<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the 52 weeks ended January 30, 1999 Commission file number 1-4947-1
J. C. Penney Funding Corporation
-------------------------------------------
(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: (972) 431-1000
- -------------------------------------------------- --------------
Securities registered pursuant to Section 12(b) of the Act: None
- ----------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act: None
- ----------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___.
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant: 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 31, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of Registrant's 1998 Annual Report ("1998 Annual Report") are
incorporated into Parts I, II, and IV. Portions of J. C. Penney Company, Inc.'s
1998 Annual Report to Stockholders ("JCPenney's 1998 Annual Report") are
incorporated into Part I.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
I(1)(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
<PAGE>
PART I
------
1. BUSINESS.
--------
J. C. Penney Funding Corporation ("Funding"), which was incorporated in
Delaware in 1964, is a wholly-owned subsidiary of J. C. Penney Company, Inc.
("JCPenney"), also incorporated in Delaware. Funding's executive offices are
located in JCPenney's offices in Plano, Texas. Its business consists of
financing a portion of JCPenney's operations through loans to JCPenney, the
purchase of customer receivable balances that arise from the retail credit sales
of JCPenney, or a combination of both. No receivables have been purchased by
Funding since 1985.
JCPenney, a company founded by James Cash Penney in 1902 and incorporated
in 1924, is a major retailer operating approximately 1,150 JCPenney department
stores in all 50 states, Puerto Rico, Mexico, and Chile. In addition, in January
1999, JCPenney completed the acquisition of the majority interest in a Brazilian
department store chain that operates 21 stores under the Renner name. The major
portion of JCPenney's business consists of providing merchandise and services to
consumers through department stores that include catalog departments. JCPenney
stores market predominantly family apparel, jewelry, shoes, accessories, and
home furnishings. In addition, JCPenney, through its wholly-owned subsidiary,
Eckerd Corporation, operates a chain of approximately 2,900 drugstores located
throughout the northeast, southeast, and Sunbelt regions of the United States,
including JCPenney's March 1999 acquisition of the New York-based Genovese
drugstore chain. JCPenney also has several direct marketing subsidiaries, the
principal of which is J. C. Penney Life Insurance Company, which market life,
health, accident and credit insurance as well as a growing portfolio of
membership services to both domestic and international customers. JCPenney's
total revenues for the 52 weeks ended January 30, 1999 were $30.7 billion and
net income was $594 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
1998 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 1998 averaged $1,938 million compared
to $2,247 million in fiscal 1997 and $2,041 million in fiscal 1996. Short-term
debt rates averaged 5.5 percent in fiscal 1998, compared to 5.6 percent in
fiscal 1997 and 5.5 percent in fiscal 1996. Interest expense decreased in fiscal
1998 compared to fiscal 1997 due to lower borrowing levels and lower short-term
interest rates. Interest expense increased in fiscal 1997 as compared to fiscal
1996 due to higher borrowing levels and higher short-term interest rates.
2
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Credit Operations of JCPenney. Virtually all types of merchandise and
-----------------------------
services sold by JCPenney in the United States, Puerto Rico, Mexico, and Chile
may be purchased on JCPenney's revolving credit card. In addition, JCPenney
accepts American Express, Diners Club (Mexico and Brazil only), Discover (United
States and Puerto Rico only), MasterCard, and Visa at JCPenney stores, catalog,
and drugstores throughout the 50 states, Puerto Rico, Mexico, Chile, and Brazil.
For additional information regarding the credit card operations of JCPenney, see
"Net Interest Expense and Credit Operations" (page 17), which appears in the
section of JCPenney's 1998 Annual Report entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and "Pre-tax cost of
JCPenney credit card", "Department Stores and Catalog", and "Key JCPenney credit
card information" (page 42), which appear in the section of JCPenney's 1998
Annual Report entitled "Supplemental Data (Unaudited)", on the pages indicated
in the parenthetical references, which are incorporated by reference herein.
Funding has never incurred any losses from JCPenney's retail credit
operation since, pursuant to the Receivables Agreement, JCPenney itself
administers the customer receivables when sold to Funding, receives all finance
charge revenue on those customer receivables, and bears all related costs.
Loan Agreement. Funding and JCPenney are parties to a Loan Agreement,
--------------
dated as of January 28, 1986, as amended ("Loan Agreement"), which provides for
unsecured loans to be made from time to time by Funding to JCPenney for the
general business purposes of JCPenney, subject to the terms and conditions of
the Loan Agreement. The loans may be either senior loans or subordinated loans,
at the election of JCPenney, provided that, without the consent of the Board of
Directors of Funding, the principal amount of loans outstanding at any time
under the Loan Agreement may not exceed specified limits. Currently such limits
may not exceed $8 billion in the aggregate for all loans and $1 billion in the
aggregate for all subordinated loans. The terms of each loan under the Loan
Agreement shall be as agreed upon at the time of such loan by Funding and
JCPenney, provided that Funding may require upon demand that any loan be paid,
and JCPenney may prepay without premium any loan, in whole or in part at any
time. Under the terms of the Loan Agreement, JCPenney and Funding agree from
time to time upon a mutually-acceptable earnings coverage of Funding's interest
and other fixed charges. If at the end of each fiscal quarter during which a
loan is outstanding, the earnings coverage of Funding's interest and other fixed
charges is less than the agreed upon ratio, JCPenney will pay to Funding an
additional amount sufficient to provide for such coverage to be not less than
the agreed upon ratio. In the event that JCPenney and Funding have not agreed
upon a mutually acceptable ratio for any fiscal quarter, the applicable
quarterly payment with respect to such period will include an amount equal to
the excess, if any, of one and one-half percent of the daily average of the
aggregate principal amount outstanding on all loans during such period, over the
aggregate amount of interest accrued on all such loans during such period.
Receivables Agreement. Since December 1, 1985, JCPenney has not sold an
---------------------
undivided interest in any of its customer receivables to Funding. The
Receivables Agreement between Funding and JCPenney, as amended ("Receivables
Agreement"), continues to be in full force and effect and while no purchases of
JCPenney
3
<PAGE>
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.
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.
4
<PAGE>
Certain state laws provide for recording or other notice formalities in
connection with the assignment of accounts receivable. Funding does not deem it
appropriate to utilize such procedures in connection with customer receivables
purchased from JCPenney. In the event of the bankruptcy or receivership of
JCPenney, it is possible that creditors of JCPenney might be deemed to have
superior rights to some or all of the customer receivables previously purchased
by Funding.
Committed Bank Credit Facilities. Committed bank credit facilities
--------------------------------
available to Funding and JCPenney as of January 30, 1999 amounted to $3.0
billion. These facilities, as amended and restated, support commercial paper
borrowing arrangements and include a $1.5 billion, 364-day revolver and a $1.5
billion, five-year revolver. The 364-day revolver includes a $750 million
seasonal credit line for the August to January period, thus allowing JCPenney to
match its seasonal borrowing requirements. (See page 2 of Funding's 1998 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.
-----------------
Funding has no material legal proceedings pending against it.
PART II
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5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
--------------------------------
JCPenney owns all of Funding's outstanding common stock. Funding's common
stock is not traded, and no dividends have been, or are currently intended to
be, declared by Funding on its common stock.
5
<PAGE>
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
The Balance Sheets of Funding as of January 30, 1999 and January 31, 1998,
and the related statements of income, reinvested earnings, and cash flows for
each of the years in the three-year period ended January 30, 1999, appearing on
pages 3 through 5 of Funding's 1998 Annual Report, together with the related
notes and the Independent Auditors' Report of KPMG LLP, independent certified
public accountants, appearing on page 6 of Funding's 1998 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 1998 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.
On April 15, 1999, Moody's Investors Service and Fitch IBCA lowered their
respective ratings of the Company's long-term debt from A2 to A3 and from A to
A-, and commercial paper from P1 to P2 and from F1 to F2.
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
--------------------------------------
None.
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 1998 Annual Report.
(a)(2) Financial Statement Schedules.
All schedules have been omitted as they are inapplicable or not
required under the rules, or the information has been submitted in
the financial statements or in the notes to the financial statements
incorporated by reference to Funding's 1998 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 1998.
None.
6
<PAGE>
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/ R. B. Cavanaugh
-----------------------------
R. B. Cavanaugh
Chairman of the Board
Dated: April 23, 1999
7
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ R. B. Cavanaugh
- -------------------
R. B. Cavanaugh Chairman of the Board April 23, 1999
(principal executive
officer); Director
S. F. Walsh*
- ------------
S. F. Walsh President April 23, 1999
(principal financial
officer); Director
W. J. Alcorn*
- -------------
W. J. Alcorn Controller (principal April 23, 1999
accounting officer)
D. A. McKay*
- ------------
D. A. McKay Director April 23, 1999
*By /s/ R. B. Cavanaugh
-------------------
R. B. Cavanaugh
Attorney-in-fact
8
<PAGE>
EXHIBIT INDEX
Exhibit
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3. (i) Articles of Incorporation
-------------------------
(a) Certificate of Incorporation of Funding, effective April 13, 1964
(incorporated by reference to Exhibit 3(a) to Funding's Annual Report on
Form 10-K for the 52 weeks ended January 29, 1994*).
(b) Certificate of Amendment of Certificate of Incorporation, effective
January 1, 1969 (incorporated by reference to Exhibit 3(b) to Funding's
Annual Report on Form 10-K for the 52 weeks ended January 29, 1994*).
(c) Certificate of Amendment of Certificate of Incorporation, effective
August 11, 1987 (incorporated by reference to Exhibit 3(c) to Funding's
Annual Report on Form 10-K for the 52 weeks ended January 29, 1994*).
(d) Certificate of Amendment of Certificate of Incorporation, effective
April 10, 1988 (incorporated by reference to Exhibit 3(d) to Funding's
Annual Report on Form 10-K for the 52 weeks ended January 29, 1994*).
(ii) Bylaws
------
(a) Bylaws of Funding, as amended to May 19, 1995 (incorporated by reference
to Exhibit 3(ii) to Funding's Quarterly Report on Form 10-Q for the 13
and 39 weeks ended October 26, 1996*).
4. Instruments defining the rights of security holders, including indentures
-------------------------------------------------------------------------
(a) Issuing and Paying Agency Agreement dated as of March 16, 1992, between
J. C. Penney Funding Corporation and Morgan Guaranty Trust Company of
New York (incorporated by reference to Exhibit 4(a) to Funding's Current
Report on Form 8-K, Date of Report - April 3, 1992*).
(b) Issuing and Paying Agency Agreement dated as of February 3, 1997,
between J. C. Penney Funding Corporation and The Chase Manhattan Bank
(incorporated by reference to Exhibit 4(b) to Funding's Annual Report on
Form 10-K for the 52 weeks ended January 25, 1997*) .
(c) Guaranty dated as of February 17, 1997, executed by J. C. Penney
Company, Inc.(incorporated by reference to Exhibit 4(c) to Funding's
Annual Report on Form 10-K for the 52 weeks ended January 25, 1997*).
(d) Amended and Restated 364-Day Revolving Credit Agreement dated as of
December 3, 1996, among J. C. Penney Company, Inc., J. C. Penney Funding
Corporation, the Lenders party thereto, Morgan Guaranty Trust Company of
New York, as Agent for the Lenders, and Bank of America Illinois,
Bankers Trust Company, The Chase Manhattan Bank,
G-1
<PAGE>
EXHIBIT INDEX
Exhibit
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Citibank, N.A., Credit Suisse, and NationsBank of Texas, N.A., as Co-
Agents for the Lenders (incorporated by reference to Exhibit 4(d) to
Funding's Annual Report on Form 10-K for the 52 weeks ended January 25,
1997*).
(e) Amended and Restated Five-Year Revolving Credit Agreement dated as of
December 3, 1996, among J. C. Penney Company, Inc., J. C. Penney Funding
Corporation, the Lenders party thereto, Morgan Guaranty Trust Company of
New York, as Agent for the Lenders, and Bank of America Illinois,
Bankers Trust Company, The Chase Manhattan Bank, Citibank, N.A., Credit
Suisse, and NationsBank of Texas, N.A., as Co-Agents for the Lenders
(incorporated by reference to Exhibit 4(e) to Funding's Annual Report on
Form 10-K for the 52 weeks ended January 25, 1997*).
(f) Amendment and Restatement Agreement to 364-Day Revolving Credit
Agreement, dated as of November 20, 1998, among J. C. Penney Company,
Inc., J. C. Penney Funding Corporation, the Lenders party thereto,
Morgan Guaranty Trust Company of New York, as Agent, Citibank, N.A.,
Nationsbanc Montgomery Securities LLC and The Chase Manhattan Bank, as
Co-Syndication Agents, and Credit Suisse First Boston and First Union
National Bank, as Managing Agents.
(g) Amendment and Restatement Agreement to Five-Year Revolving Credit
Agreement, dated as of November 21, 1997, among J. C. Penney Company,
Inc., J. C. Penney Funding Corporation, the Lenders party thereto,
Morgan Guaranty Trust Company of New York, as Agent, and Bank of America
National Trust and Savings Association, Bankers Trust Company, The Chase
Manhattan Bank, Citibank, N.A., Credit Suisse First Boston, and
NationsBank of Texas, N.A., as Managing Agents (incorporated by
reference to Exhibit 4(g) to Funding's Annual Report on Form 10-K for
the 53 weeks ended January 31, 1998*).
(h) Commercial Paper Dealer Agreement dated March 16, 1992 between J. C.
Penney Funding Corporation and J.P. Morgan Securities Inc. (incorporated
by reference to Exhibit 10(a) to Funding's Current Report on Form 8-K,
Date of Report - April 3, 1992*).
(i) Commercial Paper Dealer Agreement dated March 16, 1992 between J. C.
Penney Funding Corporation and The First Boston Corporation
(incorporated by reference to Exhibit 10(b) to Funding's Current Report
on Form 8-K, Date of Report - April 3, 1992*).
G-2
<PAGE>
EXHIBIT INDEX
Exhibit
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(j) Commercial Paper Dealer Agreement dated May 3, 1994 between J. C. Penney
Funding Corporation and Merrill Lynch Money Markets Inc. (incorporated
by reference to Exhibit 4(g) to Funding's Annual Report on Form 10-K for
the 52 weeks ended January 28, 1995*).
(k) Commercial Paper Dealer Agreement dated January 25, 1995 between J. C.
Penney Funding Corporation and Morgan Stanley & Co. Incorporated
(incorporated by reference to Exhibit 4(h) to Funding's Annual Report on
Form 10-K for the 52 weeks ended January 28, 1995*).
(l) Commercial Paper Dealer Agreement dated February 7, 1997 between J. C.
Penney Funding Corporation and Credit Suisse First Boston Corporation
(incorporated by reference to Exhibit 4(l) to Funding's Annual Report on
Form 10-K for the 52 weeks ended January 25, 1997*).**
(m) Guaranty dated as of December 3, 1996, executed by J. C. Penney Company,
Inc. with respect to the Amended and Restated 364-Day and Five Year
Revolving Credit Agreements, each dated as of December 3, 1996
(incorporated by reference to Exhibit 4(m) to Funding's Annual Report on
Form 10-K for the 52 weeks ended January 25, 1997*).
Instruments evidencing long-term debt, previously issued but now fully
prepaid, have not been filed as exhibits hereto because none of the debt
authorized under any such instrument exceeded 10 percent of the total assets
of the Registrant. The Registrant agrees to furnish a copy of any of its
long-term debt instruments to the Securities and Exchange Commission upon
request.
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*).
G-3
<PAGE>
EXHIBIT INDEX
Exhibit
-------
(c) Loan Agreement dated as of January 28, 1986 between J. C. Penney
Company, Inc. and J. C. Penney Financial Corporation (incorporated by
reference to Exhibit 1 to Funding's Current Report on Form 8-K, Date of
Report - January 28, 1986*).
(d) Amendment No. 1 to Loan Agreement dated as of January 28, 1986 between
J. C. Penney Company, Inc. and J. C. Penney Financial Corporation
(incorporated by reference to Exhibit 1 to Funding's Current Report on
Form 8-K, Date of Report - December 31, 1986*).
(e) Amendment No. 2 to Loan Agreement dated as of January 28, 1986 between
J. C. Penney Company, Inc. and J. C. Penney Funding Corporation
(incorporated by reference to Exhibit 10(e) to Funding's Annual Report
on Form 10-K for the 52 weeks ended January 25, 1997*).
(f) Line of Credit Agreement dated as of July 1, 1994, between J. C. Penney
Funding Corporation and J. C. Penney Chile, Inc. (incorporated by
reference to Exhibit 10(e) to Funding's Annual Report on Form 10-K for
the 52 weeks ended January 28, 1995*).
13. Annual Report to Security Holders
---------------------------------
Excerpt from Funding's 1998 Annual Report.
23. Independent Auditor's Consent
-----------------------------
24. Power of Attorney
-----------------
27. Financial Data Schedule
-----------------------
Financial Data Schedule for the 52 week period ended January 30, 1999.
99. Additional Exhibits
-------------------
Excerpt from JCPenney's 1998 Annual Report to Stockholders.
*SEC file number 1-4947-1
** Funding has entered into identical Commercial Paper Dealer Agreements dated
February 7, 1997 with each of Merrill Lynch Money Markets Inc., J.P. Morgan
Securities Inc., and Morgan Stanley & Co. Incorporated, which agreements are
omitted pursuant to Instruction 2 to Item 601 of Regulation S-K. Funding
agrees to furnish a copy of any of such agreements to the Securities and
Exchange Commission upon request.
G-4
<PAGE>
Exhibit 4(F)
CONFORMED COPY
================================================================================
J. C. PENNEY COMPANY, INC.
J. C. PENNEY FUNDING CORPORATION
--------------------------
AMENDED AND RESTATED 364-DAY REVOLVING CREDIT
AGREEMENT
dated as of November 20, 1998
--------------------------
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Agent,
CITIBANK, N.A., NATIONSBANC MONTGOMERY SECURITIES LLC and
THE CHASE MANHATTAN BANK,
as Co-Syndication Agents,
CREDIT SUISSE FIRST BOSTON and FIRST UNION NATIONAL BANK,
as Managing Agents
--------------------------
J.P. MORGAN SECURITIES INC.,
Lead Arranger
================================================================================
<PAGE>
AMENDED AND RESTATED 364-DAY REVOLVING CREDIT
AGREEMENT
AMENDED AND RESTATED 364-DAY REVOLVING CREDIT AGREEMENT dated as of
November 20, 1998 among J. C. PENNEY COMPANY, INC. and J. C. PENNEY FUNDING
CORPORATION (the "Borrowers"), the LENDERS listed on the signature pages hereof
(the "Lenders"), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the
"Agent"), and CITIBANK, N.A., NATIONSBANC MONTGOMERY SECURITIES LLC and THE
CHASE MANHATTAN BANK, as Co-Syndication Agents (the "Co-Syndication Agents"),
and CREDIT SUISSE FIRST BOSTON and FIRST UNION NATIONAL BANK, as Managing Agents
(the "Managing Agents").
