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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the 52 weeks ended January 27, 1996 Commission file number 1-4947-1
J. C. Penney Funding Corporation
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(Exact name of registrant as specified in its charter)
DELAWARE 51-0101524
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(State of incorporation) (I.R.S. Employer ID No.)
6501 LEGACY DRIVE, PLANO, TEXAS 75024-3698
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 431-1000
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: None
----
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date: 500,000 shares of Common
Stock of $100 par value, as of March 18, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of Registrant's 1995 Annual Report ("1995 Annual Report") are
incorporated into Parts I, II, and IV. Portions of J. C. Penney Company, Inc.'s
1995 Annual Report to Stockholders ("JCPenney's 1995 Annual Report") are
incorporated into Part I.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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PART I
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1. BUSINESS.
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J. C. Penney Funding Corporation ("Funding"), which was incorporated in
Delaware in 1964, is a wholly-owned subsidiary of J. C. Penney Company, Inc.
("JCPenney"), also incorporated in Delaware. Funding's executive offices are
located in JCPenney's offices in Plano, Texas. Its business consists of
financing a portion of JCPenney's operations through loans to JCPenney, the
purchase of customer receivable balances that arise from the retail credit sales
of JCPenney, or a combination of both. No receivables have been purchased by
Funding since 1985.
JCPenney is a major retailer, with department stores in all 50 states,
Puerto Rico, Mexico, and Chile. The major portion of JCPenney's business
consists of providing merchandise and services to consumers through department
stores that include catalog departments. JCPenney markets predominantly family
apparel, jewelry, shoes, accessories, and home furnishings. JCPenney's total
revenues for the 52 weeks ended January 27, 1996 were $21.4 billion and net
income was $838 million. Pursuant to the terms of financing agreements between
Funding and JCPenney, payments from JCPenney to Funding are designed to produce
earnings sufficient to cover Funding's fixed charges, principally interest on
borrowings, at a coverage ratio mutually agreed upon between Funding and
JCPenney. (See "Loan Agreement" and "Receivables Agreement", below.) The
earnings to fixed charges coverage ratio has historically been, and in fiscal
1995 was, at least 1.5 to 1.
Operations of Funding. To finance the operations of JCPenney as described
---------------------
under "Business" above, Funding sells its short-term notes (commercial paper) to
investors through dealer-placed programs. The short-term notes are guaranteed on
a subordinated basis by JCPenney. Funding has, from time to time, issued long-
term debt in public and private markets in the United States and abroad. Prior
to April 3, 1992, Funding issued commercial paper and master notes to investors
on a direct issue basis. Funding also has in place arrangements for short-term
bank borrowings. Short-term debt in fiscal 1995 averaged $2,145 million compared
to $1,990 million in fiscal 1994 and $1,347 million in fiscal 1993. Short-term
debt rates averaged 5.9 percent in fiscal 1995, compared to 4.6 percent in
fiscal 1994 and 3.2 percent in fiscal 1993. Interest expense increased in fiscal
1995 compared to fiscal 1994 and 1993 largely due to higher borrowing levels and
higher short-term interest rates.
Credit Operations of JCPenney. Virtually all types of merchandise and
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services sold by JCPenney in the United States, Puerto Rico, Mexico, and Chile
may be purchased on JCPenney's revolving credit card. In addition, JCPenney
accepts American Express, Diners Club (Mexico only), Discover (United States and
2
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Puerto Rico only), MasterCard, and Visa at JCPenney stores, catalog, and drug
stores throughout the 50 states, Puerto Rico, Mexico, and Chile. For additional
information regarding the credit card operations of JCPenney, see "Net interest
expense and credit operations" (pages 19 and 32), which appears in the section
of JCPenney's 1995 Annual Report entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations", "Receivables" (page 26),
which appears in the section of JCPenney's 1995 Annual Report entitled "Notes to
Consolidated Financial Statements", and "Credit Operations", "Pre-tax cost of
JCPenney credit card", "Credit sales", and "Key JCPenney credit card
information" (page 37), which appear in the section of JCPenney's 1995 Annual
Report entitled "Supplemental Information (Unaudited)", on the pages indicated
in the parenthetical references, which are incorporated by reference herein.
Funding has never incurred any losses from JCPenney's retail credit
operation since, pursuant to the Receivables Agreement, JCPenney itself
administers the customer receivables when sold to Funding, receives all finance
charge revenue on those customer receivables, and bears all related costs.
Loan Agreement. Funding and JCPenney are parties to a Loan Agreement, dated
--------------
as of January 28, 1986, as amended ("Loan Agreement"), which provides for
unsecured loans to be made from time to time by Funding to JCPenney for the
general business purposes of JCPenney, subject to the terms and conditions of
the Loan Agreement. The loans may be either senior loans or subordinated loans,
at the election of JCPenney, provided that, without the consent of the Board of
Directors of Funding, the principal amount of loans outstanding at any time
under the Loan Agreement may not exceed specified limits. Currently such limits
may not exceed $4 billion in the aggregate for all loans and $500 million in the
aggregate for all subordinated loans. The terms of each loan under the Loan
Agreement shall be as agreed upon at the time of such loan by Funding and
JCPenney, provided that Funding may require upon demand that any loan be paid,
and JCPenney may prepay without premium any loan, in whole or in part at any
time. Under the terms of the Loan Agreement, JCPenney and Funding agree from
time to time upon a mutually-acceptable earnings coverage of Funding's interest
and other fixed charges. If at the end of each fiscal quarter during which a
loan is outstanding, the earnings coverage of Funding's interest and other fixed
charges is less than the agreed upon ratio, JCPenney will pay to Funding an
additional amount sufficient to provide for such coverage to be not less than
the agreed upon ratio. In the event that JCPenney and Funding have not agreed
upon a mutually acceptable ratio for any fiscal quarter, that applicable
quarterly payment with respect to such period will include an amount equal to
the excess, if any, of one and one-half percent of the daily average of the
aggregate principal amount outstanding on all loans during such period, over the
aggregate amount of interest accrued on all such loans during such period.
3
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Receivables Agreement. Since December 1, 1985, JCPenney has not sold an
---------------------
undivided interest in any of its customer receivables to Funding. The
Receivables Agreement between Funding and JCPenney, as amended ("Receivables
Agreement"), continues to be in full force and effect and while no purchases of
JCPenney customer receivables by Funding are presently contemplated, JCPenney
may again commence sales of its customer receivables to Funding.
The Receivables Agreement sets forth the terms and provisions governing
sales of customer receivables (other than specified types of customer
receivables immaterial in amount) by JCPenney to Funding. At the end of each
monthly accounting period, JCPenney may sell to Funding an undivided interest in
its undefaulted customer receivables which are not sold or contracted to be sold
by JCPenney to anyone other than Funding. Settlements are made as of the end of
each such monthly accounting period with respect to collections, defaults, and
other adjustments to customers' accounts occurring during that month.
The purchase price for the customer receivables acquired by Funding from
JCPenney is equal to the aggregate dollar amount of such customer receivables.
JCPenney pays to Funding at the end of each monthly accounting period a discount
in an amount agreed upon from time to time. In the event of a failure to agree
as to the amount of the discount, the amount to be paid is one-half of one
percent of the average daily closing balance of conveyed customer receivables
held by Funding during such monthly accounting period less the average daily
closing balance of the Contract Reserve Account during such period.
In addition, at the time of purchase of customer receivables from JCPenney,
Funding withholds from the purchase price, and adds to the Contract Reserve
Account, the lesser of (i) five percent of the amount of customer receivables
then being purchased, or (ii) the amount, if any, by which the amount in the
Contract Reserve Account is less than five percent of the total amount of
customer receivables then owned by Funding. If the amount in the Contract
Reserve Account should exceed five percent of the total amount of customer
receivables owned by Funding at the end of any monthly accounting period, such
excess is to be paid to JCPenney in accordance with the Receivables Agreement.
If any portion of a customer receivable becomes more than 180 days past due or
if the customer is, in the judgment of JCPenney, unable to make further payment,
such customer receivable is considered to be in default for the purposes of the
Receivables Agreement and is charged against the Contract Reserve Account.
Collections with respect to any such defaulted customer receivable are credited
to the Contract Reserve Account. As described above, all bad debts written off
to date have been covered by the Contract Reserve Account.
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Funding acquires all of JCPenney's right, title, and interest in and to the
undivided portion of the customer receivables being conveyed to it. All sales
of customer receivables to Funding are without recourse to JCPenney. However,
in the event of returned, rejected, or repossessed merchandise to which any
previously conveyed undefaulted customer receivable relates, or in the event of
a breach of a warranty made by JCPenney in the Receivables Agreement to which
any previously conveyed undefaulted customer receivable relates, JCPenney is
obligated to pay to Funding the amount by which Funding has been damaged.
Either party has the right at any time to terminate the further sale or
purchase, as the case may be, of customer receivables under the Receivables
Agreement.
Certain state laws provide for recording or other notice formalities in
connection with the assignment of accounts receivable. Funding does not deem it
appropriate to utilize such procedures in connection with customer receivables
purchased from JCPenney. In the event of the bankruptcy or receivership of
JCPenney, it is possible that creditors of JCPenney might be deemed to have
superior rights to some or all of the customer receivables previously purchased
by Funding.
Committed Bank Credit Facilities. Committed bank credit facilities
--------------------------------
available to Funding as of January 27, 1996, amounted to $3.0 billion. In 1995,
Funding amended its two syndicated revolving credit facility agreements. These
facilities, which support commercial paper borrowing arrangements, include a
$1.5 billion, 364-day revolver and a $1.5 billion, five-year revolver with a
group of 41 domestic and international banks. Neither of the borrowing
facilities was in use as of January 27, 1996. (See page 8 of Funding's 1995
Annual Report which is incorporated herein by reference.)
Employment. Funding has had no employees since April 30, 1992.
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General. Legislation regulating consumer credit has been enacted in all
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states and federally. Funding's operations have not been affected by such
legislation since Funding does not deal directly with consumers.
2. PROPERTIES.
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Funding owns no physical properties.
3. LEGAL PROCEEDINGS.
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Funding has no material legal proceedings pending against it.
5
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PART II
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5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
-------------------------------------
JCPenney owns all of Funding's outstanding common stock. Funding's common
stock is not traded, and no dividends have been, or are currently intended to
be, declared by Funding on its common stock.
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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The Balance Sheets of Funding as of January 27, 1996, January 28, 1995, and
January 29, 1994, and the related statements of income, reinvested earnings, and
cash flows for the years then ended, appearing on pages 3 through 5 of Funding's
1995 Annual Report, together with the related notes and the Independent
Auditors' Report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing on page 6 of Funding's 1995 Annual Report, the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing on page 2 thereof, the section of Funding's 1995 Annual
Report entitled "Five Year Financial Summary" appearing on page 7 thereof, and
the unaudited quarterly financial highlights ("Quarterly Data") appearing on
page 8 thereof, are incorporated herein by reference in response to Item 8 of
Form 10-K.
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
---------------------------------------------
Funding has had no change in or disagreements with its independent
certified public accountants on accounting matters and/or financial disclosure.
PART IV
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14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.
--------------------------------------------
(a)(1) All Financial Statements.
See Item 8 of this Form 10-K for financial statements incorporated by
reference to Funding's 1995 Annual Report.
6
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(a)(2) Financial Statement Schedules.
All schedules have been omitted as they are inapplicable or not
required under the rules, or the information has been submitted in the
financial statements or in the notes to the financial statements
incorporated by reference to Funding's 1995 Annual Report.
(a)(3) Exhibits.
See separate Exhibit Index on pages G-1 through G-4.
(b) Reports on Form 8-K filed during the fourth quarter of fiscal 1995.
None.
SIGNATURES
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Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
J. C. PENNEY FUNDING CORPORATION
--------------------------------
(Registrant)
By /s/ D. A. McKay
-------------------------
D. A. McKay
Chairman of the Board
Dated: April 15, 1996
7
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Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ D. A. McKay
- ------------------
D. A. McKay Chairman of the Board April 15, 1996
(principal executive
officer); Director
S. F. Walsh*
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S. F. Walsh President April 15, 1996
(principal financial
officer); Director
W. J. Alcorn*
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W. J. Alcorn Controller (principal April 15, 1996
accounting officer)
R. B. Cavanaugh*
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R. B. Cavanaugh Director April 15, 1996
*By /s/ D. A. McKay
-----------------
D. A. McKay
Attorney-in-fact
8
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EXHIBIT INDEX
Exhibit
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3. Articles of Incorporation and Bylaws
------------------------------------
(a) Certificate of Incorporation of Funding, effective April 13, 1964
(incorporated by reference to Exhibit 3(a) to Funding's Annual Report
on Form 10-K for the 52 weeks ended January 29, 1994*).
(b) Certificate of Amendment of Certificate of Incorporation, effective
January 1, 1969 (incorporated by reference to Exhibit 3(b) to
Funding's Annual Report on Form 10-K for the 52 weeks ended January
29, 1994*).
(c) Certificate of Amendment of Certificate of Incorporation, effective
August 11, 1987 (incorporated by reference to Exhibit 3(c) to
Funding's Annual Report on Form 10-K for the 52 weeks ended
January 29, 1994*).
(d) Certificate of Amendment of Certificate of Incorporation, effective
April 10, 1988 (incorporated by reference to Exhibit 3(d) to Funding's
Annual Report on Form 10-K for the 52 weeks ended January 29, 1994*).
(e) Bylaws of Funding, as amended to September 1, 1976 (incorporated by
reference to Exhibit 3(e) to Funding's Annual Report on Form 10-K for
the 52 weeks ended January 29, 1994*).
4. Instruments defining the rights of security holders, including indentures
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(a) Issuing and Paying Agency Agreement dated as of March 16, 1992, between
J. C. Penney Funding Corporation and Morgan Guaranty Trust Company of
New York (incorporated by reference to Exhibit 4(a) to Funding's
Current Report on Form 8-K, Date of Report - April 3, 1992*).
(b) Guaranty dated as of February 13, 1992, executed by J. C. Penney
Company, Inc. (incorporated by reference to
G-1
<PAGE>
EXHIBIT INDEX
Exhibit
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Exhibit 4(b) to Funding's Current Report on Form 8-K, Date of Report -
April 3, 1992*).
(c) Amendment and Restatement Agreement dated as of December 7, 1994,
relating to the 364-day Revolving Credit Agreement dated as of December
16, 1993, 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 Bankers Trust Company,
Chemical Bank and Credit Suisse, as Co-Agents for the Lenders
(incorporated by reference to Exhibit 4(c) to Funding's Annual Report
on Form 10-K for the 52 weeks ended January 28, 1995*).
(d) Amendment No. 1, dated as of December 6, 1995, to Amended and Restated
Credit Agreement, relating to the 364-day Revolving Credit Agreement
dated as of December 16, 1993.
(e) Amendment and Restatement Agreement dated as of December 7, 1994,
relating to the five-year Revolving Credit Agreement dated as of
December 16, 1993, 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 Bankers Trust
Company, Chemical Bank and Credit Suisse, as Co-Agents for the Lenders
(incorporated by reference to Exhibit 4(d) to Funding's Annual Report
on Form 10-K for the 52 weeks ended January 28, 1995*).
(f) Amendment No. 1, dated as of December 6, 1995, to Amended and Restated
Credit Agreement, relating to the five-year Revolving Credit Agreement
dated as of December 16, 1993.
(g) Commercial Paper Dealer Agreement dated March 16, 1992 between J. C.
Penney Funding Corporation and J. P. Morgan Securities Inc.
(incorporated by reference to Exhibit 10(a) to Funding's Current Report
on Form 8-K, Date of Report - April 3, 1992*).
(h) Commercial Paper Dealer Agreement dated March 16, 1992 between J. C.
Penney Funding Corporation and The First Boston Corporation
(incorporated by reference to Exhibit 10(b) to Funding's Current Report
on Form 8-K, Date of Report - April 3, 1992*).
(i) Commercial Paper Dealer Agreement dated May 3, 1994 between J. C.
Penney Funding Corporation and Merrill Lynch Money
G-2
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EXHIBIT INDEX
Exhibit
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Markets Inc. (incorporated by reference to Exhibit 4(g) to Funding's
Annual Report on Form 10-K for the 52 weeks ended January 28, 1995*).
(j) Commercial Paper Dealer Agreement dated January 25, 1995 between J. C.
Penney Funding Corporation and Morgan Stanley & Co., Incorporated
(incorporated by reference to Exhibit 4(h) to Funding's Annual Report
on Form 10-K for the 52 weeks ended January 28, 1995*).
Instruments evidencing long-term debt, previously issued but now fully
prepaid, have not been filed as exhibits hereto because none of the debt
authorized under any such instrument exceeded 10 percent of the total assets
of the Registrant. The Registrant agrees to furnish a copy of any of its
long-term debt instruments to the Securities and Exchange Commission upon
request.
10. Material Contracts
------------------
THE CORPORATION HAS NO COMPENSATORY PLANS OR ARRANGEMENTS REQUIRED TO
BE FILED AS EXHIBITS TO THIS REPORT PURSUANT TO ITEM 14(c) OF THIS
REPORT.
(a) Amended and Restated Receivables Agreement dated as of January 29, 1980
between J. C. Penney Company, Inc. and J. C. Penney Financial
Corporation (incorporated by reference to Exhibit 10(a) to Funding's
Annual Report on Form 10-K for the 52 weeks ended January 29, 1994*).
(b) Amendment No. 1 to Amended and Restated Receivables Agreement dated as
of January 25, 1983 between J. C. Penney Company, Inc. and J. C. Penney
Financial Corporation (incorporated by reference to Exhibit 10(b) to
Funding's Annual Report on Form 10-K for the 52 weeks ended January 29,
1994*).
(c) Loan Agreement dated as of January 28, 1986 between J. C. Penney
Company, Inc. and J. C. Penney Financial Corporation (incorporated by
reference to Exhibit 1 to Funding's Current Report on Form 8-K, Date of
Report - January 28, 1986*).
(d) Amendment No. 1 to Loan Agreement dated as of January 28, 1986 between
J. C. Penney Company, Inc. and J. C. Penney Financial Corporation
(incorporated by reference to Exhibit
G-3
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EXHIBIT INDEX
Exhibit
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1 to Funding's Current Report on Form 8-K, Date of Report-December 31,
1986*).
(e) Line of Credit Agreement dated as of July 1, 1994, between J. C. Penney
Funding Corporation and J. C. Penney Chile, Inc. (incorporated by
reference to Exhibit 10(e) to Funding's Annual Report on Form 10-K for
the 52 weeks ended January 28, 1995*).
* SEC file number 1-4947-1
13. Annual Report to Security Holders
---------------------------------
Excerpt from Funding's 1995 Annual Report.
23. Consent of Independent Certified Public Accountants
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24. Power of Attorney
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27. Financial Data Schedule
-----------------------
Financial Data Schedule for the 52 week period ended January 27, 1996.
99. Additional Exhibits
-------------------
Excerpt from JCPenney's 1995 Annual Report to Stockholders.
