ($ in millions) 1998 1997 - ------------------------------------------------------------------------- Trade payables $ 1,496 $ 1,551 Accrued salaries, vacation, and bonus 444 487 Taxes payable 232 486 Interest payable 165 165 Common dividends payable 140 136 Other(1) 988 1,234 - ------------------------------------------------------------------------- Total $ 3,465 $ 4,059 - ------------------------------------------------------------------------- (1) Includes $110 million and $216 million for 1998 and 1997, respectively, related to other charges, principally future lease obligations. 5 SHORT-TERM DEBT - ------------------------------------------------- ($ in millions) 1998 1997 - ------------------------------------------------------------------------- Commercial paper $ 1,924 $ 1,417 Average interest rate at year-end 5.1% 5.6% - ------------------------------------------------------------------------- Committed bank credit facilities available to the Company as of January 30, 1999 totaled $3.0 billion. The facilities, as amended and restated in 1998, support the Company's short-term borrowing program and are comprised of a $1.5 billion, 364-day revolver and a $1.5 billion, five-year revolver. The 364-day revolver includes a $750 million seasonal credit line for the August to January period, allowing the Company to match its seasonal borrowing requirements. None of the borrowing facilities was in use as of January 30, 1999. The Company also has $910 million of uncommitted credit lines in the form of letters of credit with seven banks to support its direct import merchandise program. As of January 30, 1999, $280 million of letters of credit issued by the Company were outstanding. 6 LONG-TERM DEBT Jan. 30, 1999 Jan. 31, 1998 - ----------------------- Avg. Avg. ($ in millions) Rate Balance Rate Balance - ------------------------------------------------------------ Notes and debentures Due Year 1 8.0% $ 424 5.4% $ 400 Due Year 2 6.7% 625 6.9% 225 Due Year 3 9.1% 250 6.7% 625 Due Year 4 7.5% 1,100 9.1% 250 Due Year 5 5.8% 1,000 7.5% 1,100 Due 6-10 years 8.0% 1,441 7.8% 1,760 Due 11-15 years 9.0% 125 8.0% 325 Due 16-20 years 7.6% 767 7.7% 780 Due 21-30 years 7.5% 875 7.5% 887 Due thereafter 7.5% 900 7.5% 900 ------------------------------------- Total notes and debentures 7.4% 7,507 7.5% 7,252 Guaranteed LESOP notes, due 1998 - 49 Capital lease obligations and other 74 134 Less current maturities (438) (449) - ------------------------------------------------------------ Total long-term debt $ 7,143 $ 6,986 - ------------------------------------------------------------ During 1998, JCP Receivables, Inc., an indirect wholly owned special purpose subsidiary of the Company, completed a public offering of $650 million aggregate principal amount of Series E asset-backed certificates of JCPenney Master Credit Card Trust. The certificates have a maturity of five years and an interest rate of 5.5 per cent. This transaction did not meet the criteria for sale accounting under FAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, and accordingly it was recorded as a secured borrowing by the Company. Proceeds from the offering were used for general corporate purposes. In 1997, the Company issued $3.0 billion of debt in connection with its drugstore acquisitions. These notes and debentures had an average maturity of 30 years and an average interest rate of 7.5 per cent. All notes and debentures have similar characteristics regardless of due date and therefore are grouped by maturity date. 29 7 CAPITAL STOCK At January 30, 1999, there were approximately 56 thousand stockholders of record. On a combined basis, the Company's savings plans, including the Company's employee stock ownership plan (ESOP), held 43.4 million shares of common stock, or 16.3 per cent of the Company's common shares after giving effect to the conversion of preferred stock. Common stock. The Company has authorized 1,250 million shares, par value $.50; 250 million shares were issued and outstanding as of January 30, 1999, and 251 million shares were issued and outstanding as of January 31, 1998. Preferred stock. The Company has authorized 25 million shares; 792 thousand shares of Series B ESOP Convertible Preferred Stock were issued and outstanding as of January 30, 1999, and 876 thousand shares were issued and outstanding as of January 31, 1998. Each share is convertible into 20 shares of the Company's common stock at $30 per common share. Dividends are cumulative and are payable semi-annually at a rate of $2.37 per common share equivalent, a yield of 7.9 per cent. Shares may be redeemed at the option of the Company or the ESOP under certain circumstances. The redemption price may be satisfied in cash or common stock or a combination of both, at the Company's sole discretion. Preferred stock purchase rights. In March 1999, the Board of Directors declared a dividend distribution of one preferred stock purchase right on each outstanding share of common stock in connection with the redemption of the Company's then existing preferred stock purchase rights program. These rights entitle the holder to purchase, for each right held, 1/1000 of a share of Series A Junior Participating Preferred Stock at a price of $140. The rights are exercisable by the holder upon the occurrence of certain events and are redeemable by the Company under certain circumstances as described by the rights agreement. The rights agreement contains a three-year independent director evaluation provision. This "TIDE" feature provides that a committee of the Company's independent directors will review the rights agreement at least every three years and, if they deem it appropriate, may recommend to the Board a modification or termination of the rights agreement. 8 STOCK-BASED COMPENSATION The Company has a stock-based compensation plan which was approved by stockholders in 1997. The plan reserved 14 million shares of common stock for issuance to plan participants upon the exercise of options over the 10-year term of the plan. Approximately 2,000 employees, comprised principally of selected management employees, are eligible to participate. Both the number of shares and the exercise price, which is based on the average market price, are fixed at the date of grant and have a maximum term of 10 years. The plan also provides for grants of stock options and stock awards to outside members of the Board of Directors. Shares acquired by such directors are not transferable until a director terminates service. The Company accounts for stock-based compensation under the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, net income and earnings per share shown in the consolidated statements of income appearing on page 22 do not reflect any compensation cost for the Company's fixed stock options. In accordance with FAS No. 123, Accounting for Stock-Based Compensation, the fair value of each fixed option granted is estimated on the date of grant using the Black-Scholes option pricing model, as follows: Option assumptions 1998 1997 1996 - ---------------------------------------------------------- Dividend yield 3.8% 4.0% 3.9% Expected volatility 20.5% 21.3% 22.3% Risk-free interest rate 5.7% 6.3% 5.6% Expected option term 6 years 6 years 5 years Fair value per share of options granted $ 13.66 $ 9.76 $ 8.88 - ---------------------------------------------------------- Compensation expense recorded under FAS No. 123 would have been approximately $21 million in 1998 and $11 million in 1997 and 1996, reducing earnings per share by eight cents in 1998, and approximately four cents in the other two years. The following table summarizes the status of the Company's fixed stock option plans for the years ended January 30, 1999, January 31, 1998, and January 25, 1997: 30 Options
- -------------------------------- (shares in thousands; price 1998 1997 1996 is weighted average) Shares Price Shares Price Shares Price - ------------------------------------------------------------------------------------------------------------ Beginning of year 7,583 $ 40 8,633 $ 36 8,867 $ 33 Granted 1,643 71 1,413 45 1,266 48 Exercised (2,100) (36) (2,347) (30) (1,427) (27) Expired and cancelled (154) (61) (116) (48) (73) (42) ---------------------------------------------------------------------------- Outstanding at end of year 6,972 48 7,583 40 8,633 36 Exercisable at end of year 5,418 41 6,428 38 7,419 35 - ------------------------------------------------------------------------------------------------------------
Options as of January 30, 1999
Outstanding Exercisable - ---------------------------------------------------------------------------------------------------------- (shares in thousands; price and Remaining remaining term are weighted averages) Shares Price Term (Yrs.) Shares Price - ---------------------------------------------------------------------------------------------------------- Under $25 83 $ 9 4.6 83 $ 9 $25-$35 1,761 28 2.3 1,761 28 $35-$45 998 42 5.7 980 42 $45-$55 1,842 48 7.6 1,842 48 Over $55 2,288 66 8.2 752 55 - ---------------------------------------------------------------------------------------------------------- Total 6,972 $ 48 6.0 5,418 $ 41 - ----------------------------------------------------------------------------------------------------------