W I T N E S S E T H :
WHEREAS, certain of the parties hereto have heretofore entered into a
364-Day Revolving Credit Agreement dated as of December 16, 1993, as amended and
restated as of December 7, 1994, as amended as of December 6, 1995, as amended
and restated as of December 3, 1996, and as amended and restated as of
November 21, 1997 (the "Agreement");
WHEREAS, at the date hereof, there are no Loans outstanding under the
Agreement; and
WHEREAS, the parties hereto desire to amend such Agreement as set forth
herein and to restate the Agreement in its entirety to read as set forth in the
Agreement with the amendments specified below;
NOW, THEREFORE, the parties hereto agree as follows:
<PAGE>
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
and restated hereby.
SECTION 2. Extension of Maturity Date. (a) The definition of "Maturity
Date" in Section 1.01 of the Agreement is amended to read in its entirety as
follows:
"Maturity Date" shall mean November 19, 1999.
(b) The date "November 20, 1998" in Section 2.11(d) of the Agreement is
changed to "November 19, 1999".
SECTION 3. Financial Statements. (a) Each reference to "January 25, 1997"
in Sections 3.05 and 3.06 of the Agreement is changed to "January 31, 1998".
(b) The date "July 26, 1997" in Section 3.05 of the Agreement is changed
to "August 1, 1998".
SECTION 4. The Agent. The last sentence of Article VIII of the Agreement
is amended to read in its entirety as follows:
No Co-Syndication Agent, Managing Agent or Co-Agent shall have any duties
or responsibilities hereunder in its capacity as such.
SECTION 5. Confirmation of Guaranty. J. C. Penney Company, Inc. confirms
that its subordinated Guaranty of the obligations of J. C. Penney Funding
Corporation dated as of December 3, 1996, shall apply to the obligations of J.
C. Penney Funding Corporation under the Agreement as amended and restated
hereby.
SECTION 6. Changes in Commitments. With effect from and including the
date this Amendment and Restatement becomes effective in accordance with
Section 9 hereof, (i) each Person listed on the signature pages hereof which is
not a party to the Agreement shall become a Lender party to the Agreement, (ii)
the Commitment of each Lender shall be the amount set forth
2
<PAGE>
opposite the name of such Lender on the Commitment Schedule annexed hereto and
(iii) Schedule 2.01 to the Agreement shall be amended to read as set forth in
Part I of said Commitment Schedule. Any Lender whose Commitment is changed to
zero shall upon such effectiveness cease to be a Lender party to the Agreement,
and all accrued fees and other amounts payable under the Agreement for the
account of such Lender shall be due and payable on such date; provided that,
subject to Section 2.20, the provisions of Sections 2.13, 2.15, 2.19 and 9.05 of
the Agreement shall continue to inure to the benefit of each such Lender.
SECTION 7. Pricing Schedule. Exhibit D to the Agreement is amended to
read in its entirety as set forth in Exhibit A hereto.
SECTION 8. Governing Law. This Amendment and Restatement shall be
governed by and construed in accordance with the laws of the State of New York.
SECTION 9. Counterparts; Conditions to Effectiveness. This Amendment and
Restatement may be signed in any number of counterparts, each of which shall be
an original, with the same effect as if the signatures thereto and hereto were
upon the same instrument. This Amendment and Restatement shall become effective
as of the date hereof when the Agent shall have received:
(a) duly executed counterparts hereof signed by the Borrowers and all of
the Lenders (or, in the case of any party as to which an executed counterpart
shall not have been received, the Agent shall have received telegraphic, telex
or other written confirmation from such party of execution of a counterpart
hereof by such party);
(b) an opinion of Charles R. Lotter, General Counsel for the Borrowers,
dated the date hereof and addressed to the Lenders, to the effect set forth in
Exhibit B hereto, and the Borrowers hereby instruct such counsel to deliver such
opinion to the Agent;
(c) a certificate from a Responsible Officer of each Borrower, dated the
date hereof, and certifying that the representations and warranties set forth in
Article III of the Agreement shall be true and correct in all material respects
on and as of the date hereof with the same effect as though made on and as of
such date, except to the extent such representations and warranties expressly
relate to an earlier date;
3
<PAGE>
(d) a certificate from a Responsible Officer of each Borrower, dated the
date hereof, and certifying that on such date, no Event of Default or Default
shall have occurred and be continuing;
(e) for its own account all fees due and payable to it and in such amounts
as have been previously agreed upon in writing between the Borrowers and the
Agent in connection with this Amendment and Restatement; and
(f) (i) a certificate of the Secretary or Assistant Secretary of each
Borrower, dated the date hereof and certifying (A) that attached thereto is a
true and complete copy of resolutions duly adopted by the Board of Directors of
such Borrower authorizing the execution, delivery and performance of the
Agreement as hereby amended and restated and the borrowings thereunder, and that
such resolutions have not been modified, rescinded or amended and are in full
force and effect, and (B) as to the incumbency and specimen signature of each
officer executing this Amendment and Restatement or any other document delivered
in connection herewith on behalf of such Borrower and (ii) a certificate of
another officer of each Borrower as to the incumbency and specimen signature of
the Secretary or Assistant Secretary executing the certificate pursuant to
(i) above.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Restatement to be duly executed as of the date first above written.
J. C. PENNEY COMPANY, INC.
By /s/ Robert B. Cavanaugh
-------------------------------------------
Title: Vice President and Treasurer
J. C. PENNEY FUNDING CORPORATION
By /s/ Stephen F. Walsh
-------------------------------------------
Title: President
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Lender and as Agent
By /s/ Maria H. Dell'Aquila
-------------------------------------------
Title: Vice President
<PAGE>
THE CHASE MANHATTAN BANK, as Lender
and as Co-Syndication Agent
By /s/ Barry R. Bergman
-------------------------------------------
Title: Vice President
CITIBANK, N.A., as Lender and as
Co-Syndication Agent
By /s/ Robert A. Snell
-------------------------------------------
Title: As Attorney in Fact
NATIONSBANC MONTGOMERY SECURITIES LLC, as
Co-Syndication Agent
By /s/ Gary Kahn
-------------------------------------------
Title: Managing Director
NATIONSBANK N.A., as Lender
By /s/ Kimberley A. Knop
-------------------------------------------
Title: Vice President
<PAGE>
CREDIT SUISSE FIRST BOSTON, as Lender and as
Managing Agent
By /s/ Thomas G. Muoio
-------------------------------------------
Title: Vice President
By /s/ J. Scott Karro
-------------------------------------------
Title: Associate
FIRST UNION NATIONAL BANK, as Lender
and as Managing Agent
By /s/ Rodger Levenson
-------------------------------------------
Title: Senior Vice President
BANKERS TRUST COMPANY, as Lender and
as Co-Agent
By /s/ Anthony LoGrippo
-------------------------------------------
Title: Vice President
THE FIRST NATIONAL BANK OF CHICAGO,
as Lender and as Co-Agent
By /s/ Vincent R. Henchek
-------------------------------------------
Title: Vice President
<PAGE>
FLEET NATIONAL BANK, as Lender and as
Co-Agent
By /s/ Thomas J. Bullard
-------------------------------------------
Title: Vice President
PNC BANK, NATIONAL ASSOCIATION, as
Lender and as Co-Agent
By /s/ Mark T. Kennedy
-------------------------------------------
Title: Vice President
WACHOVIA BANK, N.A., as Lender and as
Co-Agent
By /s/ Paige D. Mesaros
-------------------------------------------
Title: Vice President
WELLS FARGO BANK N.A., as Lender and
as Co-Agent
By /s/ Edith R. Lim
-------------------------------------------
Title: Vice President
<PAGE>
By /s/ Mark Haberecht
-------------------------------------------
Title: Assistant Vice President
THE BANK OF TOKYO-MITSUBISHI, LTD., as
Lender and as Co-Agent
By /s/ John M. Mearns
-------------------------------------------
Title: Vice President and Manager
THE BANK OF NEW YORK
By /s/ Charlotte Sohn
-------------------------------------------
Title: Vice President
BANKBOSTON, N.A.
By /s/ Judith C.E. Kelly
-------------------------------------------
Title: Vice President
MARINE MIDLAND BANK
By /s/ Robert Corder, #9428
-------------------------------------------
Title: Authorized Signatory
MELLON BANK, N.A.
By /s/ Richard J. Schaich
-------------------------------------------
Title: Assistant Vice President
<PAGE>
SUNTRUST BANK, ATLANTA
By /s/ Todd C. Davis
-------------------------------------------
Title: Assistant Vice President
By /s/ Deborah S. Armstrong
-------------------------------------------
Title: First Vice President
BANK OF HAWAII
By /s/ Brenda K. Testerman
-------------------------------------------
Title: Vice President
FIRST AMERICAN NATIONAL BANK
By /s/ Stephen Arnold
-------------------------------------------
Title: Assistant Vice President
FIRSTAR BANK MILWAUKEE, N.A.
By /s/ Desiree K. Dujmic
-------------------------------------------
Title: Commercial Banking Officer
<PAGE>
KEYBANK NATIONAL ASSOCIATION
By /s/ Frank J. Jancar
-------------------------------------------
Title: Vice President
THE NORTHERN TRUST COMPANY
By /s/ John E. Burda
-------------------------------------------
Title: Second Vice President
ROYAL BANK OF CANADA
By /s/ Karen T. Hull
-------------------------------------------
Title: Retail Group Manager
STATE STREET BANK AND TRUST COMPANY
By /s/ Johnny Ip
-------------------------------------------
Title: Vice President
CRESTAR BANK
By /s/ James P. Duval, Jr.
-------------------------------------------
Title: Vice President
<PAGE>
BARCLAYS BANK PLC
By /s/ Marlene Wechselblatt
-------------------------------------------
Title: Vice President
HIBERNIA NATIONAL BANK
By /s/ Angela Bentley
-------------------------------------------
Title: Portfolio Manager
By /s/ Katherine Gonzalez by Angela Bentley
-------------------------------------------
Title: Relationship Manager
NATIONAL CITY BANK
By /s/ George M. Gevas
-------------------------------------------
Title: Vice President
UMB BANK, n.a.
By /s/ David A. Proffitt
-------------------------------------------
Title: Senior Vice President
<PAGE>
U.S. BANK NATIONAL ASSOCIATION
By /s/ David A. Draxler
-------------------------------------------
Title: Vice President
FIRST SECURITY BANK, N.A.
By /s/ Judy Callister
-------------------------------------------
Title: Vice President
<PAGE>
DEPARTING LENDERS
-----------------
CREDIT AGRICOLE INDOSUEZ
By /s/ Katherine L. Abbott
-------------------------------------------
Title: First Vice President
By /s/ W. Leroy Startz
-------------------------------------------
Title: First Vice President
THE FUJI BANK, LTD. HOUSTON AGENCY
By /s/ Kazuyuki Nishimura
-------------------------------------------
Title: Senior Vice President
ISTITUTO BANCARIO SAN PAOLO DI TORINO
INSTITUTO MOBILIARE ITALIANO SPA
By /s/ Robert Wurster
-------------------------------------------
Title: First Vice President
By /s/ Glen Binder
-------------------------------------------
Title: Vice President
<PAGE>
NATIONAL AUSTRALIA BANK LIMITED
A.C.N. 004044937
By /s/ Frank J. Campiglia
-------------------------------------------
Title: Vice President
NORWEST BANK MINNESOTA, N.A.
By /s/ Mary D. Falck
-------------------------------------------
Title: Vice President
THE YASUDA TRUST AND BANKING CO., LTD.,
NEW YORK BRANCH
By /s/ Junichiro Kawamura
-------------------------------------------
Title: Vice President
<PAGE>
COMMITMENT SCHEDULE
I. Continuing Lenders
Name of Lender and Applicable Lending Office Commitment
Morgan Guaranty Trust Company of New York $90,000,000
The Chase Manhattan Bank $85,000,000
Citibank, N.A. $85,000,000
NationsBank N.A. $85,000,000
Credit Suisse First Boston $80,000,000
First Union National Bank $80,000,000
Bankers Trust Company $72,500,000
The First National Bank of Chicago $60,000,000
Fleet National Bank $60,000,000
PNC Bank, National Association $60,000,000
Wachovia Bank, N.A. $60,000,000
Wells Fargo Bank N.A. $60,000,000
The Bank of Tokyo-Mitsubishi, Ltd. $55,000,000
The Bank of New York $45,000,000
BankBoston, N.A. $45,000,000
Marine Midland Bank $45,000,000
Mellon Bank, N.A. $45,000,000
SunTrust Bank, Atlanta $37,500,000
Bank of Hawaii $30,000,000
First American National Bank $30,000,000
S-1
<PAGE>
Name of Lender and Applicable Lending Office Commitment
Firstar Bank Milwaukee, N.A. $30,000,000
KeyBank National Association $30,000,000
The Northern Trust Company $30,000,000
Royal Bank of Canada $30,000,000
State Street Bank and Trust Company $30,000,000
Crestar Bank $25,000,000
Barclays Bank PLC $20,000,000
Hibernia National Bank $20,000,000
National City Bank $20,000,000
UMB Bank, n.a. $20,000,000
U.S. Bank National Association $20,000,000
First Security Bank, N.A. $15,000,000
S-2
<PAGE>
II. Departing Lenders
Name of Lender and Applicable Lending Office Commitment
Credit Agricole Indosuez $0
The Fuji Bank, Ltd., Houston Agency $0
Istituto Bancario San Paolo Di Torino Instituto Mobiliare $0
Italiano SPA
National Australia Bank Limited $0
Norwest Bank Minnesota, N.A. $0
The Yasuda Trust and Banking Co., Ltd., New York Branch $0
Total $1,500,000,000
==============
S-3
<PAGE>
EXHIBIT A
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 and Utilization that exists on such day:
================================================================================
Category I II III IV V VI
================================================================================
Facility Fee 0.050% 0.070% 0.080% 0.100% 0.1750% 0.300%
Percentage
Euro-Dollar
Margin
Utilization less than 1/3 0.175% 0.180% 0.270% 0.300% 0.575% 0.700%
Utilization greater than or
equal to 1/3 0.225% 0.230% 0.370% 0.400% 0.825% 1.200%
================================================================================
For purposes of this Schedule, the following terms have the following
meanings, subject to the further provisions of this Schedule:
"Category I" exists at any date if, at such date, the Index Debt is rated at
least A+ by S&P or A1 by Moody's.
"Category II" exists at any date if, at such date, (i) the Index Debt is
rated at least A by S&P or A2 by Moody's and (ii) Category I does not exist.
"Category III" exists at any date if, at such date, (i) the Index Debt is
rated at least A- by S&P or A3 by Moody's and (ii) neither Category I nor
Category II exists.
"Category IV" exists at any date if, at such date, (i) the Index Debt is
rated at least BBB+ by S&P or Baa1 by Moody's and (ii) none of Category I,
Category II and Category III exists.
"Category V" exists at any date if, at such date, (i) the Index Debt is
rated at least BBB- by S&P or Baa3 by Moody's and (ii) none of Category I,
Category II, Category III and Category IV exists.
A-1
<PAGE>
"Category VI" exists at any date if, at such date, (i) the Index Debt is
rated below BBB- by S&P or below Baa3 by Moody's and (ii) no other Category
exists.
"Category" refers to the determination of which of Category I, Category II,
Category III, Category IV, Category V or Category VI exists at any date.
"Moody's" means Moody's Investors Service, Inc.
"S&P" means Standard & Poor's Ratings Services.
"Utilization" means, at any date, a fraction (i) the numerator of which is
the aggregate outstanding principal amount of all Loans at such date and (ii)
the denominator of which is the aggregate amount of the Commitments at such
date, determined in each case after giving effect to any transactions on such
date; provided that if for any reason any Loans remain outstanding following
termination of the Commitments, Utilization shall be deemed to be not less than
1/3.
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 longer be in the business of rating corporate debt obligations or (b)
of any other reason outside the control of J. C. Penney and Funding), such
rating agency shall be deemed to have established a rating in Category VI 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 J. C. Penney 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
A-2
<PAGE>
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 V (or Category VI if such Percentage or Margin shall have
been determined by reference to Category V or VI under clause (A) above) and (C)
after 180 days, the Facility Fee Percentage and the Euro-Dollar Margin shall be
determined by reference to Category VI.
In the case of split ratings from S&P and Moody's, the rating to be used to
determine Categories is the higher of the two (e.g., A+/A2 results in Category
I); provided that in the event the split is more than one full ratings "notch",
the average rating (or the higher of the two intermediate ratings) shall be used
(e.g. A+/A3 results in Category II, as does A+/Baa1); and provided further that
if at any date the Index Debt is rated BB+ or lower by S&P or Ba1 or lower by
Moody's, the Facility Fee Percentage and the Euro-Dollar Margin shall be
determined by reference to Category VI.
A-3
<PAGE>
EXHIBIT B
November 20, 1998
Each of the lenders referred to below
Re: Amended and Restated 364-Day Revolving Credit Agreement of
J. C. Penney Company, Inc. and
J. C. Penney Funding Corporation
Ladies and Gentlemen:
As the General Counsel of J. C. Penney Company, Inc., a Delaware
corporation ("JCPenney"), and of J. C. Penney Funding Corporation, a Delaware
corporation ("Funding" and, together with JCPenney, "Borrowers"), I have been
asked to render an opinion pursuant to Section 9(b) of the Amended and Restated
364-Day Revolving Credit Agreement dated as of November 20, 1998 among the
Borrowers, Morgan Guaranty Trust Company of New York, as Agent (the "Agent"),
the lenders listed on the signature pages thereof (the "Lenders"), Citibank,
N.A., Nationsbanc Montgomery Securities LLC and The Chase Manhattan Bank, as Co-
Syndication Agents (the "Co-Syndication Agents"), and Credit Suisse First Boston
and First Union National Bank, as Managing Agents (the "Managing Agents") (the
"Amendment and Restatement") which amends and restates the 364-Day Revolving
Credit Agreement dated as of December 16, 1993, as amended and restated with new
Lenders as of December 7, 1994, as amended with new Lenders as of December 6,
1995, as amended and restated as of December 3, 1996, and as amended and
restated as of November 21, 1997 (such Credit Agreement, as amended and restated
by the Amendment and Restatement, the "Credit Agreement").