G-4
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Exhibit 4(d)
[CONFORMED COPY]
AMENDMENT NO. 1
TO AMENDED AND RESTATED CREDIT AGREEMENT
AMENDMENT dated as of December 6, 1995 among J.C. PENNEY COMPANY, INC.
and J.C. PENNEY FUNDING CORPORATION (the "Borrowers"), the LENDERS listed on the
signature pages hereof (the "Lenders"), MORGAN GUARANTY TRUST COMPANY OF NEW
YORK, as Agent for the Lenders (the "Agent"), BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, BANKERS TRUST COMPANY, CHEMICAL BANK, CREDIT SUISSE and
NATIONSBANK OF TEXAS, N.A., as Co-Agents (the "Co-Agents").
W I T N E S S E T H :
WHEREAS, the parties hereto have heretofore entered into a 364-Day
Revolving Credit Agreement dated as of December 16, 1993, as Amended and
Restated as of December 7, 1994 (the "Agreement"); and
WHEREAS, the parties hereto desire to amend the Agreement as set forth
below;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions; References. Unless otherwise specifically
-----------------------
defined herein, each term used herein which is defined in the Agreement shall
have the meaning assigned to such term in the Agreement. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Agreement shall from and after the date hereof refer to the
Agreement as amended hereby.
<PAGE>
SECTION 2. Amendment of Section 1.01 of the Agreement. Section 1.01
------------------------------------------
of the Agreement is amended:
(a) by adding the following definitions in the appropriate
alphabetical position:
"Available Commitment" shall mean an amount at any date equal to the
--------------------
lesser of (a) the Total Commitment and (b) (i) for the period from and
including February 1 of any calendar year to and including July 31 of
any calendar year, $1,000,000,000, and (ii) for the period from and
including August 1 of any calendar year to and including January 31 of
the next calendar year, $1,000,000,000 or such greater amount as the
Borrowers shall elect in accordance with Section 2.21.
"Seasonal Availability Period" shall mean the period from and
----------------------------
including August 1 of any calendar year to and including January 31 of
the next calendar year.
(b) by replacing the definition of Facility Fee Percentage with the
following new definition:
"Facility Fee Percentage" shall mean 0.0500%.
-----------------------
(c) by replacing the definition of "Standby Margin" with the
following new definition:
"Standby Margin" shall mean on any date with respect to each Standby
--------------
Loan made as part of any ABR Borrowing, 0, and with respect to each
Standby Loan made as part of any Eurodollar Standby Borrowing,
0.1750%.
(d) by replacing the date "December 6, 1995" with the date
"December 4, 1996" in the definition of Maturity Date; and
(e) by adding the words "or increased from time to time pursuant to
Section 2.22" immediately following the number "2.11" in the definition of
Commitment.
2
<PAGE>
SECTION 3. Amendment of Article II of the Agreement. Article II of
----------------------------------------
the Agreement is amended:
(a) by adding immediately after the words "Section 2.11" in
Section 2.01 the words "and increased from time to time pursuant to
Section 2.22";
(b) by replacing the words "Total Commitment" with the words
"Available Commitment" in the (i) twelfth and twentieth lines of
Section 2.01, (ii) in the fifteenth and last lines of Section 2.02(a) and
in the last line of Section 2.03(h);
(c) by amending the first sentence of Section 2.06(a) to read in full
as follows:
The Borrowers agree, jointly and severally, to pay to the Agent for
the account of the Lenders ratably in proportion to their Commitments on
each March 31, June 30, September 30 and December 31 and on the date on
which the Commitments of the Lenders shall be terminated as provided
herein, a facility fee (a "Facility Fee") at a rate per annum equal to the
Facility Fee Percentage on the Available Commitment, whether used or
unused.
(d) by adding the following new section 2.21:
Section 2.21 Changes in the Available Commitment.
-----------------------------------
During any Seasonal Availability Period the Borrowers may increase or
reduce the Available Commitment in multiples of $100,000,000 upon three
Business Days' notice to the Agent in the case of an increase and upon five
Business Days' notice to the Agent in the case of a reduction; provided
--------
that any such changes are consistent with the definition of Available
Commitment in Section 1.01; and provided further that there will be no more
-------- -------
than three increases and three reductions during any Seasonal Availability
Period.
(e) by adding the following Section 2.22:
SECTION 2.22. Optional Increase in Commitments.
--------------------------------
At any time, if no Event of Default or Default shall have occurred and
be continuing, the Borrowers may, if they so elect in their sole
discretion, increase the Total Commitment, either by designating a person
not theretofore a Lender to become a Lender or by agreeing with an existing
Lender that such Lender's Commitment shall be increased. Upon execution
and
3
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delivery by the Borrowers and such Lender or other person of an instrument
of assumption in form reasonably satisfactory to the Agent, such existing
Lender shall have a Commitment as therein set forth or such other person
shall become a Lender with a Commitment as therein set forth and all the
rights and obligations of a Lender with such a Commitment hereunder;
provided:
--------
(i) that the Borrowers shall provide prompt notice of such
increase to the Agent, who shall promptly notify the other Lenders;
(ii) that the Commitment of any Lender does not exceed 10% of the
Total Commitment after such increase; and
(iii) that the amount of such increase, together with all other
increases in Commitments pursuant to this Section 2.22 since the date
of this Agreement, does not exceed $375,000,000.
SECTION 4. Confirmation of Guaranty. J.C.Penney Company, Inc.
------------------------
confirms that its subordinated Guaranty of the obligations of J.C. Penney
Funding Corporation dated as of December 7, 1994 shall apply to the obligations
of J.C. Penney Funding Corporation under the Agreement as amended hereby.
SECTION 5. New Lenders; Changes in Commitments. With effect from and
-----------------------------------
including the date this Amendment becomes effective in accordance with Section 7
hereof, (i) each Person listed on the signature pages hereof which is not a
party to the Agreement shall become a Lender party to the Agreement and (ii) the
Commitment of each Lender shall be the amount set forth opposite the name of
such Lender on the signature pages hereof, as such amount may be reduced from
time to time pursuant to Section 2.11 of the Agreement. Any Lender whose
Commitment is changed to zero shall upon such effectiveness cease to be a Lender
party to the Agreement, and all accrued fees and other amounts payable under the
Agreement for the account of such Lender shall be due and payable on such date;
provided that the provisions of Section 9.05 of the Agreement shall continue to
inure to the benefit of each such Lender.
SECTION 6. Governing Law. This Amendment shall be governed by and
-------------
construed in accordance with the laws of the State of New York.
4
<PAGE>
SECTION 7. Counterparts; Conditions to Effectiveness. This Amendment
-----------------------------------------
may be signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Amendment shall become effective as of the date hereof when
the Agent shall have received:
(a) duly executed counterparts hereof signed by the Borrowers and all
of the Lenders (or, in the case of any party as to which an executed
counterpart shall not have been received, the Agent shall have received
telegraphic, telex or other written confirmation from such party of
execution of a counterpart hereof by such party);
(b) a favorable written opinion of Charles R. Lotter, General Counsel
for the Borrowers, dated the date hereof and addressed to the Lenders, to
the effect set forth in Exhibit A hereto, and the Borrowers hereby instruct
such counsel to deliver such opinion to the Agent;
(c) a certificate from a Responsible Officer of each Borrower, dated
the date hereof, and certifying that the representations and warranties set
forth in Article III of the Agreement shall be true and correct in all
material respects on and as of the date hereof with the same effect as
though made on and as of such date, except to the extent such
representations and warranties expressly relate to an earlier date;
(d) a certificate from a Responsible Officer of each Borrower, dated
the date hereof, and certifying that on such date, no Event of Default or
Default shall have occurred and be continuing;
(e) for its own account all fees due and payable to it and in such
amounts as have been previously agreed upon in writing between the
Borrowers and the Agent in connection with the Credit Agreement as amended
hereunder; and
(f) (i) a certificate of the Secretary or Assistant Secretary of each
Borrower, dated the date hereof and certifying (A) that attached thereto is
a true and complete copy of resolutions duly adopted by the Board of
Directors of such Borrower authorizing the execution, delivery and
performance of the Agreement as hereby amended and the borrowings
thereunder, and that such resolutions have not been modified, rescinded or
5
<PAGE>
amended and are in full force and effect, and (B) as to the incumbency and
specimen signature of each officer executing this Amendment or any other
document delivered in connection herewith on behalf of such Borrower and
(ii) a certificate of another officer of each Borrower as to the incumbency
and specimen signature of the Secretary or Assistant Secretary executing
the certificate pursuant to (i) above.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the date first above written.
J.C. PENNEY COMPANY, INC.
By /s/ Leo A. Gispanski
-----------------------
Title: Vice President &
Treasurer
J.C. PENNEY FUNDING
CORPORATION
By /s/ Don McKay
-----------------------
Title: Chairman of the
Board
Commitments:
- -----------
$100,000,000 MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, individually
and as Agent
By /s/ Stephen B. King
--------------------------
Title: Vice President
$63,750,000 BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, individually and as Co-Agent
By /s/ Jody B. Schneider
---------------------------
Title: Vice President
$63,750,000 BANKERS TRUST COMPANY,
individually and as Co-Agent
By /s/ Kathleen A. Judge
--------------------------
Title: Vice President
7
<PAGE>
$63,750,000 CHEMICAL BANK, individually
and as Co-Agent
By /s/ Neil R. Boylan
--------------------------
Title: Vice President
$63,750,000 CREDIT SUISSE, individually
and as Co-Agent
By /s/ Stephen N. Flynn
--------------------------
Title: Member of Senior
Management
By /s/ Marilou Palenzuela
-------------------------
Title: Member of Senior
Management
$63,750,000 NATIONSBANK OF TEXAS, N.A.,
individually and as Co-Agent
By /s/ Steven A. Deily
-------------------------
Title: Senior Vice
President
$31,250,000 ABN AMRO BANK N.V.
By /s/ Laurie Tuzo
--------------------------
Title: Vice President
$31,250,000 THE FIRST NATIONAL BANK
OF BOSTON
By /s/ Bethann R. Halligan
-------------------------
Title: Vice President
8
<PAGE>
$17,500,000 BANK OF HAWAII
By /s/ Joseph T. Donaldson
-------------------------
Title: Vice President
$31,250,000 THE BANK OF NEW YORK
By /s/ Charlotte Sohn
-----------------------
Title: Vice President
$20,000,000 THE BANK OF TOKYO, LTD.
By /s/ John M. Mearns
-------------------------
Title: Vice President
$20,000,000 BANK ONE TEXAS, N.A.
By /s/ Scott Rhea
-------------------------
Title: Assistant Vice
President
$25,000,000 BANQUE NATIONALE DE PARIS
By /s/ Henry F. Setina
-------------------------
Title: Vice President
$40,000,000 CITIBANK, N.A.
By /s/ Robert A. Snell
--------------------------
Title: Vice President
9
<PAGE>
$31,250,000 CREDIT LYONNAIS NEW YORK
BRANCH
By /s/ Robert Ivosevich
---------------------------
Title: Senior Vice
President
$40,000,000 DAI-ICHI KANGYO BANK, LTD.
By /s/ Mitsuaki Yamazaki
--------------------------
Title: Assistant Vice
President
$31,250,000 DEUTSCHE BANK AG, NEW YORK
AND/OR CAYMAN ISLANDS BRANCH
By /s/ David H. Kahn
-------------------------
Title: Assistant Vice
President
By /s/ Hans-Josef Thiele
--------------------------
Title: Vice President
$40,000,000 FIRST INTERSTATE BANK
OF CALIFORNIA
By /s/ William J. Baird
--------------------------
Title: Senior Vice
President
$40,000,000 THE FIRST NATIONAL BANK
OF CHICAGO
By /s/ Catherine V. Frank
---------------------------
Title: Assistant Vice
President
10
<PAGE>
$12,500,000 FIRST SECURITY BANK
OF UTAH, N.A.
By /s/ Judy Callister
-------------------------
Title: Vice President
$31,250,000 FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By /s/ Mark M. Harden
--------------------------
Title: Vice President
$17,500,000 FIRSTAR BANK MILWAUKEE, N.A.
By /s/ Timothy W. Somers
-------------------------
Title: Vice President
$40,000,000 THE FUJI BANK, LTD.
By /s/ David L. Kelley
--------------------------
Title: Vice President
$40,000,000 THE INDUSTRIAL BANK
OF JAPAN TRUST COMPANY
By /s/ J. Kenneth Biegen
--------------------------
Title: Senior Vice
President
$25,000,000 INSTITUTO BANCARIO
SAN PAOLO DI TORINO
SPA-NEW YORK
By /s/ Robert Wurster
-------------------------
Title: First Vice President
11
<PAGE>
By /s/ Gerard M. McKenna
-------------------------
Title: Vice President
$25,000,000 THE LONG-TERM CREDIT BANK
OF JAPAN, LIMITED
By /s/ John J. Sullivan
--------------------------
Title: Joint General
Manager
$40,000,000 MELLON BANK, N.A.
By /s/ Marc T. Kennedy
--------------------------
Title: Assistant Vice
President
$20,000,000 THE MITSUBISHI BANK, LTD.
By /s/ Takeshi Yokokawa
-------------------------
Title: Joint General
Manager
$0 NATIONAL WESTMINSTER BANK PLC
BY /s/ Ernest V. Hodge
--------------------------
Title: Vice President
$25,000,000 THE NORTHERN TRUST COMPANY
By /s/ Martin G. Alston
-------------------------
Title: Vice President
12
<PAGE>
$25,000,000 NORWEST BANK MINNESOTA, N.A.
By /s/ Alan R. Thometz
-------------------------
Title: Vice President
$40,000,000 PNC BANK, N.A.
By /s/ Gregory Gaschler
-------------------------
Title: Vice President
$40,000,000 ROYAL BANK OF CANADA
By /s/ J. D. Frost
------------------------
Title: Senior Manager
$40,000,000 THE SANWA BANK LTD.
By /s/ Robert S. Smith
------------------------
Title: Assistant Vice
President
$31,250,000 SOCIETE GENERALE
By /s/ Louis P. Laville, III
--------------------------
Title: Vice President
$40,000,000 THE SUMITOMO BANK, LTD.
By /s/ Harumitsu Seki
--------------------------
Title: General Manager
13
<PAGE>
$40,000,000 SUNBANK, N.A.
By /s/ J. Carol Doyle
--------------------------
Title: Senior Vice
President
$25,000,000 SWISS BANK CORPORATION
By /s/ Sheila C. Weimer
-------------------------
Title: Associate Director
by /s/ William A. McDonnell
-------------------------
Title: Associate Director
Merchant Banking
$40,000,000 UNION BANK OF SWITZERLAND
By /s/ Dan O. Boyle
-------------------------
Title: Vice President
By /s/ George Kubove
-------------------------
Title: Vice President
$20,000,000 UNITED MISSOURI BANK, N.A.
By /s/ Walter Beck
-------------------------
Title: Executive Vice
President
$25,000,000 UNITED STATES NATIONAL
BANK OF OREGON
By /s/ Blake R. Howells
-------------------------
Title: Vice President
14
<PAGE>
$40,000,000 WACHOVIA BANK
OF GEORGIA, N.A.
By /s/ Douglas L. Williams
---------------------------
Title: Senior Vice
President-Group
Executive
Total Commitments:
- -----------------
$1,500,000,000
=============
15
<PAGE>
EXHIBIT A
---------
Charles R. Lotter
Executive Vice President
Secretary and General Counsel
December ___, 1995
Each of the lenders referred to below
Re: Revolving Credit Agreement of
J.C. Penney Company, Inc. and
J.C. Penney Funding Corporation
-------------------------------
Dear Sirs:
As the General Counsel of J. C. Penney Company, Inc., a Delaware
corporation ("JCPenney"), and of J. C. Penney Funding Corporation, a Delaware
corporation ("Funding"; together with JCPenney, "Borrowers"), I have been asked
to render an opinion in connection with the 364-Day Revolving Credit Agreement
dated as of December 16, 1993, as amended and restated with new Lenders as of
December 7, 1994 and as amended by Amendment No. 1 with new Lenders as of
December 6, 1995 (the "Agreement"), among the Borrowers, Morgan Guaranty Trust
Company of New York ("Agent"), the lenders listed on the signature pages of
Amendment No. 1 (the "Lenders"), and Bankers Trust Company, Chemical Bank, and
Credit Suisse ("Co-Agents").
In rendering the opinion set forth below, I have examined originals,
photostatic, or certified copies of the Agreement, the respective corporate
records and documents of the Borrowers, copies of public documents, certificates
of the officers or representatives of the Borrowers, and such other instruments
and documents, and have made such inquiries, as I have deemed necessary as a
basis for such opinion. In making such examinations, I have assumed with your
consent the genuineness of all signatures (other than the signatures of the
Borrowers) and the authenticity of all documents submitted to me as originals,
the conformity to original documents of all documents submitted to me as
certified or photostatic copies, and the authenticity of the
<PAGE>
originals of such latter documents. As to questions of fact material to such
opinion, to the extent I deemed necessary, I have relied upon the
representations and warranties of the Borrowers made in the Agreement and upon
certificates of the officers of the Borrowers. Capitalized terms not otherwise
defined in this opinion letter have the meanings specified in the Agreement.
Based upon the foregoing, I am of the opinion that:
1. Each of the Borrowers has been duly incorporated and is validly
existing and in good standing under the laws of the State of Delaware, and is
duly qualified as a foreign corporation and in good standing under the laws of
each jurisdiction where the failure to so qualify would have a Material Adverse
Effect. Each of the Borrowers has the requisite corporate power and authority
to own, pledge, and operate its properties and assets, to lease the property it
operates under lease, and to conduct its business as now conducted.
2. The execution, delivery and performance by the Borrowers of the
Agreement and the Borrowings by the Borrowers under the Agreement (i) are within
the corporate power of each of the Borrowers; (ii) have been duly authorized by
each of the Borrowers by all necessary corporate action; (iii) are not in
contravention of JCPenney's Restated Certificate of Incorporation; as amended,
Funding's Certificate of Incorporation; as amended, or either of the Borrower's
by-laws; (iv) to the best of my knowledge do not violate any material law,
statute, rule or regulation, or any material order of any Governmental
Authority, applicable to either of the Borrowers; (v) do not conflict with or
result in the breach of, or constitute a default under, the material borrowing
indentures, agreements, or other instruments of either of the Borrowers; (vi) do
not result in the creation or imposition of any Lien upon any of the property or
assets of either of the Borrowers other than any Lien created by the Agreement;
and (vii) do not require the consent or approval of, or any filing with, any
Governmental Authority or any other person party to those agreements described
above other than those that have been obtained or made or where the failure to
obtain such consent or approval would not result in a Material Adverse Effect.
3. The Agreement has been duly executed and delivered by each of the
Borrowers and constitutes a legal, valid, and binding obligation of such
Borrower, enforceable against such Borrower in accordance with its terms, except
2
<PAGE>
as such enforcement may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium, and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
4. Neither Borrower is an "investment company" within the meaning of
the Investment Company Act of 1940, as amended, or a "public-utility company" or
a "holding company" within the meaning of the Public Utility Holding Company Act
of 1935, as amended.