9 INTEREST EXPENSE, NET - ---------------------- ($ in millions) 1998 1997 1996 - --------------------------------------------------- Short-term debt $ 106 $ 121 $ 102 Long-term debt 557 527 312 Other, net* (52) (67) (55) - --------------------------------------------------- Interest expense, net $ 611 $ 581 $ 359 - --------------------------------------------------- * Includes $39 million in 1998 and $34 million in 1997 and 1996 for interest income from the Company's investment in asset-backed certificates. 10 LEASE COMMITMENTS The Company conducts the major part of its operations from leased premises that include retail stores, warehouses, offices, and other facilities. Almost all leases will expire during the next 20 years; however, most leases will be renewed or replaced by leases on other premises. Rent expense for real property operating leases totaled $585 million in 1998, $541 million in 1997, and $333 million in 1996, including contingent rent based on sales of $66 million, $72 million, and $48 million for the three years, respectively. The Company also leases data processing equipment and other personal property under operating leases of primarily three to five years. Rent expense for personal property leases was $123 million in 1998, $126 million in 1997, and $106 million in 1996. Future minimum lease payments for noncancelable operating and capital leases, net of subleases, as of January 30, 1999 were: - ------------------------------ ($ in millions) Operating Capital - -------------------------------------------------------- 1999 $ 565 $ 11 2000 510 11 2001 440 11 2002 408 6 2003 384 1 Thereafter 2,841 - - -------------------------------------------------------- Total minimum lease payments $ 5,148 $ 40 Present value $ 2,715 $ 35 Weighted average interest rate 10% 10% - -------------------------------------------------------- Minimum lease payments are shown net of estimated executory costs, principally real estate taxes, maintenance, and insurance. 31 11 ADVERTISING COSTS Advertising costs consist principally of newspaper, television, radio, and catalog book costs. In 1998, the total cost of advertising was $1,077 million compared with $977 million in 1997, and $988 million in 1996. The "other assets" section of the consolidated balance sheets includes deferred catalog book costs of $87 million as of January 30, 1999, and $89 million as of January 31, 1998. 12 RETIREMENT PLANS The Company's retirement plans consist principally of a noncontributory pension plan, a noncontributory supplemental retirement program for certain management associates, a contributory medical and dental plan, and a savings plan, including a 401(k) plan and an employee stock ownership plan. In addition, in 1998, the Company adopted two nonqualified savings plans. Pension plan assets are invested in a balanced portfolio of equity and debt securities managed by third party investment managers. In addition, Eckerd has a noncontributory pension plan. As of January 1, 1999, all Eckerd retirement benefit plans were frozen and all employees began to accrue benefits under the Company's retirement plans. The following tables include the benefit obligation related to the Company's early retirement program (see Note 13, page 33, for additional information). The cost of these programs and the December 31 balances of plan assets and obligations are shown below: Expense - ----------------------------- ($ in millions) 1998 1997 1996 - ------------------------------------------------------- Pension and health care Service cost $ 76 $ 68 $ 73 Interest cost 221 200 186 Projected return on assets (283) (488) (386) Net amortization 14 248 174 -------------------------- 28 28 47 Savings plan expense 76 71 56 - ------------------------------------------------------- Total retirement plans $ 104 $ 99 $ 103 - ------------------------------------------------------- Assumptions 1998 1997 1996 - ------------------------------------------------------- Discount rate 6.75% 7.25% 8.0% Expected return on plan assets 9.5% 9.5% 9.5% Salary progression rate 4.0% 4.0% 4.0% Health care trend rate 7.0% 7.0% 7.0% - ------------------------------------------------------- Assets and obligations Pension plans* - ------------------------------------ ($ in millions) 1998 1997 - ------------------------------------------------------- Projected benefit obligation Beginning of year $ 2,749 $ 2,187 Service and interest cost 273 243 Actuarial (gain)/loss 184 400 Benefits paid (200) (210) Amendments and other - 129 - ------------------------------------------------------- End of year 3,006 2,749 Fair value of plan assets Beginning of year 3,064 2,735 Company contributions 32 29 Net gains/(losses) 497 510 Benefits paid (200) (210) - ------------------------------------------------------- End of year 3,393 3,064 Excess of fair value over projected benefits 387 315 Unrecognized gains and prior service cost 75 125 - ------------------------------------------------------- Prepaid pension cost $ 462 $ 440 - ------------------------------------------------------- * Includes supplemental retirement plan. Medical and dental - ----------------------------------- ($ in millions) 1998 1997 - ------------------------------------------------------- Accumulated benefit obligation $ 334 $ 335 Net unrecognized losses 10 13 - ------------------------------------------------------- Net medical and dental liability $ 344 $ 348 - ------------------------------------------------------- A one per cent change in the health care trend rate would change the accumulated benefit obligation and expense by approximately $24 million and $2 million, respectively. 32 13 OTHER CHARGES, NET During 1996 and 1997, the Company recorded other charges principally related to drugstore integration activities, department store closings and FAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (FAS 121), impairments, and early retirements and reduction in force programs. The following tables provide a summary of the charges by year and by category as well as a roll forward of reserves that were established for certain of the charges. 1996 Charges
1996 ------------------------------------------------- - -------------------------------------------------------- Cash Other Y/E ($ in millions) Expense Outlays Changes Reserve - --------------------------------------------------------------------------------------------------------- Department stores and catalog Reduction in force $ 11 $ (11) $ - $ - - --------------------------------------------------------------------------------------------------------- Eckerd drugstores FAS 121 impairments and loss on the divestiture of drugstore assets(1) 174 - (174) - Future lease obligations and severance(2) 69 - - 69 Allowance for notes receivable(3) - - 25 25 Headquarters severance(2) 17 - - 17 Other(2) 32 (12) (16) 4 ------------------------------------------------- 292 (12) (165) 115 - --------------------------------------------------------------------------------------------------------- Total $ 303 $ (23) $ (165) $ 115 - --------------------------------------------------------------------------------------------------------- 1996 | 1997 | 1998 -----------|---------------------------------|---------------------------------- - ---------------------------- Y/E | Cash Other Y/E | Cash Other Y/E ($ in millions) Reserve | Outlays Changes Reserve | Outlays Changes Reserve - ---------------------------------------|---------------------------------|---------------------------------- | | Eckerd drugstore | | | | Future lease obligations | | and severance(2) $ 69 | $ (3) $ - $ 66 | $ (7) $ - $ 59 | | Allowance for notes | | receivable(3) 25 | - - 25 | - - 25 | | Headquarters severance(2) 17 | (16) - 1 | (1) - - | | Other(2) 4 | - - 4 | - - 4 - ---------------------------------------|---------------------------------|---------------------------------- Total $ 115 | $ (19) $ - $ 96 | $ (8) $ - $ 88 - ------------------------------------------------------------------------------------------------------------
(1) Charges related to FAS 121 impairments were recorded as a reduction of property, plant, and equipment balances. (2) Reserve balances are included as a component of accounts payable and accrued expenses. (3) The allowance for notes receivable is included as a reduction of receivables, net. 33 Department stores and catalog Reduction in force. As part of the Company's ongoing program to reduce the cost structure for stores and catalog and improve the Company's competitive position and future performance, it announced the elimination of 119 store and field support positions in September 1996, all of which were subsequently eliminated. Subsequent periods benefited from the elimination of related salary costs. The charges, which were expensed and paid in the fourth quarter of 1996, related to severance and outplacement. Eckerd drugstores FAS 121 impairments and loss on the divestiture of drugstore assets. In the fourth quarter of 1996, the Company recorded $174 million of charges associated with the Eckerd acquisition. This amount was comprised of the following components: 1) $53 million related to the closing of certain underperforming and/or overlapping drugstores; 2) $96 million related to the divestiture of certain Rite Aid and Kerr drugstores; and 3) $25 million related principally to the write-off of goodwill associated with previous acquisitions. Each of these items is discussed in more detail below: 1) In October 1996, the Company acquired Fay's Incorporated (Fay's), a chain of approximately 270 drugstores. Also in October 1996, Thrift Drug, Inc., a wholly owned subsidiary of the Company, entered into an agreement to acquire substantially all of the assets of approximately 190 Rite Aid drugstores in North and South Carolina. At the time of the acquisition, no significant changes to the operations of these stores were expected. In November 1996, the Company entered into an agreement to acquire Eckerd, a chain of 1,748 drugstores. Upon entering into the agreement to acquire Eckerd, the Company began to plan for the integration of its approximately 1,100 existing drugstores into the Eckerd name and format. The integration plan provided for, among other things, the closing of 86 overlapping and/or under-performing Thrift and Fay's drugstores, all of which were leased facilities. These stores had a sales base of approximately $130 million and operating losses of approximately $9 million before non-cash operating expenses, such as depreciation. During 1997, 64 stores were closed. The remaining store closings were delayed into fiscal 1998 to facilitate a timely and orderly transition between the operations of the stores to be closed and the surrounding stores that were to remain open and operating. All stores were closed as of the end of fiscal 1998. A FAS 121 impairment charge of $53 million related to these stores was recorded by the Company in 1996. Impaired assets consisted primarily of store fixtures and leasehold improvements. Since these assets could not readily be used at other store locations and no ready market existed outside the Company, they were discarded at the time of closing. Accordingly, the impairment charge recorded for these assets represented their carrying value as of the end of fiscal 1996. Asset values were reduced to zero and as a result, depreciation was discontinued. The stores were operating at a loss and continued to do so subsequent to the FAS 121 impairment charge. Operating results for the individual stores were included in operations through the date of closing. There were no significant changes to the Company's initial estimate of impairment. 