In rendering the opinion set forth below, I have examined originals,
photostatic, or certified copies of the Credit Agreement, the respective
corporate records and documents of the Borrowers, copies of public documents,
certificates of the officers or representatives of the Borrowers, and such other
instruments and documents, and have made such inquiries, as I have deemed
necessary as a basis for such opinion. In making such examinations, I have
assumed the genuineness of all signatures (other than the signatures of the
B-1
<PAGE>
Borrowers) and the authenticity of all documents submitted to me as originals,
the conformity to original documents of all documents submitted to me as
certified or photostatic copies, and the authenticity of the originals of such
latter documents. As to questions of fact material to such opinion, to the
extent I deemed necessary, I have relied upon the representations and warranties
of the Borrowers made in the Credit Agreement and upon certificates of the
officers of the Borrowers. Capitalized terms not otherwise defined in this
opinion letter have the meanings specified in the Credit Agreement.
Based upon the foregoing, I am of the opinion that:
1. Each of the Borrowers has been duly incorporated and is validly
existing and in good standing under the laws of the State of Delaware, and is
duly qualified as a foreign corporation and in good standing under the laws of
each jurisdiction where the failure to so qualify would have a Material Adverse
Effect. Each of the Borrowers has the requisite corporate power and authority to
own, pledge, and operate its properties and assets, to lease the property it
operates under lease, and to conduct its business as now conducted.
2. The execution, delivery, and performance by the Borrowers of the
Credit Agreement, the Borrowings by the Borrowers under the Credit Agreement (i)
are within the corporate power of each of the Borrowers; (ii)have been duly
authorized by each of the Borrowers by all necessary corporate action; (iii) are
not in contravention of JCPenney's Restated Certificate of Incorporation,
Funding's Certificate of Incorporation, as amended, or either of the Borrower's
bylaws; (iv) to the best of my knowledge do not violate any material law,
statute, rule, or regulation, or any material order of any Governmental
Authority, applicable to either of the Borrowers; (v) do not conflict with or
result in the breach of, or constitute a default under, the material borrowing
indentures, agreements, or other instruments of either of the Borrowers; (vi) do
not result in the creation or imposition of any Lien upon any of the property or
assets of either of the Borrowers other than any Lien created by the Credit
Agreement; and (vii) do not require the consent or approval of, or any filing
with, any Governmental Authority or any other person party to those agreements
described above other than those that have been obtained or made or where the
failure to obtain such consent or approval would not result in a Material
Adverse Effect.
B-2
<PAGE>
3. The Credit Agreement has been duly executed and delivered by each of
the Borrowers and constitutes a legal, valid, and binding obligation of each
such Borrower, enforceable against such Borrower in accordance with its terms,
except as such enforcement may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium, and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
4. Neither Borrower is an "investment company" within the meaning of the
Investment Company Act of 1940, as amended, or a "public-utility company" or a
"holding company" within the meaning of the Public Utility Holding Company Act
of 1935, as amended.
5. To the best of my knowledge, except as set forth in Schedule 3.09 of
the Credit Agreement, no litigation by or before any Governmental Authority is
now pending or threatened against JCPenney or Funding (i) which involves the
Credit Agreement or (ii) as to which there is a reasonable possibility of an
adverse determination and which, if adversely determined, would, individually or
in the aggregate result in a Material Adverse Effect.
6. The Support Agreements have been duly executed and delivered by
JCPenney and, where applicable, Funding and, as of the date hereof, are in full
force and effect in accordance with their terms.
The opinions expressed herein are limited to the laws of the State of
Delaware with respect to the opinions provided in paragraph 1 (except as to due
qualification as a foreign corporation and good standing under the laws of other
jurisdictions) and clauses (i), (ii), and (iii) of paragraph 2. The other
opinions expressed are limited to the laws of the State of New York and the laws
of the United States. I do not express any opinion herein concerning any laws
of any other jurisdictions. This opinion is furnished to you in connection with
the transactions contemplated by the Credit Agreement, and may not be relied
upon by any other person, firm, or corporation for any purpose or by you in any
other context without my prior written consent.
Very truly yours,
Charles R. Lotter
Executive Vice President,
Secretary and General Counsel
B-3
<PAGE>
EXHIBIT 13
Management's Discussion and Analysis of 1998 Annual Report
Financial Condition and Results of Operations
J. C. Penney Funding Corporation ("Funding") is a wholly-owned consolidated
subsidiary of J. C. Penney Company, Inc. ("JCPenney"). The business of Funding
consists of financing a portion of JCPenney's operations through loans to
JCPenney, the purchase of customer receivable balances that arise from the
retail credit sales of JCPenney, or a combination of both. No receivables have
been purchased by Funding since 1985. The loan agreement between Funding and
JCPenney provides for unsecured loans to be made by Funding to JCPenney. Each
loan is evidenced by a revolving promissory note and is payable upon demand in
whole or in part as may be required by Funding. Copies of Funding's loan and
receivables agreements with JCPenney are available upon request.
Funding issues commercial paper through Credit Suisse First Boston Corporation,
J.P. Morgan Securities Inc., Merrill Lynch Money Markets Inc., and Morgan
Stanley Dean Witter to corporate and institutional investors in the domestic
market. The commercial paper is guaranteed by JCPenney on a subordinated basis.
The commercial paper was rated "A1" by Standard & Poor's Corporation, "P1" by
Moody's Investors Service, and "F1" by Fitch Investors Service, Inc. at the end
of fiscal 1998. As of January 1999, JCPenney and Funding's credit ratings were
under review for possible downgrade.
Income is derived primarily from earnings on loans to JCPenney and is designed
to produce earnings sufficient to cover interest expense at a coverage ratio of
at least one and one-half times.
In 1998, net income decreased to $35 million from $43 million in 1997. Net
income for 1997 increased from $38 million in 1996. The decrease in 1998 is
attributed to lower lending levels and lower interest rates. The increase in
1997 is attributed to higher lending levels and higher interest rates. Interest
expense was $106 million in 1998 compared with $127 million in 1997 and $111
million in 1996. Interest earned from JCPenney was $160 million in 1998 compared
to $193 million in 1997 and $169 million in 1996.
Commercial paper borrowings averaged $1,922 million in 1998 compared to $2,129
million in 1997 and $1,827 million in 1996. The average interest rate on
commercial paper was 5.5 per cent in 1998, down from 5.6 per cent in 1997 and up
from 5.5 percent in 1996.
Committed bank credit facilities available to Funding and JCPenney as of January
30, 1999 amounted to $3 billion. The facilities, as amended and restated,
support JCPenney's short term borrowing program, and are comprised of a $1.5
billion, 364-day revolver, and a $1.5 billion, five-year revolver. The 364-day
revolver includes a $750 million seasonal credit line for the August to January
period thus allowing JCPenney to match its seasonal borrowing requirements.
There were no outstanding borrowings under these credit facilities during fiscal
1998.
JCPenney has initiated actions to address the Year 2000 issue relating to
Funding. Year 2000 readiness work was more than 90 per cent complete as of
January 30, 1999. Since January 1999, JCPenney has been retesting all systems
critical to JCPenney's core businesses. JCPenney has also focused on the Year
2000 readiness of its suppliers and service providers, both independently and in
conjunction with the National Retail Federation. Total costs associated with
these efforts are not expected to have a material impact on the financial
results of either JCPenney or Funding. In addition, Funding has communicated
with its commercial paper dealers to determine their Year 2000 readiness.
However, there can be no guarantee that the systems of these commercial paper
dealers on which Funding relies will be converted in a timely manner, or that a
failure to convert would not have a material adverse effect on Funding's
operations.
We would like to express our appreciation to the institutional investment
community, as well as to our credit line participants and commercial paper
dealers for their continued support during 1998.
/s/ Robert B. Cavanaugh
- -----------------------
Chairman of the Board
February 25, 1999
3
<PAGE>
Statements of Income J. C. Penney Funding Corporation
($ in millions)
For the Year 1998 1997 1996
---------------------
Interest income from JCPenney........................ $ 160 $ 193 $ 169
Interest expense..................................... 106 127 111
------ ------ -----
Income before income taxes........................... 54 66 58
Income taxes...................................... 19 23 20
------ ------ -----
Net income........................................... $ 35 $ 43 $ 38
====== ====== =====
Statements of Reinvested Earnings
($ in millions)
1998 1997 1996
---------------------
Balance at beginning of year......................... $1,007 $ 964 $ 926
Net income........................................... 35 43 38
------ ------ -----
Balance at end of year............................... $1,042 $1,007 $ 964
====== ====== =====
See Notes to Financial Statements on page 7
4
<PAGE>
Balance Sheets J. C. Penney Funding Corporation
(In millions except share data)
1998 1997
--------------
Assets
Loans to JCPenney.............................. $3,129 $2,591
====== ======
Liabilities and Equity of JCPenney
Current Liabilities
Short term debt................................ $1,924 $1,416
Due to JCPenney................................ 18 23
------ ------
Total Current Liabilities................. 1,942 1,439
Equity of JCPenney
Common stock (including contributed
capital), par value $100:
Authorized, 750,000 shares -
issued and outstanding, 500,000 shares.... 145 145
Reinvested earnings............................ 1,042 1,007
------ ------
Total Equity of JCPenney.................. 1,187 1,152
------ ------
Total Liabilities and Equity of JCPenney.. $3,129 $2,591
====== ======
See Notes to Financial Statements on page 7
5
<PAGE>
Statements of Cash Flows J. C. Penney Funding Corporation
($ in millions)
For the Year 1998 1997 1996
--------------------------
Operating Activities
Net income.................................... $ 35 $ 43 $ 38
(Increase)Decrease in loans to JCPenney....... (538) 2,471 (2,499)
Increase(Decrease) in amount due to JCPenney.. (5) 22 (9)
----- -------- -------
$(508) $ 2,536 $(2,470)
Financing Activities
Increase(Decrease) in short term debt......... $ 508 $(2,536) $ 2,470
Supplemental Cash Flow Information
Interest paid................................. $ 106 $ 127 $ 111
Income taxes paid............................. $ 23 $ 2 $ 28
See Notes to Financial Statements on page 7
6
<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 30, 1999 and January 31, 1998, and the related
statements of income, reinvested earnings, and cash flows for each of the years
in the three-year period ended January 30, 1999. These financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of J. C. Penney Funding
Corporation as of January 30, 1999 and January 31, 1998, and the results of its
operations and its cash flows for each of the years in the three-year period
ended January 30, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Dallas, Texas
February 25, 1999
- --------------------------------------------------------------------------------
Notes to Financial Statements
Nature of Operations
- --------------------
J. C. Penney Funding Corporation ("Funding") is a wholly-owned consolidated
subsidiary of J. C. Penney Company, Inc. ("JCPenney"). The principal business
of Funding consists of financing a portion of JCPenney's operations through
loans to JCPenney. To finance its operations, Funding issues commercial paper,
which is guaranteed by JCPenney on a subordinated basis, to corporate and
institutional investors in the domestic market. Funding has, from time to time,
issued long term debt in public and private markets in the United States and
abroad.
Definition of Fiscal Year
Funding's fiscal year ends on the last Saturday in January. Fiscal 1998 ended
January 30, 1999, fiscal 1997 ended January 31, 1998, and fiscal 1996 ended
January 25, 1997. Fiscal 1997 was a 53- week year and Fiscal 1998 and 1996 were
52-week years.
Commercial Paper Placement
Funding places commercial paper solely through dealers. The average interest
rate on commercial paper at year end 1998, 1997, and 1996 was 5.1%, 5.7%, and
5.5%, respectively.
Summary Of Accounting Policies
- ------------------------------
Income Taxes
Funding's taxable income is included in the consolidated federal income tax
return of JCPenney. Income taxes in Funding's statement of income are computed
as if Funding filed a separate federal income tax return.
Use of Estimates
Funding's financial statements have been prepared in conformity with generally
accepted accounting principles. Certain amounts included in the financial
statements are estimated based on currently available information and
management's judgment as to the outcome of future conditions and circumstances.
While every effort is made to ensure the integrity of such estimates, including
the use of third party specialists where appropriate, actual results could
differ from these estimates.
New Accounting Rules
- --------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income, in June 1997.
This statement, which was effective for fiscal years beginning after December
15, 1997, had no impact on Funding as comprehensive income is equal to net
income.
Loans to JCPenney
- -----------------
Funding and JCPenney are parties to a Loan Agreement which provides for
unsecured loans, payable on demand, to be made from time to time by Funding to
JCPenney for the general business purposes of JCPenney, subject to the
terms and conditions of the Loan Agreement. Under the terms of the Loan
Agreement, Funding and JCPenney agree upon a mutually-acceptable earnings
coverage of Funding's interest and other fixed charges. The earnings to fixed
charges ratio has historically been at least one and one-half times.
Committed Bank Credit Facilities
- --------------------------------
Committed bank credit facilities available to Funding and JCPenney as of January
30, 1999 amounted to $3 billion. The facilities, as amended and restated,
support JCPenney's short term borrowing program, and are comprised of a $1.5
billion, 364-day revolver, and a $1.5 billion, five-year revolver. The 364-day
revolver includes a $750 million seasonal credit line for the August to January
period thus allowing JCPenney to match its seasonal borrowing requirements.
There were no outstanding borrowings under these credit facilities at January
30, 1999.
Fair Value of Financial Instruments
- -----------------------------------
The fair value of short term debt (commercial paper) at January 30, 1999 and
January 31, 1998 approximates the amount as reflected on the balance sheet due
to its short average maturity.
The fair value of loans to JCPenney at January 30, 1999, and January 31, 1998
also approximates the amount reflected on the balance sheet because the loan is
payable on demand and the interest charged on the loan balance is adjusted to
reflect current market interest rates.
7
<PAGE>
Five Year Financial Summary J. C. Penney Funding Corporation
($ in millions)
<TABLE>
<CAPTION>
At Year End 1998 1997 1996 1995 1994
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Capitalization
Short term debt
Commercial paper.............. $1,924 $1,416 $2,049 $1,482 $2,074
Credit line advance........... -- -- 1,903 -- --
------ ------ ------ ------ ------
Total short term debt..... 1,924 1,416 3,952 1,482 2,074
Equity of JCPenney................. 1,187 1,152 1,109 1,071 1,028
------ ------ ------ ------ ------
Total capitalization..................... $3,111 $2,568 $5,061 $2,553 $3,102
====== ====== ====== ====== ======
Committed bank credit facilities......... $3,000 $3,000 $6,000 $3,000 $2,500
For the Year
Income................................... $ 160 $ 193 $ 169 $ 194 $ 143
Expenses................................. $ 106 $ 127 $ 111 $ 128 $ 94
Net income............................... $ 35 $ 43 $ 38 $ 43 $ 32
Fixed charges - times earned............. 1.52 1.52 1.52 1.52 1.52
Peak short term debt..................... $3,117 $4,295 $4,010 $2,771 $2,649
Average debt............................. $1,938 $2,247 $2,041 $2,145 $1,990
Average interest rates................... 5.5% 5.6% 5.5% 5.9% 4.6%
</TABLE>
8
<PAGE>
Quarterly Data J. C. Penney Funding Corporation
($ in millions) (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
----------------- ------------------- -------------------- ------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
----- ---- ---- ----- ----- ----- ----- ----- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income....................... $ 34 82 32 33 29 33 46 35 36 47 47 68
Expenses..................... $ 22 54 21 22 19 22 30 23 24 32 31 44
Income before taxes.......... $ 12 28 11 11 10 11 16 12 12 15 16 24
Net income................... $ 8 18 7 7 7 7 10 8 8 10 10 16
Fixed charges -
times earned............... 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52
</TABLE>
Committed Revolving Credit Facilities
as of January 30, 1999
Bank of America NT & SA Mellon Bank, N.A.
Bank of Hawaii Morgan Guaranty Trust Company
The Bank of New York of New York
The Bank of Tokyo-Mitsubishi, Ltd. National Australia Bank Limited
Bank One, Texas N.A. NationsBank, N.A.
BankBoston, N.A. The Northern Trust Company
Bankers Trust Company PNC Bank, N.A.
Barclays Bank PLC Royal Bank of Canada
The Chase Manhattan Bank The Sakura Bank, Ltd.
Citibank, N.A. State Street Bank & Trust Company
Credit Agricole Indosuez SunTrust Bank, Atlanta
Credit Suisse First Boston UMB Bank, N.A.
First National Bank of Chicago U.S. Bank National Association
First Security Bank of Utah, N.A. Wachovia Bank, N.A.
First Union National Bank Wells Fargo Bank, N.A.
Firstar Bank Milwaukee, N.A.
Fleet National Bank
The Fuji Bank, Ltd.
Hibernia National Bank
Istituto Bancario San Paolo di
Torino S.p.A.
Marine Midland Bank
9
<PAGE>
Exhibit 23
INDEPENDENT AUDITOR'S CONSENT
The Board of Directors of
J. C. Penney Funding Corporation:
We consent to incorporation by reference in the Registration Statements on Form
S-8 (Nos. 33-28390, 33-59666, 33-59668, 33-66070, 33-66072, 33-56995, 333-13949,
333-13951, 333-22627, 333-22607, 333-33343, 333-27329, 333-71237) and Form S-3
(No. 333-57019) of J. C. Penney Company, Inc. of our report dated February 25,
1999, relating to the balance sheets of J. C. Penney Funding Corporation as of
January 30, 1999 and January 31, 1998, and the related statements of income,
reinvested earnings, and cash flows for each of the years in the three-year
period ended January 30, 1999, which report is incorporated by reference in the
January 30, 1999 Annual Report on Form 10-K of J. C. Penney Funding Corporation.