5. To the best of my knowledge after due inquiry, except as set
forth in Schedule 3.09 of the Agreement, no litigation by or before any
Governmental Authority is now pending or threatened against JCPenney or Funding
(i) which involves the Agreement or (ii) as to which there is a reasonable
possibility of an adverse determination and which, if adversely determined,
would, individually or in the aggregate, result in a Material Adverse Effect.
6. The Support Agreements have been duly executed and delivered by
JCPenney and, where applicable, Funding and, as of the Closing Date, are in full
force and effect in accordance with their terms.
The opinions expressed herein are limited to the laws of the State of
Delaware with respect to the opinions provided in paragraph 1 (except as to due
qualification as a foreign corporation and good standing under the laws of other
jurisdictions) and clauses (i), (ii) and (iii) of paragraph 2. The other
opinions expressed are limited to the laws of the State of New York and the laws
of the United States. I do not express any opinion herein concerning any laws
of any other jurisdictions. The opinion is furnished to you in connection with
the transactions contemplated by the Agreement, and may not be relied upon by
any other person, firm, or corporation for any purpose or by you in any other
context without my prior written consent.
Very truly yours,
Charles R. Lotter
3
<PAGE>
EXHIBIT 4(F)
[CONFORMED COPY]
AMENDMENT NO. 1
TO AMENDED AND RESTATED CREDIT AGREEMENT
AMENDMENT dated as of December 6, 1995 among J.C. PENNEY COMPANY, INC.
and J.C. PENNEY FUNDING CORPORATION (the "Borrowers"), the LENDERS listed on the
signature pages hereof (the "Lenders"), MORGAN GUARANTY TRUST COMPANY OF NEW
YORK, as Agent for the Lenders (the "Agent"), BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, BANKERS TRUST COMPANY, CHEMICAL BANK, CREDIT SUISSE and
NATIONSBANK OF TEXAS, N.A., as Co-Agents (the "Co-Agents").
W I T N E S S E T H :
WHEREAS, the parties hereto have heretofore entered into a 5-Year
Revolving Credit Agreement dated as of December 16, 1993, as Amended and
Restated as of December 7, 1994 (the "Agreement"); and
WHEREAS, the parties hereto desire to amend the Agreement as set forth
below;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions; References. Unless otherwise specifically
-----------------------
defined herein, each term used herein which is defined in the Agreement shall
have the meaning assigned to such term in the Agreement. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Agreement shall from and after the date hereof refer to the
Agreement as amended hereby.
SECTION 2. Amendment of Section 1.01 of the Agreement. Section 1.01
------------------------------------------
of the Agreement is amended:
(a) by replacing the definition of Facility Fee Percentage with the
following new definition:
<PAGE>
"Facility Fee Percentage" shall mean the facility fee percentage
-----------------------
determined daily in accordance with the Pricing Schedule.
(b) by replacing the definition of "Standby Margin" with the
following new definition:
"Standby Margin" shall mean with respect to each Standby Loan made as
--------------
part of any ABR Borrowing, 0, and with respect to each Standby Loan
made as part of any Eurodollar Standby Borrowing, the Euro-Dollar
Margin determined daily in accordance with the Pricing Schedule.
(c) by replacing the date "December 7, 1999" with the date
"December 6, 2000" in the definition of Maturity Date.
(d) by adding the words "or increased from time to time pursuant to
Section 2.21" immediately following the number "2.11" in the definition of
Commitment.
SECTION 3. Amendment of Article II of the Agreement. Article II of
----------------------------------------
the Agreement is amended:
(a) by adding immediately after the words "Section 2.11" in
Section 2.01 the words "and increased from time to time pursuant to
Section 2.21"; and
(b) by adding the following Section 2.21:
SECTION 2.21. Optional Increase in Commitments.
--------------------------------
At any time, if no Event of Default or Default shall have occurred and
be continuing, the Borrowers may, if they so elect in their sole
discretion, increase the Total Commitment, either by designating a person
not theretofore a Lender to become a Lender or by agreeing with an existing
Lender that such Lender's Commitment shall be increased. Upon execution
and delivery by the Borrowers and such Lender or other person of an
instrument of assumption in form reasonably satisfactory to the Agent, such
existing Lender shall have a Commitment as therein set forth or such other
person shall become a Lender with a Commitment as therein set forth and all
the rights and obligations of a Lender with such a Commitment hereunder;
provided:
--------
-2-
<PAGE>
(i) that the Borrowers shall provide prompt notice of such
increase to the Agent, who shall promptly notify the other Lenders;
(ii) that the Commitment of any Lender does not exceed 10% of the
Total Commitment after such increase; and
(iii) that the amount of such increase, together with all other
increases in Commitments pursuant to this Section 2.21 since the date
of this Agreement, does not exceed $375,000,000.
SECTION 4. Amendment of Section 9.04 of the Agreement. Section 9.04
------------------------------------------
of the Agreement is amended by replacing the amount "$15,000,000" in the
thirteenth line of paragraph b with the amount "$20,000,000".
SECTION 5. Pricing Schedule. The Agreement is further amended by
----------------
adding the annexed Pricing Schedule thereto as Exhibit D to the Agreement.
SECTION 6. Confirmation of Guaranty. J.C. Penney Company, Inc.
------------------------
confirms that its subordinated Guaranty of the obligations of J.C. Penney
Funding Corporation dated as of December 7, 1994 shall apply to the obligations
of J.C. Penney Funding Corporation under the Agreement as amended hereby and the
reference in the second recital thereto to "One Billion Dollars
($1,000,000,000)" is hereby changed to "One Billion Five Hundred Million Dollars
($1,500,000,000)".
SECTION 7. New Lenders; Changes in Commitments. With effect from and
-----------------------------------
including the date this Amendment becomes effective in accordance with Section 9
hereof, (i) each Person listed on the signature pages hereof which is not a
party to the Agreement shall become a Lender party to the Agreement and (ii) the
Commitment of each Lender shall be the amount set forth opposite the name of
such Lender on the signature pages hereof, as such amount may be reduced from
time to time pursuant to Section 2.11 of the Agreement. Any Lender whose
Commitment is changed to zero shall upon such effectiveness cease to be a Lender
party to the Agreement, and all accrued fees and other amounts payable under the
Agreement for the account of such Lender shall be due and payable on such date;
provided that the provisions of Section 9.05 of the Agreement shall continue to
inure to the benefit of each such Lender.
SECTION 8. Governing Law. This Amendment shall be governed by and
-------------
construed in accordance with the laws of the State of New York.
-3-
<PAGE>
SECTION 9. Counterparts; Conditions to Effectiveness. This Amendment
-----------------------------------------
may be signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Amendment shall become effective as of the date hereof when
the Agent shall have received:
(a) duly executed counterparts hereof signed by the Borrowers and all
of the Lenders (or, in the case of any party as to which an executed
counterpart shall not have been received, the Agent shall have received
telegraphic, telex or other written confirmation from such party of
execution of a counterpart hereof by such party);
(b) a favorable written opinion of Charles R. Lotter, General Counsel
for the Borrowers, dated the date hereof and addressed to the Lenders, to
the effect set forth in Exhibit A hereto, and the Borrowers hereby instruct
such counsel to deliver such opinion to the Agent;
(c) a certificate from a Responsible Officer of each Borrower, dated
the date hereof, and certifying that the representations and warranties set
forth in Article III of the Agreement shall be true and correct in all
material respects on and as of the date hereof with the same effect as
though made on and as of such date, except to the extent such
representations and warranties expressly relate to an earlier date;
(d) a certificate from a Responsible Officer of each Borrower, dated
the date hereof, and certifying that on such date, no Event of Default or
Default shall have occurred and be continuing;
(e) for its own account all fees due and payable to it and in such
amounts as have been previously agreed upon in writing between the
Borrowers and the Agent in connection with the Credit Agreement as amended
hereunder; and
(f) (i) a certificate of the Secretary or Assistant Secretary of each
Borrower, dated the date hereof, and certifying (A) that attached thereto
is a true and complete copy of resolutions duly adopted by the Board of
Directors of such Borrower authorizing the execution, delivery and
performance of the Agreement as hereby amended and the borrowings
thereunder, and that such resolutions have not been modified, rescinded or
-4-
<PAGE>
amended and are in full force and effect, and (B) as to the incumbency and
specimen signature of each officer executing this Amendment or any other
document delivered in connection herewith on behalf of such Borrower and
(ii) a certificate of another officer of each Borrower as to the incumbency
and specimen signature of the Secretary or Assistant Secretary executing
the certificate pursuant to (i) above.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the date first above written.
J.C. PENNEY COMPANY, INC.
By /s/ Leo A. Gispanski
--------------------------
Title: Vice President &
Treasurer
J.C. PENNEY FUNDING
CORPORATION
By /s/ Don McKay
--------------------------
Title: Chairman of the Board
Commitments:
- -----------
$100,000,000 MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, individually
and as Agent
By /s/ Stephen B. King
--------------------------
Title: Vice President
$63,750,000 BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
individually and as Co-Agent
By /s/ Jody B. Schneider
---------------------------
Title: Vice President
$63,750,000 BANKERS TRUST COMPANY,
individually and as Co-Agent
By /s/ Kathleen A. Judge
--------------------------
-6-
<PAGE>
Title: Vice President
$63,750,000 CHEMICAL BANK, individually
and as Co-Agent
By /s/ Neil R. Boylan
--------------------------
Title: Vice President
$63,750,000 CREDIT SUISSE, individually
and as Co-Agent
By /s/ Stephen N. Flynn
---------------------------
Title: Member of Senior
Management
By /s/ Marilou Palenzuela
--------------------------
Title: Member of Senior
Management
$63,750,000 NATIONSBANK OF TEXAS, N.A.,
individually and as Co-Agent
By /s/ Steven A. Deily
--------------------------
Title: Senior Vice
President
$31,250,000 ABN AMRO BANK N.V.
By /s/ Laurie Tuzo
-------------------------
Title: Vice President
$31,250,000 THE FIRST NATIONAL BANK
OF BOSTON
By /s/ Bethann R. Halligan
--------------------------
Title: Vice President
-7-
<PAGE>
$17,500,000 BANK OF HAWAII
By /s/ Joseph T. Donaldson
--------------------------
Title: Vice President
$31,250,000 THE BANK OF NEW YORK
By /s/ Charlotte Sohn
------------------------
Title: Vice President
$20,000,000 THE BANK OF TOKYO, LTD.
By /s/ John M. Mearns
--------------------------
Title: Vice President
$20,000,000 BANK ONE TEXAS, N.A.
By /s/ Scott Rhea
--------------------------
Title: Assistant Vice
President
$25,000,000 BANQUE NATIONALE DE PARIS
By /s/ Henry F. Setina
--------------------------
Title: Vice President
$40,000,000 CITIBANK, N.A.
By /s/ Robert A. Snell
--------------------------
Title: Vice President
-8-
<PAGE>
$31,250,000 CREDIT LYONNAIS NEW YORK
BRANCH
By /s/ Robert Ivosevich
--------------------------
Title: Senior Vice
President
$40,000,000 DAI-ICHI KANGYO BANK, LTD.
By /s/ Mitsuaki Yamazaki
--------------------------
Title: Assistant Vice
President
$31,250,000 DEUTSCHE BANK AG, NEW YORK
AND/OR CAYMAN ISLANDS BRANCH
By /s/ David H. Kahn
--------------------------
Title: Assistant Vice
President
By /s/ Hans-Josef Thiele
--------------------------
Title: Vice President
$40,000,000 FIRST INTERSTATE BANK
OF CALIFORNIA
By /s/ William J. Baird
-----------------------
Title: Senior Vice
President
$40,000,000 THE FIRST NATIONAL BANK
OF CHICAGO
By /s/ Catherine V. Frank
--------------------------
Title: Assistant Vice
President
-9-
<PAGE>
$12,500,000 FIRST SECURITY BANK
OF UTAH, N.A.
By /s/ Judy Callister
--------------------------
Title: Vice President
$31,250,000 FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By /s/ Mark M. Harden
--------------------------
Title: Vice President
$17,500,000 FIRSTAR BANK MILWAUKEE, N.A.
By /s/ Timothy W. Somers
--------------------------
Title: Vice President
$40,000,000 THE FUJI BANK, LTD.
By /s/ David L. Kelley
---------------------------
Title: Vice President
$40,000,000 THE INDUSTRIAL BANK
OF JAPAN TRUST COMPANY
By /s/ J. Kenneth Biegen
--------------------------
Title: Senior Vice
President
-10-
<PAGE>
$25,000,000 INSTITUTO BANCARIO
SAN PAOLO DI TORINO
SPA-NEW YORK
By /s/ Robert Wurster
--------------------------
Title: First Vice
President
By /s/ Gerard M. McKenna
--------------------------
Title: Vice President
$25,000,000 THE LONG-TERM CREDIT BANK
OF JAPAN, LIMITED
By /s/ John J. Sullivan
--------------------------
Title: Joint General
Manager
$40,000,000 MELLON BANK, N.A.
By /s/ Marc T. Kennedy
--------------------------
Title: Assistant Vice
President
$20,000,000 THE MITSUBISHI BANK, LTD.
By /s/ Takeshi Yokokawa
--------------------------
Title: Joint General
Manager
$0 NATIONAL WESTMINSTER BANK PLC
By /s/ Ernest V. Hodge
---------------------------
Title: Vice President
-11-
<PAGE>
$25,000,000 THE NORTHERN TRUST COMPANY
By /s/ Martin G. Alston
--------------------------
Title: Vice President
$25,000,000 NORWEST BANK MINNESOTA, N.A.
By /s/ Alan R. Thometz
--------------------------
Title: Vice President
$40,000,000 PNC BANK, N.A.
By /s/ Gregory Gaschler
--------------------------
Title: Vice President
$40,000,000 ROYAL BANK OF CANADA
By /s/ J. D. Frost
--------------------------
Title: Senior Manager
$40,000,000 THE SANWA BANK LTD.
By /s/ Robert S. Smith
--------------------------
Title: Assistant Vice
President
$31,250,000 SOCIETE GENERALE
By /s/ Louis P. Laville, III
--------------------------
Title: Vice President
-12-
<PAGE>
$40,000,000 THE SUMITOMO BANK, LTD.
By /s/ Harumitsu Seki
---------------------------
Title: General Manager
$40,000,000 SUNBANK, N.A.
By /s/ J. Carol Doyle
--------------------------
Title: Senior Vice
President
$25,000,000 SWISS BANK CORPORATION
By /s/ Sheila C. Weimer
--------------------------
Title: Associate Director
By /s/ William A. McDonnell
--------------------------
Title: Associate Director
Merchant Banking
$40,000,000 UNION BANK OF SWITZERLAND
By /s/ Dan O. Boyle
-------------------------
Title: Vice President
By /s/ George Kubove
--------------------------
Title: Vice President
$20,000,000 UNITED MISSOURI BANK, N.A.
By /s/ Walter Beck
--------------------------
Title: Executive Vice
President
-13-
<PAGE>
$25,000,000 UNITED STATES NATIONAL
BANK OF OREGON
By /s/ Blake R. Howells
--------------------------
Title: Vice President
$40,000,000 WACHOVIA BANK
OF GEORGIA, N.A.
By /s/ Douglas L. Williams
--------------------------
Title: Senior Vice
President-Group
Executive
Total Commitments:
- -----------------
$1,500,000,000
=============
-14-
<PAGE>
EXHIBIT A
---------
Charles R. Lotter
Executive Vice President
Secretary and General Counsel
December ___, 1995
Each of the lenders referred to below
Re: Revolving Credit Agreement of
J.C. Penney Company, Inc. and
J.C. Penney Funding Corporation
-------------------------------
Dear Sirs:
As the General Counsel of J. C. Penney Company, Inc., a Delaware
corporation ("JCPenney"), and of J. C. Penney Funding Corporation, a Delaware
corporation ("Funding"; together with JCPenney, "Borrowers"), I have been asked
to render an opinion in connection with the 5-Year Revolving Credit Agreement
dated as of December 16, 1993, as amended and restated with new Lenders as of
December 7, 1994 and as amended by Amendment No. 1 with new Lenders as of
December 6, 1995 (the "Agreement"), among the Borrowers, Morgan Guaranty Trust
Company of New York ("Agent"), the lenders listed on the signature pages of
Amendment No. 1 (the "Lenders"), and Bankers Trust Company, Chemical Bank, and
Credit Suisse ("Co-Agents").
In rendering the opinion set forth below, I have examined originals,
photostatic, or certified copies of the Agreement, the respective corporate
records and documents of the Borrowers, copies of public documents, certificates
of the officers or representatives of the Borrowers, and such other instruments
and documents, and have made such inquiries, as I have deemed necessary as a
basis for such opinion. In making such examinations, I have assumed with your
consent the genuineness of all signatures (other than the signatures of the
Borrowers) and the authenticity of all documents submitted to me as originals,
the conformity to original documents of all documents submitted to me as
certified or photostatic copies, and the authenticity of the
<PAGE>
originals of such latter documents. As to questions of fact material to such
opinion, to the extent I deemed necessary, I have relied upon the
representations and warranties of the Borrowers made in the Agreement and upon
certificates of the officers of the Borrowers. Capitalized terms not otherwise
defined in this opinion letter have the meanings specified in the Agreement.
Based upon the foregoing, I am of the opinion that:
1. Each of the Borrowers has been duly incorporated and is validly
existing and in good standing under the laws of the State of Delaware, and is
duly qualified as a foreign corporation and in good standing under the laws of
each jurisdiction where the failure to so qualify would have a Material Adverse
Effect. Each of the Borrowers has the requisite corporate power and authority
to own, pledge, and operate its properties and assets, to lease the property it
operates under lease, and to conduct its business as now conducted.
2. The execution, delivery and performance by the Borrowers of the
Agreement and the Borrowings by the Borrowers under the Agreement (i) are within
the corporate power of each of the Borrowers; (ii) have been duly authorized by
each of the Borrowers by all necessary corporate action; (iii) are not in
contravention of JCPenney's Restated Certificate of Incorporation; as amended,
Funding's Certificate of Incorporation; as amended, or either of the Borrower's
by-laws; (iv) to the best of my knowledge do not violate any material law,
statute, rule or regulation, or any material order of any Governmental
Authority, applicable to either of the Borrowers; (v) do not conflict with or
result in the breach of, or constitute a default under, the material borrowing
indentures, agreements, or other instruments of either of the Borrowers; (vi) do
not result in the creation or imposition of any Lien upon any of the property or
assets of either of the Borrowers other than any Lien created by the Agreement;
and (vii) do not require the consent or approval of, or any filing with, any
Governmental Authority or any other person party to those agreements described
above other than those that have been obtained or made or where the failure to
obtain such consent or approval would not result in a Material Adverse Effect.