2) As a condition of its approval of the Eckerd acquisition, the Federal Trade Commission (FTC) required that the Company divest itself of 164 stores (divested stores) in North and South Carolina (consisting of both Rite Aid and Kerr drugstores) to a single buyer to maintain adequate competition in the two states. Pursuant to the FTC agreement, the consummation of the acquisition of the Rite Aid stores was delayed until the Company entered into an agreement to sell the divested stores. Ultimately, the Company entered into an agreement with a former member of Thrift management and other parties to sell the divested stores for $75 million ($42 million in cash and $33 million in notes receivable). The Company recognized a FAS 121 impairment charge of $75 million related to the Rite Aid stores. The impairment charge was necessary as the undiscounted cash flows for these units were not sufficient to support recorded asset values, including furniture and fixtures and other intangibles. The amount of the impairment charge was determined based on the difference between the fair value of the assets, as calculated through discounted expected cash flows, and the carrying amount for those assets. In addition, the Company recorded a loss of $21 million related to the divestiture of the Kerr stores. These 34 Kerr stores had a sales base of approximately $59 million and operating income of approximately $3 million before non-cash operating expenses. 3) As part of the acquisition of Eckerd, the decision was made to operate all drugstores under the Eckerd name and format. Consequently, goodwill in the amount of $10 million, which had been allocated under purchase accounting to the Fay's trade name, was determined to have no value. In addition, the Company recorded an impairment charge of $15 million related to goodwill associated with unprofitable business units operated by the former drugstore operations. 34 Future lease obligations and severance. In connection with these drugstore closings and the sale of divested stores, the Company established a $69 million reserve for the present value of future lease obligations. The store closing plan anticipated that Eckerd would remain liable for all future lease payments. The present value of future lease obligations was calculated using a 6.7 per cent discount rate and anticipated no subleasing activity or lease buyouts. Costs are being charged against the reserve as incurred; the interest component related to lease payments is recorded as rent expense with no corresponding increase in the reserve. Payments during the next five years are expected to be approximately $2 million per year. These reserves will be assessed periodically to determine their adequacy. No changes have been deemed necessary through the end of 1998. Approximately 1,150 store employees, including store managers as well as salaried and non-salaried personnel, were terminated as a result of store closings. Allowance for notes receivable. A portion of the proceeds related to the sale of the divested stores was financed by the Company through a note receivable of $33 million. The FTC agreement provided that the Company could not maintain a continuing interest in the divested stores. This placed significant constraints on the Company's ability to collect on the note which remains uncertain. Consequently, a reserve for 75 per cent ($25 million) of the face value of the note receivable was established. This reserve is reviewed for adequacy on a periodic basis. No adjustments have been deemed necessary through the end of 1998. Headquarters severance. A reserve of $17 million was established for termination benefits related to the elimination of the Thrift headquarters and certain support facilities upon the acquisition of Eckerd. Approximately 400 employees were affected by the plan to eliminate these functions, which included all levels of Thrift management and administrative staff. Ultimately, 436 employees were terminated under this program, with the majority of the employees being terminated during 1997. Actual termination costs were charged against the reserve as incurred with $16 million being incurred and charged against the reserve in 1997. The program has been completed and no adjustments were required to the reserve. Other. The principal component of other integration charges was $15 million related to the change of the Thrift accounting policy for certain contractual vendor payments to a more preferable accounting method. This item was established as unearned income on the consolidated balance sheet as of year-end 1996 and is being recognized over the contract terms through the year 2002. The remaining $17 million, the majority of which was expensed as incurred, was related to integration activities for the Fay's stores and other activities such as contract terminations. 1997 Charges
1997 - ---------------------------------------------------------------------------------------------------------- Cash Other Y/E ($ in millions) Expense Outlays Changes Reserve - ---------------------------------------------------------------------------------------------------------- Department stores and catalog Early retirement(1) $ 151 $ (1) $ (150) $ - Reduction in force(2) 55 - - 55 FAS 121 impairments(3) 72 - (72) - Future lease obligations and severance(2) 61 (6) - 55 ------------------------------------------------------------- 339 (7) (222) 110 - ---------------------------------------------------------------------------------------------------------- Sale of business units (63) 63 - - - ---------------------------------------------------------------------------------------------------------- Eckerd drugstores Store integration 61 (61) - - Systems integration 26 (26) - - Advertising/grand reopening 26 (26) - - Future obligations, primarily leases(2) 37 (2) - 35 Gain on the sale of institutional pharmacy (47) 47 - - -------------------------------------------------------------- 103 (68) - 35 - ---------------------------------------------------------------------------------------------------------- Total $ 379 $ (12) $ (222) $ 145 - ----------------------------------------------------------------------------------------------------------
35
1997 1998 ----------------------------------------------------------------- - ----------------------------------------- Y/E Cash Other Y/E ($ in millions) Reserves Outlays Changes Reserve - ---------------------------------------------------------------------------------------------------------- Department stores and catalog Reduction in force(2) $ 55 $ (44) $ (11) $ - Future obligations and severance(2) 55 (24) (11) 20 ----------------------------------------------------------------- 110 (68) (22) 20 - ---------------------------------------------------------------------------------------------------------- Eckerd drugstores Future obligations, primarily leases(2) 35 (8) - 27 - ---------------------------------------------------------------------------------------------------------- Total $ 145 $ (76) $ (22) $ 47 - ----------------------------------------------------------------------------------------------------------
(1) The early retirement program was reflected in the 1997 year end balance sheet as follows: $58 million in enhanced pension benefits was credited against prepaid pension assets which are included in other assets; $5 million of retiree medical liability and $85 million for the new non-qualified retirement plan are included in other liabilities; and such amounts are included in retirement plan disclosures in Note 12 on page 32. In addition, $2 million of plan administration costs was included in accounts payable and accrued expenses in 1997. (2) Reserve balances are included as a component of accounts payable and accrued expenses. (3) Charges related to FAS 121 impairments were recorded as a reduction of property, plant, and equipment balances. Department stores and catalog As part of the Company's initiatives to reduce the cost structure for department stores and catalog and improve the Company's competitive position and future performance, the following actions were taken in the third and fourth quarters of 1997: Early retirement. In August 1997 the Company announced a voluntary early retirement program (Program) to all department stores, catalog, and corporate support management employees who were age 55 or older and had at least 10 years of service. Approximately 1,600 employees were eligible to participate in the program, and approximately 1,245, or 78 per cent, elected to retire under the Program. The charge of $151 million includes $158 million of termination benefits that were actuarially calculated based on the employees electing to retire under the Program (representing lump-sum payments as well as the present value of periodic future payments determined at a discount rate of 7.5%), $5 million of actuarially calculated post retirement welfare benefits, and $3 million of outside consulting and administration costs. These costs were offset by a $15 million pension curtailment gain which was the result of a decrease in the projected benefit obligation (PBO) of the Company's qualified pension plan. The PBO was reduced due to the elimination of the liability for future salary increases resulting from the early termination of employees who elected to retire under the Program. Of the $3 million of outside consulting and administrative costs, approximately $2 million represented cash outlays, and the remainder was reversed in the fourth quarter of 1998. All other amounts recorded under this program are included in Retirement Plans disclosure in Note 12 on page 32. Reduction in force. In the fourth quarter of 1997, the Company announced a restructuring plan to eliminate approximately 1,700 management employees. The $55 million charge represents severance, outplacement, and other termination benefits offered to all affected associates. There was no cash outlay in 1997 because, while employees were notified of the restructuring plan in the fourth quarter of 1997, they did not leave the Company until 1998. Cash outlays of $44 million in 1998 represent termination benefits paid to the approximately 1,550 employees terminated. The plan was completed in the fourth quarter of 1998 at less cost than originally estimated due in part to employee resignations prior to being involuntarily terminated and employees obtaining positions elsewhere in the Company. Consequently, approximately $11 million was reversed in the fourth quarter of 1998. FAS 121 impairments. The Company identified 97 underperforming stores that did not meet the