/s/ KPMG LLP
Dallas, Texas
April 23, 1999
<PAGE>
Exhibit 24
POWER OF ATTORNEY
-----------------
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 30, 1999, hereby constitutes and appoints W. J. Alcorn and R. B.
Cavanaugh, and each of them, his or her true and lawful attorneys-in-fact and
agents, with full power to act without the other, for him or her and in his or
her name, place, and stead, in any and all capacities, to sign said Annual
Report, which is about to be filed, and any and all subsequent amendments to
said Annual Report, and to file said Annual Report and each subsequent amendment
so signed, with all exhibits thereto, and any and all documents in connection
therewith, and to appear before the Securities and Exchange Commission in
connection with any matter relating to said Annual Report and any subsequent
amendments, hereby granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform any and all acts and things
requisite and necessary to be done in and about the premises as fully and to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney as of
the 23rd day of April, 1999.
/s/ R. B. Cavanaugh /s/ W. J. Alcorn
- ------------------------------ --------------------------------
R. B. Cavanaugh W. J. Alcorn
Chairman of the Board Controller
(principal executive officer); (principal accounting officer)
Director
/s/ S. F. Walsh
- ------------------------------
S. F. Walsh
President
(principal financial officer);
Director
/s/ D. A. McKay
- ----------------------------
D. A. McKay
Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENT OF INCOME OF J. C.
PENNEY FUNDING CORPORATION AS OF JANUARY 30, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> JAN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 3,129
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,129
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,129
<CURRENT-LIABILITIES> 1,942
<BONDS> 0
0
0
<COMMON> 145
<OTHER-SE> 1,042
<TOTAL-LIABILITY-AND-EQUITY> 3,129
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (54)
<INCOME-PRETAX> 54
<INCOME-TAX> 19
<INCOME-CONTINUING> 35
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
Exhibit 99
M a n a g e m e n t 's D i s c u s s i o n a n d A n a l y s i s
of Financial Condition and Results of Operations
<TABLE>
<CAPTION>
J. C. Penney Company, Inc.
- -------------------------------------------------- 52 Weeks 53 Weeks 52 Weeks
($ in millions) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Segment operating profit
Department stores and catalog (LIFO) $ 1,013 $ 1,368 $ 1,183
Eckerd drugstores (LIFO) 254 347 99
Direct marketing 233 214 186
- ----------------------------------------------------------------------------------------------------------
Total segments 1,500 1,929 1,468
Other unallocated 26 39 45
Net interest expense and credit operations (480) (547) (278)
Amortization of intangible assets (113) (117) (23)
Other charges, net 22 (379)(1) (303)(2)
Income before income taxes 955 925 909
Income taxes (361) (359) (344)
- ----------------------------------------------------------------------------------------------------------
Net income $ 594 $ 566 $ 565
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company previously reported $447 million (pre-tax) of other charges,
net (formerly labeled as restructuring and business integration expenses,
net), in 1997. $45 million of this amount has been reclassified as a
reduction to drugstore gross margin and $23 million has been reclassified
as an increase to department stores and catalog SG&A.
(2) The Company previously reported $354 million (pre-tax) of other charges,
net, in 1996. $31 million of this amount has been reclassified as a
reduction to drugstore gross margin and $20 million has been reclassified
as an increase to department stores and catalog SG&A.
12
<PAGE>
R e s u l t s o f O p e r a t i o n s
Net income in 1998 totaled $594 million, or $2.19 per share, compared with $566
million, or $2.10 per share, in 1997 and $565 million, or $2.25 per share, in
1996. Operating results for 1998 include credits of $13 million, net of tax, or
five cents per share, related to the reversal of reserves established in 1997.
Operating results for 1997 include $231 million in other charges, net of tax, or
86 cents per share, related principally to an early retirement program, closing
of underperforming department stores, and drugstore integration activities.
Operating results for 1996 include $196 million in other charges, net of tax, or
79 cents per share, related primarily to drugstore integration activities (see
Note 13 to the consolidated financial statements on page 33 for further
discussion of the 1997 and 1996 charges). Excluding these items, earnings per
share totaled $2.14 in 1998 compared with $2.96 in 1997 and $3.04 in 1996. All
references to earnings per share are on a diluted basis.
Certain amounts reported as other charges (formerly labeled as restructuring and
business integration expenses), net, have been reclassified in this year's
report. Charges related to one-time start-up activities have been reclassified
to department stores and catalog selling, general, and administrative (SG&A)
expenses, and inventory integration losses associated with the Company's
drugstore operations have been reclassified to drugstore gross margin. Following
is a summary of the reclassifications and their effects on reported earnings per
share before other charges:
- ------------------------------------------- 1997 1996
($ in millions, except per share data) $ EPS $ EPS
- --------------------------------------------------------------------------------
As previously reported
Net income $ 566 $ 2.10 $ 565 $ 2.25
Other charges, net 273 1.02 228 0.92
-------------------------------------
Earnings before other charges, net $ 839 $ 3.12 $ 793 $ 3.17
Reclassifications (net of tax) to:
Drugstore gross margin (28) (0.11) (19) (0.08)
Department stores and catalog SG&A (14) (0.05) (13) (0.05)
-------------------------------------
Total reclassifications (42) (0.16) (32) (0.13)
Revised
Net income $ 566 $ 2.10 $ 565 $ 2.25
Other charges, net 231 0.86 196 0.79
-------------------------------------
Earnings before other charges, net $ 797 $ 2.96 $ 761 $ 3.04
- --------------------------------------------------------------------------------
The following discussion addresses results of operations on a segment basis. The
discussion addresses changes in comparable store sales (those open for more than
a year) where appropriate, and changes in costs and expenses as a per cent of
sales because 1997 included an extra week.
13
<PAGE>
Department stores and catalog
- ------------------------------------- 52 Weeks 53 Weeks 52 Weeks
($ in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Retail sales, net
Department stores $ 15,402 $ 16,047 $ 15,734
Catalog 3,929 3,908 3,772
---------------------------------------
Total retail sales, net 19,331 19,955 19,506
- --------------------------------------------------------------------------------
FIFO gross margin 5,697 6,152 5,872
LIFO credit 35 20 20
---------------------------------------
Total gross margin 5,732 6,172 5,892
SG&A expenses (4,719) (4,804) (4,709)
- --------------------------------------------------------------------------------
Operating profit $ 1,013 $ 1,368 $ 1,183
- --------------------------------------------------------------------------------
Sales per cent inc/(dec)
Department stores(1) (2.8)% 0.7% 5.1%
Comparable stores (1.9)% (0.3)% 3.4%
Catalog(1) 1.5% 2.7% 0.9%
Ratios as a per cent of sales
FIFO gross margin 29.5% 30.8% 30.1%
LIFO gross margin 29.7% 30.9% 30.2%
SG&A expenses 24.4% 24.1% 24.1%
LIFO operating profit 5.3% 6.8% 6.1%
LIFO EBITDA(2) 8.6% 9.7% 9.0%
- --------------------------------------------------------------------------------
(1) Sales comparisons are shown on a 52-week basis for all periods presented.
Including 1997's 53rd week, department stores sales declined by 3.9 per
cent in 1998 and increased 2.0 per cent in 1997, while catalog sales
increased by 0.6 per cent and 3.6 per cent for 1998 and 1997, respectively.
(2) Earnings before interest, including interest on operating leases, income
taxes, depreciation, and amortization. EBITDA includes finance revenue net
of credit operating costs and bad debt. EBITDA is provided as an
alternative assessment of operating performance and is not intended to be a
substitute for GAAP measurements. Calculations may vary for other
companies.
1998 compared with 1997. Operating profit totaled $1,013 million in 1998
compared with $1,368 million in 1997. The decline for the year was primarily
attributable to lower sales coupled with lower gross margins. Sales in
comparable department stores declined by 1.9 per cent and were especially soft
in the fourth quarter. Department store sales were strongest in women's apparel,
while athletic apparel and footwear were particularly hard hit by softening
sales throughout 1998. Sales were weak across all regions of the country.
Catalog sales increased by 1.5 per cent on a 52-week basis and were strongest in
the third quarter when they increased by 8.0 per cent. Third quarter catalog
sales benefited from participation in department store promotional programs
which may have shifted buying patterns for catalog shoppers from the fourth
quarter to third quarter. Both department stores and catalog results, although
not readily quantifiable, were impacted by disruptions caused by the many
organizational and process changes initiated in 1997 and completed in 1998.
These changes impacted both the flow of merchandise and store personnel serving
customers.
LIFO gross margin as a per cent of sales for department stores and catalog
declined by 120 basis points compared with 1997, principally as a result of
aggressive promotional programs during the fourth quarter. As the fourth quarter
progressed, the Company increased promotions to stimulate sales. While this
generated unit sales and helped manage inventory levels, it had a negative
impact on gross margin as a per cent of sales. Markup improved in 1998 as the
Company continued to drive down its merchandise sourcing costs and improved
efficiencies with its supplier base. The improvement in markup partially offset
the effects of the higher markdowns. Gross margin includes a LIFO credit of $35
million in 1998 and $20 million in 1997. The LIFO credits for both years are
generally the result of a combination of flat to declining retail
14
<PAGE>
prices as measured by the Company's internally developed inflation index, and
improving markup. The Company continued to control its SG&A expense levels
throughout 1998. However, they were not leveraged as a per cent of sales due to
sales declines, increasing by 30 basis points from prior year levels. In 1998
the Company realized savings of approximately $95 million related to the early
retirement and reduction in force programs as well as other cost-saving
initiatives. These savings were reinvested in programs designed to enhance
customer service in the stores and into advertising and promotional programs.
1997 compared with 1996. Operating profit for department stores and catalog was
$1,368 million in 1997, an increase of $185 million, or 15.6 per cent, compared
with 1996. The increase in operating profit was principally related to
improvements in gross margin and well-managed expense levels. Comparable store
sales declined 0.3 per cent for the year compared with 1996. Department store
sales were strongest in the first half of the year as the Company emphasized
promotional programs designed to reduce its inventory levels. Sales performance
in department stores was led by the women's apparel division, particularly
dresses and career and casual wear, and the children's and shoe division.
Catalog sales for the year increased by 2.7 per cent compared with 1996 on a
52-week basis, and were led by women's and men's apparel as well as the home
division.
Gross margin for department stores and catalog increased by 70 basis points in
1997 compared with 1996, and included a LIFO credit of $20 million in both 1997
and 1996. SG&A expenses were well managed across all areas, particularly
advertising, and were flat as a percentage of sales as compared with 1996.
Eckerd drugstores
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
- -------------------------------- 1996(1)
($ in millions) 1998 1997(1) Pro Forma Historical
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retail sales, net $ 10,325 $ 9,663 $ 8,526 $ 3,147
-----------------------------------------------------------------
FIFO gross margin 2,208 2,093 1,870 708
LIFO charge (45) (32) (23) (5)
Inventory integration losses (98) (45) (31) (31)
-----------------------------------------------------------------
Total gross margin 2,065 2,016 1,816 672
SG&A expenses (1,811) (1,669) (1,510) (573)
-----------------------------------------------------------------
Operating profit $ 254 $ 347 $ 306 $ 99
-----------------------------------------------------------------
Sales per cent increase
Total sales(2) 8.9% 11.2%(3) 10.3% 100.0+%
Comparable stores 9.2% 7.4% 7.8% 7.7%
Ratios as a per cent of sales
FIFO gross margin 20.4% 21.2% 21.6% 21.5%
LIFO gross margin 20.0% 20.9% 21.3% 21.3%
SG&A expenses 17.5% 17.3% 17.7% 18.2%
LIFO operating profit 2.5% 3.6% 3.6% 3.1%
LIFO EBITDA(4) 5.1% 5.8% 5.7% 5.4%
-----------------------------------------------------------------
</TABLE>
(1) 1997 and 1996 gross margin, operating profit, and EBITDA have been restated
to reflect inventory integration charges that were previously reported as
part of the Company's other charges. The inventory charges were primarily
related to the liquidation of nonconforming merchandise that resulted from
conversion of all drugstores to the Eckerd name and format.
(2) Sales comparisons are shown on a 52-week basis for all periods presented.
Including 1997's 53rd week, drugstore sales increased by 6.9 per cent and
13.3 per cent for 1998 and 1997, respectively.
(3) 1997 sales increase is calculated based upon 1996 pro forma sales.
(4) Earnings before interest, including interest on operating leases, income
taxes, depreciation, and amortization. EBITDA is provided as an alternative
assessment of operating performance and is not intended to be a substitute
for GAAP measurements. Calculations may vary for other companies.
15
<PAGE>
1998 compared with 1997. Operating profit for the Company's drugstore segment
totaled $254 million in 1998 compared with $347 million for the prior year.
Sales grew at a strong pace throughout the year, increasing by 9.2 per cent for
comparable stores. Sales growth was fueled by a 15.0 per cent gain in comparable
pharmacy sales, which account for approximately 60 per cent of total store
sales. Non-pharmacy merchandise sales increased 1.5 per cent for the year, and
strengthened as the year progressed. Sales also benefited from the relocation of
175 stores to more convenient free-standing locations during the year; these
relocated stores typically generate sales growth of over 30 per cent.
Both 1998 and 1997 included charges related to the liquidation of nonconforming
merchandise resulting from the conversion of the former Thrift, Fay's, Kerr, and
certain acquired Rite Aid and Revco drugstores into the Eckerd name and format.
These charges totaled $98 million in 1998 and $45 million in 1997. Excluding
these charges, gross margin declined by 40 basis points in 1998. Gross margin
declines were principally attributable to a higher percentage of pharmacy sales,
especially managed care sales, which carry lower margins. Approximately 85 per
cent of pharmacy sales are processed through managed care providers. Gross
margin for non-pharmacy merchandise improved for the year. Gross margin includes
a LIFO charge of $45 million in 1998 compared with a $32 million charge last
year as a result of continuing inflation in drugstore merchandise, particularly
pharmaceuticals. SG&A expenses as a per cent of sales increased by 20 basis
points for the year, and were negatively impacted by additional staffing costs
in connection with the integration of the various drugstore formats during the
first half of the year. In the second half, expenses were leveraged.
1997 compared with 1996. The acquisition of Eckerd Corporation (Eckerd), which
was completed in February 1997, transformed the Company's drugstores from a $3
billion to a $9 billion operation. Due to the dramatic increase in the size of
the combined operation, management believes that it is more meaningful to
compare 1997 operating results to 1996 pro forma operating results, assuming the
acquisitions had occurred at the beginning of 1996. The following comments are
based upon such a comparison. Historical information is provided in the table on
the previous page for reference purposes only.
During 1997, Eckerd was heavily involved in the integration of the Company's
former drugstore operations into the Eckerd organization. Despite the
significant integration activities that were occurring throughout 1997,
operating profit increased to $347 million from $306 million in 1996, an
increase of $41 million. The improvement was principally related to increased
sales volumes and reduced SG&A expenses from the combined operations. Sales
growth was strong the entire year, increasing by 11.2 per cent on a 52-week
basis and 7.4 per cent on a comparable store basis. Sales improvement was driven
by increases in pharmacy sales. Pharmacy sales continue to be positively
impacted by growth in managed care sales, which account for approximately 80 per
cent of the prescription business.
Both 1997 and 1996 included charges related to the liquidation of nonconforming
merchandise resulting from the conversion of drugstores to the Eckerd name and
format. These charges totaled $45 million in 1997 and $31 million in 1996.
Excluding these charges, gross margin declined by 40 basis points as a per cent
of sales. The decline in gross margin per cent was primarily attributable to
grand reopening promotional activities for the converted regions and growth in
the managed care prescription business, which carries lower margins. Gross
margin included a $32 million LIFO charge compared with a $23 million charge in
1996, reflecting continued inflation in prescription drug prices. SG&A expenses
were well leveraged as a result of higher sales volumes and the elimination of
duplicate support functions. For the year, SG&A expenses improved by 40 basis
points as a per cent of sales.
16
<PAGE>
Direct Marketing
- --------------------------------------
($ in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Operating revenue
Insurance
premiums, net $ 872 $ 800 $ 711
Membership fees 65 50 37
Investment income 85 78 70
------------------------------------------
Total revenue 1,022 928 818
Claims and benefits (340) (332) (298)
Other operating
expenses(1) (449) (382) (334)
- --------------------------------------------------------------------------------
Operating profit $ 233 $ 214 $ 186
- --------------------------------------------------------------------------------
Revenue increase 10.1% 13.4% 20.3%
Operating profit increase 8.9% 15.1% 18.5%
Operating profit as a
per cent of revenue 22.8% 23.1% 22.7%
- --------------------------------------------------------------------------------
(1) Includes amortization of deferred acquisition costs of $195 million, $170
million, and $149 million, respectively.
In 1998, JCPenney Insurance Group changed its name to J. C. Penney Direct
Marketing Services, Inc. (Direct Marketing) to more properly reflect the nature
of its business - marketing both insurance and membership services.
Direct Marketing's operating profit has been consistently strong, totaling $233
million in 1998 compared with $214 million in 1997 and $186 million in 1996,
representing approximately 23 per cent of revenues in each year. Both revenue
and operating profit for Direct Marketing improved in 1998 for the eleventh
consecutive year. Total revenue exceeded $1 billion for the first time in 1998,
increasing from $928 million in 1997 and $818 million in 1996. The increase
during both 1998 and 1997 was principally related to health insurance premiums,
which account for approximately 70 per cent of total premiums, and which
increased by 11.7 per cent and 17.6 per cent, respectively. Revenue growth for
the three-year period is attributable to successfully maintaining and enhancing
marketing relationships with businesses for the sale of insurance products
throughout the United States and Canada, principally banks, oil companies, and
retailers. In 1998, Direct Marketing expanded its international operations when
it began marketing through business relationships in the United Kingdom and
initiated activity in Australia.
Membership services, which consist principally of benefits for dental, pharmacy,
vision and hearing, as well as services for travelers and motorists represent a
small but growing component of the Direct Marketing business.
Net interest expense and credit operations
- ----------------------------
($ in millions) 1998 1997 1996
- -------------------------------------------------------------
Revenue $ (702) $ (675) $ (650)
Bad debt expense 229 307 238
Operating expenses 342 334 331
Interest expense, net 611 581 359
- -------------------------------------------------------------
Net interest expense
and credit operations $ 480 $ 547 $ 278
90-day delinquency rate 3.0% 3.9% 3.7%
- -------------------------------------------------------------
Includes amounts related to the Company's retained interest in JCP Master Credit
Card Trust.