3. The Agreement has been duly executed and delivered by each of the
Borrowers and constitutes a legal, valid, and binding obligation of such
Borrower, enforceable against such Borrower in accordance with its terms, except
-2-
<PAGE>
as such enforcement may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium, and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
4. Neither Borrower is an "investment company" within the meaning of
the Investment Company Act of 1940, as amended, or a "public-utility company" or
a "holding company" within the meaning of the Public Utility Holding Company Act
of 1935, as amended.
5. To the best of my knowledge after due inquiry, except as set
forth in Schedule 3.09 of the Agreement, no litigation by or before any
Governmental Authority is now pending or threatened against JCPenney or Funding
(i) which involves the Agreement or (ii) as to which there is a reasonable
possibility of an adverse determination and which, if adversely determined,
would, individually or in the aggregate, result in a Material Adverse Effect.
6. The Support Agreements have been duly executed and delivered by
JCPenney and, where applicable, Funding and, as of the Closing Date, are in full
force and effect in accordance with their terms.
The opinions expressed herein are limited to the laws of the State of
Delaware with respect to the opinions provided in paragraph 1 (except as to due
qualification as a foreign corporation and good standing under the laws of other
jurisdictions) and clauses (i), (ii) and (iii) of paragraph 2. The other
opinions expressed are limited to the laws of the State of New York and the laws
of the United States. I do not express any opinion herein concerning any laws
of any other jurisdictions. The opinion is furnished to you in connection with
the transactions contemplated by the Agreement, and may not be relied upon by
any other person, firm, or corporation for any purpose or by you in any other
context without my prior written consent.
Very truly yours,
Charles R. Lotter
-3-
<PAGE>
EXHIBIT D
---------
PRICING SCHEDULE
The "Facility Fee Percentage" and "Euro-Dollar Margin" for any day are
the respective percentages set forth below in the applicable row under the
column corresponding to the Category that exists on such day:
<TABLE>
<CAPTION>
==================================================================
Category I II III IV V
==================================================================
<S> <C> <C> <C> <C> <C>
Facility Fee 0.06750% 0.0750% 0.100% 0.1750% 0.250%
Percentage
- ------------------------------------------------------------------
Euro-Dollar 0.10750% 0.150% 0.200% 0.3750% 0.500%
Margin
==================================================================
</TABLE>
For purposes of this Schedule, the following terms have the following
meanings:
"Category I" exists at any date if, at such date, (i) the Index Debt
is rated at least AA- by S&P or at least Aa3 by Moody's and (ii) Category V does
--
not exist.
"Category II" exists at any date if, at such date, (i) the Index Debt
is rated at least A by S&P or at least A2 by Moody's and (ii) neither Category I
--
nor Category V exists.
"Category III" exists at any date if, at such date, (i) the Index Debt
is rated at least BBB+ by S&P or at least Baa1 by Moody's and (ii) none of
--
Category I, Category II and Category V exists.
"Category IV" exists at any date if, at such date, (i) the Index Debt
is rated at least BBB- by S&P and at least Baa3 by Moody's and (ii) none of
---
Category I, Category II and Category III exists.
"Category V" exists at any date if the Index Debt is rated below BBB-
by S&P or below Baa3 by Moody's.
--
"Category" refers to the determination of which of Category I,
Category II, Category III, Category IV or Category V exists at any date.
For purposes of the foregoing, (i) if no rating for the Index Debt
shall be available from either rating agency, (other than because (a) such
rating agency shall no
<PAGE>
longer be in the business of rating corporate debt obligations or (b) of any
other reason outside the control of JCPenney and Funding), such rating agency
shall be deemed to have established a rating in Category V and (ii) if any
rating established or deemed to have been established by Moody's or S&P shall be
changed (other than as a result of a change in the rating system of either
Moody's or S&P), such change shall be effective as of the date on which such
change is first publicly announced by the rating agency making such change. If
the rating system of either Moody's or S&P shall change prior to the Maturity
Date, or if either such rating agency shall cease to be in the business of
rating corporate debt obligations or shall no longer have in effect a rating for
any reason outside the control of JCPenney and Funding, the Borrowers and the
Lenders shall negotiate in good faith to amend the references to specific
ratings in this definition to reflect such changed rating system or the absence
of such a rating. Pending agreement on any such amendment, (i) if the rating
system of one such rating agency shall remain unchanged, or if a rating shall be
available from one such rating agency, the Facility Fee Percentage and the Euro-
Dollar Margin shall be determined by reference to the rating established by such
rating agency, (ii) if no rating for the Index Debt shall be available from
either rating agency then (A) for 60 days, the Facility Fee Percentage and the
Euro-Dollar Margin shall be determined by reference to the rating or ratings
most recently available, (B) after 60 days, the Facility Fee Percentage and the
Euro-Dollar Margin shall be determined by reference to Category IV (or Category
V if such Percentage or Margin shall have been determined by reference to
Category IV under clause (A) above) and (C) after 180 days, the Facility Fee
Percentage or Euro-Dollar Margin shall be determined by reference to Category V.
-2-
<PAGE>
EXHIBIT 13
1995 Annual Report
Management's Discussion and Analysis of
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 CS First Boston Corporation, J.P. Morgan
Securities Inc., Merrill Lynch Money Markets Inc., and Morgan Stanley & Co.,
Incorporated to corporate and institutional investors in the domestic market.
The commercial paper is guaranteed by JCPenney on a subordinated basis. Funding
has, from time to time, issued long term debt in public and private markets in
the United States and abroad. The commercial paper is rated "A1" by Standard &
Poor's Corporation, "P1" by Moody's Investors Service, Inc., and "F1" by Fitch
Investors Service, Inc.
Income is derived primarily from earnings on loans to JCPenney and is designed
to produce earnings sufficient to cover its interest expense at a coverage
ratio of at least one and one-half times.
In 1995, net income increased to $43 million from $32 million in 1994 and $16
million in 1993. The increases in 1995 and 1994 are attributed to higher
borrowing levels and higher interest rates. Interest expense was $128 million in
1995 compared with $94 million in 1994 and $47 million in 1993. Interest earned
from JCPenney was $194 million in 1995 compared to $143 million in 1994 and $71
million in 1993.
Commercial paper borrowings averaged $2,145 million in 1995 compared to $1,990
million in 1994 and $1,347 million in 1993. The average interest rate on
commercial paper was 5.9 per cent in 1995, up from 4.6 per cent in 1994 and 3.2
percent in 1993.
Committed bank credit facilities available to Funding and JCPenney as of January
27, 1996, amounted to $3.0 billion. In 1995, JCPenney and Funding amended the
two syndicated revolving credit facilities totaling $3.0 billion with a group of
domestic and international banks. These facilities consist of a $1.5 billion,
364-day revolver, and a $1.5 billion, five-year revolver. The 364-day revolver
includes a $500 million seasonal credit line for the August to January period
thus allowing JCPenney to match its seasonal borrowing requirements. These
facilities support JCPenney's short term borrowing program. None of the
borrowing facilities were in use as of January 27, 1996. See page 8 for a
complete list of committed bank credit facilities.
We would like to express our appreciation to the institutional investment
community, as well as to our credit line participants and commercial paper
dealers for their continued support during 1995.
/s/ Donald A. McKay
Donald A. McKay
Chairman of the Board
April 5, 1996
-----------
2
<PAGE>
Statements of Income J.C. Penney Funding Corporation
($ in millions)
<TABLE>
<CAPTION>
For the Year 1995 1994 1993
-----------------------------------
<S> <C> <C> <C>
Interest Income From JCPenney............ $ 194 $ 143 $ 71
Interest Expense......................... 128 94 47
------ ------ ------
Income before income taxes............... 66 49 24
Income taxes........................ 23 17 8
------ ------ ------
Net income............................... $ 43 $ 32 $ 16
====== ====== ======
<CAPTION>
Statements of Reinvested Earnings
($ in millions)
1995 1994 1993
-----------------------------------
<S> <C> <C> <C>
Balance at beginning of year............. $ 883 $ 851 $ 835
Net income............................... 43 32 16
------ ------ ------
Balance at end of year................... $ 926 $ 883 $ 851
====== ====== ======
</TABLE>
--------
See Notes to Financial Statements on page 6 3
<PAGE>
Balance Sheets J.C.Penney Funding Corporation
(In millions except share data)
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------
<S> <C> <C> <C>
Assets
Loans to JCPenney............................... $2,563 $3,114 $2,323
====== ====== ======
Liabilities and Equity of JCPenney
Current Liabilities
Short term debt................................. $1,482 $2,074 $1,284
Due to JCPenney................................. 10 12 43
------ ------ ------
Total Current Liabilities................... 1,492 2,086 1,327
Equity of JCPenney
Common stock (including contributed
capital), par value $100:
Authorized, 750,000 shares -
issued and outstanding, 500,000 shares........ 145 145 145
Reinvested earnings............................. 926 883 851
------ ------ ------
Total Equity of JCPenney.................... 1,071 1,028 996
------ ------ ------
Total Liabilities and Equity of JCPenney.... $2,563 $3,114 $2,323
====== ====== ======
</TABLE>
-----------
4
See Notes to Financial Statements on page 6
<PAGE>
Statements of Cash Flows J.C.Penney Funding Corporation
($ In millions)
<TABLE>
<CAPTION>
For the Year 1995 1994 1993
----------------------------
<S> <C> <C> <C>
Operating Activities
Net income...................................... $ 43 $ 32 $ 16
(Increase)Decrease in loans to JCPenney......... 551 (791) (411)
Increase(Decrease) in amount due to JCPenney.... (2) (31) (2)
------ ------ ------
$ 592 $ (790) $ (397)
Financing Activities
Increase(Decrease) in short term debt........... $ (592) $ 790 $ 397
Supplemental Cash Flow Information
Interest paid................................... $ 128 $ 94 $ 47
Income taxes paid............................... $ 26 $ 10 $ 4
</TABLE>
-----------
See Notes to Financial Statements on page 6 5
<PAGE>
Independent Auditors' Report J.C. Penney Funding Corporation
To the Board of Directors of
J.C. Penney Funding Corporation:
We have audited the accompanying balance sheets of J.C. Penney Funding
Corporation as of January 27, 1996, January 28, 1995, and January 29, 1994, and
the related statements of income, reinvested earnings, and cash flows, appearing
on pages 3 through 5 for the years then ended. These financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of J.C. Penney Funding Corporation
as of January 27, 1996, January 28, 1995, and January 29, 1994, and the results
of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Dallas, Texas
February 22, 1996
- --------------------------------------------------------------------------------
Notes to Financial Statements
Nature of Operations
- --------------------
J.C. Penney Funding Corporation ("Funding") is a wholly-owned consolidated
subsidiary of J.C. Penney Company, Inc. ("JCPenney"). The principal business of
Funding consists of financing a portion of JCPenney's operations through loans
to JCPenney. To finance its operations, Funding issues commercial paper, which
is guaranteed by JCPenney on a subordinated basis, to corporate and
institutional investors in the domestic market. Funding has, from time to time,
issued long term debt in public and private markets in the United States and
abroad.
Definition of Fiscal Year
Funding's fiscal year ends on the last Saturday in January. Fiscal year 1995
ended January 27, 1996, 1994 ended January 28, 1995, and 1993 ended January 29,
1994.
Commercial Paper Placement
Funding places commercial paper solely through dealers. The average interest
rate on commercial paper at year end 1995, 1994, and 1993 was 5.7%, 5.9%, and
3.2%, 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 consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. Certain amounts included in the
consolidated financial statements are estimated based on currently available
information and management's judgment as to the outcome of future conditions and
circumstances. While every effort is made to ensure the integrity of such
estimates, including the use of third party specialists where appropriate,
actual results could differ from these estimates.
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 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
27, 1996, amounted to $3.0 billion. In 1995, JCPenney and Funding amended the
two syndicated revolving credit facilities totaling $3.0 billion with a group of
domestic and international banks. These facilities consist of a $1.5 billion,
364-day revolver, and a $1.5 billion, 5 year revolver. The 364-day revolver
includes a $500 million seasonal credit line for the August to January period
thus allowing JCPenney to match its seasonal borrowing requirements. These
facilities support JCPenney's short term borrowing program. None of the
borrowing facilities were in use as of January 27, 1996.
Fair Value of Financial Instruments
- -----------------------------------
The fair value of short term debt (commercial paper) at January 27, 1996,
January 28, 1995, and January 29, 1994 approximates the amount as reflected on
the balance sheet due to its short average maturity.
The fair value of loans to JCPenney at January 27, 1996, January 28, 1995, and
January 29, 1994, also approximates the amount reflected on the balance sheet
because the loan is payable on demand and the interest charged on the loan
balance is adjusted to reflect current market interest rates.
--------
6
<PAGE>
Five Year Financial Summary J.C. Penney Funding Corporation
($ In millions)
<TABLE>
<CAPTION>
At Year End 1995 1994 1993 1992 1991
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Capitalization
Short term debt
Commercial paper ......... $ 1,482 $2,074 $ 1,284 $ 887 $ 414
Master notes ............. -- -- -- -- 57
------- ------ ------- ------- -------
Total short term debt... 1,482 2,074 1,284 887 471
Long term debt
7.875% to 9.25% due 1996
to 1998.................. -- -- -- -- 177
------- ------ ------- ------- -------
Total debt ................. 1,482 2,074 1,284 887 648
------- ------ ------- ------- -------
Equity of JCPenney ......... 1,071 1,028 996 980 963
------- ------ ------- ------- -------
Total capitalization ......... $ 2,553 $3,102 $ 2,280 $ 1,867 $ 1,611
======= ====== ======= ======= =======
Committed bank credit
facilities .................. $ 3,000 $2,500 $ 1,250 $ 1,250 $ 1,250
For the Year
Income ................ $ 194 $ 143 $ 71 $ 77 $ 101
Expenses ................ $ 128 $ 94 $ 47 $ 51 $ 67
Net income ................ $ 43 $ 32 $ 16 $ 17 $ 23
Fixed charges - times earned.. 1.52 1.52 1.52 1.52 1.52
Peak short term debt.......... $ 2,771 $2,649 $ 2,327 $ 1,665 $ 1,489
Average debt
Short term ................ $ 2,145 $1,990 $ 1,347 $ 1,146 $ 754
Long term ................ -- $ -- $ -- $ 39 $ 232
Total ................ $ 2,145 $1,990 $ 1,347 $ 1,185 $ 986
Average interest rates
Short term debt ........... 5.9% 4.6% 3.2% 3.7% 5.6%
Long term debt ............ --% --% --% 8.9% 8.7%
Total ................ 5.9% 4.6% 3.2% 3.9% 6.3%
</TABLE>
__________
7
<PAGE>
Quarterly Data J.C. Penney Funding Corporation
($ in millions)(Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
------------------- -------------------- -------------------- ---------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income ...................... $ 48 24 13 48 32 15 52 38 22 46 49 21
Expenses .................... $ 31 16 9 32 21 10 34 25 14 31 32 14
Income before taxes ......... $ 17 8 4 16 11 5 18 13 8 15 17 7
Net income .................. $ 11 5 3 10 7 3 12 9 5 10 11 5
Fixed charges -
times earned ............... 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52
</TABLE>
Committed Revolving Credit Facilities
as of January 27, 1996
ABN-AMRO Bank N.V. The Long Term Credit Bank of
Bank of America NT & SA Japan, Ltd.
Bank of Hawaii Mellon Bank, N.A.
Bank of New York Mitsubishi Bank
Bank One, Texas, N.A. Morgan Guaranty Trust Company
Bankers Trust Company of New York
The Bank of Tokyo, Ltd. NationsBank of Texas, N.A.
Banque Nationale de Paris The Northern Trust Company
Chemical Bank Norwest Bank Minnesota, N.A.
Citibank, N.A. PNC Bank, N.A.
Credit Lyonnais The Royal Bank of Canada
Credit Suisse The Sanwa Bank Limited
Dai-Ichi Kangyo Bank San Paolo Bank
Deutsche Bank A.G. Societe Generale
First Interstate Bank of California The Sumitomo Bank, Limited
The First National Bank of Boston SunBank, N.A.
The First National Bank of Chicago Swiss Bank Corporation
First Security Bank of Utah, N.A. Union Bank of Switzerland
First Union National Bank of United Missouri Bank, N.A.
North Carolina United States National Bank
Firstar Bank, Milwaukee, N.A. of Oregon
The Fuji Bank, Limited Wachovia Bank of North Carolina, N.A.
The Industrial Bank of Japan
Trust Company
________________
8
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
To the Board of Directors of
J. C. Penney Funding Corporation:
We consent to incorporation by reference in: (1) the Registration Statement
(No. 33-28390) on Form S-8; (2) the Registration Statement (No. 33-59666) on
Form S-8; (3) the Registration Statement (No. 33-59668) on Form S-8; (4) the
Registration Statement (No. 33-66070) on Form S-8; (5) the Registration
Statement (No. 33-66072) on Form S-8; (6) the Registration Statement
(No. 33-53275) on Form S-3; (7) the Registration Statement (No. 33-56993) on
Form S-8; and (8) the Registration Statement (No. 33-56995) on Form S-8 of J. C.
Penney Company, Inc. of our report dated February 22, 1996, relating to the
balance sheets of J. C. Penney Funding Corporation as of January 27, 1996,
January 28, 1995, and January 29, 1994, and the related statements of income,
reinvested earnings, and cash flows for the years then ended, which report
appears in the 1995 Annual Report of J. C. Penney Funding Corporation, which
Annual Report is incorporated by reference in the Annual Report on Form 10-K of
J. C. Penney Funding Corporation for the year ended January 27, 1996.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Dallas, Texas
April 15, 1996
<PAGE>
Exhibit 24
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, THAT each of the undersigned directors and
officers of J. C. PENNEY FUNDING CORPORATION, a Delaware corporation, which is
about to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Exchange Act of 1934, its Annual Report
on Form 10-K for the 52 weeks ended January 27, 1996, hereby constitutes and
appoints W. J. Alcorn and D. A. McKay, and each of them, his or her true and
lawful attorneys-in-fact and agents, with full power to act without the other,
for him or her and in his or her name, place, and stead, in any and all
capacities, to sign said Annual Report, which is about to be filed, and any and
all subsequent amendments to said Annual Report, and to file said Annual Report
and each subsequent amendment so signed, with all exhibits thereto, and any and
all documents in connection therewith, and to appear before the Securities and
Exchange Commission in connection with any matter relating to said Annual Report
and any subsequent amendments, hereby granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform any and all
acts and things requisite and necessary to be done in and about the premises as
fully and to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney as of
the 3rd day of April, 1996.
/s/ D. A. McKay /s/ W. J. Alcorn
- ------------------------------ --------------------------------
D. A. McKay W. J. Alcorn
Chairman of the Board Controller
(principal executive officer); (principal accounting officer)
Director
/s/ S. F. Walsh
- ------------------------------
S. F. Walsh
President
(principal financial officer);
Director
/s/ R. B. Cavanaugh
- --------------------------------
R. B. Cavanaugh
Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED INCOME STATEMENT OF
J. C. PENNEY FUNDING CORPORATION AS OF JANUARY 27, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-27-1996
<PERIOD-END> JAN-27-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,563
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,563
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,563
<CURRENT-LIABILITIES> 1,492
<BONDS> 0
<COMMON> 145
0
0
<OTHER-SE> 926
<TOTAL-LIABILITY-AND-EQUITY> 2,563
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (66)
<INCOME-PRETAX> 66
<INCOME-TAX> 23
<INCOME-CONTINUING> 43
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99
J.C.Penney Company, Inc.