Company's profit objectives and several support units (credit service centers and warehouses) which were no longer needed. This unit closing plan (Plan) represents unit closings over and above the normal course of store closures within a given year, which are typically relocations. All units were closed by the end of fiscal 1998. The major actions comprising the Plan consisted of the identification of a closing date (to coincide with termination rights and/or other trigger dates contained in the lease, if applicable), and the notification of affected parties (e.g., employees, landlords, and community representatives) in accordance with the Company's store closing procedures. Substantially all of the stores and support units included in the portfolio were leased, and as such, the Company was not responsible for the disposal of property, other than fixtures, which for 36 the most part were discarded. Unit closing costs include future lease obligations and termination benefits, and FAS 121 impairments. Impaired assets resulting from the store closings consist primarily of store furniture and fixtures, and leasehold improvements. The majority of the stores identified for closure were older stores in small markets and the associated furniture and fixtures were outdated. Therefore, these items could not be readily used at another location, and there was not a ready market for these items to determine a fair value. Accordingly, the impairment charge recorded for these assets represents the carrying value of the assets as of the end of fiscal 1997. Depreciation of these assets was discontinued as the impairment charges reduced the asset balances to zero. The stores were operating at a loss and continued to do so subsequent to the FAS 121 impairment charge. There were no significant changes to the Company's initial estimate of impairment. Future lease obligations and severance. In connection with the above store closings, the Company established a $61 million reserve for the present value of future lease obligations ($31 million) and other store closing costs ($30 million), principally severance and outplacement. The store closing plan anticipated that the Company would remain liable for all future lease payments. Present values were calculated assuming a ten per cent discount rate and anticipated no subleasing activity or lease buyouts. Costs are being charged against the reserve as incurred. The cash outlays in 1997 and 1998 represent severance benefits paid for approximately 1,550 employees terminated under the program, and lease payments for closed stores. The interest component of lease payments of approximately $2 million in 1998 was recorded as interest expense, with a corresponding increase in the reserve, in the fourth quarter of 1998 and future years. The remaining reserve as of the end of 1998 represents future lease obligations for all closed stores. The actual timing of store closings did not differ significantly from the estimate upon which the liability for future lease obligations was based. On average, the remaining lease term for closed stores was seven years, and payments during the next five years are expected to be approximately $4 million per year. Adjustments to the reserves in 1998 included reversals of approximately $5 million due to reduced lease obligations stemming from subleased facilities, and $6 million for employment-related costs. Employment-related costs were less than original estimates as a result of several factors, including voluntary resignations, a higher rate of employee transfers, and the termination of a higher proportion of employees with less tenure with the Company. These reserves will continue to be assessed periodically. The stores identified for closure were generally those with a poor performance history, and to a large extent, declining sales. The short-term effect of the closings was the net loss of approximately $225 million in sales and the elimination of approximately $15 million in operating losses before non-cash operating charges such as depreciation. The Company expects to realize benefits of approximately $32 million per year as a result of eliminating operating losses associated with the closed stores and the redeployment of working capital. Sale of business units A gain on the sale of business units of $63 million was included in the 1997 other charges. JCPenney National Bank (JCPNB), a consumer bank which issued VISA and MasterCard credit cards, was sold in 1997 at a gain of $49 million. In addition, the Company recorded a $14 million gain representing a supplemental, contingent payment related to the 1995 sale of JCPenney Business Services, Inc. (BSI). BSI provided credit-related services to third party credit-card issuers. JCPNB 1996 revenues and operating income were $129 million and $2 million, respectively. The sale of JCPNB did not have a negative impact on the Company's results of operations or financial position in 1997, and it is not expected to have a material impact in future periods. Eckerd drugstores The majority of drugstore charges recorded as other charges in 1997 relate to integration activities that were expensed as incurred in accordance with EITF 95-3. Such costs were comprised of the following: Store integration - charges totaling $61 million related to the conversion of the former Thrift, Fay's, and Kerr stores and certain warehouse facilities to the Eckerd name and format, including training, overhead redundancies during the transition period, and other similar integration-related costs. Systems integration - costs associated with the conversion of the previously owned drugstores to the Eckerd systems platform totaled $26 million. Advertising and grand pre-opening - costs associated with introducing the Eckerd name in converted regions as well as costs related to the grand re-opening of converted drugstores totaled $26 million. In addition, the Company recorded the following drugstore related items as other charges in 1997: Future obligations, primarily leases. In the second quarter of 1997, as part of the ongoing drugstore integration process, the Company closed 26 additional drugstores. These stores were part of the portfolio of retained Rite Aid stores (see previous discussion). The Company recorded a FAS 121 37 impairment charge for the store assets in 1996. These closings did not involve any termination benefits. The liability in 1997 was limited to future lease obligations on these stores. The reserve for future lease obligations for these stores is based on the present value of lease obligations through the year 2017. Additionally, in the fourth quarter of 1997, the Company became obligated to make future lease payments for 27 stores that Fay's had sold prior to being acquired by the Company on which the buyer had defaulted and failed to make lease payments. Fay's, and therefore the Company, was contractually obligated to make the lease payments. Accordingly, the Company recorded a charge for future lease obligations on these stores at the time the liability became known. The reserve for future lease obligations on these stores is based on lease payments through the year 2009. A charge of $25 million related to all of these lease obligations was recorded. These events are not expected to have an effect on future sales, and other than future lease obligations, there will be no impact on future operating results as none of the stores operated as part of Thrift drugstores. In addition, an $8 million charge was recorded for liabilities established for pending litigation, and the remaining $4 million relates to other miscellaneous charges, each individually insignificant. As of the end of 1998, these combined reserves totaled $27 million. There have been no adjustments to these liabilities as of the end of 1998. Gain on the sale of institutional pharmacy. As part of the integration plan, the Company sold its underperforming institutional pharmacy operation in the fourth quarter of 1997 and recorded a gain of $47 million. This operation generated sales of $80 million in 1997. 14 TAXES Deferred tax assets and liabilities reflected on the Company's consolidated balance sheets were measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The major components of deferred tax (assets)/liabilities as of January 30, 1999 and January 31, 1998 were as follows: Temporary differences - --------------------------------- ($ in millions) 1998 1997 - --------------------------------------------------------- Depreciation and amortization $ 1,084 $ 977 Leases 312 339 Other charges, net (46) (139) Deferred acquisition costs 233 211 Other, including comprehensive income 77 53 - --------------------------------------------------------- Total $ 1,660 $ 1,441 - --------------------------------------------------------- Income tax expense - ----------------------- ($ in millions) 1998 1997 1996 - --------------------------------------------------------- Current Federal and foreign $ 111 $ 319 $ 321 State and local 31 39 43 ----------------------------- 142 358 364 - --------------------------------------------------------- Deferred Federal and foreign 219 3 (19) State and local - (2) (1) ----------------------------- 219 1 (20) - --------------------------------------------------------- Total $ 361 $ 359 $ 344 Effective tax rate 37.8% 38.8% 37.9% - --------------------------------------------------------- Reconciliation of tax rates - ------------------------------ (per cent of pre-tax income) 1998 1997 1996 - --------------------------------------------------------- Federal income tax at statutory rate 35.0 35.0 35.0 State and local income taxes, less federal income tax benefit 2.2 2.8 3.0 Tax effect of dividends on allocated ESOP shares (1.4) (1.3) (1.3) Tax credits and other 2.0 2.3 1.2 - --------------------------------------------------------- Total 37.8 38.8 37.9 - --------------------------------------------------------- 38 15 SEGMENT REPORTING The Company operates in three business segments: department stores and catalog, Eckerd drugstores, and Direct Marketing. The results of department stores and catalog are combined because they generally serve the same customer, have virtually the same mix of merchandise, and the majority of catalog sales are completed in department stores. For more detailed descriptions of each business segment, including products sold, see page 1 and pages 4 through 10 of this report. Other items are shown in the table below for purposes of reconciling to total Company consolidated amounts.