See page 42 for additional information.
Net interest expense and credit operations improved by $67 million in 1998
compared with 1997, principally as a result of declines in bad debt expenses.
Bad debt expense declined by $78 million for the year as a result of favorable
credit industry trends as well as the Company's efforts to tighten credit
underwriting standards to improve portfolio performance and reduce risk. At the
end of fiscal 1998, 90-day delinquencies were 3.0 per cent of receivables
compared with 3.9 per cent at the end of 1997. Higher revenues in 1998 reflect
the increase in owned customer receivables from $2,956 million to $3,406
million. Interest expense, net, including financing costs for receivables,
inventory, and capital, increased to $611 million from $581 million last year
due to higher borrowing levels.
Net interest expense and credit operations increased in 1997 compared to 1996,
principally as a result of rising bad debt on customer receivables and interest
expense on debt related to the drugstore acquisitions. While revenue increased
in 1997, primarily as a result of modifications that were made to credit terms
in selected states, it was more than offset by an increase of $69 million in bad
debt expense. Bad debt expense in both 1997 and 1996 was negatively impacted by
high delinquency rates and high levels of personal bankruptcies that were
affecting the entire credit industry. The 90-day delinquency rate was 3.9 per
cent at the end of 1997 compared with 3.7 per cent at the end of 1996. Interest
expense increased in 1997 primarily as a result of $3.0 billion of debt that was
issued in connection with the Eckerd acquisition.
17
<PAGE>
The Company has experienced a migration of credit sales from its proprietary
credit card to third-party cards over the past several years (see Supplemental
Data on page 42). The Company has not experienced any significant adverse
effects on total credit sales from the decline in proprietary card usage and
continues to successfully manage both its proprietary card levels and its
relationships with bankcard providers. The decline in receivable balances,
however, has had a positive impact on the Company's cash flow.
Income taxes. The effective income tax rate in 1998 decreased to 37.8 per cent
compared with 38.8 per cent in 1997 and 37.9 per cent in 1996.
F I N A N C I A l C O N D I T I O N
Cash flow from operating activities was $1,058 million in 1998 compared with
$1,218 million in 1997 and $382 million in 1996. Declines in receivable and
inventory levels had a positive impact on cash flow for the year. While net
income has remained relatively flat in recent years, cash flow has remained
strong as a result of the increases in non-cash charges, primarily related to
the Eckerd acquisition. 1998 cash flow from operations, adjusted for the effects
of receivables financing, was sufficient to fund substantially all of the
Company's operating needs - working capital, capital expenditures, and
dividends. Management expects cash flow to cover the Company's operating needs
for the foreseeable future.
Merchandise inventory. Total LIFO inventory was $6,031 million in 1998 compared
with $6,162 million in 1997 and $5,722 million in 1996. The increase in 1997 was
related to growth within Eckerd drugstores. FIFO merchandise inventory for
department stores and catalog was $4,082 million, a decrease of 3.7 per cent on
an overall basis and approximately two per cent for comparable stores compared
with 1997 levels as the Company continued to focus on improving its merchandise
procurement processes and increasing inventory turnover. Eckerd FIFO merchandise
inventory was $2,176 million, an increase of 1.3 per cent compared with the
prior year. It is anticipated that Eckerd inventories will grow as a result of
its store expansion plans and its strategy to relocate older strip center stores
to free-standing locations.
Properties. Property, plant, and equipment, net of accumulated depreciation,
totaled $5,458 million at January 30, 1999, compared with $5,329 million and
$5,014 million at the ends of fiscal 1997 and 1996, respectively.
At the end of 1998, the Company operated 1,148 JCPenney department stores,
comprising 115.3 million gross square feet. The decline in the store count over
the past two years was principally related to the closing of underperforming
stores that was a component of the Company's 1997 other charges. All stores
slated for closing had closed by the end of fiscal 1998. In addition, the
Company operated 2,756 Eckerd drugstores as of the end of fiscal 1998,
comprising 27.6 million square feet. Eckerd store counts have declined as a
result of closing underperforming and overlapping stores during the conversion
of former drugstore formats to Eckerd.
Capital expenditures
- ------------------------
($ in millions) 1998 1997 1996
- ------------------------------------------------------
Department stores and
catalog $ 420 $ 443 $ 636
Eckerd drugstores 256 341 103
Other corporate 20 26 51
------------------------------
Total $ 696 $ 810 $ 790
- ------------------------------------------------------
1998 capital spending levels for property, plant, and equipment declined for
both department stores and catalog and Eckerd drugstores. In 1998, the Company
spent approximately $150 million on existing department store locations compared
with approximately $200 million in both 1997 and 1996. It is expected that
capital spending for department stores and catalog will total approximately $300
million in 1999.
Capital spending for drugstores declined in 1998 by $85 million. Capital
spending levels in 1997 included additional capital requirements needed to
support the conversion of drugstores to the Eckerd name and format. During 1998,
Eckerd added 256 new, relocated, and acquired stores and expects to add an
additional 275 in 1999, excluding the Genovese acquisition. Capital spending in
1999 is projected at approximately $300 million, with the majority of the
spending related to the new and relocated stores.
Total capital spending for 1999 is currently projected at approximately $650
million.
18
<PAGE>
Acquisitions. The Company completed the acquisition of a majority interest in
Lojas Renner S.A. (Renner), a 21-store Brazilian department store chain, in
January 1999. The total purchase price of $139 million is being allocated to
assets acquired and liabilities assumed based on their estimated fair values.
The excess of the purchase price over fair value is expected to be $58 million
and is included in intangible assets in the consolidated balance sheets. The
acquisition is being accounted for under the purchase method. Renner is a
calendar year company, and therefore their results will be included with Company
results of operations beginning in fiscal 1999.
During fiscal 1998, Direct Marketing formed Quest Membership Services, Inc. and
acquired certain assets to expand its membership services operation to include
travel services. In addition, Direct Marketing acquired Insurance Consultants,
Inc. which strengthens its access to other business relationships. The total
purchase price for the two acquisitions was approximately $72 million.
Intangible assets. At the end of 1998, goodwill and other intangible assets,
net, totalled $2,933 million compared with $2,940 million in 1997 and $1,861
million in 1996. Intangible assets consist principally of favorable lease
rights, prescription files, software, trade name, and goodwill. They represent
the excess of the purchase price over the fair value of assets received in the
Company's drugstore acquisitions. The increase in 1997 was related to the
completion of the Eckerd acquisition in February 1997.
Reserves. At the end of 1998, the consolidated balance sheet included reserves
totaling $110 million which are included as a component of accounts payable and
accrued expenses and $25 million in receivables, net. These reserves were
established in connection with 1996 and 1997 restructuring charges, principally
those related to drugstore integration activities and the closing of
underperforming department stores. The reserves consisted principally of the
present value of future lease obligations for closed stores and for severance
and outplacement costs related to a reduction in force program. Reserve balances
were calculated based upon estimated costs to complete the various programs.
Actual costs were below the original estimates for the reduction in force
program and closing of underperforming stores. Consequently, reserves were
adjusted in the fourth quarter of 1998, resulting in a pre-tax credit of $22
million that is reported as other charges, net. Reserve balances were reduced by
$84 million in 1998 for cash payments made during the year. Also, in connection
with the Company's early retirement program, reserves were established for the
periodic future payments to be made under the Company's pension plans. These
reserves are included in pension liabilities which are discussed in Note 12 to
the consolidated financial statements, Retirement Plans, on page 32. Payments
for both lease obligations and pension benefits will be paid out over an
extended period of time. See Note 13, Other Charges, Net, on page 33 for
additional information.
Debt to capital
1998 1997 1996
- ---------------------------------------------------------------
Debt to capital per cent 62.7%* 60.4% 64.5%**
- ---------------------------------------------------------------
* Upon completion of the Genovese Drug Stores, Inc. acquisition, the debt to
capital ratio declined to 61.9 per cent.
** Upon completion of the Eckerd acquisition, the debt to capital ratio declined
to 60.1 per cent.
The Company's debt to capital per cent, assuming completion of the drugstore
acquisitions, has increased over the past three years. The Company expects the
debt to capital ratio to improve over the next several years.
During the fourth quarter of 1998, JCP Receivables, Inc., an indirect wholly
owned special purpose subsidiary of the Company, completed a public offering of
$650 million aggregate principal amount of 5.5 per cent Series E asset-backed
securities of the JCP Master Credit Card Trust. In addition, the Company retired
$449 million of debt at the normal maturity date during the year, including the
debt associated with the Company's ESOP. In 1997's first quarter, the Company
issued $3.0 billion of long-term debt, which principally represented a
conversion of short-term debt that had been issued in 1996 in connection with
the initial phase of the Eckerd acquisition. The average effective interest rate
on the debt issued in 1997 was 7.5 per cent and the average maturity was 30
years. Total debt, both on and off-balance-sheet, was $12,044 million at the end
of 1998 compared with $11,237 million in 1997 and $10,807 million in 1996.
During the past three years, the Company has issued 28.4 million shares of
common stock related to its drugstore acquisitions. The Company repurchased 5.0
million shares of its common stock in the fourth quarter of 1998 for $270
million and 7.5 million shares in 1996 for $366 million as part of previously
approved share repurchase programs. The Company has the authority to repurchase
an additional 5.0 million shares under these programs.
19
<PAGE>
Year 2000 readiness. The Year 2000 issue exists because many computer systems
store and process dates using only the last two digits of the year. Such
systems, if not changed, may interpret "00" as "1900" instead of the year
"2000." The Company has been working to identify and address Year 2000 issues
since January 1995. The scope of this effort includes internally developed
information technology systems, purchased and leased software, embedded systems,
and electronic data interchange transaction processing.
In October 1996, a companywide task force was formed to provide guidance to the
Company's operating and support departments and to monitor the progress of
efforts to address Year 2000 issues. The Company has also consulted with various
third parties, including, but not limited to, outside consultants, outside
service providers, infrastructure suppliers, industry groups, and other retail
companies and associations to develop industrywide approaches to the Year 2000
issue, to gain insights to problems, and to provide additional perspectives on
solutions. Year 2000 readiness work was more than 90 per cent complete as of
January 30, 1999. Since January 1999, the Company has been retesting all systems
critical to the Company's core businesses. The Company has also focused on the
Year 2000 readiness of its suppliers and service providers, both independently
and in conjunction with the National Retail Federation.
Despite the significant efforts to address Year 2000 concerns, the Company could
potentially experience disruptions to some of its operations, including those
resulting from noncompliant systems used by third-party business and
governmental entities. The Company has developed contingency plans to address
potential Year 2000 disruptions. These plans include business continuity plans
that address accessibility and functionality of Company facilities as well as
steps to be taken if an event causes failure of a system critical to the
Company's core business activities.
Through the end of fiscal 1998, the Company had incurred approximately $32
million to achieve Year 2000 compliance, including approximately $9 million
related to capital projects. The Company's projected cost for Year 2000
remediation is currently estimated to be $46 million. Total costs have not had,
and are not expected to have, a material impact on the Company's financial
results.
Inflation and changing prices. Inflation and changing prices have not had a
significant impact on the Company in recent years due to low levels of
inflation.
Subsequent events. In February 1999, the Company redeemed approximately $199
million principal amount of 9.25 per cent of Eckerd notes that had an original
maturity date in 2004.
On March 1, 1999, the Company completed the acquisition of Genovese Drug Stores,
Inc. (Genovese), a 141-drugstore chain with locations in New York, New Jersey,
and Connecticut, with 1998 sales of approximately $800 million. The acquisition
was accomplished through an exchange of approximately 9.6 million shares of
JCPenney common stock for the outstanding shares of Genovese, and the conversion
of outstanding Genovese stock options into approximately 550 thousand common
stock options of the Company. The total value of the transaction, including the
assumption of approximately $65 million of debt, was approximately $420 million.
The purchase price will be allocated to assets acquired and liabilities assumed
based on their estimated fair values, as well as intangible assets acquired,
primarily prescription files and favorable lease rights. The excess purchase
price over the fair value of assets acquired and liabilities assumed will be
classified as goodwill and amortized over 40 years. The acquisition will be
accounted for under the purchase method.
20
<PAGE>
COMPANY STATEMENT ON FINANCIAL INFORMATION
The Company is responsible for the information presented in this Annual Report.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and present fairly, in all material
respects, the Company's results of operations, financial position, and cash
flows. Certain amounts included in the consolidated financial statements are
estimated based on currently available information and judgment as to the
outcome of future conditions and circumstances. Financial information elsewhere
in this Annual Report is consistent with that in the consolidated financial
statements.
The Company's system of internal controls is supported by written policies and
procedures and supplemented by a staff of internal auditors. This system is
designed to provide reasonable assurance, at suitable costs, that assets are
safeguarded and that transactions are executed in accordance with appropriate
authorization, and are recorded and reported properly. The system is continually
reviewed, evaluated, and where appropriate, modified to accommodate current
conditions. Emphasis is placed on the careful selection, training, and
development of professional managers.
An organizational alignment that is premised upon appropriate delegation of
authority and division of responsibility is fundamental to this system.
Communication programs are aimed at assuring that established policies and
procedures are disseminated and understood throughout the Company.
The consolidated financial statements have been audited by independent auditors
whose report appears to the right. Their audit was conducted in accordance with
generally accepted auditing standards, which include the consideration of the
Company's internal controls to the extent necessary to form an independent
opinion on the consolidated financial statements prepared by management.
The Audit Committee of the Board of Directors is composed solely of directors
who are not officers or employees of the Company. The Audit Committee's
responsibilities include recommending to the Board for stockholder approval the
independent auditors for the annual audit of the Company's consolidated
financial statements. The Committee also reviews the independent auditors' audit
strategy and plan, scope, fees, audit results, and non-audit services and
related fees; internal audit reports on the adequacy of internal controls; the
Company's ethics program; status of significant legal matters; the scope of the
internal auditors' plans and budget and results of their audits; and the
effectiveness of the Company's program for correcting audit findings. The
independent auditors and Company personnel, including internal auditors, meet
periodically with the Audit Committee to discuss auditing and financial
reporting matters.
/s/ Donald A. McKay
Donald A. McKay
Executive Vice President and Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of J. C. Penney Company, Inc.:
We have audited the accompanying consolidated balance sheets of J. C. Penney
Company, Inc. and Subsidiaries as of January 30, 1999, and January 31, 1998, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three-year period ended January 30, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of J. C. Penney
Company, Inc. and Subsidiaries as of January 30, 1999, and January 31, 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended January 30, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
KPMG LLP
Dallas, Texas
February 25, 1999
21
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
J. C. Penney Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- ------------------------------------------------------
($ in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue
Retail sales, net $ 29,656 $ 29,618 $ 22,653
Direct marketing revenue 1,022 928 818
--------------------------------------------------
Total revenue 30,678 30,546 23,471
Costs and expenses
Cost of goods sold 21,761 21,385 16,058
Drugstore inventory integration losses 98 45 31
--------------------------------------------------
Total cost of goods sold 21,859 21,430 16,089
Selling, general, and administrative expenses 6,530 6,473 5,282
Costs and expenses of Direct Marketing 789 714 632
Other unallocated (26) (39) (45)
Net interest expense and credit operations 480 547 278
Amortization of intangible assets 113 117 23
Other charges, net (22) 379 303
--------------------------------------------------
Total costs and expenses 29,723 29,621 22,562
--------------------------------------------------
Income before income taxes 955 925 909
Income taxes 361 359 344
- ---------------------------------------------------------------------------------------------------------
Net income $ 594 $ 566 $ 565
- ---------------------------------------------------------------------------------------------------------
Earnings per common share
- ------------------------------------------------------ Average
(in millions, except per share data) Income Shares EPS
- ---------------------------------------------------------------------------------------------------------
1998
Net income $ 594
Less preferred stock dividends (38)
---------------------------------------------------
Basic EPS 556 253 $ 2.20
Stock options and convertible preferred stock 37 18
- ---------------------------------------------------------------------------------------------------------
Diluted EPS $ 593 271 $ 2.19
- ---------------------------------------------------------------------------------------------------------
1997
Net income $ 566
Less preferred stock dividends (40)
---------------------------------------------------
Basic EPS 526 247 $ 2.13
Stock options and convertible preferred stock 36 21
- ---------------------------------------------------------------------------------------------------------
Diluted EPS $ 562 268 $ 2.10
- ---------------------------------------------------------------------------------------------------------
1996
Net income $ 565
Less preferred stock dividends (40)
---------------------------------------------------
Basic EPS 525 226 $ 2.32
Stock options and convertible preferred stock 35 22
- ---------------------------------------------------------------------------------------------------------
Diluted EPS $ 560 248 $ 2.25
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to the Consolidated Financial Statements on pages 26 through 39.
22
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
J. C. Penney Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Accumulated
Guaranteed Other Total
- ----------------------- Common Preferred LESOP Reinvested Comprehensive Stockholders'
($ in millions) Stock Stock Obligation Earnings Income/(Loss)(1) Equity
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
January 27, 1996 $ 1,112 $ 603 $ (228) $ 4,339 $ 58 $ 5,884
- ------------------------------------------------------------------------------------------------------------
Net income 565 565
Net unrealized change
in investments (18) (18)
Currency translation
adjustments (3) (3)
-----------------------------------------------------------------------------------
Total comprehensive
income 565 (21) 544
Dividends declared (511) (511)
Common stock issued 350 350
Common stock retired (46) (320) (366)
Preferred stock retired (35) (35)
LESOP payment 86 86
- ------------------------------------------------------------------------------------------------------------
January 25, 1997 1,416 568 (142) 4,073 37 5,952
- ------------------------------------------------------------------------------------------------------------
Net income 566 566
Net unrealized change
in investments 14 14
Currency translation
adjustments (3) (3)
-----------------------------------------------------------------------------------
Total comprehensive
income 566 11 577
Dividends declared (573) (573)
Common stock issued 1,350 1,350
Preferred stock retired (42) (42)
LESOP payment 93 93
- ------------------------------------------------------------------------------------------------------------
January 31, 1998 2,766 526 (49) 4,066 48 7,357
- ------------------------------------------------------------------------------------------------------------
Net income 594 594
Net unrealized change
in investments (1) (1)
Currency translation
adjustments(2) (61) (61)
-----------------------------------------------------------------------------------
Total comprehensive
income 594 (62) 532
Dividends declared (588) (588)
Common stock issued 140 140
Common stock retired (56) (214) (270)
Preferred stock retired (51) (51)
LESOP payment 49 49
- ------------------------------------------------------------------------------------------------------------
January 30, 1999 $ 2,850 $ 475 $ - $ 3,858 $ (14) $ 7,169
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net unrealized changes in investment securities are shown net of deferred
taxes of $36 million, $39 million, and $30 million, respectively. A deferred
tax asset has not been established for currency translation adjustments.