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
While results for 1995 fell short of expectations, the Company's profits and
earnings per share achieved the third highest level in the Company's history.
The Company's financial condition remained strong. Cash flow generated from
operations exceeded $1 billion, capital investment was at an all time high, and
the Company's debt ratio improved and remained better than the Company's target.
Also in 1995, to further enhance stockholder value, the Company purchased 7.5
million shares of its common stock and increased the dividend by over 14 per
cent.
Over the next three years, the Company plans to continue with an aggressive
capital expenditures program currently planned at over $2 billion. Most of the
capital investment will be devoted to opening new and relocated JCPenney stores
and to remodeling existing store facilities.
In the area of expense management, the Company has made significant
progress in the last five years. The ratio of selling, general and
administrative (SG&A) expenses to sales has declined 240 basis points during
that time. This improvement has more than offset the impact of generally flat
gross margins experienced by the Company and throughout the retail industry over
the same period. In 1995, the Company continued to control expenses across all
operating areas; however, with sales volume at about the same level as last
year, the SG&A ratio increased slightly. Expense management will continue to be
a priority.
Looking to 1996 and beyond, the Company remains focused on its commitment
to achieving its long term financial goals and to adding value for its
stockholders.
<TABLE>
<CAPTION>
1995 1994 1993 1992/(1)/ 1991
-----------------------------------------------------------------------------------------------------
Revenue (In millions) $ % Change $ % Change $ % Change $ % Change $ % Change
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
JCPenney stores 14,973 (0.3) 15,023 6.9 14,056 4.4 13,460 12.1 12,007 (.3)
Comparative store sales
per cent increase/(decrease) (1.4) 6.8 5.3 9.7 (1.5)
Catalog 3,738 (2.1) 3,817 8.6 3,514 11.0 3,166 5.5 3,002 (6.8)
Drug stores/(2)/ 1,851 20.2 1,540 9.0 1,413 2.2 1,383 16.0 1,192 8.6
Comparative store sales
per cent increase 5.5 5.5 6.5 10.9 6.1
-----------------------------------------------------------------------------------------------------
Total retail sales 20,562 0.9 20,380 7.4 18,983 5.4 18,009 11.2 16,201 (1.0)
JCPenney Insurance 697 22.1 571 20.2 475 22.5 388 18.3 328 28.6
JCPenney National Bank 160 21.7 131 9.5 120 2.0 118 (1.1) 119 2.6
-----------------------------------------------------------------------------------------------------
Total revenue 21,419 1.6 21,082 7.7 19,578 5.7 18,515 11.2 16,648 (1.0)
=====================================================================================================
</TABLE>
/(1)/ Comprised 53 weeks.
/(2)/ 1995 includes sales for Kerr Drug, acquired in February 1995.
17
JCP
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations continued
- --------------------------------------------------------------------------------
Results of operations
Net income for fiscal 1995 totaled $838 million after three successive years of
record Company earnings. Earnings in 1994 were $1,057 million and in 1993 were
$940 million. 1995 results were adversely impacted by the softness in consumer
demand and the continuing consolidation within the retail industry, both of
which contributed to a highly promotional retail environment. On a fully diluted
basis, 1995 earnings per share totaled $3.33 compared with $4.05 in 1994 and
$3.53 in fiscal 1993. In 1994, net income increased over the prior year as a
result of higher sales volumes in both JCPenney stores and catalog.
Net Income
($ in Millions)
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Year $ (millions)
---- ------------
<S> <C>
1991 80
1992 777
1993 940
1994 1,057
1995 838
</TABLE>
Retail sales in 1995 increased by 0.9 per cent, to $20.6 billion compared to
$20.4 billion in 1994 and $19.0 billion in 1993. Sales levels in 1995 were weak
throughout the year and particularly during the fourth quarter. Sales were soft
across most merchandise lines in JCPenney stores and catalog, reflecting the
continuing pressure in the retail sector of the economy.
Sales for JCPenney stores were relatively unchanged in 1995 at $15.0 billion,
about the same level as in 1994 and up from $14.1 billion in 1993. On a
comparable store basis, sales decreased 1.4 per cent in 1995, after posting an
increase of 6.8 per cent in 1994. Catalog sales decreased 2.1 per cent to $3.7
billion compared to $3.8 billion in 1994 and $3.5 billion
Retail Sales
($ in Millions)
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Year $ (millions)
---- ------------
<S> <C>
1991 16,201
1992 18,009
1993 18,983
1994 20,380
1995 20,562
</TABLE>
in 1993. Sales for drug stores, which include sales from the 97 Kerr Drug stores
acquired in February 1995, increased by 20.2 per cent to $1.9 billion, compared
to $1.5 billion in 1994 and $1.4 billion in 1993. Excluding Kerr Drug, drug
store sales continued their growth trend, increasing 7.1 per cent in fiscal
1995. On a comparable store basis, drug store sales increased by 5.5 per cent
over the prior year in both 1995 and 1994.
Gross margin on retail sales totaled $6.2 billion in 1995 compared to $6.4
billion in 1994 and $6.0 billion in 1993. The decrease in 1995 was principally
attributable to weak sales volume and higher markdowns due to the highly
competitive and promotional retail environment, particularly in the fourth
quarter of the year. In 1994, gross margin increased as a result of favorable
sales performance and improved inventory management. As a per cent of sales,
gross margin decreased to 30.3 per cent in 1995 from 31.5 per cent in 1994 and
1993. Included in the 1995 gross margin was a last-in, first-out (LIFO) credit
of $21 million. The LIFO benefit was a result of declines in inventory levels.
In 1994, the Company recorded a LIFO charge of $1 million, and in 1993 recorded
a $36 million LIFO credit due to declines in retail prices.
LIFO Gross Margin
(Per cent to Sales)
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Year Percent of Retail Sales
---- -----------------------
<S> <C>
1991 31.5
1992 31.7
1993 31.5
1994 31.5
1995 30.3
</TABLE>
Selling, general, and administrative (SG&A) expenses continued to be well
managed and totaled $4.9 billion in 1995, compared to $4.8 billion in 1994, and
$4.5 billion in 1993. These expenses increased $112 million, or 2.3 per cent,
over 1994 levels, resulting in part from increases in paper costs and postal
rates, which impact catalog and the retail advertising program. Also
contributing to the SG&A increase was the acquisition of Kerr Drug. Included in
1995 SG&A expenses was a reduction of $18 million for non-recurring items. At
the end of the year, the Company sold JCPenney Business Services, Inc., a
subsidiary which provided authorization, billing,
18
JCP
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations continued
- --------------------------------------------------------------------------------
and other services to third party credit-card issuers, for a pre-tax gain of $67
million. The Company also recorded a $49 million charge, principally related to
the early adoption of The Financial Accounting Standards Board's Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Excluding the
effects of paper and postage increases, the Kerr Drug acquisition, and non-
recurring charges, SG&A expenses increased by approximately one percent.
As a per cent of sales, SG&A expenses rose by 30 basis points to 23.8 per
cent in 1995 compared to 23.5 per cent in 1994 and 23.7 per cent in 1993. In
1994, SG&A expenses increased due to planned increases in store and catalog
advertising.
SG&A Expenses
(Per cent to Sales)
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Year Percent of Retail Sales
---- -----------------------
<S> <C>
1991 25.6
1992 24.7
1993 23.7
1994 23.5
1995 23.8
</TABLE>
Net interest expense and credit operations totaled $183 million in 1995 compared
with $93 million in 1994 and $73 million in 1993. The increase is principally
attributable to two factors: higher interest costs related to the Company's
stock buy-back program and capital expenditures, and higher bad debt costs
resulting from unfavorable trends in delinquency rates and consumer
bankruptcies.
Net interest expense and credit operations increased in 1994 primarily as a
result of higher finance charge revenue offset by higher bad debt expense
associated with higher levels of customer receivables, and higher interest
expense to support the increase in working capital requirements and the stock
buy-back program.
The effective income tax rate for 1995 was 37.5 per cent, down from 37.8 per
cent in 1994. In 1993, the effective income tax rate was 39.3 per cent, and
included a $14 million charge for the revaluation of deferred taxes.
The JCPenney insurance companies continued to show strong growth in operating
performance as a result of successful efforts to establish relationships with
third party business partners. Pre-tax income was $161 million in 1995, an
increase of $23 million, or 16.7 per cent, over 1994's income of $138 million
and $120 million in 1993. This growth resulted primarily from favorable trends
in premiums and policy retention. Total revenue for 1995 was $697 million,
compared with $571 million in 1994 and $475 million in 1993. At year end 1995,
the insurance companies had 9.0 million policies and certificates in force, as
compared with 7.5 million and 5.8 million in 1994 and 1993, respectively.
Consumer banking, which offers Visa and MasterCard credit cards to consumers,
generated pre-tax income of $29 million in 1995 compared with $27 million in
1994 and $29 million in 1993. While results improved in 1995, they were
adversely impacted by trends in bad debt. Income in 1994 decreased as a result
of higher interest rates on deposits. At the end of 1995, approximately 470
thousand credit cards were active.
Financial condition. The Company's goal is to maintain a strong balance sheet.
Solid earnings and consistent cash flow over the past several years have
contributed to the Company's strong financial condition. This provides the
Company with the flexibility to capitalize on attractive opportunities for
growth, increase its dividends, and to periodically purchase its stock -- all of
which enhance stockholder value.
Total debt, both on and off balance sheet, was $6.5 billion at January 27,
1996, up $176 million from $6.4 billion at January 28, 1995, and $5.6 billion at
January 29, 1994. During 1995, the Company issued $1 billion of medium term
notes with an average maturity of 10 years and an average coupon rate of
approximately 6.7 per cent. Additionally, in April 1995 the Company retired, at
par, $165 million of its 9.45 per cent Notes due in 1998. During the course of
the year, short term debt, net, decreased by $569 million.
Currently the Company's long term debt is rated A+ by Standard and Poor's
Corporation, A1 by Moody's Investors Service and A+ by Fitch Investors Service,
Inc. The Company's commercial paper is rated A1, P1, and F1 by the three
organizations, respectively. These ratings, which are among the highest in the
retail industry, reflect the Company's strong balance sheet.
Cash flow generated by operations in 1995 more than met the Company's operating
cash requirements. Cash flow generated internally, consisting of net income plus
depreciation and amortization, and deferred taxes, totaled $1.3 billion in 1995,
which covered the Company's needs for record capital expenditures and dividends.
In addition
19
JCP
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations continued
- --------------------------------------------------------------------------------
the Company used debt financing to continue its stock buy-back program.
The Company expects to continue generating sufficient cash flow internally to
meet substantially all of its cash requirements for working capital, capital
expenditures, and dividends.
Capital expenditures, on a cash basis, for fiscal 1995 were the highest in
Company history at $717 million, and include the $173 million acquisition cost
of seven Woodward & Lothrop stores in the Washington, D.C., area. These stores
are scheduled to open in mid-1996 after improvements have been completed.
Capital expenditures in fiscal years 1994 and 1993 totaled $550 million and $480
million, respectively. The Company currently expects to spend approximately $700
million per year over the next three years, a significant portion of which will
be devoted to new store openings and the modernization of existing stores.
Debt to capital. Over the last several years, the Company's debt capacity has
increased as a result of its strong earnings and cash flow. As a measure of the
Company's strong balance sheet, the debt to capital ratio improved to 52.6 per
cent in 1995, compared to 53.1 per cent in 1994. In 1993, the debt to capital
ratio was 51.1 per cent. Debt includes both on and off-balance-sheet financing,
as discussed on pages 37 and 38. In 1995, the Company's strong balance sheet
provided the opportunity to purchase approximately 7.5 million shares under its
current stock buy-back program at a cost of $335 million. Over the past two
years, the Company has purchased 17.5 million shares at a cost of $810 million.
Debt to Capital Ratio
(Per cent)
[BAR CHART APPEARS HERE]
<TABLE>
<CAPTION>
Year Percent
---- -------
<S> <C>
1991 59.0
1992 53.2
1993 51.1
1994 53.1
1995 52.6
</TABLE>
Dividends. On March 13, 1996, the Board of Directors increased the quarterly
common dividend by 8.3 per cent to 52 cents per share, or an indicated annual
rate of $2.08. Dividends on common shares were paid at a quarterly rate of 48
cents per share in 1995, an increase of 14 per cent compared to 42 cents per
share in 1994, and 36 cents per share in 1993, for an annual indicated rate of
$1.92 per share in 1995, $1.68 per share in 1994, and $1.44 per share in 1993.
Dividends per Share
(Dollars)
[BAR CHART APPEARS HERE]
<TABLE>
<CAPTION>
Year $
---- ------
<S> <C>
1991 1.32
1992 1.32
1993 1.44
1994 1.68
1995 1.92
</TABLE>
Inflation and changing prices have not had a significant impact on the Company
in recent years due to low levels of inflation.
20
JCP
<PAGE>
- --------------------------------------------------------------------------------
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 27, 1996, January 28, 1995, and
January 29, 1994, and the related consolidated statements of income, reinvested
earnings, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of J.C. Penney
Company, Inc. and Subsidiaries as of January 27, 1996, January 28, 1995, and
January 29, 1994, and the results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles.
As discussed in notes 2, 19, and 20 to the consolidated financial statements,
the Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, in 1993, Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities, in 1994, and Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of, in 1995.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
200 Crescent Court, Dallas, Texas 75201
February 22, 1996
- --------------------------------------------------------------------------------
Company Statement
on Financial Information
- --------------------------------------------------------------------------------
The Company is responsible for the information presented in this Annual Report.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and are considered to present fairly in
all material respects the Company's results of operations, financial position,
and cash flows. Certain amounts included in the consolidated financial
statements are estimated based on currently available information and judgment
of the outcome of future conditions and circumstances. Financial information
elsewhere in this Annual Report is consistent with that in the consolidated
financial statements.
The Company's system of internal controls is supported by written policies
and procedures and supplemented by a staff of internal auditors. This system is
designed to provide reasonable assurance, at suitable costs, that assets are
safeguarded and that transactions are executed in accordance with appropriate
authorization and are recorded and reported properly. The system is continually
reviewed, evaluated, and where appropriate, modified to accommodate current
conditions. Emphasis is placed on the careful selection, training, and
development of professional managers.
An organizational alignment that is premised upon appropriate delegation of
authority and division of responsibility is fundamental to this system.
Communication programs are aimed at assuring that established policies and
procedures are disseminated and understood throughout the Company.
The consolidated financial statements have been audited by independent
auditors whose report appears to the left. This audit was conducted in
accordance with generally accepted auditing standards, which include the
consideration of the Company's internal controls to the extent necessary to form
an independent opinion on the consolidated financial statements prepared by
management.
The Audit Committee of the Board of Directors is composed solely of directors
who are not officers or employees of the Company. The Audit Committee's
responsibilities include recommending to the Board for stockholder approval the
independent auditors for the annual audit of the Company's consolidated
financial statements. The Committee also reviews the independent auditors' audit
strategy and plan, scope, fees, audit results, and non-audit services and
related fees; internal audit reports on the adequacy of internal controls; the
Company's ethics program; status of significant legal matters; the scope of the
internal auditors' plans and budget and results of their audits; and the
effectiveness of the Company's program for correcting audit findings. The
independent auditors and Company personnel, including internal auditors, meet
periodically with the Audit Committee to discuss auditing and financial
reporting matters.
/s/ Donald A. McKay
Donald A. McKay
Senior Vice President and Chief Financial Officer
21
JCP
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statements of Income
- --------------------------------------------------------------------------------
J.C. Penney Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
For the Year (In millions except per share data) 1995 1994 1993
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue
Retail sales $20,562 $20,380 $18,983
Revenue of insurance and bank 857 702 595
---------------------------------
Total revenue 21,419 21,082 19,578
---------------------------------
Costs and expenses
Cost of goods sold, occupancy, buying, and
warehousing costs 14,333 13,970 12,997
Selling, general, and administrative
expenses 4,895 4,783 4,508
Costs and expenses of insurance and bank 667 537 446
Net interest expense and credit operations 183 93 73
---------------------------------
Total costs and expenses 20,078 19,383 18,024
---------------------------------
Income before income taxes, extraordinary
charge, and cumulative effect of accounting
change 1,341 1,699 1,554
Income taxes 503 642 610
---------------------------------
Income before extraordinary charge and
cumulative effect of accounting change 838 1,057 944
Extraordinary charge on debt redemption,
net of income taxes of $35 - - (55)
Cumulative effect of accounting change for
income taxes - - 51
---------------------------------
Net income $ 838 $ 1,057 $ 940
=================================
Earnings per common share
Primary
Income before extraordinary charge and
cumulative effect of accounting change $ 3.48 $ 4.29 $ 3.79
Extraordinary charge on debt redemption, net - - (.23)
Cumulative effect of accounting change for
income taxes - - .21
---------------------------------
Net income $ 3.48 $ 4.29 $ 3.77
=================================
Fully diluted
Income before extraordinary charge and
cumulative effect of accounting change $ 3.33 $ 4.05 $ 3.55
Extraordinary charge on debt redemption, net - - (.21)
Cumulative effect of accounting change for
income taxes - - .19
---------------------------------
Net income $ 3.33 $ 4.05 $ 3.53
=================================
</TABLE>
See Notes to Consolidated Financial Statements on pages 25 through 36.
22
JCP
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
J.C. Penney Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Assets (In millions) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets
Cash and short term investments of $173,
$207, and $156 $ 173 $ 261 $ 173
Receivables, net 5,207 5,159 4,679
Merchandise inventory 3,935 3,876 3,545
Prepaid expenses 94 73 80
--------------------------------
Total current assets 9,409 9,369 8,477
Properties, net 4,281 3,954 3,818
Investments, primarily insurance operations 1,651 1,359 1,182
Deferred insurance policy acquisition costs 582 482 426
Other assets 1,179 1,038 885
--------------------------------
$17,102 $16,202 $14,788
================================
<CAPTION>
Liabilities and Stockholders' Equity (In millions)
- --------------------------------------------------------------------------------
Current liabilities
<S> <C> <C> <C>
Accounts payable and accrued expenses $ 2,404 $ 2,274 $2,139
Short term debt 1,509 2,092 1,284
Current maturities of long term debt - - 348
Deferred taxes 107 115 112
--------------------------------
Total current liabilities 4,020 4,481 3,883
Long term debt 4,080 3,335 2,929
Deferred taxes 1,188 1,039 1,013
Bank deposits 767 702 581
Insurance policy and claims reserves 691 568 540
Other liabilities 472 462 477
Stockholders' equity
Preferred stock, without par value:
Authorized, 25 million shares - issued, 1
million shares
of Series B LESOP convertible preferred 603 630 648
Guaranteed LESOP obligation (228) (307) (379)
Common stock, par value 50c:
Authorized, 1,250 million shares - issued,
224, 227, and 236 million shares 1,112 1,030 1,003
Reinvested earnings 4,397 4,262 4,093
--------------------------------
Total stockholders' equity 5,884 5,615 5,365
--------------------------------
$17,102 $16,202 $14,788
================================
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Consolidated Statements of Reinvested Earnings
- --------------------------------------------------------------------------------
(In millions)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Reinvested earnings at beginning of year $ 4,262 $ 4,093 $3,531
Net income 838 1,057 940
Net unrealized change in debt and equity
securities and currency translation adjustments 72 (21) 1
Retirement of common stock (301) (435) -
Common stock dividends declared (434) (392) (339)
Preferred stock dividends declared, net of taxes (40) (40) (40)
Reinvested earnings at end of year --------------------------------
$ 4,397 $ 4,262 $4,093
================================
</TABLE>
See Notes to Consolidated Financial Statements on pages 25 through 36.