Depreciation - --------------------------------- Operating Total Capital and ($ in millions) Year Revenue Earnings Assets Expenditures Amortization - ------------------------------------------------------------------------------------------------------------ Department stores and catalog 1998 $19,331 $ 1,013 $ 14,563 $ 439 $ 380 1997 19,955 1,368 14,980 464 366 1996 19,506 1,183 14,754 680 325 Eckerd drugstores 1998 10,325 254 6,361 256 138 1997 9,663 347 6,064 341 112 1996 3,147 99 4,389 103 41 Direct Marketing 1998 1,022 233 2,603 1 6 1997 928 214 2,283 5 5 1996 818 186 1,986 7 6 Total segments 1998 30,678 1,500 23,527 696 524 1997 30,546 1,929 23,327 810 483 1996 23,471 1,468 21,129 790 372 Net interest expense and credit operations 1998 (480) 1997 (547) 1996 (278) Other unallocated and amortization of intangible assets 1998 (87) 111 113 1997 (78) 166 101 1996 22 959 9 Other charges, net 1998 22 1997 (379) 1996 (303) Total Company 1998 30,678 955 23,638 696 637 1997 30,546 925 23,493 810 584 1996 23,471 909 22,088 790 381 - ---------------------------------------------------------------------------------------------------------
Total Company operating earnings equals income before income taxes as shown on the Company's consolidated statements of income. 39 QUARTERLY DATA (UNAUDITED) J. C. Penney Company, Inc. and Subsidiaries
- ------------------------------------------ First Second Third Fourth ($ in millions, except per share data) 1998 1997 1998 1997 1998 1997(1) 1998 1997(1) - --------------------------------------------------------------------------------------------------------------------------- Retail sales, net $ 6,806 $ 6,481 $ 6,510 $ 6,420 $ 7,297 $ 7,208 $ 9,043 $ 9,509 Total revenue 7,052 6,705 6,761 6,649 7,549 7,441 9,316 9,751 LIFO gross margin 1,904 1,804 1,629 1,709 2,015 2,038 2,249 2,637 Net income 174 139 27 90 186 136 207 201 Net income per common share, diluted 0.64 0.53 0.08 0.32 0.68 0.49 0.77 0.76 Dividend per common share 0.545 0.535 0.545 0.535 0.545 0.535 0.545 0.535 Price range: High 77 7/8 51 5/8 78 3/4 59 59 3/8 64 1/4 56 1/8 68 1/4 Low 64 11/16 44 7/8 58 45 5/8 42 5/8 54 11/16 38 1/8 53 1/4 Close 71 15/16 45 7/8 58 11/16 57 15/16 47 1/2 56 7/16 39 67 3/8 - --------------------------------------------------------------------------------------------------------------------------
(1) 3rd and 4th quarter net income and net income per share have been restated to shift $23 million, net of tax, of voluntary early retirement costs from 3rd to 4th quarter. The restatement had no effect on full year net income or net income per share. FIVE YEAR FINANCIAL SUMMARY J. C. Penney Company, Inc. and Subsidiaries
- ---------------------------------------------- (in millions, except per share data) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- Results for the year Total revenue $ 30,678 $ 30,546 $ 23,471 $ 21,242 $ 20,937 Retail sales, net 29,656 29,618 22,653 20,562 20,380 Per cent increase 0.1% 30.7% 10.2% 0.9% 7.4% Net income 594 566 565 838 1,057 Return on beginning stockholders' equity 8.1% 7.9%(1) 9.6% 14.9% 19.7% Per common share Net income, diluted $ 2.19 $ 2.10 $ 2.25 $ 3.33 $ 4.05 Dividends 2.18 2.14 2.08 1.92 1.68 Stockholders' equity 26.99 27.57 25.67 24.76 23.45 Financial position Capital expenditures 696 810 790 749 544 Total assets 23,638 23,493 22,088 17,102 16,202 Long-term debt 7,143 6,986 4,565 4,080 3,335 Stockholders' equity 7,169 7,357 5,952 5,884 5,615 Other Common shares outstanding at end of year 250 251 224 224 227 Weighted average common shares Basic 253 247 226 226 234 Diluted 271 268 248 249 258 Number of employees at end of year (in thousands) 262 260 252 205 202 - -----------------------------------------------------------------------------------------------------------
(1) Assumes the completion of the Eckerd acquisition in beginning equity. 40 FIVE YEAR OPERATIONS SUMMARY J. C. Penney Company, Inc. and Subsidiaries
1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- Department stores Number of stores Beginning of year 1,203 1,228 1,238 1,233 1,246 Openings 12 34 36 43 29 Closings (67) (59) (46) (38) (42) -------------------------------------------------------------- End of year 1,148(1) 1,203 1,228 1,238 1,233 Gross selling space (in millions) 115.3 118.4 117.2 114.3 113.0 Sales (in millions) $ 15,402 $ 16,047 $ 15,734 $ 14,973 $ 15,023 Sales including catalog desks (in millions) 18,208 19,089 18,694 17,930 18,048 Sales per gross square foot 156 157 159 156 159 - ----------------------------------------------------------------------------------------------------------- Catalog Number of catalog units Department stores 1,139 1,199 1,226 1,228 1,233 Freestanding sales centers and other 512 554 569 565 568 Drugstores 139 110 107 106 94 -------------------------------------------------------------- Total 1,790 1,863 1,902 1,899 1,895 Sales (in millions) $ 3,929 $ 3,908 $ 3,772 $ 3,738 $ 3,817 - ----------------------------------------------------------------------------------------------------------- Eckerd drugstores Number of stores Beginning of year 2,778 2,699 645 526 506 Openings 220(2) 199(2) 47 37 46 Acquisitions 36 200 2,020 97 - Closings (278)(2) (320)(2) (13) (15) (26) -------------------------------------------------------------- End of year 2,756 2,778 2,699 645 526 Gross selling space (in millions) 27.6 27.4 26.4 6.2 4.5 Sales (in millions) $ 10,325 $ 9,663 $ 3,147 $ 1,851 $ 1,540 Sales per gross square foot 350 314 261 253 243 - ----------------------------------------------------------------------------------------------------------- Direct Marketing Revenue (in millions) $ 1,022 $ 928 $ 818 $ 680 $ 557 Distribution of revenue JCPenney customers 50% 53% 56% 65% 73% Other non-JCPenney customers 50% 47% 44% 35% 27% Policies, certificates, and memberships in force at year end (in millions) 14.7 13.2 11.3 9.6 7.5 - -----------------------------------------------------------------------------------------------------------
(1) Excludes 21 department stores operated in Brazil under the Renner name. (2) Includes relocations of 175 drugstores in 1998 and 127 drugstores in 1997. 41 SUPPLEMENTAL DATA (UNAUDITED) General. The following information is provided as a supplement to the Company's audited financial statements. Its purpose is to facilitate an understanding of the Company's credit operations, capital structure, and cash flows. Credit operations. The following presents the results of the Company's proprietary credit card operation and shows both the net cost of credit in support of the Company's retail businesses and the net cost of credit measured on an all-inclusive, economic basis. The "economic basis" of the cost of credit includes the cost of equity capital in addition to debt used to finance accounts receivable balances. The cost of equity capital is based on the Company's minimum return on equity objective of 16 per cent. The results presented below cover all JCPenney credit card accounts receivable serviced. Pre-tax cost of JCPenney credit card
- ---------------------------------------------- ($ in millions) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------- Revenue $ (788) $ (803) $ (772) --------------------------------------------------- Bad debt expense 264 356 277 Operating expenses (including in-store costs) 270 281 298 Interest expense on debt financing 262 285 281 --------------------------------------------------- Total costs 796 922 856 Pre-tax cost of credit Retail operations 8 119 84 Equity capital 131 144 138 - ------------------------------------------------------------------------------------------------------- Total - economic basis 139 263 222 Per cent of JCPenney credit sales 1.8% 3.0% 2.4% - -------------------------------------------------------------------------------------------------------
Department stores and catalog
- --------------------------------- ($ in billions) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Per cent of Per cent of Per cent of Eligible Eligible Eligible Sales Sales Sales Sales Sales Sales - ------------------------------------------------------------------------------------------------------------- JCPenney credit card $ 7.6 39.4% $ 8.6 43.4% $ 9.1 46.9% Third-party credit cards 5.0 26.1% 4.7 23.5% 4.1 21.2% - ------------------------------------------------------------------------------------------------------------- Total $ 12.6 65.4% $ 13.3 66.9% $ 13.2 68.1% - -------------------------------------------------------------------------------------------------------------
Key JCPenney credit card information