(2) 1998 currency translation adjustments include $(49) million associated with
assets acquired and liabilities assumed in the purchase of Renner.
See Notes to the Consolidated Financial Statements on pages 26 through 39.
23
<PAGE>
CONSOLIDATED BALANCE SHEETS
J. C. Penney Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
($ in millions) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash (including short-term investments of $95 and $208) $ 96 $ 287
Retained interest in JCP Master Credit Card Trust 415 1,073
Receivables, net (bad debt reserve of $149 and $135) 4,415 3,819
Merchandise inventory (including LIFO reserves of $227 and $225) 6,031 6,162
Prepaid expenses 168 143
----------------------------------
Total current assets 11,125 11,484
Property, plant, and equipment
Land and buildings 3,109 2,993
Furniture and fixtures 4,045 4,089
Leasehold improvements 1,179 1,192
Accumulated depreciation (2,875) (2,945)
----------------------------------
Property, plant, and equipment, net 5,458 5,329
Investments, principally held by Direct Marketing 1,961 1,774
Deferred policy acquisition costs 847 752
Goodwill and other intangible assets, net (accumulated
amortization of $221 and $108) 2,933 2,940
Other assets 1,314 1,214
- ---------------------------------------------------------------------------------------------------------
Total Assets $ 23,638 $ 23,493
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 3,465 $ 4,059
Short-term debt 1,924 1,417
Current maturities of long-term debt 438 449
Deferred taxes 143 116
----------------------------------
Total current liabilities 5,970 6,041
Long-term debt 7,143 6,986
Deferred taxes 1,517 1,325
Insurance policy and claims reserves 946 872
Other liabilities 893 912
----------------------------------
Total Liabilities 16,469 16,136
Stockholders' Equity
Preferred stock: authorized, 25 million shares; issued and outstanding,
0.8 million and 0.9 million shares Series B ESOP Convertible Preferred 475 526
Guaranteed LESOP obligation - (49)
Common stock, par value 50 cents: authorized, 1,250 million shares;
issued and outstanding 250 million and 251 million shares 2,850 2,766
Reinvested earnings 3,858 4,066
Accumulated other comprehensive income/(loss) (14) 48
----------------------------------
Total Stockholders' Equity 7,169 7,357
- ---------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 23,638 $ 23,493
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to the Consolidated Financial Statements on pages 26 through 39.
24
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
J. C. Penney Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- ----------------------------------------------------
($ in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 594 $ 566 $ 565
Gain on the sale of banking assets - (52) -
Other charges, net (22) 371 310
Depreciation and amortization, including
intangible assets 637 584 381
Deferred taxes 219 1 (18)
Change in cash from:
Customer receivables 258 215 (172)
Inventory, net of trade payables 64 (395) (521)
Current taxes payable (171) 116 31
Other assets and liabilities, net (521)(1) (188) (194)
-----------------------------------------------------
1,058 1,218 382
- ---------------------------------------------------------------------------------------------------------
Investing Activities
Capital expenditures (744) (824) (704)
Proceeds from the sale of banking assets, net - 276 -
Acquisitions(2) (247) - (1,776)
Purchase of investment securities (611) (401) (471)
Proceeds from the sale of investment securities 447 252 493
-----------------------------------------------------
(1,155) (697) (2,458)
- ---------------------------------------------------------------------------------------------------------
Financing Activities
Change in short-term debt 507 (2,533) 2,401
Proceeds from the issuance of long-term debt 644 2,990 596
Payment of long-term debt (478) (343) (133)
Common stock issued, net 89 79 33
Common stock purchased and retired (270) - (366)
Dividends paid, preferred and common (586) (558) (497)
-----------------------------------------------------
(94) (365) 2,034
- ---------------------------------------------------------------------------------------------------------
Net Increase/(Decrease) in Cash and
Short-Term Investments (191) 156 (42)
Cash and short-term investments at beginning of year 287 131 173
- ---------------------------------------------------------------------------------------------------------
Cash and Short-Term Investments at End of Year $ 96 $ 287 $ 131
- ---------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
Interest paid $ 649 $ 571 $ 390
Interest received 45 71 60
Income taxes paid 307 225 356
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) The increase in other assets and liabilities, net, is principally related to
increases in Eckerd receivables and payments related to reserves established
in 1997.
(2) Reflects total cash changes related to acquisitions.
Non-cash transactions: In 1997, the Company issued 23.2 million shares of common
stock having a value of $1.3 billion to complete the acquisition of Eckerd. In
1996, the Company issued 5.2 million shares of common stock having a value of
$278 million for the acquisition of Fay's Incorporated.
See Notes to the Consolidated Financial Statements on pages 26 through 39.
25
<PAGE>
Notes to the Consolidated Financial Statements
1 Summary of Accounting Policies
2 Retained Interest in JCP Master Credit Card Trust
3 Investments and Fair Value of Financial Instruments
4 Accounts Payable and Accrued Expenses
5 Short-Term Debt
6 Long-Term Debt
7 Capital Stock
8 Stock-Based Compensation
9 Interest Expense, Net
10 Lease Commitments
11 Advertising Costs
12 Retirement Plans
13 Other Charges, Net
14 Taxes
15 Segment Reporting
26
<PAGE>
1 SUMMARY OF ACCOUNTING POLICIES
Basis of presentation. Certain prior year amounts have been reclassified to
conform to the current year presentation.
Basis of consolidation. The consolidated financial statements present the
results of J. C. Penney Company, Inc. and its subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Definition of fiscal year. The Company's fiscal year ends on the last Saturday
in January. Fiscal 1998 ended January 30, 1999; fiscal 1997 ended January 31,
1998; and fiscal 1996 ended January 25, 1997. Fiscal 1997 was a 53-week year;
fiscal 1998 and 1996 were 52-week years. The accounts of Direct Marketing and
Renner are on a calendar-year basis.
Retail sales, net. Retail sales include merchandise and services, net of
returns, and exclude all taxes.
Direct marketing revenue. Premium income for life insurance contracts is
recognized as income when due. Premium income for accident and health, and
credit insurance and membership services income is reported as earned over the
coverage period. Premiums and fees paid in advance are deferred and recognized
as income over the coverage period.
Earnings per common share. Basic earnings per share is computed by dividing net
income less dividend requirements on the Series B ESOP convertible preferred
stock, net of tax, by the weighted average common stock outstanding. Diluted
earnings per share assumes the exercise of stock options and the conversion of
the Series B ESOP convertible preferred stock into the Company's common stock.
Additionally, it assumes adjustment of net income for the additional cash
requirements, net of tax, needed to fund the ESOP debt service resulting from
the assumed replacement of the preferred dividends with common stock dividends.
Cash and short-term investments. The Company's short-term investments are
comprised principally of commercial paper which has a maturity at the
acquisition date of less than three months. All other securities are classified
as investments on the consolidated balance sheets.
Accounts receivable. The Company's policy is to write off accounts when the
scheduled minimum payment has not been received for six consecutive months, if
any portion of the balance is more than 12 months past due, or if it is
otherwise determined that the customer is unable to pay. Collection efforts
continue subsequent to write-off, and recoveries are applied as a reduction of
bad debt losses.
Merchandise inventory. Substantially all merchandise inventory is valued at the
lower of cost (last-in, first-out) or market, determined by the retail method.
The Company determines the lower of cost or market on an aggregated basis for
similar types of merchandise. The Company applies internally developed indices
to measure increases and decreases in its own retail prices.
Depreciation and amortization. All long-lived assets are amortized on a
straight-line basis over their respective useful lives. The primary useful life
for buildings is 50 years, and ranges from three to 20 years for furniture and
equipment. Improvements to leased premises are amortized over the expected term
of the lease or their estimated useful lives, whichever is shorter. Trade name
and goodwill are generally amortized over 40 years. Other intangible assets,
whose fair value is determined at the date of acquisition, are amortized over
periods ranging from five to seven years.
Impairment of assets. The Company assesses the recoverability of asset values,
including goodwill and other intangible assets, on a periodic basis by comparing
expected cash flows to net book value. Impaired assets are written down to
estimated fair value.
Deferred charges. Deferred policy acquisition and advertising costs, principally
solicitation and marketing costs and commissions, incurred by Direct Marketing
to secure new business are amortized over the expected premium-paying period of
the related policies and over the expected period of benefits for memberships.
Capitalized software costs. Costs associated with the acquisition or development
of software for internal use are capitalized and amortized over the expected
useful life of the software. The amortization period generally ranges from three
to 10 years.
Investments. The Company's investments are classified as available-for-sale and
are carried at fair value. Changes in unrealized gains and losses are included
in other comprehensive income, net of applicable income taxes.
Insurance policy reserves. Liabilities established by Direct Marketing for
future policy benefits are computed using a net level premium method including
assumptions as to investment yields, mortality, morbidity, and persistency based
on the Company's experience.
Advertising. Costs for newspaper, television, radio, and other media advertising
are expensed as incurred. Catalog book preparation and printing costs, which are
considered direct response advertising, are charged to expense over the life of
the catalog, not to exceed six months.
27
<PAGE>
Pre-opening expenses. Costs associated with the opening of new stores are
expensed in the period incurred.
Derivative financial instruments. The Company selectively uses non-leveraged,
off-balance-sheet derivative instruments to manage its market and interest rate
risk, and does not hold derivative positions for trading purposes. The current
derivative position consists of a non-leveraged, off-balance-sheet interest rate
swap which is accounted for by recording the net interest received or paid as an
adjustment to interest expense on a current basis. Gains or losses resulting
from market movements are not recognized.
Use of estimates. Certain amounts included in the Company's consolidated
financial statements are based upon estimates. Actual results may differ from
these estimates.
New accounting rules. The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (FAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, in June 1998. The new rules are effective
for quarters beginning after June 15, 1999. The Company has a limited exposure
to derivative products and does not expect these new rules to have a material
impact on reported results.
The American Institute of Certified Public Accountants (AICPA) issued Statement
of Position (SOP) No. 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, in March 1998. The Company adopted the
new rules in 1998 and capitalized approximately $20 million of software
development costs during the year. Due to the significance of systems
development costs, it is expected that capitalized software costs will increase
over the next several years.
The AICPA also issued SOP No. 98-5, Reporting on the Costs of Start-Up
Activities, in April 1998. The Company adopted the new accounting rules in 1998.
The new rules require that start-up costs, including store pre-opening expenses,
be expensed as incurred. The Company's existing accounting policy conforms with
the new rules; accordingly, there was no impact on the Company's results of
operation.
2 RETAINED INTEREST IN JCP MASTER CREDIT CARD TRUST
The Company has transferred portions of its customer receivables to a trust
which, in turn, has sold certificates in public offerings representing undivided
interests in the trust. As of January 30, 1999, $1,143 million of the
certificates were outstanding and the balance of the receivables in the trust
was $1,578 million. The Company owns the remaining undivided interest in the
trust not represented by the certificates.
The retained interest in the trust is accounted for as an investment in
accordance with FAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. The carrying value of $415 million in 1998 and $1,073 million
in 1997 includes a valuation reserve of $15 million and $40 million,
respectively. Due to the short-term nature of this investment, the carrying
value approximates fair value.
3 INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
1998 1997
- -----------------------------------------------------------------------------
Amortized Fair Amortized Fair
($ in millions) Cost Value Cost Value
- -----------------------------------------------------------------------------
Fixed income securities $ 1,269 $ 1,322 $ 1,126 $ 1,167
Asset-backed certificates 431 449 431 459
Equity securities 159 190 113 148
- -----------------------------------------------------------------------------
Total $ 1,859 $ 1,961 $ 1,670 $ 1,774
- -----------------------------------------------------------------------------
Investments. The Company's investments are recorded at fair value based on
quoted market prices and consist principally of fixed income and equity
securities, substantially all of which are held by Direct Marketing, and
asset-backed certificates. The majority of the fixed income securities mature
during the next ten years. Unrealized gains and losses are included in
stockholders' equity, net of tax, and are shown as a component of other
comprehensive income.
Financial liabilities. Financial liabilities are recorded in the consolidated
balance sheets at historical cost, which approximates fair value. Such fair
values are not necessarily indicative of actual market transactions. The fair
value of long-term debt, excluding capital leases, is based on the interest rate
environment and the Company's credit rating. All long-term debt is fixed rate
and therefore the Company is not exposed to fluctuations in market rates except
to the extent described in the following paragraph.
Derivative financial instruments. The Company's current derivative position
consists of one interest rate swap which was entered into in connection with the
issuance of asset-backed certificates in 1990. This swap helps to protect
certificate holders by reducing the effects of an early amortization of the
28
<PAGE>
principal. According to the terms of the swap, the Company pays fixed interest
at 9.625 per cent and receives variable interest based on floating commercial
paper rates. The Company's total exposure resulting from the swap is not
material. As discussed in Note 1, the net amount paid or received is included in
interest expense.
Concentrations of credit risk. The Company has no significant concentrations of
credit risk. Individual accounts comprising accounts receivable are widely
dispersed and investments are well diversified.
4 ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- -------------------------------------------------
($ in millions) 1998 1997
- -------------------------------------------------------------------------
Trade payables $ 1,496 $ 1,551
Accrued salaries, vacation, and bonus 444 487
Taxes payable 232 486
Interest payable 165 165
Common dividends payable 140 136
Other(1) 988 1,234
- -------------------------------------------------------------------------
Total $ 3,465 $ 4,059
- -------------------------------------------------------------------------
(1) Includes $110 million and $216 million for 1998 and 1997, respectively,
related to other charges, principally future lease obligations.
5 SHORT-TERM DEBT
- -------------------------------------------------
($ in millions) 1998 1997
- -------------------------------------------------------------------------
Commercial paper $ 1,924 $ 1,417
Average interest rate at year-end 5.1% 5.6%
- -------------------------------------------------------------------------
Committed bank credit facilities available to the Company as of January 30, 1999
totaled $3.0 billion. The facilities, as amended and restated in 1998, support
the Company's short-term borrowing program and are comprised of a $1.5 billion,
364-day revolver and a $1.5 billion, five-year revolver. The 364-day revolver
includes a $750 million seasonal credit line for the August to January period,
allowing the Company to match its seasonal borrowing requirements. None of the
borrowing facilities was in use as of January 30, 1999.
The Company also has $910 million of uncommitted credit lines in the form of
letters of credit with seven banks to support its direct import merchandise
program. As of January 30, 1999, $280 million of letters of credit issued by the
Company were outstanding.
6 LONG-TERM DEBT
Jan. 30, 1999 Jan. 31, 1998
- ----------------------- Avg. Avg.
($ in millions) Rate Balance Rate Balance
- ------------------------------------------------------------
Notes and debentures
Due Year 1 8.0% $ 424 5.4% $ 400
Due Year 2 6.7% 625 6.9% 225
Due Year 3 9.1% 250 6.7% 625
Due Year 4 7.5% 1,100 9.1% 250
Due Year 5 5.8% 1,000 7.5% 1,100
Due 6-10 years 8.0% 1,441 7.8% 1,760
Due 11-15 years 9.0% 125 8.0% 325
Due 16-20 years 7.6% 767 7.7% 780
Due 21-30 years 7.5% 875 7.5% 887
Due thereafter 7.5% 900 7.5% 900
-------------------------------------
Total notes and
debentures 7.4% 7,507 7.5% 7,252
Guaranteed LESOP
notes, due 1998 - 49
Capital lease
obligations and other 74 134
Less current
maturities (438) (449)
- ------------------------------------------------------------
Total long-term debt $ 7,143 $ 6,986
- ------------------------------------------------------------
During 1998, JCP Receivables, Inc., an indirect wholly owned special purpose
subsidiary of the Company, completed a public offering of $650 million aggregate
principal amount of Series E asset-backed certificates of JCPenney Master Credit
Card Trust. The certificates have a maturity of five years and an interest rate
of 5.5 per cent. This transaction did not meet the criteria for sale accounting
under FAS No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities, and accordingly it was recorded as a secured
borrowing by the Company. Proceeds from the offering were used for general
corporate purposes. In 1997, the Company issued $3.0 billion of debt in
connection with its drugstore acquisitions. These notes and debentures had an
average maturity of 30 years and an average interest rate of 7.5 per cent. All
notes and debentures have similar characteristics regardless of due date and
therefore are grouped by maturity date.
29
<PAGE>
7 CAPITAL STOCK
At January 30, 1999, there were approximately 56 thousand stockholders of
record. On a combined basis, the Company's savings plans, including the
Company's employee stock ownership plan (ESOP), held 43.4 million shares of
common stock, or 16.3 per cent of the Company's common shares after giving
effect to the conversion of preferred stock.
Common stock. The Company has authorized 1,250 million shares, par value $.50;
250 million shares were issued and outstanding as of January 30, 1999, and 251
million shares were issued and outstanding as of January 31, 1998.
Preferred stock. The Company has authorized 25 million shares; 792 thousand
shares of Series B ESOP Convertible Preferred Stock were issued and outstanding
as of January 30, 1999, and 876 thousand shares were issued and outstanding as
of January 31, 1998. Each share is convertible into 20 shares of the Company's
common stock at $30 per common share. Dividends are cumulative and are payable
semi-annually at a rate of $2.37 per common share equivalent, a yield of 7.9 per
cent. Shares may be redeemed at the option of the Company or the ESOP under
certain circumstances. The redemption price may be satisfied in cash or common
stock or a combination of both, at the Company's sole discretion.
Preferred stock purchase rights. In March 1999, the Board of Directors declared
a dividend distribution of one preferred stock purchase right on each
outstanding share of common stock in connection with the redemption of the
Company's then existing preferred stock purchase rights program. These rights
entitle the holder to purchase, for each right held, 1/1000 of a share of Series
A Junior Participating Preferred Stock at a price of $140. The rights are
exercisable by the holder upon the occurrence of certain events and are
redeemable by the Company under certain circumstances as described by the rights
agreement. The rights agreement contains a three-year independent director
evaluation provision. This "TIDE" feature provides that a committee of the
Company's independent directors will review the rights agreement at least every
three years and, if they deem it appropriate, may recommend to the Board a
modification or termination of the rights agreement.