23
JCP
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
J.C. Penney Company, Inc. and Subsidiaries
For the Year (In millions) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 838 $1,057 $ 940
Extraordinary charge, net of income taxes - - 55
Cumulative effect of accounting change for
income taxes - - (51)
Depreciation and amortization 341 323 316
Amortization of original issue discount 4 5 48
Deferred taxes 144 29 100
Change in cash from:
Customer receivables 73 (326) (352)
Securitized customer receivables amortized - - (425)
Inventory, net of trade payables (55) (352) (196)
Other assets and liabilities, net 58 2 (149)
--------------------------------
1,403 738 286
--------------------------------
Investing activities
Capital expenditures (717) (550) (480)
Purchases of investment securities (583) (476) (351)
Proceeds from sales of investment securities 420 287 215
Acquisition of Kerr Drug (74) - (12)
--------------------------------
(954) (739) (628)
--------------------------------
Financing activities
Change in short term debt (583) 808 377
Issuance of long term debt 991 500 1,015
Payments of long term debt (244) (350) (875)
Premium on debt retirement - - (76)
Common stock issued, net 124 45 37
Common stock purchased and retired (335) (475) -
Preferred stock retired (27) (18) (18)
Dividends paid, preferred and common (463) (421) (371)
--------------------------------
(537) 89 89
--------------------------------
Net increase/(decrease) in cash and
short term investments (88) 88 (253)
Cash and short term investments at
beginning of year 261 173 426
--------------------------------
Cash and short term investments at end of year $ 173 $ 261 $ 173
================================
Supplemental cash flow information
Interest paid $ 355 $ 301 $ 253
Interest received $ 54 $ 55 $ 51
Income taxes paid $ 409 $ 509 $ 486
</TABLE>
See Notes to Consolidated Financial Statements on pages 25 through 36.
24
JCP
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Nature of Operations
2. Summary of Accounting Policies
3. Receivables
4. Merchandise Inventory
5. Properties
6. Capital Expenditures
7. Investments
8. Derivative Financial Instruments
9. Fair Value of Financial Instruments
10. Accounts Payable and Accrued Expenses
11. Short Term Debt
12. Long Term Debt
13. Preferred Stock
14. Common Stock
15. Net Interest Expense and Credit Operations
16. Rent Expense
17. Advertising Costs
18. Retirement Plans
19. Non-Recurring Items
20. Taxes
21. Segment Reporting
1 Nature of Operations
J.C. Penney Company, Inc. is a major retailer with stores located in all 50
states, Puerto Rico, Mexico, and Chile. The major portion of the Company's
business is conducted domestically, and consists of providing merchandise and
services to consumers through department stores that include catalog
departments. The Company's merchandise offerings consist predominantly of family
apparel, jewelry, shoes, accessories, and home furnishings. In addition, the
Company operates Thrift Drug, Inc. (Thrift Drug). Thrift Drug consists
principally of retail drug stores which sell pharmaceuticals and related
products as well as general merchandise. Thrift Drug stores are located
primarily in the northeastern and southeastern United States.
In addition to its retail operations, the Company operates several insurance
companies, the principal of which is J.C. Penney Life Insurance Company, Inc.
(collectively, JCPenney Insurance), and consumer banking, which consists
principally of JCPenney National Bank (JCPenney National Bank). JCPenney
Insurance markets life, health, accident, and credit policies through direct
response solicitations throughout the United States and Canada to JCPenney
customers and customers of third party credit-card issuers. JCPenney National
Bank offers VISA and MasterCard credit cards to consumers; it does not engage in
commercial lending activities.
2 Summary of Accounting Policies
Basis of presentation. Certain prior year amounts have been restated to conform
with the presentation for 1995.
Basis of consolidation. The consolidated financial statements present the
results of J.C. Penney Company, Inc. and its subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Definition of fiscal year. The Company's fiscal year ends on the last Saturday
in January. Fiscal year 1995 ended January 27, 1996, 1994 ended January 28,
1995, and 1993 ended January 29, 1994. The accounts of JCPenney Insurance and
JCPenney National Bank are on a calendar year basis.
Retail sales. Retail sales include merchandise and services, net of returns, and
exclude sales taxes.
Earnings per common share. Primary earnings per share are computed by dividing
net income less dividend requirements on the Series B LESOP convertible
preferred stock, net of tax, by the weighted average common stock and common
stock equivalents outstanding. Fully diluted earnings per share also assume
conversion of the Series B LESOP convertible preferred stock into the Company's
common stock. Additionally, it assumes adjustment of net income for the
additional cash requirements, net of tax, needed to fund the LESOP debt service
resulting from the assumed replacement of the preferred dividends with common
stock dividends. The number of shares used in the computation of fully diluted
earnings per share was 249 million in 1995, 258 million in 1994, and 261 million
in 1993.
Cash and short term investments. Cash invested in instruments with remaining
maturities of three months or less from time of investment is reflected as short
term investments.
Merchandise inventory. Substantially all merchandise inventory is valued at the
lower of cost (last-in, first-out) or market, determined by the retail method.
The Company applies internally developed indices to measure increases and
decreases in its own retail prices.
Depreciation. The cost of buildings and equipment is depreciated on a straight
line basis over the estimated useful lives of the assets. The principal annual
rates of depreciation are two to 10 per cent for buildings and building
improvements, five per cent for warehouse fixtures and equipment, 10 per cent
for selling fixtures and equipment, and 20 to 33 per cent for computer
equipment. Improvements to leased premises are amortized on a straight line
basis over the expected term of the lease or their estimated useful lives,
whichever is shorter.
Deferred charges. Expenses associated with the opening of new stores are written
off in the year of the store opening, except those of stores opened in January,
which are written off in the following fiscal year. Deferred policy acquisition
costs, principally marketing costs and commissions incurred by JCPenney
Insurance to secure new insurance policies, are amortized over the expected
premium-paying period of the related policies.
25
JCP
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements continued
- --------------------------------------------------------------------------------
Investments. Effective January 30, 1994, the Company adopted SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, issued by the
Financial Accounting Standards Board. Adoption of this statement had no material
effect on the Company. The Company's investments, which consist of fixed income
securities (principally bonds) held by JCPenney Insurance, marketable equity
securities, and JCP Receivables, Inc. asset-backed certificates held by the
Company, are classified as available-for-sale and are carried at fair value.
Changes in unrealized gains and losses are recorded directly to stockholders'
equity, net of applicable income taxes. In 1993, fixed income securities and
asset-backed certificates were carried at amortized cost on the consolidated
balance sheets.
Insurance policy and claims reserves. Liabilities established by JCPenney
Insurance for future policy benefits are computed using a net level premium
method including assumptions as to investment yields, mortality, morbidity, and
persistency based on the Company's experience. Liabilities for unpaid claims are
charged to expense in the period that the claims are incurred.
Advertising. Costs for newspaper, television, radio, and other media advertising
are expensed as incurred. Catalog book preparation and printing costs, which are
considered direct response advertising, are charged to expense over the life of
the catalog, not to exceed six months.
Derivative Financial Instruments. The Company's current derivative positions
consist of non-leveraged off-balance-sheet interest rate swaps. These interest
rate swaps are accounted for by recording the net interest received or paid as
an adjustment to interest expense on a current basis. Gains or losses resulting
from market movements are not recognized.
Use of Estimates. The Company's consolidated financial statements have been
prepared in conformity with generally accepted accounting principles. Certain
amounts included in the consolidated financial statements are estimated based on
currently available information and management's judgment as to the outcome of
future conditions and circumstances. While every effort is made to ensure the
integrity of such estimates, including the use of third party specialists where
appropriate, actual results could differ from these estimates.
Impairment of long-lived assets. The Financial Accounting Standards Board issued
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of, in March 1995. This statement, which requires
that economically impaired long-lived assets, such as property, plant and
equipment, be written down to fair value if certain criteria are met, was
adopted at the beginning of the 1995 fourth quarter. Consequently, the Company
will review its long-lived assets to be held and used, whenever events or
circumstances indicate that the carrying value of those assets may not be
recoverable. An impairment loss is indicated if the sum of the expected future
cash flows is less than the carrying amount of the assets. In this circumstance,
the Company recognizes an impairment loss for the amount by which the carrying
amount of the asset exceeds the fair value of the asset. The Company accounts
for long-lived assets to be disposed of at the lower of their carrying amount or
fair value less cost to sell once management has committed to a plan to dispose
of the assets.
3 Receivables
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- ------------------------------------------------------------------
<S> <C> <C> <C>
Customer receivables serviced $4,688 $4,751 $4,410
Customer receivables sold 725 725 725
--------------------------
Customer receivables owned 3,963 4,026 3,685
Less allowance for doubtful accounts 84 74 59
--------------------------
Customer receivables, net 3,879 3,952 3,626
JCPenney National Bank receivables 776 729 587
Other receivables 552 478 466
--------------------------
Receivables, net $5,207 $5,159 $4,679
==========================
</TABLE>
The Company's policy is to write off accounts when the scheduled minimum
payment has not been received for six consecutive months, if any portion of the
balance is more than 12 months past due, or if it is otherwise determined that
the customer is unable to pay. Collection efforts continue subsequent to write
off, and recoveries are applied as a reduction of bad debt losses.
During the period 1988 to 1990, the Company transferred portions of its
customer receivables to a trust which, in turn, sold certificates representing
undivided interests in the trust in public offerings. Certificates sold during
this period totaled $1,400 million. No gain or loss was recognized at the date
of sale. As of January 27, 1996, $725 million of the certificates were
outstanding and the balance of the receivables in the trust was $1,737 million.
The Company owns the remaining undivided interest in the trust not represented
by the certificates and will continue to service all receivables for the trust.
Cash flows generated from receivables in the trust are dedicated to payment
of interest on the outstanding certificates with stated rates of 8.95 per cent
and 9.625 per cent, absorption of defaulted accounts in the trust, and payment
of servicing fees to the Company. Reserve funds (fully funded at $91 million)
are available if cash flows from the receivables become insufficient to make
such payments. None of the reserve funds has been utilized as of January 27,
1996. Additionally, the Company has made available to the trust irrevocable
letters of credit of $87 million that may be drawn upon should the reserve funds
be exhausted. None of the letters of credit was in use as of January 27, 1996.
4 Merchandise Inventory
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- ------------------------------------------------------------------
<S> <C> <C> <C>
Merchandise inventory, at lower
of cost (FIFO) or market $4,161 $4,123 $3,791
LIFO reserve (226) (247) (246)
----------------------------
Merchandise inventory, at LIFO cost $3,935 $3,876 $3,545
============================
</TABLE>
26
JCP
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements continued
- --------------------------------------------------------------------------------
5 Properties
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- ---------------------------------------------------------
<S> <C> <C> <C>
Land $ 216 $ 213 $ 213
Buildings
Owned 2,410 2,178 2,119
Capital leases 182 186 219
Fixtures and equipment 2,978 2,763 2,693
Leasehold improvements 622 611 575
-------------------------
6,408 5,951 5,819
Less accumulated depreciation
and amortization 2,127 1,997 2,001
-------------------------
Properties, net $4,281 $3,954 $3,818
=========================
</TABLE>
At January 27, 1996, the Company owned 279 retail stores and other units,
four catalog distribution centers, one store merchandise distribution center,
its home office facility, and the JCPenney Insurance corporate offices.
6 Capital Expenditures
Capital expenditures, primarily for new and relocated JCPenney stores and for
modernizations and updates of existing stores, were as follows:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- -----------------------------------------------------------
<S> <C> <C> <C>
JCPenney stores:
New and relocated stores* $ 399 $ 197 $ 162
Modernizations and updates 134 136 130
Technology and other store
improvements 54 78 44
--------------------------
587 411 336
Catalog 28 21 21
Drug stores 53 59 40
Other 81 53 62
--------------------------
Total capital expenditures $ 749 $ 544 $ 459
==========================
</TABLE>
* 1995 total includes $173 million for the purchase of seven Woodward &
Lothrop stores in the Washington, D.C., area.
7 Investments
Investments at year end 1995 and 1994 were carried at fair value on the
consolidated balance sheets. In 1993, fixed income securities held by
JCPenney Insurance and asset-backed certificates held by the Company were
carried at amortized cost on the consolidated balance sheets. The amortized
cost and fair values of investments were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
(In millions) Cost Value Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed income securities
JCPenney Insurance
U.S. Government obligations $ 96 $ 104 $ 111 $ 107 $ 139 $ 153
Corporate bonds 349 376 278 266 280 302
Mortgage-backed securities 309 311 216 199 158 164
Other investments 94 97 100 89 93 91
------------------------------------------------------------------
848 888 705 661 670 710
JCPenney Company
Asset-backed certificates 431 488 431 453 431 510
Other cash investments 166 168 149 148 1 1
------------------------------------------------------------------
$1,445 $1,544 $1,285 $1,262 $1,102 $1,221
Equity securities
JCPenney Insurance $ 37 $ 49 $ 35 $ 37 $ 28 $ 33
JCPenney Company 58 58 58 60 43 47
------------------------------------------------------------------
$ 95 $ 107 $ 93 $ 97 $ 71 $ 80
------------------------------------------------------------------
Total investments $1,540 $1,651 $1,378 $1,359 $1,173 $1,301
==================================================================
</TABLE>
27
JCP
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements continued
- --------------------------------------------------------------------------------
Unrealized capital gains and losses on fixed income and equity securities
included in stockholders' equity at year end 1995 were as follows:
<TABLE>
<CAPTION>
Gross
Cost or Unrealized Net
Amortized Fair ----------------- Unrealized
(In millions) Cost Value Gains (Losses) Gains/(Losses)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JCPenney Insurance fixed income securities $ 848 $ 888 $ 46 $ (6) $40
Asset-backed certificates 431 488 57 -- 57
Other cash investments 166 168 2 -- 2
Equity securities 95 107 15 (3) 12
------------------------------------------------------
$1,540 $1,651 $120 $(9) $111
Deferred income taxes 41
--------
Total $ 70
========
</TABLE>
At January 28, 1995, the Company had recorded net unrealized losses of $12
million, net of income taxes, on investments having a fair value of $1,359
million and an amortized cost of $1,378 million.
The scheduled maturities for fixed income securities at year end 1995 were as
follows:
<TABLE>
<CAPTION>
Amortized Fair
(In millions) Cost Value
- --------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 44 $ 45
Due after one year through five years 332 341
Due after five years through 10 years 569 635
Due after 10 years 171 192
---------------------------
1,116 1,213
Mortgage-backed securities 309 311
Other 20 20
---------------------------
Total $1,445 $1,544
===========================
</TABLE>
Realized gains and losses on investment transactions are determined on a first-
in, first-out basis, are included in income on the trade date, and are reported
as revenue of insurance and bank on the consolidated statements of income. These
gains were $4 million in 1995, $7 million in 1994, and $14 million in 1993.
8 Derivative Financial Instruments
The Company selectively uses non-leveraged, off-balance-sheet derivative
instruments to manage its market and interest rate risk, and does not hold
derivatives for trading purposes. Current derivative positions consist of off-
balance-sheet interest rate swaps which management believes present no
significant risk to the Company.
Current derivative positions. In connection with the sale of asset-backed
certificates in 1990, the Company entered into two offsetting interest rate
swaps, each with a notional principal amount of $375 million. The swaps help to
protect certificate holders by reducing the possibility of an early amortization
of the principal.
In addition, the Company has in place interest rate swap contracts that were
entered into in connection with the issuance of $250 million principal amount of
8.25 per cent sinking fund debentures in August 1992. To date, these swaps,
which combined have a notional principal amount equal to the face amount of the
debentures, have lowered the effective interest rate on the debentures to
approximately seven per cent and have reduced interest expense by about $10
million. These swaps terminate in August 1996.
The counterparties to these contracts are high credit quality commercial
banks. Consequently, credit risk, which is inherent in all swaps, has been
minimized to a large extent.
The impact of these interest rate swaps on both interest expense and the
Company's average long term borrowing rate for 1995, 1994, and 1993 was not
material.
9 Fair Value of Financial Instruments
Estimates of fair value are made at a specific point in time, based on relevant
market prices and information about the financial instrument. The estimated fair
values of financial instruments presented on the following page are not
necessarily indicative of the amounts the Company might realize in actual market
transactions. The carrying amount and fair value for the financial assets and
liabilities on the consolidated balance sheets at each year end were:
28
JCP
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Financial assets
JCPenney Insurance fixed income securities $ 888 $ 888 $ 661 $ 661 $ 670 $ 710
Asset-backed certificates 488 488 453 453 431 510
Other cash investments 168 168 148 148 1 1
Equity securities 107 107 97 97 80 80
Receivables, net 5,207 5,207 5,159 5,159 4,679 4,679
Cash and short term investments 173 173 261 261 173 173
Financial liabilities
Long term debt (excluding capital leases)* $3,989 $4,185 $3,231 $3,124 $2,802 $3,021
Bank deposits 767 696 702 698 581 584
Short term debt 1,509 1,509 2,092 2,092 1,284 1,284
Current maturities of long term debt - - - - 348 348
</TABLE>
*The fair value of the off-balance-sheet interest rate swaps at the end of 1995,
1994, and 1993 was $2 million, $(8) million, and $13 million, respectively.
Fair values for fixed income securities, asset-backed certificates, and
equity securities are based on quoted market prices. Fixed income securities and
asset-backed certificates were carried at fair value on the consolidated balance
sheets at year end 1995 and 1994, and were carried at amortized cost in 1993.
The Company believes that the carrying value of existing customer and bank
receivables is the best estimate of fair value because of their short average
maturity, and bad debt losses can be reasonably estimated and have been
reserved. The carrying amount for the Company's cash and short term investments,
short term debt, and current maturities of long term debt approximates fair
value due to their short maturities. The fair value for long term debt,
excluding capital leases, was determined based on the interest rate environment
and the Company's credit rating. The fair value of bank deposits was based on
the discounted value of contractual cash flows. The fair value of interest rate
swaps was estimated based on quotes from brokers, and reflects the estimated
amount that the Company would receive or pay to terminate the contracts at the
reporting date.