- ----------------------------------------------- (in millions, except where noted) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Number of accounts serviced with balances 14.1 16.4 18.9 Total customer receivables serviced $ 4,149 $ 4,721 $ 5,006 Average customer receivables serviced $ 4,123 $ 4,576 $ 4,428 Average account balance (in dollars) $ 295 $ 287 $ 265 Average account maturity (in months) 4.7 4.5 4.5 90-day delinquency rate 3.0% 3.9% 3.7% - -------------------------------------------------------------------------------------------------------------
42 Capital structure. The Company's objective is to maintain a capital structure that will assure continuing access to financial markets so that it can, at reasonable cost, provide for future needs and capitalize on attractive opportunities for growth. The debt to capital per cent shown in the table below includes both debt recorded on the Company's consolidated balance sheets as well as off-balance-sheet debt related to operating leases and the securitization of a portion of the Company's customer accounts receivable (asset-backed certificates). Debt to capital per cent - ------------------------ ($ in millions) 1998 1997 1996 - --------------------------------------------------------- Short-term debt, net of cash investments $ 1,602 $ 1,209 $ 3,818 Long-term debt, including current maturities 7,581 7,435 4,815 ----------------------------- 9,183 8,644 8,633 Off-balance-sheet debt: Present value of operating leases 2,715 2,250 1,800 Securitization of receivables, net 146 343 374 ----------------------------- Total debt 12,044 11,237 10,807 Consolidated equity 7,169 7,357 5,952 - --------------------------------------------------------- Total capital $ 19,213 $ 18,594 $ 16,759 Per cent of total debt to capital 62.7%* 60.4% 64.5%** - --------------------------------------------------------- * Upon completion of the Genovese acquisition, the Company's debt to capital ratio decreased to 61.9 per cent. ** Upon completion of the Eckerd acquisition, the Company's debt to capital ratio decreased to 60.1 per cent. The Company's debt to capital per cent has increased over the past three years which is reflective of its drugstore acquisitions. The Company currently expects the per cent to improve over the next several years. Financing costs incurred by the Company to finance its operations, including those costs related to off-balance-sheet liabilities, were as follows: - -------------------------- ($ in millions) 1998 1997 1996 - ---------------------------------------------------------- Interest expense, net $ 611 $ 581 $ 359 Interest portion of LESOP debt payment 2 10 17 Off-balance-sheet financing costs: Interest imputed on operating leases 225 180 110 Asset-backed certificate interest 46 68 68 - ---------------------------------------------------------- Total $ 884 $ 839 $ 554 - ---------------------------------------------------------- Economic Value Added (EVA(R)). During 1998 the Company put the EVA concept in place as a key decision-making criterion for management. EVA is a tool that enables companies to measure the creation of financial value. Since the changes in EVA are often closely related to the changes in a company's stock price, the Company believes that management of the business on the basis of EVA will maximize the return on capital invested by its stockholders. Training for all management employees, focusing on the use of EVA as a management measurement tool, will be completed in 1999. The Company's principal aim is the continual improvement in EVA, which directs attention to long-term performance. EVA principles are being incorporated into decision-making processes, including acquisition analyses, capital expenditure allocations, inventory management, and other strategic plans. The Company has begun linking EVA performance with incentive compensation programs. In 1998, approximately 400 senior management employees had EVA performance as a component of their incentive compensation. 1998's EVA performance plan award was zero because the EVA growth target for 1998 was not met. In 1999, incentive compensation that includes an EVA component will be expanded to cover additional management employees who participate in the Company's incentive compensation program. 43 EBITDA. Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a key measure of cash flow generated and is provided as an alternative assessment of operating performance. It is not intended to be a substitute for GAAP measurements. Following is a calculation of EBITDA by operating segment on an individual and combined basis (excludes other unallocated); calculations may vary for other companies: Department Eckerd - ----------------- stores & drug- Direct Total ($ in millions) catalog stores Marketing Segments - -------------------------------------------------------- 1998 Revenue $ 19,331 $ 10,325 $ 1,022 $ 30,678 Operating profit 1,013 254 233 1,500 Depreciation and amortization 380 138 6 524 Credit operating results 131 - - 131 Other(1) 139 134 - 273 --------------------------------------- EBITDA 1,663 526 239 2,428 % of revenue 8.6% 5.1% 23.4% 7.9% - -------------------------------------------------------- 1997 Revenue $ 19,955 $9,663 $ 928 $30,546 Operating profit 1,368 347 214 1,929 Depreciation and amortization 366 112 5 483 Credit operating results 35 - - 35 Other(1) 160 97 - 257 --------------------------------------- EBITDA $ 1,929 $ 556 $ 219 $ 2,704 % of revenue 9.7% 5.8% 23.6% 8.9% - -------------------------------------------------------- 1996 Revenue $ 19,506 $ 3,147 $ 818 $23,471 Operating profit 1,183 99 186 1,468 Depreciation and amortization 325 41 6 372 Credit operating results 81 - - 81 Other(1) 165 30 - 195 --------------------------------------- EBITDA $ 1,754 $ 170 $ 192 $ 2,116 % of revenue 9.0% 5.4% 23.5% 9.0% - -------------------------------------------------------- (1) Consists of interest on operating leases and the ESOP, and the impact of asset-backed certificates. Credit ratings. The Company's objective is to maintain a strong investment grade rating on its senior long-term debt and commercial paper. As of March 1999, the Company's credit ratings were under review for possible downgrade. Credit ratings at year end were: Long-Term Commercial Debt Paper - ----------------------------------------------------- Standard & Poor's Corporation A A1 Moody's Investors Service A2 P1 Fitch Investors Service, Inc. A F1 - ----------------------------------------------------- 44 EX-21 12 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT ------------------------------ Set forth below is a list of certain subsidiaries of the Company at March 22, 1999. All of the voting securities of each named subsidiary are owned by the Company or by another subsidiary of the Company. SUBSIDIARIES - ------------ Eckerd Corporation (Delaware) J. C. Penney Direct Marketing Services, Inc.(Delaware) J. C. Penney Funding Corporation (Delaware) J. C. Penney Life Insurance Company (Vermont) JCPenney Card Bank (National Association) J. C. Penney Properties, Inc. (Delaware) JCP Realty, Inc. (Delaware) JCP Receivables, Inc. (Delaware) Thrift Drug, Inc. Separate financial statements are filed for J. C. Penney Funding Corporation, which is a consolidated subsidiary, in a separate Annual Report on Form 10-K. The names of other subsidiaries have been omitted because these unnamed subsidiaries, considered in the aggregate as a single subsidiary, do not constitute a significant subsidiary. EX-23 13 CONSENT OF KPMG LLP EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT ----------------------------- The Board of Directors of J. C. Penney Company, Inc.: We consent to incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-28390, 33-59666, 33-59668, 33-66070, 33-66072, 33-56995, 333-13949, 333-13951, 333-22627, 333-22607, 33-33343, 333-27329, 333-71237) and Form S-3 (No. 333-57019) of J.C. Penney Company, Inc. of our report dated February 25, 1999, relating to the consolidated balance sheets of J. C. Penney Company, Inc. and subsidiaries as of January 30, 1999 and January 31, 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended January 30, 1999, which report is incorporated by reference in the January 30, 1999 Annual Report on Form 10-K of J.C. Penney Company, Inc. and to our report dated February 25, 1999 on the related financial statement schedule, which report appears in the January 30, 1999 Annual Report on Form 10-K of J. C. Penney Company, Inc. /s/ KPMG LLP Dallas, Texas April 23, 1999 EX-24 14 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY ----------------- Each of the undersigned directors and officers of J. C. PENNEY