8 STOCK-BASED COMPENSATION
The Company has a stock-based compensation plan which was approved by
stockholders in 1997. The plan reserved 14 million shares of common stock for
issuance to plan participants upon the exercise of options over the 10-year term
of the plan. Approximately 2,000 employees, comprised principally of selected
management employees, are eligible to participate. Both the number of shares and
the exercise price, which is based on the average market price, are fixed at the
date of grant and have a maximum term of 10 years. The plan also provides for
grants of stock options and stock awards to outside members of the Board of
Directors. Shares acquired by such directors are not transferable until a
director terminates service.
The Company accounts for stock-based compensation under the provisions of APB
Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, net
income and earnings per share shown in the consolidated statements of income
appearing on page 22 do not reflect any compensation cost for the Company's
fixed stock options. In accordance with FAS No. 123, Accounting for Stock-Based
Compensation, the fair value of each fixed option granted is estimated on the
date of grant using the Black-Scholes option pricing model, as follows:
Option assumptions
1998 1997 1996
- ----------------------------------------------------------
Dividend yield 3.8% 4.0% 3.9%
Expected volatility 20.5% 21.3% 22.3%
Risk-free interest rate 5.7% 6.3% 5.6%
Expected option term 6 years 6 years 5 years
Fair value per share of
options granted $ 13.66 $ 9.76 $ 8.88
- ----------------------------------------------------------
Compensation expense recorded under FAS No. 123 would have been approximately
$21 million in 1998 and $11 million in 1997 and 1996, reducing earnings per
share by eight cents in 1998, and approximately four cents in the other two
years. The following table summarizes the status of the Company's fixed stock
option plans for the years ended January 30, 1999, January 31, 1998, and January
25, 1997:
30
<PAGE>
Options
<TABLE>
<CAPTION>
- --------------------------------
(shares in thousands; price 1998 1997 1996
is weighted average) Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year 7,583 $ 40 8,633 $ 36 8,867 $ 33
Granted 1,643 71 1,413 45 1,266 48
Exercised (2,100) (36) (2,347) (30) (1,427) (27)
Expired and cancelled (154) (61) (116) (48) (73) (42)
----------------------------------------------------------------------------
Outstanding at end of year 6,972 48 7,583 40 8,633 36
Exercisable at end of year 5,418 41 6,428 38 7,419 35
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Options as of January 30, 1999
<TABLE>
<CAPTION>
Outstanding Exercisable
- ----------------------------------------------------------------------------------------------------------
(shares in thousands; price and Remaining
remaining term are weighted averages) Shares Price Term (Yrs.) Shares Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Under $25 83 $ 9 4.6 83 $ 9
$25-$35 1,761 28 2.3 1,761 28
$35-$45 998 42 5.7 980 42
$45-$55 1,842 48 7.6 1,842 48
Over $55 2,288 66 8.2 752 55
- ----------------------------------------------------------------------------------------------------------
Total 6,972 $ 48 6.0 5,418 $ 41
- ----------------------------------------------------------------------------------------------------------
</TABLE>
9 INTEREST EXPENSE, NET
- ----------------------
($ in millions) 1998 1997 1996
- ---------------------------------------------------
Short-term debt $ 106 $ 121 $ 102
Long-term debt 557 527 312
Other, net* (52) (67) (55)
- ---------------------------------------------------
Interest expense, net $ 611 $ 581 $ 359
- ---------------------------------------------------
* Includes $39 million in 1998 and $34 million in 1997 and 1996 for interest
income from the Company's investment in asset-backed certificates.
10 LEASE COMMITMENTS
The Company conducts the major part of its operations from leased premises that
include retail stores, warehouses, offices, and other facilities. Almost all
leases will expire during the next 20 years; however, most leases will be
renewed or replaced by leases on other premises. Rent expense for real property
operating leases totaled $585 million in 1998, $541 million in 1997, and $333
million in 1996, including contingent rent based on sales of $66 million, $72
million, and $48 million for the three years, respectively.
The Company also leases data processing equipment and other personal property
under operating leases of primarily three to five years. Rent expense for
personal property leases was $123 million in 1998, $126 million in 1997, and
$106 million in 1996.
Future minimum lease payments for noncancelable operating and capital leases,
net of subleases, as of January 30, 1999 were:
- ------------------------------
($ in millions) Operating Capital
- --------------------------------------------------------
1999 $ 565 $ 11
2000 510 11
2001 440 11
2002 408 6
2003 384 1
Thereafter 2,841 -
- --------------------------------------------------------
Total minimum lease payments $ 5,148 $ 40
Present value $ 2,715 $ 35
Weighted average interest rate 10% 10%
- --------------------------------------------------------
Minimum lease payments are shown net of estimated executory costs, principally
real estate taxes, maintenance, and insurance.
31
<PAGE>
11 ADVERTISING COSTS
Advertising costs consist principally of newspaper, television, radio, and
catalog book costs. In 1998, the total cost of advertising was $1,077 million
compared with $977 million in 1997, and $988 million in 1996. The "other assets"
section of the consolidated balance sheets includes deferred catalog book costs
of $87 million as of January 30, 1999, and $89 million as of January 31, 1998.
12 RETIREMENT PLANS
The Company's retirement plans consist principally of a noncontributory pension
plan, a noncontributory supplemental retirement program for certain management
associates, a contributory medical and dental plan, and a savings plan,
including a 401(k) plan and an employee stock ownership plan. In addition, in
1998, the Company adopted two nonqualified savings plans. Pension plan assets
are invested in a balanced portfolio of equity and debt securities managed by
third party investment managers. In addition, Eckerd has a noncontributory
pension plan. As of January 1, 1999, all Eckerd retirement benefit plans were
frozen and all employees began to accrue benefits under the Company's retirement
plans. The following tables include the benefit obligation related to the
Company's early retirement program (see Note 13, page 33, for additional
information). The cost of these programs and the December 31 balances of plan
assets and obligations are shown below:
Expense
- -----------------------------
($ in millions) 1998 1997 1996
- -------------------------------------------------------
Pension and health care
Service cost $ 76 $ 68 $ 73
Interest cost 221 200 186
Projected return on
assets (283) (488) (386)
Net amortization 14 248 174
--------------------------
28 28 47
Savings plan expense 76 71 56
- -------------------------------------------------------
Total retirement plans $ 104 $ 99 $ 103
- -------------------------------------------------------
Assumptions
1998 1997 1996
- -------------------------------------------------------
Discount rate 6.75% 7.25% 8.0%
Expected return on
plan assets 9.5% 9.5% 9.5%
Salary progression rate 4.0% 4.0% 4.0%
Health care trend rate 7.0% 7.0% 7.0%
- -------------------------------------------------------
Assets and obligations
Pension plans*
- ------------------------------------
($ in millions) 1998 1997
- -------------------------------------------------------
Projected benefit obligation
Beginning of year $ 2,749 $ 2,187
Service and interest cost 273 243
Actuarial (gain)/loss 184 400
Benefits paid (200) (210)
Amendments and other - 129
- -------------------------------------------------------
End of year 3,006 2,749
Fair value of plan assets
Beginning of year 3,064 2,735
Company contributions 32 29
Net gains/(losses) 497 510
Benefits paid (200) (210)
- -------------------------------------------------------
End of year 3,393 3,064
Excess of fair value over
projected benefits 387 315
Unrecognized gains
and prior service cost 75 125
- -------------------------------------------------------
Prepaid pension cost $ 462 $ 440
- -------------------------------------------------------
* Includes supplemental retirement plan.
Medical and dental
- -----------------------------------
($ in millions) 1998 1997
- -------------------------------------------------------
Accumulated benefit obligation $ 334 $ 335
Net unrecognized losses 10 13
- -------------------------------------------------------
Net medical and dental liability $ 344 $ 348
- -------------------------------------------------------
A one per cent change in the health care trend rate would change the accumulated
benefit obligation and expense by approximately $24 million and $2 million,
respectively.
32
<PAGE>
13 OTHER CHARGES, NET
During 1996 and 1997, the Company recorded other charges principally related to
drugstore integration activities, department store closings and FAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of (FAS 121), impairments, and early retirements and reduction in
force programs. The following tables provide a summary of the charges by year
and by category as well as a roll forward of reserves that were established for
certain of the charges.
1996 Charges
<TABLE>
<CAPTION>
1996
-------------------------------------------------
- -------------------------------------------------------- Cash Other Y/E
($ in millions) Expense Outlays Changes Reserve
- ---------------------------------------------------------------------------------------------------------
Department stores and catalog
Reduction in force $ 11 $ (11) $ - $ -
- ---------------------------------------------------------------------------------------------------------
Eckerd drugstores
FAS 121 impairments and loss on the
divestiture of drugstore assets(1) 174 - (174) -
Future lease obligations and severance(2) 69 - - 69
Allowance for notes receivable(3) - - 25 25
Headquarters severance(2) 17 - - 17
Other(2) 32 (12) (16) 4
-------------------------------------------------
292 (12) (165) 115
- ---------------------------------------------------------------------------------------------------------
Total $ 303 $ (23) $ (165) $ 115
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
1996 | 1997 | 1998
-----------|--------------------------------|-----------------------------------
- ---------------------------- Y/E | Cash Other Y/E | Cash Other Y/E
($ in millions) Reserve | Outlays Changes Reserve | Outlays Changes Reserve
- ---------------------------------------|--------------------------------|-----------------------------------
<S> <C> | <C> <C> <C> | <C> <C> <C>
Eckerd drugstores | |
| |
Future lease obligations | |
and severance(2) $ 69 | $ (3) $ - $ 66 | $ (7) $ - $ 59
| |
Allowance for notes | |
receivable(3) 25 | - - 25 | - - 25
| |
Headquarters severance(2) 17 | (16) - 1 | (1) - -
| |
Other(2) 4 | - - 4 | - - 4
- ---------------------------------------|--------------------------------|-----------------------------------
Total $ 115 | $ (19) $ - $ 96 | $ (8) $ - $ 88
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Charges related to FAS 121 impairments were recorded as a reduction of
property, plant, and equipment balances.
(2) Reserve balances are included as a component of accounts payable and accrued
expenses.
(3) The allowance for notes receivable is included as a reduction of
receivables, net.
33
<PAGE>
Department stores and catalog
Reduction in force. As part of the Company's ongoing program to reduce the cost
structure for stores and catalog and improve the Company's competitive position
and future performance, it announced the elimination of 119 store and field
support positions in September 1996, all of which were subsequently eliminated.
Subsequent periods benefited from the elimination of related salary costs. The
charges, which were expensed and paid in the fourth quarter of 1996, related to
severance and outplacement.
Eckerd drugstores
FAS 121 impairments and loss on the divestiture of drugstore assets. In the
fourth quarter of 1996, the Company recorded $174 million of charges associated
with the Eckerd acquisition. This amount was comprised of the following
components: 1) $53 million related to the closing of certain underperforming
and/or overlapping drugstores; 2) $96 million related to the divestiture of
certain Rite Aid and Kerr drugstores; and 3) $25 million related principally to
the write-off of goodwill associated with previous acquisitions. Each of these
items is discussed in more detail below:
1) In October 1996, the Company acquired Fay's Incorporated (Fay's), a chain of
approximately 270 drugstores. Also in October 1996, Thrift Drug, Inc., a wholly
owned subsidiary of the Company, entered into an agreement to acquire
substantially all of the assets of approximately 190 Rite Aid drugstores in
North and South Carolina. At the time of the acquisition, no significant changes
to the operations of these stores were expected. In November 1996, the Company
entered into an agreement to acquire Eckerd, a chain of 1,748 drugstores. Upon
entering into the agreement to acquire Eckerd, the Company began to plan for the
integration of its approximately 1,100 existing drugstores into the Eckerd name
and format. The integration plan provided for, among other things, the closing
of 86 overlapping and/or under-performing Thrift and Fay's drugstores, all of
which were leased facilities. These stores had a sales base of approximately
$130 million and operating losses of approximately $9 million before non-cash
operating expenses, such as depreciation. During 1997, 64 stores were closed.
The remaining store closings were delayed into fiscal 1998 to facilitate a
timely and orderly transition between the operations of the stores to be closed
and the surrounding stores that were to remain open and operating. All stores
were closed as of the end of fiscal 1998.
A FAS 121 impairment charge of $53 million related to these stores was recorded
by the Company in 1996. Impaired assets consisted primarily of store fixtures
and leasehold improvements. Since these assets could not readily be used at
other store locations and no ready market existed outside the Company, they were
discarded at the time of closing. Accordingly, the impairment charge recorded
for these assets represented their carrying value as of the end of fiscal 1996.
Asset values were reduced to zero and as a result, depreciation was
discontinued. The stores were operating at a loss and continued to do so
subsequent to the FAS 121 impairment charge. Operating results for the
individual stores were included in operations through the date of closing. There
were no significant changes to the Company's initial estimate of impairment.
2) As a condition of its approval of the Eckerd acquisition, the Federal Trade
Commission (FTC) required that the Company divest itself of 164 stores (divested
stores) in North and South Carolina (consisting of both Rite Aid and Kerr
drugstores) to a single buyer to maintain adequate competition in the two
states. Pursuant to the FTC agreement, the consummation of the acquisition of
the Rite Aid stores was delayed until the Company entered into an agreement to
sell the divested stores. Ultimately, the Company entered into an agreement with
a former member of Thrift management and other parties to sell the divested
stores for $75 million ($42 million in cash and $33 million in notes
receivable). The Company recognized a FAS 121 impairment charge of $75 million
related to the Rite Aid stores. The impairment charge was necessary as the
undiscounted cash flows for these units were not sufficient to support recorded
asset values, including furniture and fixtures and other intangibles. The amount
of the impairment charge was determined based on the difference between the fair
value of the assets, as calculated through discounted expected cash flows, and
the carrying amount for those assets. In addition, the Company recorded a loss
of $21 million related to the divestiture of the Kerr stores. These 34 Kerr
stores had a sales base of approximately $59 million and operating income of
approximately $3 million before non-cash operating expenses.
3) As part of the acquisition of Eckerd, the decision was made to operate all
drugstores under the Eckerd name and format. Consequently, goodwill in the
amount of $10 million, which had been allocated under purchase accounting to the
Fay's trade name, was determined to have no value. In addition, the Company
recorded an impairment charge of $15 million related to goodwill associated with
unprofitable business units operated by the former drugstore operations.
34
<PAGE>
Future lease obligations and severance. In connection with these drugstore
closings and the sale of divested stores, the Company established a $69 million
reserve for the present value of future lease obligations. The store closing
plan anticipated that Eckerd would remain liable for all future lease payments.
The present value of future lease obligations was calculated using a 6.7 per
cent discount rate and anticipated no subleasing activity or lease buyouts.
Costs are being charged against the reserve as incurred; the interest component
related to lease payments is recorded as rent expense with no corresponding
increase in the reserve. Payments during the next five years are expected to be
approximately $2 million per year. These reserves will be assessed periodically
to determine their adequacy. No changes have been deemed necessary through the
end of 1998.
Approximately 1,150 store employees, including store managers as well as
salaried and non-salaried personnel, were terminated as a result of store
closings.
Allowance for notes receivable. A portion of the proceeds related to the sale of
the divested stores was financed by the Company through a note receivable of $33
million. The FTC agreement provided that the Company could not maintain a
continuing interest in the divested stores. This placed significant constraints
on the Company's ability to collect on the note which remains uncertain.
Consequently, a reserve for 75 per cent ($25 million) of the face value of the
note receivable was established. This reserve is reviewed for adequacy on a
periodic basis. No adjustments have been deemed necessary through the end of
1998.
Headquarters severance. A reserve of $17 million was established for termination
benefits related to the elimination of the Thrift headquarters and certain
support facilities upon the acquisition of Eckerd. Approximately 400 employees
were affected by the plan to eliminate these functions, which included all
levels of Thrift management and administrative staff. Ultimately, 436 employees
were terminated under this program, with the majority of the employees being
terminated during 1997. Actual termination costs were charged against the
reserve as incurred with $16 million being incurred and charged against the
reserve in 1997. The program has been completed and no adjustments were required
to the reserve.
Other. The principal component of other integration charges was $15 million
related to the change of the Thrift accounting policy for certain contractual
vendor payments to a more preferable accounting method. This item was
established as unearned income on the consolidated balance sheet as of year-end
1996 and is being recognized over the contract terms through the year 2002. The
remaining $17 million, the majority of which was expensed as incurred, was
related to integration activities for the Fay's stores and other activities such
as contract terminations.
1997 Charges
<TABLE>
<CAPTION>
1997
- ----------------------------------------------------------------------------------------------------------
Cash Other Y/E
($ in millions) Expense Outlays Changes Reserve
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Department stores and catalog
Early retirement(1) $ 151 $ (1) $ (150) $ -
Reduction in force(2) 55 - - 55
FAS 121 impairments(3) 72 - (72) -
Future lease obligations and severance(2) 61 (6) - 55
-------------------------------------------------------------
339 (7) (222) 110
- ----------------------------------------------------------------------------------------------------------
Sale of business units (63) 63 - -
- ----------------------------------------------------------------------------------------------------------
Eckerd drugstores
Store integration 61 (61) - -
Systems integration 26 (26) - -
Advertising/grand reopening 26 (26) - -
Future obligations, primarily leases(2) 37 (2) - 35
Gain on the sale of institutional pharmacy (47) 47 - -
--------------------------------------------------------------
103 (68) - 35
- ----------------------------------------------------------------------------------------------------------
Total $ 379 $ (12) $ (222) $ 145
- ----------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
1997 1998
-----------------------------------------------------------------
- ----------------------------------------- Y/E Cash Other Y/E
($ in millions) Reserves Outlays Changes Reserve
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Department stores and catalog
Reduction in force(2) $ 55 $ (44) $ (11) $ -
Future obligations and severance(2) 55 (24) (11) 20
-----------------------------------------------------------------
110 (68) (22) 20
- ----------------------------------------------------------------------------------------------------------
Eckerd drugstores
Future obligations, primarily leases(2) 35 (8) - 27
- ----------------------------------------------------------------------------------------------------------
Total $ 145 $ (76) $ (22) $ 47
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) The early retirement program was reflected in the 1997 year end balance
sheet as follows: $58 million in enhanced pension benefits was credited
against prepaid pension assets which are included in other assets; $5
million of retiree medical liability and $85 million for the new
non-qualified retirement plan are included in other liabilities; and such
amounts are included in retirement plan disclosures in Note 12 on page 32.