Concentrations of credit risk. Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally of customer
accounts receivable and investments. Concentrations of credit risk for the
Company's customer accounts receivable are limited due to the large number of
customers comprising the Company's credit card base and their dispersion across
the country. With respect to investments held by JCPenney Insurance, the Company
limits the credit risk by diversifying its investments by industry sector and by
investing primarily in high grade fixed income securities. The result has been a
conservative portfolio having an average rating of AA.
10 Accounts Payable and Accrued
Expenses
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- -----------------------------------------------------------------
<S> <C> <C> <C>
Trade payables $ 979 $1,014 $1,034
Accrued salaries, vacations,
profit-sharing, and bonuses 309 336 311
Taxes, including income taxes 362 358 234
Workers' compensation and
public liability insurance 132 123 126
Common dividend payable 107 96 85
Other 515 347 349
Total $2,404 $2,274 $2,139
</TABLE>
11 Short Term Debt
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- -----------------------------------------------------------------
<S> <C> <C> <C>
Commercial paper $1,482 $2,074 $1,284
Other 27 18 -
----------------------------
Total $1,509 $2,092 $1,284
Average interest rate at year end 5.7% 5.9% 3.2%
============================
</TABLE>
Committed bank credit facilities available to the Company as of January 27,
1996, amounted to $3.0 billion. In 1995, the Company amended its two syndicated
revolving credit facilities totaling $3.0 billion with a group of domestic and
international banks. These facilities consist of a $1.5 billion, 364-day
revolver, and a $1.5 billion, five-year revolver. The 364-day revolver includes
a $500 million seasonal credit line for the August to January period, thus
allowing the Company to match its seasonal borrowing requirements. These
facilities support the Company's short term borrowing program. None of the
borrowing facilities was in use as of January 27, 1996.
Also, the Company had $955 million of uncommitted credit lines in the form of
letters of credit with seven banks to support its direct import merchandise
program. At January 27, 1996, $317 million of letters of credit issued by the
Company were outstanding.
29
JCP
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
12 Long Term Debt
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Original issue discount
6% debentures, due 2006, $200 at
maturity, effective rate 13.2% $ 108 $ 104 $ 101
Debentures and notes
5.375% to 7.375%, due 1998 to
2023 2,500 1,500 1,000
8.25% to 8.375%, due 1996 to 2022 250 250 250
9% to 10%, due 1997 to 2021 835 1,000 1,000
Guaranteed LESOP notes, 8.17%,
due 1998* 228 307 379
Present value of commitments
under capital leases 91 104 127
Other 68 70 72
------------------------------------------
Long term debt $4,080 $3,335 $2,929
Average long term debt outstanding $3,241 $2,754 $2,471
Average interest rates 7.9% 8.2% 9.9%
==========================================
</TABLE>
*For further discussion, see LESOP on page 33.
<TABLE>
<CAPTION>
Changes in long term debt
(In millions) 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Increases
5.375% to 7.375% notes, due 1998
to 2023 $1,000 $ 500 $1,000
Amortization of original issue
discount 4 3 48
Other -- -- 16
-----------------------------------------
1004 503 1,064
-----------------------------------------
Decreases
Transfers to current maturities
of long term debt -- -- 348
8.375% to 10.625% debentures,
bonds, and notes, due 1996 to 2021,
retired in 1993 and 1995 165 -- 872
Other, including LESOP
amortization 94 97 86
-----------------------------------------
259 97 1,306
-----------------------------------------
Net increase/(decrease) in long
term debt $ 745 $ 406 $ (242)
=========================================
</TABLE>
<TABLE>
<CAPTION>
Maturities of long term debt
(In millions) Long Term Debt Capital Leases
- --------------------------------------------------------------------------------
<S> <C> <C>
1996 $ 6 $ 18
1997 257 15
1998 422 13
1999 232 13
2000 307 12
2001 to 2005 1,536 25
Thereafter 1,093 15
---------------------------
Total $3,853 $ 111
======
Less future interest and
executory expenses 20
--------
Present value $ 91
</TABLE>
13 Preferred Stock
In 1988, a leveraged employee stock ownership plan (LESOP) was adopted (see page
33 for further discussion). The LESOP purchased approximately 1.2 million shares
of a new issue of Series B convertible preferred stock from the Company. These
shares are convertible into shares of the Company's common stock at a conversion
rate equivalent to 20 shares of common stock for each share of preferred stock.
The conversion price is $30 per common share. The convertible preferred stock
may be redeemed at the option of the Company or the LESOP, under certain limited
circumstances. The redemption price may be satisfied in cash or common stock or
a combination of both at the Company's sole discretion. The dividends are
cumulative, are payable semi-annually on January 1 and July 1, and yield 7.9 per
cent. The convertible preferred stock issued to the LESOP has been recorded in
the
30
JCP
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
stockholders' equity section of the consolidated balance sheets, and the
"Guaranteed LESOP obligation," representing borrowings by the LESOP, has been
recorded as a reduction of stockholders' equity. As of January 27, 1996,
approximately 827 thousand shares had been allocated to participants' accounts
since 1988, and approximately 350 thousand shares were committed to be released
in the next three years.
Preferred stock dividends. The preferred dividend is payable semi-annually at an
annual rate of $2.37 per common equivalent share. Preferred dividends declared
were $48 million in 1995, $50 million in 1994, and $52 million in 1993; on an
after tax basis, the dividends amounted to $29 million in 1995, $31 million in
1994, and $31 million in 1993.
Preferred stock purchase rights. In 1990, the Board of Directors declared a
dividend distribution of one new preferred stock purchase right on each
outstanding share of common stock and authorized the redemption of the old
preferred stock purchase rights for five cents per share totaling $12 million.
The preferred stock purchase rights, in accordance with the rights agreement,
entitle the holder to purchase, for each right held, 1/400 of a share of
Series A junior participating preferred stock at a price of $140. The rights are
exercisable upon the occurrence of certain events and are redeemable by the
Company under certain circumstances, all as described in the rights agreement.
14 Common Stock
The quarterly common dividend was 48 cents per share in 1995, 42 cents per share
in 1994, and 36 cents per share in 1993, or an indicated annual rate of $1.92
per share in 1995, $1.68 per share in 1994, and $1.44 per share in 1993. Common
dividends declared were $434 million in 1995, $392 million in 1994, and $339
million in 1993.
On March 9, 1994, the Board of Directors approved the purchase of up to 10
million shares of the Company's common stock. This purchase program was
completed in January 1995 at a cost of $475 million. All shares were retired and
returned to the status of authorized but unissued shares of common stock. A
second purchase program, for up to an additional 10 million shares of the
Company's common stock, was approved by the Board of Directors on January 23,
1995, and was begun in late January 1995. As of January 27, 1996, the Company
had purchased 7.5 million shares for $335 million.
There were approximately 54,000 stockholders of record at year end 1995. In
addition, the Company's savings plans, including the LESOP, had 115,000
participants and held 36.1 million shares of the Company's common stock. The
savings plans also held 1.0 million shares of preferred stock, convertible into
20.1 million shares of common stock. On a combined basis, these plans held
approximately 23 per cent of the Company's common shares after giving effect to
the conversion of the preferred stock at the end of fiscal year 1995.
<TABLE>
<CAPTION>
Shares Paid-in Capital
(In thousands) (In millions)
Changes in outstanding ---------------------------------- -----------------------------
common stock 1995 1994 1993 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year 227,441 236,086 234,778 $1,030 $1,003 $ 955
Common stock issued 3,858 1,455 1,308 113 70 48
Common stock purchased and retired (7,374) (10,100) - (31) (43) -
--------------------------------------------------------------------
Balance at end of year 223,925 227,441 236,086 $1,112 $1,030 $1,003
====================================================================
</TABLE>
Equity Compensation Plan and Non-Associate Directors' Equity Plan. Under the
1993 Equity Compensation Plan (Plan), approved by stockholders in May 1993,
which replaced the expiring 1989 Equity Compensation Plan, 11.6 million shares
of common stock were reserved for issuance upon the exercise of options and
stock appreciation rights and for the payment of stock awards over the five-year
term of the Plan. No discount options or tax benefit rights may be issued under
the Plan. Participants in the Plan are generally to be selected management
associates of the Company and its subsidiaries and affiliates as determined by
the committee administering the Plan. It is anticipated that approximately 2,000
associates will be eligible to participate. No awards may be made under the Plan
after May 31, 1998. Under the 1993 Non-Associate Directors' Equity Plan
(Directors' Plan), which was also approved by stockholders in May 1993, 90,000
shares of common stock were reserved for issuance upon the exercise of stock
options and the payment of stock awards over its five-year term. Each director
who is presently not an active employee of the Company will automatically be
granted annually an option to purchase 800 shares, in tandem with an award of
200 restricted shares of common stock. An initial grant/award in this same
amount will also automatically be granted to each new Non-Associate Director
upon his or her first being elected as a director. Such stock options will
become exercisable six months from the date of grant, but shares acquired upon
such exercise will not be transferable until a director terminates service.
31
JCP
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
-----------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Option Shares Option Shares Option
Stock options (In thousands) Price (In thousands) Price (In thousands) Price
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year 8,347 $31.36 8,235 $27.96 8,844 $27.42
Granted 1,230 43.00 997 55.31 159 41.24
Exercised (689) 25.67 (865) 26.51 (752) 24.49
Expired and cancelled (21) 38.63 (20) 32.68 (16) 26.89
-------------- ----------- ------------
Balance at end of year 8,867 $33.40 8,347 $31.36 8,235 $27.96
==========================================================================
</TABLE>
At year end 1995 and 1994, options covering 7.6 million shares and 7.3 million
shares, respectively, were excercisable and 8.7 million shares and 10.4 million
shares, respectively, were reserved for future grants.
<TABLE>
<CAPTION>
15 Net Interest Expense and Credit Operations
(In millions) 1995 1994 1993
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Short term debt $ 129 $ 92 $ 43
Long term debt 254 225 246
Income on short term investments (18) (16) (14)
Interest capitalized (8) (3) (4)
Other, net* (32) (28) (30)
---------------------------
Interest expense, net 325 270 241
Finance charge revenue (631) (624) (523)
Credit costs
Bad debt expense, net 219 177 95
Operating expenses (including third party credit
costs) 270 270 260
---------------------------
Net interest expense and credit operations $ 183 $ 93 $ 73
---------------------------
</TABLE>
* Includes $34 million in each year for interest income from the Company's
investment in asset-backed certificates.
16 Rent Expense
The Company conducts the major part of its operations from leased premises which
include retail stores, distribution centers, warehouses, offices, and other
facilities. Almost all leases will expire during the next 20 years; however,
most leases will be renewed or replaced by leases on other premises. Rent
expense for real property operating leases was:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- ------------------------------------------------------
<S> <C> <C> <C>
Minimum rents $ 245 $ 235 $ 236
Contingent rents based on sales 36 37 37
---------------------
Total $ 281 $ 272 $ 273
=====================
</TABLE>
The Company also leases data processing equipment and other personal property
under operating leases of primarily three to five years. Rent expense for
personal property leases was $106 million in 1995, $92 million in 1994, and $90
million in 1993.
Future minimum lease payments for noncancelable real and personal property
operating leases and subleases as of January 27, 1996, were:
<TABLE>
<CAPTION>
(In millions) Operating Leases
- ---------------------------------------------------
<S> <C>
1996 $ 259
1997 213
1998 183
1999 160
2000 144
Thereafter 706
---------
Total minimum lease payments $1,665
=========
Present value $1,000
Weighted average interest rate 10%
=========
</TABLE>
The minimum lease payments are shown net of estimated executory costs, which are
principally real estate taxes, maintenance, and insurance.
32
JCP
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
17 Advertising Costs
Advertising costs consist principally of newspaper, television, radio, and
catalog book costs. In 1995, the total cost of advertising charged to expense
was $969 million, compared with $912 million in 1994, and $818 million in 1993.
The consolidated balance sheets included deferred catalog book costs of $111
million at January 27, 1996, $99 million at January 28, 1995, and $88 million at
January 29, 1994, and are included in other assets.
<TABLE>
<CAPTION>
18 Retirement Plans
(In millions) 1995 1994 1993
- ------------------------------------------------------------
<S> <C> <C> <C>
Pension
Service cost $ 44 $ 57 $ 50
Interest cost 148 134 123
Actual return on assets (464) (22) (236)
Net amortization and deferral 302 (181) 59
-----------------------
Pension charge/(credit) 30 (12) (4)
-----------------------
Post retirement health care
Service cost 3 3 3
Interest cost 23 25 24
Net amortization and deferral (2) --- ---
-----------------------
Post retirement health care charge 24 28 27
LESOP expense 53 53 50
-----------------------
Total retirement plans $ 107 $ 69 $ 73
=======================
</TABLE>
Pension plan. JCPenney's principal pension plan, which is noncontributory,
covers substantially all United States employees who have completed 1,000 or
more hours of service within a period of 12 consecutive months and have attained
21 years of age. In addition, the Company has an unfunded, noncontributory,
supplemental retirement program for certain management employees. In general,
benefits payable under the principal pension plan are determined by reference to
a participant's final average earnings and years of credited service up to 35
years.
In 1995, the Company reduced its discount rate to 7.25 per cent, reflecting the
lower interest rate environment. The impact of this change increased the
Company's obligation at year end 1995. Pension plan assumptions are reviewed and
modified as necessary on an annual basis. The Company made a $104 million
contribution to the plan in 1995, $99 million contribution in 1994, and a $65
million contribution in 1993.
Post retirement health care benefits. The Company's retiree health care plan
(Retiree Plan) covers medical and dental services, and eligibility for benefits
is based on age and years of service. The Retiree Plan is contributory and the
amounts paid by retired employees have increased in recent years and are
expected to continue to do so. For certain groups of employees, Company
contributions toward the cost of retiree coverage will be based on a fixed
dollar amount which will vary with years of service, age, and dependent
coverage. The Retiree Plan is funded on a pay-as-you-go basis by the Company and
retiree contributions.
The Company uses the same discount rate for both its pension plan and Retiree
Plan. The health care trend rate was lowered from 9.5 per cent to 9.0 per cent
for 1996 with gradual reductions to five per cent by 2004 and beyond. A one per
cent increase in the health care trend rate would increase the amount reported
for the accumulated obligation by $24 million and would result in $2 million
additional expense for 1995.
LESOP. The Company's LESOP, adopted in 1988, is a defined contribution plan
which covers substantially all United States employees who have completed at
least 1,000 hours of service within a period of 12 consecutive months, and if
hired on or after January 1, 1988, have attained 21 years of age.
The LESOP borrowed $700 million at an interest rate of 8.17 per cent through
a 10 year loan guaranteed by the Company. The LESOP used the proceeds of the
loan to purchase a new issue of convertible preferred stock from the Company.
The Company used the proceeds from the issuance of preferred stock to the LESOP
to purchase 28 million common shares of the Company in the open market.
The Company has reflected the guaranteed LESOP borrowing as long term debt
on the consolidated balance sheets. A like amount of "Guaranteed LESOP
obligation" was recorded as a reduction of stockholders' equity. The convertible
preferred stock issued to the LESOP for cash was recorded in the stockholders'
equity section. As the Company makes contributions to the LESOP, these
contributions, plus the dividends paid on the Company's preferred stock held by
the LESOP, will be used to repay the loan. As the principal amount of the loan
is repaid, the "Guaranteed LESOP obligation" is reduced accordingly.
The amount of LESOP expense recorded by the Company represents its cash
contribution to the LESOP.
33
JCP
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
The following table sets forth the status of the Company's retirement plans:
<TABLE>
<CAPTION>
December 31
-------------------------------------------------
Retirement plans (In millions) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pension
Present value of accumulated benefits
Vested $ 1,817 $ 1,368 $ 1,367
Non-vested 94 75 80
----------------------------------------------
$ 1,911 $ 1,443 $ 1,447
==============================================
Present value of projected benefit obligation $(2,183) $(1,661) $(1,781)
Net assets at fair market value 2,292 1,825 1,800
Unrecognized transition asset, net of unrecognized losses 345 200 216
----------------------------------------------
Net prepaid pension cost $ 454 $ 364 $ 235
==============================================
Post retirement health care benefits
Accumulated benefit obligation
Retirees $ 249 $ 217 $ 246
Fully eligible active participants 30 43 51
Other active participants 39 40 41
-----------------------------------------------
318 300 338
Unrecognized net gain/(loss) 19 32 (10)
-----------------------------------------------
Net liability $ 337 $ 332 $ 328
===============================================
Key assumptions
Rate of return on pension plan assets 9.5% 9.5% 9.5%
Discount rate 7.25% 8.75% 7.25%
Salary progression rate 4.0% 4.0% 4.0%
===============================================
</TABLE>
<TABLE>
<CAPTION>
Savings Plans Pension
--------------------------------------------------------------
December 31 December 31
Total assets and equity (In millions) 1995 1994 1993 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JCPenney preferred and common stock $2,714 $ 2,662 $ 3,030 $ --- $ --- $ ---
Equity securities 203 120 117 1,661 1,288 1,424
Fixed income investments 1,199 1,048 1,091 574 473 302
LESOP loan obligation, including accrued
interest of $11, $14, and $17 (279) (358) (431) --- --- ---
Other assets, net 77 63 47 57 64 74
-------------------------------------------------------------
Net assets $3,914 $ 3,535 $ 3,854 $ 2,292 $1,825 $1,800
=============================================================
<CAPTION>
Savings Plans Pension
-------------------------------------------------------------
December 31 December 31
Changes in fair value of net assets (In millions) 1995 1994 1993 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net assets at beginning of year $3,535 $3,854 $2,903 $1,825 $1,800 $1,585
Company contribution 53 53 50 104 99 65
Participants' contributions 209 203 184 --- --- ---
Gains/(losses) 425 (280) 984 464 22 236
LESOP interest expense (23) (30) (35) --- --- ---
Benefits paid (285) (265) (232) (101) (96) (86)
-------------------------------------------------------------
Net assets at end of year $3,914 $ 3,535 $ 3,854 $ 2,292 $1,825 $1,800
=============================================================
</TABLE>
19 Non-Recurring Items
For 1995, non-recurring items generated a pre-tax reduction in expenses of $18
million; the reduction is reported as a component of SG&A expenses in the
consolidated statements of income. The net reduction consisted of two items. In
the fourth quarter of 1995, the Company sold JCPenney Business Services, Inc., a
subsidiary which provided credit authorization, billing, and other services to
third party credit-card issuers for a cash purchase price of $96 million. The
sale generated a pre-tax gain of $67 million. Also in fourth quarter 1995, the
Company recorded a $49 million charge, or 12 cents per share, for the early
adoption of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. The charge related primarily to the
write down of buildings and improvements for JCPenney stores. Fair value for
these assets was based on discounted future cash flows.