COMPANY, INC., a Delaware corporation ("Company") , which will file with the Securities and Exchange Commission, Washington, D.C. ("Commission"), under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the 52 weeks ended January 30, 1999, hereby constitutes and appoints W. J. Alcorn, R. B. Cavanaugh, C. R. Lotter, and D. A. McKay, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power to each of them to act without the others, for him or her and in his or her name, place, and stead, in any and all capacities, to sign such Annual Report, which is about to be filed, and any and all subsequent amendments to such Annual Report ("Annual Report"), and to file such Annual Report so signed, with all exhibits thereto, and any and all documents in connection therewith, and to appear before the Commission in connection with any matter relating to such Annual Report, hereby granting to the attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises as fully and to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney as of the 10th day of March, 1999. /s/ J. E. OESTERREICHER /s/ D. A. MCKAY - ------------------------------ ------------------------------ J. E. Oesterreicher D. A. McKay Chairman of the Board and Executive Vice President and Chief Executive Officer Chief Financial Officer (principal executive officer); (principal financial officer) Director /s/ W. J. ALCORN - ------------------------------ W. J. Alcorn Vice President and Controller (principal accounting officer) /s/ M. A. BURNS /s/ T. J. ENGIBOUS - ------------------------------ ------------------------------ M. A. Burns T. J. Engibous Director Director /s/ K. B. FOSTER /s/ V. E. JORDAN, JR. - ------------------------------ ------------------------------ K. B. Foster V. E. Jordan, Jr. Director Director /s/ GEORGE NIGH /s/ J. C. PFEIFFER - ------------------------------ ------------------------------ George Nigh J. C. Pfeiffer Director Director /s/ A. W. RICHARDS /s/ FRANCISCO SANCHEZ-LOAEZA - ------------------------------ ------------------------------ A. W. Richards Francisco Sanchez-Loaeza Director Director /s/ C. S. SANFORD, JR. /s/ R. G. TURNER - ------------------------------ ------------------------------ C. S. Sanford, Jr. R. G. Turner Director Director EX-27.(A) 15 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 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS JAN-30-1999 JAN-30-1999 96 415 4,564 149 6,031 11,125 8,333 2,875 23,638 5,970 7,143 0 475 2,850 3,844 23,638 29,656 30,678 21,859 28,389 494 229 611 955 361 594 0 0 0 594 2.20 2.19
EX-27.(B) 16 RESTATED FDS (1-31-98)
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 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS JAN-31-1998 JAN-31-1998 287 1,073 3,954 135 6,162 11,484 8,274 2,945 23,493 6,041 6,986 0 526 2,766 4,065 23,493 29,618 30,546 21,430 27,903 830 307 581 925 359 566 0 0 0 566 2.13 2.10
EX-27.(C) 17 RESTATED FDS (1-25-97)
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 1,111 4,723 77 5,722 11,712 7,715 2,701 22,088 7,966 4,565 0 568 1,416 3,968 22,088 22,653 23,471 16,089 21,371 594 238 359 909 344 565 0 0 0 565 2.32 2.25
EX-99.(B) 18 EXCERPT FROM JCP FUNDING A/R EXHIBIT 99(b) Management's Discussion and Analysis of 1998 Annual Report Financial Condition and Results of Operations J. C. Penney Funding Corporation ("Funding") is a wholly-owned consolidated subsidiary of J. C. Penney Company, Inc. ("JCPenney"). The business of Funding consists of financing a portion of JCPenney's operations through loans to JCPenney, the purchase of customer receivable balances that arise from the retail credit sales of JCPenney, or a combination of both. No receivables have been purchased by Funding since 1985. The loan agreement between Funding and JCPenney provides for unsecured loans to be made by Funding to JCPenney. Each loan is evidenced by a revolving promissory note and is payable upon demand in whole or in part as may be required by Funding. Copies of Funding's loan and receivables agreements with JCPenney are available upon request. Funding issues commercial paper through Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc., Merrill Lynch Money Markets Inc., and Morgan Stanley Dean Witter to corporate and institutional investors in the domestic market. The commercial paper is guaranteed by JCPenney on a subordinated basis. The commercial paper was rated "A1" by Standard & Poor's Corporation, "P1" by Moody's Investors Service, and "F1" by Fitch Investors Service, Inc. at the end of fiscal 1998. As of January 1999, JCPenney and Funding's credit ratings were under review for possible downgrade. Income is derived primarily from earnings on loans to JCPenney and is designed to produce earnings sufficient to cover interest expense at a coverage ratio of at least one and one-half times. In 1998, net income decreased to $35 million from $43 million in 1997. Net income for 1997 increased from $38 million in 1996. The decrease in 1998 is attributed to lower lending levels and lower interest rates. The increase in 1997 is attributed to higher lending levels and higher interest rates. Interest expense was $106 million in 1998 compared with $127 million in 1997 and $111 million in 1996. Interest earned from JCPenney was $160 million in 1998 compared to $193 million in 1997 and $169 million in 1996. Commercial paper borrowings averaged $1,922 million in 1998 compared to $2,129 million in 1997 and $1,827 million in 1996. The average interest rate on commercial paper was 5.5 per cent in 1998, down from 5.6 per cent in 1997 and up from 5.5 percent in 1996. Committed bank credit facilities available to Funding and JCPenney as of January 30, 1999 amounted to $3 billion. The facilities, as amended and restated, support JCPenney's short term borrowing program, and are comprised of a $1.5 billion, 364-day revolver, and a $1.5 billion, five-year revolver. The 364-day revolver includes a $750 million seasonal credit line for the August to January period thus allowing JCPenney to match its seasonal borrowing requirements. There were no outstanding borrowings under these credit facilities during fiscal 1998. JCPenney has initiated actions to address the Year 2000 issue relating to Funding. Year 2000 readiness work was more than 90 per cent complete as of January 30, 1999. Since January 1999, JCPenney has been retesting all systems critical to JCPenney's core businesses. JCPenney has also focused on the Year 2000 readiness of its suppliers and service providers, both independently and in conjunction with the National Retail Federation. Total costs associated with these efforts are not expected to have a material impact on the financial results of either JCPenney or Funding. In addition, Funding has communicated with its commercial paper dealers to determine their Year 2000 readiness. However, there can be no guarantee that the systems of these commercial paper dealers on which Funding relies will be converted in a timely manner, or that a failure to convert would not have a material adverse effect on Funding's operations. We would like to express our appreciation to the institutional investment community, as well as to our credit line participants and commercial paper dealers for their continued support during 1998. Robert B. Cavanaugh Chairman of the Board February 25, 1999 3 Statements of Income J. C. Penney Funding Corporation ($ in millions) For the Year 1998 1997 1996 --------------------- Interest income from JCPenney........................ $ 160 $ 193 $ 169 Interest expense..................................... 106 127 111 ------ ------ ----- Income before income taxes........................... 54 66 58 Income taxes...................................... 19 23 20 ------ ------ ----- Net income........................................... $ 35 $ 43 $ 38 ====== ====== ===== Statements of Reinvested Earnings ($ in millions) 1998 1997 1996 --------------------- Balance at beginning of year......................... $1,007 $ 964 $ 926 Net income........................................... 35 43 38 ------ ------ ----- Balance at end of year............................... $1,042 $1,007 $ 964 ====== ====== ===== See Notes to Financial Statements on page 7 4 Balance Sheets J. C. Penney Funding Corporation (In millions except share data) 1998 1997 -------------- Assets Loans to JCPenney.............................. $3,129 $2,591 ====== ====== Liabilities and Equity of JCPenney Current Liabilities Short term debt................................ $1,924 $1,416 Due to JCPenney................................ 18 23 ------ ------ Total Current Liabilities................. 