34
JCP
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
20 Taxes
The Company adopted SFAS No. 109, Accounting for Income Taxes, effective January
31, 1993. This statement requires an asset and liability approach to accounting
for differences between the tax basis of an asset or liability and its reported
amount in the financial statements (temporary differences). Deferred taxes are
determined by applying the provisions of enacted tax laws, and adjustments are
required for changes in tax laws and rates. Deferred taxes reflected on the
balance sheet were reduced by $51 million, and a cumulative adjustment was
recorded to increase net income by the same amount, using current tax rates in
effect at the beginning of fiscal 1993.
Deferred tax assets and liabilities reflected on the Company's consolidated
balance sheet at January 27, 1996, 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 liabilities/(assets) at January 27, 1996, were as follows:
<TABLE>
<CAPTION>
Temporary differences (In millions) 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
Assets:
Workers' compensation/public liability $ (101) $ (100)
Accounts receivable (33) (29)
Restructuring reserve (16) (18)
Other --- (60)
Liabilities:
Retirement plans 51 12
Leases 332 338
Inventory 104 94
Depreciation 774 757
Deferred acquisition costs 174 160
Other 10 ---
-----------------
Total $1,295 $1,154
=================
</TABLE>
No valuation allowances have been considered necessary for any year. The Company
believes that the existing deductible temporary differences will be offset by
future reversals of differences generating taxable income.
<TABLE>
<CAPTION>
Income tax expense (In millions) 1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $306 $521 $443
State and local 56 92 67
-----------------------------
362 613 510
-----------------------------
Deferred
Federal 124 25 80
State and local 17 4 20
-----------------------------
141 29 100
-----------------------------
Total $503 $642 $610
Effective tax rate 37.5% 37.8% 39.3%
=============================
</TABLE>
<TABLE>
<CAPTION>
Per cent of
Amounts (In millions) Pre-tax Income
Reconciliation of tax rates 1995 1994 1993 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax at statutory rate $ 469 $ 594 $ 544 35.0 35.0 35.0
State and local income taxes, less federal
income tax benefit 49 65 58 3.6 3.8 3.7
Revaluation of deferred taxes --- --- 14 --- --- .9
Tax effect of dividends on
allocated LESOP shares (11) (9) (9) (.8) (.5) (.5)
Tax credits and other (4) (8) 3 (.3) (.5) .2
--------------------------------------------------------
Total $ 503 $ 642 $ 610 37.5 37.8 39.3
========================================================
</TABLE>
35
JCP
<PAGE>
------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
------------------------------------------------------------
21 Segment Reporting
The Company operates predominantly in two business segments, retail and
insurance. Banking operations are shown in the table below only for purposes of
reconciling to total Company consolidated amounts.
<TABLE>
<CAPTION>
Depreciation
Pre-tax Total and Capital
(In millions) Revenue Income* Assets Amortization Expenditures
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Retail 1995 $20,562 $ 1,151 $14,525 $338 $742
1994 20,380 1,534 14,057 320 534
1993 18,983 1,405 12,888 313 452
Insurance 1995 $ 697 $ 161 $ 1,741 $ 3 $ 7
1994 571 138 1,360 3 10
1993 475 120 1,246 3 7
Banking 1995 $ 160 $ 29 $ 836 --- ---
1994 131 27 785 --- ---
1993 120 29 654 --- ---
Total Company 1995 $21,419 $ 1,341 $17,102 $341 $749
1994 21,082 1,699 16,202 323 544
1993 19,578 1,554 14,788 316 459
* Income before income taxes, extraordinary charge, and cumulative
effect of accounting change.
</TABLE>
------------------------------------------------------------
QUARTERLY DATA (UNAUDITED)
------------------------------------------------------------
<TABLE>
<CAPTION>
First Second Third Fourth
----------------------------------------------------------------------------------------
(In millions except per share data) 1995 1994 1993 1995 1994 1993 1995 1994 1993 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Retail sales 4,367 4,350 3,964 4,435 4,242 3,963 5,128 5,149 4,735 6,632 6,639 6,321
Per cent increase/(decrease) 0.4 9.7 4.5 4.6 7.1 4.6 (0.4) 8.7 9.1 (0.1) 5.0 3.9
Total revenue 4,564 4,519 4,106 4,643 4,412 4,106 5,352 5,328 4,888 6,860 6,823 6,478
Per cent increase 1.0 10.0 4.8 5.3 7.4 5.0 0.4 9.0 9.3 0.5 5.3 4.3
LIFO gross margin 1,370 1,395 1,280 1,292 1,282 1,191 1,592 1,661 1,530 1975 2,072 1,985
LIFO gross margin, per cent of retail sales 31.4 32.1 32.3 29.1 30.2 30.1 31.0 32.2 32.3 29.8 31.2 31.4
Selling, general, and administrative
expenses, per cent of retail sales 26.3 25.1 25.9 25.0 25.5 25.8 23.4 23.4 24.2 21.7 21.2 20.8
Income before extraordinary charge
and cumulative effect of
accounting change 156 223 172 116 132 112 240 274 221 326 428 439
Net income 156 223 206 116 132 112 240 274 185 326 428 437
Income per share before extraordinary
charge and cumulative effect of
accounting change
Primary .63 .88 .68 .46 .52 .43 1.00 1.11 .88 1.39 1.78 1.80
Fully diluted .61 .84 .65 .46 .51 .42 .95 1.04 .83 1.31 1.66 1.65
Net income per common share
Primary .63 .88 .82 .46 .52 .43 1.00 1.11 .73 1.39 1.78 1.79
Fully diluted .61 .84 .78 .46 .51 .42 .95 1.04 .69 1.31 1.66 1.64
Dividends per common share .48 .42 .36 .48 .42 .36 .48 .42 .36 .48 .42 .36
Common stock price range
High 47 59 45 50 54 49 50 54 52 49 52 56
Low 41 50 36 43 47 41 43 47 39 42 39 49
Close 44 54 43 49 49 45 44 51 52 46 41 52
</TABLE>
36
JCP
<PAGE>
------------------------------------------------------------
Supplemental Information (unaudited)
------------------------------------------------------------
General. The following information is provided as a supplement to the Company's
audited financial statements. Its purpose is to facilitate an understanding of
the Company's credit operations, capital structure, and cash flows.
Credit Operations. The following table presents the results of the Company's
proprietary credit card operation, measuring on an all-inclusive basis the costs
of granting, operating, and financing credit, net of finance charge revenue.
This presentation does not include any profits derived from merchandise and
services purchased by customers. Revenue, costs, and expenses contained in the
table below relate to all customer accounts receivable generated and serviced by
the Company, including those recorded as sold under asset securitization
transactions. This presentation is designed to measure on an "economic basis"
the total pre-tax cost of providing the JCPenney credit card to customers.
<TABLE>
<CAPTION>
Pre-tax cost of JCPenney credit card
(In millions) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Finance charge revenue
On receivables owned $ (631) $ (624) $ (523)
On receivables sold (112) (105) (129)
--------------------------------------
Total (743) (729) (652)
--------------------------------------
Bad debt expense 256 208 128
Operating expenses
(including in-store costs) 255 268 265
Cost of capital 415 404 400
--------------------------------------
Total 926 880 793
--------------------------------------
Pre-tax cost of JCPenney credit $ 183 $ 151 $ 141
Per cent of JCPenney credit sales 2.0% 1.6% 1.6%
======================================
</TABLE>
The cost of capital shown above represents the cost of financing both
Company-owned accounts receivable and securitized accounts receivable. The cost
of the sold receivables is the actual interest paid to certificate holders. The
owned accounts receivables are financed with both debt and equity capital. The
debt component uses the total Company weighted average interest rate, while the
equity component uses the Company's minimum return on equity objective of 16 per
cent. On a combined basis, for both owned and sold receivables, the debt and
equity components of the total capital requirements were 88 per cent debt and 12
per cent equity, which approximates the finance industry standard debt to equity
ratio.
<TABLE>
<CAPTION>
1995 1994 1993
Credit sales Per cent Per cent Per cent
(JCPenney stores Amounts of Eligible Amounts of Eligible Amounts of Eligible
and catalog) (In billions) Sales (In billions) Sales (In billions) Sales
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JCPenney
credit card $ 9.0 48.4 $ 9.4 49.6 $ 8.7 49.6
American
Express,
Discover,
MasterCard,
and Visa 3.7 19.8 3.4 17.9 2.8 16.1
-------------------------------------------------------------------------------------
Total $12.7 68.2 $ 12.8 67.5 $11.5 65.7
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
Key JCPenney credit card information
(In millions) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of accounts
serviced with balances 17.0 17.6 17.2
Total customer
receivables serviced $4,688 $4,751 $4,410
Average customer
receivables financed $4,258 $4,197 $3,767
Average account
balances (in dollars) $ 275 $ 269 $ 256
Average account
maturity (months) 4.3 4.2 4.0
=======================================
</TABLE>
Capital structure. The Company's objective is to maintain a capital structure
that will assure continuing access to financial markets so that it can, at
reasonable cost, provide for future needs and capitalize on attractive
opportunities for growth.
The debt to capital ratio shown in the table below includes both debt recorded
on the Company's consolidated balance sheet as well as off-balance-sheet debt
related to operating leases and the securitization of a portion of the Company's
customer accounts receivable (asset-backed certificates).
<TABLE>
<CAPTION>
Debt to capital (In millions) 1995 1994 1993
- ----------------------------------------------------------------
<S> <C> <C> <C>
Short term debt,
net of cash investments $ 1,168 $ 1,737 $ 1,127
Long term debt,
including current maturities 4,080 3,335 3,277
------------------------------
5,248 5,072 4,404
Off-balance-sheet debt
Present value of operating leases 1,000 1,000 900
Securitization of accounts
receivable, net 294 294 294
------------------------------
Total debt 6,542 6,366 5,598
Consolidated equity 5,884 5,615 5,365
------------------------------
Total capital $12,426 $11,981 $10,963
Per cent of total debt to capital 52.6% 53.1% 51.1%
==============================
</TABLE>
The Company builds its capital base according to the different needs and credit
characteristics of its customer receivables and its other core retail assets.
Customer receivables are highly diversified and predictable financial assets,
very different from the core assets of a retailer, which include fixed assets
and inventories for stores and catalog. Accordingly, the Company finances
receivables with more leverage, much like a finance company. The standards for
these assets are a debt ratio of approximately 88 per cent, and interest
coverage of about 1.5 times. Core assets are financed with less leverage and are
more comparable to the leverage of non-retail industrial companies with strong
credit ratings. The Company's capital structure at the end of fiscal year 1995
was:
37
JCP
<PAGE>
------------------------------------------------------------
Supplemental Information (unaudited) continued
------------------------------------------------------------
<TABLE>
<CAPTION>
Customer Core
(In millions) Receivables Assets Combined
- -------------------------------------------------------------
<S> <C> <C> <C>
Debt $4,029 $2,513 $ 6,542
Equity 575 5,309 5,884
-----------------------------------
Total capital $4,604 $7,822 $12,426
Debt to capital per cent 87.5% 32.1% 52.6%
===================================
</TABLE>
The historical debt to capital per cent and fixed charge coverage for the
prior three years, on a separate and combined basis, was:
Debt to capital per cent
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------
<S> <C> <C> <C>
Combined 52.6 53.1 51.1
Core assets 32.1 31.1 27.1
Customer receivables 87.5 87.5 87.5
==================
</TABLE>
Fixed charge coverage
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------
<S> <C> <C> <C>
Combined 3.4 4.5 4.3
Core assets 6.0 9.1 8.7
Customer receivables 1.5 1.5 1.4
==================
</TABLE>
Financing costs incurred by the Company to finance its operations, including
those costs related to off-balance-sheet liabilities, were as follows:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- -------------------------------------------------
<S> <C> <C> <C>
Interest expense, net $ 325 $ 270 $ 241
Interest portion of LESOP
debt payment 23 30 35
Off-balance-sheet
financing costs
Interest imputed on
operating leases 102 95 97
Asset-backed certificates
interest 68 68 88
----------------------
Total $ 518 $ 463 $ 461
======================
</TABLE>
Earnings before interest, taxes, depreciation, and amortization (EBITDA).
Management believes that a key measure of cash flow generated is earnings before
interest, taxes, depreciation, and amortization (EBITDA). EBITDA is not intended
to represent cash flow or any other measure of performance in accordance with
generally accepted accounting principles, but is included as a tool for
analyzing the Company's financial condition. The following schedule shows the
calculation of EBITDA and EBITDA margin as a per cent of total revenue.
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes,
extraordinary charge, and cumulative
effect of accounting change $ 1,341 $ 1,699 $ 1,554
Financing costs 518 463 461
Depreciation and amortization,
including operating leases 481 449 416
-----------------------------
EBITDA $ 2,340 $ 2,611 $ 2,431
Total revenue $21,419 $21,082 $19,578
EBITDA per cent of total revenue 10.9% 12.4% 12.4%
=============================
</TABLE>
Credit ratings. Over the years, the Company has maintained one of the highest
credit ratings in the retail industry. The Company's objective is to maintain a
strong investment grade rating on its senior long term debt, and A1/P1/F1
ratings on commercial paper. Currently, the credit ratings for the Company are
as follows:
<TABLE>
<CAPTION>
Long Term Commercial
Debt Paper
- -------------------------------------------------------------------
<S> <C> <C>
Standard & Poor's Corporation A+ A1
Moody's Investors Service A1 P1
Fitch Investors Service, Inc. A+ F1
======================
</TABLE>
38
JCP
<PAGE>
------------------------------------------------------------
Five Year Financial Summary
------------------------------------------------------------
<TABLE>
<CAPTION>
J.C. Penney Company, Inc. and Subsidiaries
(In millions except per share data) 1995 1994 1993/(1)/ 1992 1991/(2)/
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results for the year
Total revenue $21,419 $21,082 $19,578 $18,515 $16,648
Retail sales $20,562 $20,380 $18,983 $18,009 $16,201
Per cent increase/(decrease) 0.9 7.4 5.4 11.2 (1.0)
LIFO gross margin, per
cent of retail sales 30.3 31.5 31.5 31.7 31.5
FIFO gross margin, per
cent of retail sales 30.2 31.5 31.3 31.5 30.9
Selling, general, and administrative
expenses, per cent of retail sales 23.8 23.5 23.7 24.7 25.6
Depreciation and amortization $ 341 $ 323 $ 316 $ 310 $ 316
Income before income taxes,
extraordinary charges, and
cumulative effect
of accounting changes $ 1,341 $ 1,699 $ 1,554 $ 1,259 $ 468
Percent to total revenue 6.3 8.1 7.9 6.8 2.8
Income taxes $ 503 $ 642 $ 610 $ 482 $ 204
Income before extraordinary charge
and cumulative effect of
accounting changes $ 838 $ 1,057 $ 944 $ 777 $ 264
Net income $ 838 $ 1,057 $ 940 $ 777 $ 80
Percent to total revenue 3.9 5.0 4.8 4.2 .5
Earnings per common share
Primary
Before extraordinary
charge and cumulative
effect of accounting changes $ 3.48 $ 4.29 $ 3.79 $ 3.15 $ .99
Net income $ 3.48 $ 4.29 $ 3.77 $ 3.15 $ .20
Fully diluted
Before extraordinary charge
and cumulative effect of
accounting changes $ 3.33 $ 4.05 $ 3.55 $ 2.95 $ .99
Net income $ 3.33 $ 4.05 $ 3.53 $ 2.95 $ .20
Per common share
Dividends $ 1.92 $ 1.68 $ 1.44 $ 1.32 $ 1.32
Stockholders' equity $ 24.76 $ 23.45 $ 21.53 $ 19.17 $ 17.33
Return on stockholders' equity 14.9 19.7 20.1 18.6 12.0
Financial position
Receivables, net $ 5,207 $ 5,159 $ 4,679 $ 3,750 $ 4,131
Merchandise inventories $ 3,935 $ 3,876 $ 3,545 $ 3,258 $ 2,897
Properties, net $ 4,281 $ 3,954 $ 3,818 $ 3,755 $ 3,633
Capital expenditures $ 749 $ 544 $ 459 $ 494 $ 506
Total assets $17,102 $16,202 $14,788 $13,467 $12,444
Total debt $ 5,589 $ 5,427 $ 4,561 $ 4,078 $ 4,062
Stockholders' equity $ 5,884 $ 5,615 $ 5,365 $ 4,705 $ 4,188
Number of common shares
outstanding at year end 224 227 236 235 233
Weighted average common shares
Primary 229 237 239 236 234
Fully diluted 249 258 261 258 234
Number of employees at
year end (In thousands) 205 202 193 192 185
</TABLE>
/(1)/ Excluding the impact of the tax rate increase on deferred taxes, after tax
income was $958 million, or $3.60 per share, on a fully diluted basis.
/(2)/ Excluding the effect of nonrecurring items and the cumulative effect of an
accounting change, after tax income was $528 million, or $2.00 per share, on a
fully diluted basis.
39
JCP
<PAGE>
------------------------------------------------------------
Five Year Operations Summary
------------------------------------------------------------
<TABLE>
<CAPTION>
J.C. Penney Company, Inc. and Subsidiaries
1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JCPenney stores
Number of stores
Beginning of year 1,233 1,246 1,266 1,283 1,312
Openings 43 29 24 33 38
Closings (38) (42) (44) (50) (67)
----------------------------------------------------
End of year 1,238 1,233 1,246 1,266 1,283
Gross selling space (In million sq. ft.) 114.3 113.0 113.9 114.4 114.5
Sales including catalog desks (In millions) $17,930 $18,048 $16,846 $15,698 $14,277
Sales per gross square foot/(1)/ $ 156 $ 159 $ 146 $ 137 $ 125
Catalog
Number of catalog units
JCPenney stores 1,228 1,233 1,246 1,266 1,283
Freestanding sales centers and merchants 548 552 543 640 697
Drug stores 106 94 101 128 134
Other, principally outlet stores 17 16 14 14 16
----------------------------------------------------
Total 1,899 1,895 1,904 2,048 2,130
Number of distribution centers 6 6 6 6 6
Distribution space (In million sq. ft.) 11.4 11.4 11.4 11.4 11.4
Sales (In millions) $ 3,738 $ 3,817 $ 3,514 $ 3,166 $ 3,002
Drug stores
Number of stores
Beginning of year 526 506 548 530 487
Openings 37 46 35 30 46
Kerr Drug acquisition 97 - - - -
Closings (15) (26) (77) (12) (3)
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End of year 645 526 506 548 530
Gross selling space (In million sq. ft.) 6.2 4.5 4.6 5.2 5.0
Sales (In millions) $ 1,851 $ 1,540 $ 1,413 $ 1,383 $ 1,192
Sales per gross square foot/(1)/ $ 253 $ 243 $ 235 $ 211 $ 201
JCPenney Insurance (In millions)
Revenue $ 697 $ 571 $ 475 $ 388 $ 328
Policies and certificates in force 9.0 7.5 5.8 4.6 4.3
Amount of life insurance in force $ 9,559 $ 8,780 $ 7,627 $ 6,552 $ 5,419
Total assets $ 1,741 $ 1,360 $ 1,246 $ 1,033 $ 857
(1)1992 is presented on a 52 week basis.
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40
JCP