1,942 1,439 Equity of JCPenney Common stock (including contributed capital), par value $100: Authorized, 750,000 shares - issued and outstanding, 500,000 shares.... 145 145 Reinvested earnings............................ 1,042 1,007 ------ ------ Total Equity of JCPenney.................. 1,187 1,152 ------ ------ Total Liabilities and Equity of JCPenney.. $3,129 $2,591 ====== ====== See Notes to Financial Statements on page 7 5 Statements of Cash Flows J. C. Penney Funding Corporation ($ in millions) For the Year 1998 1997 1996 -------------------------- Operating Activities Net income.................................... $ 35 $ 43 $ 38 (Increase)Decrease in loans to JCPenney....... (538) 2,471 (2,499) Increase(Decrease) in amount due to JCPenney.. (5) 22 (9) ----- -------- ------- $(508) $ 2,536 $(2,470) Financing Activities Increase(Decrease) in short term debt......... $ 508 $ (2,536) $ 2,470 Supplemental Cash Flow Information Interest paid................................. $ 106 $ 127 $ 111 Income taxes paid............................. $ 23 $ 2 $ 28 See Notes to Financial Statements on page 7 6 Independent Auditors' Report J. C. Penney Funding Corporation To the Board of Directors of J. C. Penney Funding Corporation: We have audited the accompanying balance sheets of J. C. Penney Funding Corporation as of January 30, 1999 and January 31, 1998, and the related statements of income, reinvested earnings, and cash flows for each of the years in the three-year period ended January 30, 1999. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of J. C. Penney Funding Corporation as of January 30, 1999 and January 31, 1998, and the results of its operations and its cash flows for each of the years in the three-year period ended January 30, 1999 in conformity with generally accepted accounting principles. /s/ KPMG LLP KPMG LLP Dallas, Texas February 25, 1999 - -------------------------------------------------------------------------------- Notes to Financial Statements Nature of Operations - -------------------- J. C. Penney Funding Corporation ("Funding") is a wholly-owned consolidated subsidiary of J. C. Penney Company, Inc. ("JCPenney"). The principal business of Funding consists of financing a portion of JCPenney's operations through loans to JCPenney. To finance its operations, Funding issues commercial paper, which is guaranteed by JCPenney on a subordinated basis, to corporate and institutional investors in the domestic market. Funding has, from time to time, issued long term debt in public and private markets in the United States and abroad. Definition of Fiscal Year Funding's fiscal year ends on the last Saturday in January. Fiscal 1998 ended January 30, 1999, fiscal 1997 ended January 31, 1998, and fiscal 1996 ended January 25, 1997. Fiscal 1997 was a 53- week year and Fiscal 1998 and 1996 were 52-week years. Commercial Paper Placement - -------------------------- Funding places commercial paper solely through dealers. The average interest rate on commercial paper at year end 1998, 1997, and 1996 was 5.1%, 5.7%, and 5.5%, respectively. Summary Of Accounting Policies Income Taxes Funding's taxable income is included in the consolidated federal income tax return of JCPenney. Income taxes in Funding's statement of income are computed as if Funding filed a separate federal income tax return. Use of Estimates Funding's financial statements have been prepared in conformity with generally accepted accounting principles. Certain amounts included in the financial statements are estimated based on currently available information and management's judgment as to the outcome of future conditions and circumstances. While every effort is made to ensure the integrity of such estimates, including the use of third party specialists where appropriate, actual results could differ from these estimates. New Accounting Rules - -------------------- The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, in June 1997. This statement, which was effective for fiscal years beginning after December 15, 1997, had no impact on Funding as comprehensive income is equal to net income. Loans to JCPenney - ----------------- Funding and JCPenney are parties to a Loan Agreement which provides for unsecured loans, payable on demand, to be made from time to time by Funding to JCPenney for the general business purposes of JCPenney, subject to the terms and conditions of the Loan Agreement. Under the terms of the Loan Agreement, Funding and JCPenney agree upon a mutually-acceptable earnings coverage of Funding's interest and other fixed charges. The earnings to fixed charges ratio has historically been at least one and one-half times. Committed Bank Credit Facilities - -------------------------------- Committed bank credit facilities available to Funding and JCPenney as of January 30, 1999 amounted to $3 billion. The facilities, as amended and restated, support JCPenney's short term borrowing program, and are comprised of a $1.5 billion, 364-day revolver, and a $1.5 billion, five-year revolver. The 364-day revolver includes a $750 million seasonal credit line for the August to January period thus allowing JCPenney to match its seasonal borrowing requirements. There were no outstanding borrowings under these credit facilities at January 30, 1999. Fair Value of Financial Instruments - ----------------------------------- The fair value of short term debt (commercial paper) at January 30, 1999 and January 31, 1998 approximates the amount as reflected on the balance sheet due to its short average maturity. The fair value of loans to JCPenney at January 30, 1999, and January 31, 1998 also approximates the amount reflected on the balance sheet because the loan is payable on demand and the interest charged on the loan balance is adjusted to reflect current market interest rates. 7 Five Year Financial Summary J. C. Penney Funding Corporation ($ in millions)
At Year End 1998 1997 1996 1995 1994 ---------------------------------------------- Capitalization Short term debt Commercial paper.............. $1,924 $1,416 $2,049 $1,482 $2,074 Credit line advance........... -- -- 1,903 -- -- ------ ------ ------ ------ ------ Total short term debt..... 1,924 1,416 3,952 1,482 2,074 Equity of JCPenney................. 1,187 1,152 1,109 1,071 1,028 ------ ------ ------ ------ ------ Total capitalization..................... $3,111 $2,568 $5,061 $2,553 $3,102 ====== ====== ====== ====== ====== Committed bank credit facilities......... $3,000 $3,000 $6,000 $3,000 $2,500 For the Year Income................................... $ 160 $ 193 $ 169 $ 194 $ 143 Expenses................................. $ 106 $ 127 $ 111 $ 128 $ 94 Net income............................... $ 35 $ 43 $ 38 $ 43 $ 32 Fixed charges - times earned............. 1.52 1.52 1.52 1.52 1.52 Peak short term debt..................... $3,117 $4,295 $4,010 $2,771 $2,649 Average debt............................. $1,938 $2,247 $2,041 $2,145 $1,990 Average interest rates................... 5.5% 5.6% 5.5% 5.9% 4.6%
8 Quarterly Data J. C. Penney Funding Corporation ($ in millions) (Unaudited)
First Second Third Fourth ----------------- ------------------- -------------------- ------------------ 1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996 ----- ---- ---- ----- ----- ----- ----- ----- ----- ----- ---- ----- Income....................... $ 34 82 32 33 29 33 46 35 36 47 47 68 Expenses..................... $ 22 54 21 22 19 22 30 23 24 32 31 44 Income before taxes.......... $ 12 28 11 11 10 11 16 12 12 15 16 24 Net income................... $ 8 18 7 7 7 7 10 8 8 10 10 16 Fixed charges - times earned............... 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52
Committed Revolving Credit Facilities as of January 30, 1999 Bank of America NT & SA Mellon Bank, N.A. Bank of Hawaii Morgan Guaranty Trust Company The Bank of New York of New York The Bank of Tokyo-Mitsubishi, Ltd. National Australia Bank Limited Bank One, Texas N.A. NationsBank, N.A. BankBoston, N.A. The Northern Trust Company Bankers Trust Company PNC Bank, N.A. Barclays Bank PLC Royal Bank of Canada The Chase Manhattan Bank The Sakura Bank, Ltd. Citibank, N.A. State Street Bank & Trust Company Credit Agricole Indosuez SunTrust Bank, Atlanta Credit Suisse First Boston UMB Bank, N.A. First National Bank of Chicago U.S. Bank National Association First Security Bank of Utah, N.A. Wachovia Bank, N.A. First Union National Bank Wells Fargo Bank, N.A. Firstar Bank Milwaukee, N.A. Fleet National Bank The Fuji Bank, Ltd. Hibernia National Bank Istituto Bancario San Paolo di Torino S.p.A. Marine Midland Bank 9 -----END PRIVACY-ENHANCED MESSAGE-----