In addition, $2 million of plan administration costs was included in
accounts payable and accrued expenses in 1997.
(2) Reserve balances are included as a component of accounts payable and accrued
expenses.
(3) Charges related to FAS 121 impairments were recorded as a reduction of
property, plant, and equipment balances.
Department stores and catalog
As part of the Company's initiatives to reduce the cost structure for department
stores and catalog and improve the Company's competitive position and future
performance, the following actions were taken in the third and fourth quarters
of 1997:
Early retirement. In August 1997 the Company announced a voluntary early
retirement program (Program) to all department stores, catalog, and corporate
support management employees who were age 55 or older and had at least 10 years
of service. Approximately 1,600 employees were eligible to participate in the
program, and approximately 1,245, or 78 per cent, elected to retire under the
Program. The charge of $151 million includes $158 million of termination
benefits that were actuarially calculated based on the employees electing to
retire under the Program (representing lump-sum payments as well as the present
value of periodic future payments determined at a discount rate of 7.5%), $5
million of actuarially calculated post retirement welfare benefits, and $3
million of outside consulting and administration costs. These costs were offset
by a $15 million pension curtailment gain which was the result of a decrease in
the projected benefit obligation (PBO) of the Company's qualified pension plan.
The PBO was reduced due to the elimination of the liability for future salary
increases resulting from the early termination of employees who elected to
retire under the Program. Of the $3 million of outside consulting and
administrative costs, approximately $2 million represented cash outlays, and the
remainder was reversed in the fourth quarter of 1998. All other amounts recorded
under this program are included in Retirement Plans disclosure in Note 12 on
page 32.
Reduction in force. In the fourth quarter of 1997, the Company announced a
restructuring plan to eliminate approximately 1,700 management employees. The
$55 million charge represents severance, outplacement, and other termination
benefits offered to all affected associates. There was no cash outlay in 1997
because, while employees were notified of the restructuring plan in the fourth
quarter of 1997, they did not leave the Company until 1998. Cash outlays of $44
million in 1998 represent termination benefits paid to the approximately 1,550
employees terminated. The plan was completed in the fourth quarter of 1998 at
less cost than originally estimated due in part to employee resignations prior
to being involuntarily terminated and employees obtaining positions elsewhere in
the Company. Consequently, approximately $11 million was reversed in the fourth
quarter of 1998.
FAS 121 impairments. The Company identified 97 underperforming stores that did
not meet the Company's profit objectives and several support units (credit
service centers and warehouses) which were no longer needed. This unit closing
plan (Plan) represents unit closings over and above the normal course of store
closures within a given year, which are typically relocations. All units were
closed by the end of fiscal 1998. The major actions comprising the Plan
consisted of the identification of a closing date (to coincide with termination
rights and/or other trigger dates contained in the lease, if applicable), and
the notification of affected parties (e.g., employees, landlords, and community
representatives) in accordance with the Company's store closing procedures.
Substantially all of the stores and support units included in the portfolio were
leased, and as such, the Company was not responsible for the disposal of
property, other than fixtures, which for
36
<PAGE>
the most part were discarded. Unit closing costs include future lease
obligations and termination benefits, and FAS 121 impairments.
Impaired assets resulting from the store closings consist primarily of store
furniture and fixtures, and leasehold improvements. The majority of the stores
identified for closure were older stores in small markets and the associated
furniture and fixtures were outdated. Therefore, these items could not be
readily used at another location, and there was not a ready market for these
items to determine a fair value. Accordingly, the impairment charge recorded for
these assets represents the carrying value of the assets as of the end of fiscal
1997. Depreciation of these assets was discontinued as the impairment charges
reduced the asset balances to zero. The stores were operating at a loss and
continued to do so subsequent to the FAS 121 impairment charge. There were no
significant changes to the Company's initial estimate of impairment.
Future lease obligations and severance. In connection with the above store
closings, the Company established a $61 million reserve for the present value of
future lease obligations ($31 million) and other store closing costs ($30
million), principally severance and outplacement. The store closing plan
anticipated that the Company would remain liable for all future lease payments.
Present values were calculated assuming a ten per cent discount rate and
anticipated no subleasing activity or lease buyouts. Costs are being charged
against the reserve as incurred. The cash outlays in 1997 and 1998 represent
severance benefits paid for approximately 1,550 employees terminated under the
program, and lease payments for closed stores. The interest component of lease
payments of approximately $2 million in 1998 was recorded as interest expense,
with a corresponding increase in the reserve, in the fourth quarter of 1998 and
future years. The remaining reserve as of the end of 1998 represents future
lease obligations for all closed stores. The actual timing of store closings did
not differ significantly from the estimate upon which the liability for future
lease obligations was based. On average, the remaining lease term for closed
stores was seven years, and payments during the next five years are expected to
be approximately $4 million per year. Adjustments to the reserves in 1998
included reversals of approximately $5 million due to reduced lease obligations
stemming from subleased facilities, and $6 million for employment-related costs.
Employment-related costs were less than original estimates as a result of
several factors, including voluntary resignations, a higher rate of employee
transfers, and the termination of a higher proportion of employees with less
tenure with the Company. These reserves will continue to be assessed
periodically.
The stores identified for closure were generally those with a poor performance
history, and to a large extent, declining sales. The short-term effect of the
closings was the net loss of approximately $225 million in sales and the
elimination of approximately $15 million in operating losses before non-cash
operating charges such as depreciation. The Company expects to realize benefits
of approximately $32 million per year as a result of eliminating operating
losses associated with the closed stores and the redeployment of working
capital.
Sale of business units
A gain on the sale of business units of $63 million was included in the 1997
other charges. JCPenney National Bank (JCPNB), a consumer bank which issued VISA
and MasterCard credit cards, was sold in 1997 at a gain of $49 million. In
addition, the Company recorded a $14 million gain representing a supplemental,
contingent payment related to the 1995 sale of JCPenney Business Services, Inc.
(BSI). BSI provided credit-related services to third party credit-card issuers.
JCPNB 1996 revenues and operating income were $129 million and $2 million,
respectively. The sale of JCPNB did not have a negative impact on the Company's
results of operations or financial position in 1997, and it is not expected to
have a material impact in future periods.
Eckerd drugstores
The majority of drugstore charges recorded as other charges in 1997 relate to
integration activities that were expensed as incurred in accordance with EITF
95-3. Such costs were comprised of the following:
Store integration - charges totaling $61 million related to the conversion of
the former Thrift, Fay's, and Kerr stores and certain warehouse facilities to
the Eckerd name and format, including training, overhead redundancies during the
transition period, and other similar integration-related costs.
Systems integration - costs associated with the conversion of the previously
owned drugstores to the Eckerd systems platform totaled $26 million.
Advertising and grand pre-opening - costs associated with introducing the Eckerd
name in converted regions as well as costs related to the grand re-opening of
converted drugstores totaled $26 million.
In addition, the Company recorded the following drugstore related items as other
charges in 1997:
Future obligations, primarily leases. In the second quarter of 1997, as part of
the ongoing drugstore integration process, the Company closed 26 additional
drugstores. These stores were part of the portfolio of retained Rite Aid stores
(see previous discussion). The Company recorded a FAS 121
37
<PAGE>
impairment charge for the store assets in 1996. These closings did not involve
any termination benefits. The liability in 1997 was limited to future lease
obligations on these stores. The reserve for future lease obligations for these
stores is based on the present value of lease obligations through the year 2017.
Additionally, in the fourth quarter of 1997, the Company became obligated to
make future lease payments for 27 stores that Fay's had sold prior to being
acquired by the Company on which the buyer had defaulted and failed to make
lease payments. Fay's, and therefore the Company, was contractually obligated to
make the lease payments. Accordingly, the Company recorded a charge for future
lease obligations on these stores at the time the liability became known. The
reserve for future lease obligations on these stores is based on lease payments
through the year 2009. A charge of $25 million related to all of these lease
obligations was recorded. These events are not expected to have an effect on
future sales, and other than future lease obligations, there will be no impact
on future operating results as none of the stores operated as part of Thrift
drugstores. In addition, an $8 million charge was recorded for liabilities
established for pending litigation, and the remaining $4 million relates to
other miscellaneous charges, each individually insignificant. As of the end of
1998, these combined reserves totaled $27 million. There have been no
adjustments to these liabilities as of the end of 1998.
Gain on the sale of institutional pharmacy. As part of the integration plan, the
Company sold its underperforming institutional pharmacy operation in the fourth
quarter of 1997 and recorded a gain of $47 million. This operation generated
sales of $80 million in 1997.
14 TAXES
Deferred tax assets and liabilities reflected on the Company's consolidated
balance sheets were measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The major components of deferred tax
(assets)/liabilities as of January 30, 1999 and January 31, 1998 were as
follows:
Temporary differences
- ---------------------------------
($ in millions) 1998 1997
- ---------------------------------------------------------
Depreciation and amortization $ 1,084 $ 977
Leases 312 339
Other charges, net (46) (139)
Deferred acquisition costs 233 211
Other, including comprehensive
income 77 53
- ---------------------------------------------------------
Total $ 1,660 $ 1,441
- ---------------------------------------------------------
Income tax expense
- -----------------------
($ in millions) 1998 1997 1996
- ---------------------------------------------------------
Current
Federal and foreign $ 111 $ 319 $ 321
State and local 31 39 43
-----------------------------
142 358 364
- ---------------------------------------------------------
Deferred
Federal and foreign 219 3 (19)
State and local - (2) (1)
-----------------------------
219 1 (20)
- ---------------------------------------------------------
Total $ 361 $ 359 $ 344
Effective tax rate 37.8% 38.8% 37.9%
- ---------------------------------------------------------
Reconciliation of tax rates
- ------------------------------
(per cent of pre-tax income) 1998 1997 1996
- ---------------------------------------------------------
Federal income tax
at statutory rate 35.0 35.0 35.0
State and local income
taxes, less federal
income tax benefit 2.2 2.8 3.0
Tax effect of dividends
on allocated
ESOP shares (1.4) (1.3) (1.3)
Tax credits and other 2.0 2.3 1.2
- ---------------------------------------------------------
Total 37.8 38.8 37.9
- ---------------------------------------------------------
38
<PAGE>
15 SEGMENT REPORTING
The Company operates in three business segments: department stores and catalog,
Eckerd drugstores, and Direct Marketing. The results of department stores and
catalog are combined because they generally serve the same customer, have
virtually the same mix of merchandise, and the majority of catalog sales are
completed in department stores. For more detailed descriptions of each business
segment, including products sold, see page 1 and pages 4 through 10 of this
report. Other items are shown in the table below for purposes of reconciling to
total Company consolidated amounts.
<TABLE>
<CAPTION>
Depreciation
- --------------------------------- Operating Total Capital and
($ in millions) Year Revenue Earnings Assets Expenditures Amortization
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Department stores and catalog 1998 $19,331 $ 1,013 $ 14,563 $ 439 $ 380
1997 19,955 1,368 14,980 464 366
1996 19,506 1,183 14,754 680 325
Eckerd drugstores 1998 10,325 254 6,361 256 138
1997 9,663 347 6,064 341 112
1996 3,147 99 4,389 103 41
Direct Marketing 1998 1,022 233 2,603 1 6
1997 928 214 2,283 5 5
1996 818 186 1,986 7 6
Total segments 1998 30,678 1,500 23,527 696 524
1997 30,546 1,929 23,327 810 483
1996 23,471 1,468 21,129 790 372
Net interest expense and
credit operations 1998 (480)
1997 (547)
1996 (278)
Other unallocated and amortization
of intangible assets 1998 (87) 111 113
1997 (78) 166 101
1996 22 959 9
Other charges, net 1998 22
1997 (379)
1996 (303)
Total Company 1998 30,678 955 23,638 696 637
1997 30,546 925 23,493 810 584
1996 23,471 909 22,088 790 381
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Total Company operating earnings equals income before income taxes as shown on
the Company's consolidated statements of income.
39
<PAGE>
QUARTERLY DATA (UNAUDITED)
J. C. Penney Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- ------------------------------------------ First Second Third Fourth
($ in millions, except per share data) 1998 1997 1998 1997 1998 1997(1) 1998 1997(1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Retail sales, net $ 6,806 $ 6,481 $ 6,510 $ 6,420 $ 7,297 $ 7,208 $ 9,043 $ 9,509
Total revenue 7,052 6,705 6,761 6,649 7,549 7,441 9,316 9,751
LIFO gross margin 1,904 1,804 1,629 1,709 2,015 2,038 2,249 2,637
Net income 174 139 27 90 186 136 207 201
Net income per common share, diluted 0.64 0.53 0.08 0.32 0.68 0.49 0.77 0.76
Dividend per common share 0.545 0.535 0.545 0.535 0.545 0.535 0.545 0.535
Price range:
High 77 7/8 51 5/8 78 3/4 59 59 3/8 64 1/4 56 1/8 68 1/4
Low 64 11/16 44 7/8 58 45 5/8 42 5/8 54 11/16 38 1/8 53 1/4
Close 71 15/16 45 7/8 58 11/16 57 15/16 47 1/2 56 7/16 39 67 3/8
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 3rd and 4th quarter net income and net income per share have been restated
to shift $23 million, net of tax, of voluntary early retirement costs from
3rd to 4th quarter. The restatement had no effect on full year net income or
net income per share.
FIVE YEAR FINANCIAL SUMMARY
J. C. Penney Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- ----------------------------------------------
(in millions, except per share data) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results for the year
Total revenue $ 30,678 $ 30,546 $ 23,471 $ 21,242 $ 20,937
Retail sales, net 29,656 29,618 22,653 20,562 20,380
Per cent increase 0.1% 30.7% 10.2% 0.9% 7.4%
Net income 594 566 565 838 1,057
Return on beginning
stockholders' equity 8.1% 7.9%(1) 9.6% 14.9% 19.7%
Per common share
Net income, diluted $ 2.19 $ 2.10 $ 2.25 $ 3.33 $ 4.05
Dividends 2.18 2.14 2.08 1.92 1.68
Stockholders' equity 26.99 27.57 25.67 24.76 23.45
Financial position
Capital expenditures 696 810 790 749 544
Total assets 23,638 23,493 22,088 17,102 16,202
Long-term debt 7,143 6,986 4,565 4,080 3,335
Stockholders' equity 7,169 7,357 5,952 5,884 5,615
Other
Common shares outstanding at end of year 250 251 224 224 227
Weighted average common shares
Basic 253 247 226 226 234
Diluted 271 268 248 249 258
Number of employees at end of year (in thousands) 262 260 252 205 202
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Assumes the completion of the Eckerd acquisition in beginning equity.
40
<PAGE>
FIVE YEAR OPERATIONS SUMMARY
J. C. Penney Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Department stores
Number of stores
Beginning of year 1,203 1,228 1,238 1,233 1,246
Openings 12 34 36 43 29
Closings (67) (59) (46) (38) (42)
--------------------------------------------------------------
End of year 1,148(1) 1,203 1,228 1,238 1,233
Gross selling space (in millions) 115.3 118.4 117.2 114.3 113.0
Sales (in millions) $ 15,402 $ 16,047 $ 15,734 $ 14,973 $ 15,023
Sales including catalog desks (in millions) 18,208 19,089 18,694 17,930 18,048
Sales per gross square foot 156 157 159 156 159
- -----------------------------------------------------------------------------------------------------------
Catalog
Number of catalog units
Department stores 1,139 1,199 1,226 1,228 1,233
Freestanding sales centers and other 512 554 569 565 568
Drugstores 139 110 107 106 94
--------------------------------------------------------------
Total 1,790 1,863 1,902 1,899 1,895
Sales (in millions) $ 3,929 $ 3,908 $ 3,772 $ 3,738 $ 3,817
- -----------------------------------------------------------------------------------------------------------
Eckerd drugstores
Number of stores
Beginning of year 2,778 2,699 645 526 506
Openings 220(2) 199(2) 47 37 46
Acquisitions 36 200 2,020 97 -
Closings (278)(2) (320)(2) (13) (15) (26)
--------------------------------------------------------------
End of year 2,756 2,778 2,699 645 526
Gross selling space (in millions) 27.6 27.4 26.4 6.2 4.5
Sales (in millions) $ 10,325 $ 9,663 $ 3,147 $ 1,851 $ 1,540
Sales per gross square foot 350 314 261 253 243
- -----------------------------------------------------------------------------------------------------------
Direct Marketing
Revenue (in millions) $ 1,022 $ 928 $ 818 $ 680 $ 557
Distribution of revenue
JCPenney customers 50% 53% 56% 65% 73%
Other non-JCPenney customers 50% 47% 44% 35% 27%
Policies, certificates, and
memberships in force at year end (in millions) 14.7 13.2 11.3 9.6 7.5
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes 21 department stores operated in Brazil under the Renner name.
(2) Includes relocations of 175 drugstores in 1998 and 127 drugstores in 1997.
41
<PAGE>
SUPPLEMENTAL DATA
(UNAUDITED)
General. The following information is provided as a supplement to the Company's
audited financial statements. Its purpose is to facilitate an understanding of
the Company's credit operations, capital structure, and cash flows.
Credit operations. The following presents the results of the Company's
proprietary credit card operation and shows both the net cost of credit in
support of the Company's retail businesses and the net cost of credit measured
on an all-inclusive, economic basis. The "economic basis" of the cost of credit
includes the cost of equity capital in addition to debt used to finance accounts
receivable balances. The cost of equity capital is based on the Company's
minimum return on equity objective of 16 per cent. The results presented below
cover all JCPenney credit card accounts receivable serviced.
Pre-tax cost of JCPenney credit card
<TABLE>
<CAPTION>
- ----------------------------------------------
($ in millions) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ (788) $ (803) $ (772)
---------------------------------------------------
Bad debt expense 264 356 277
Operating expenses (including in-store costs) 270 281 298
Interest expense on debt financing 262 285 281
---------------------------------------------------
Total costs 796 922 856
Pre-tax cost of credit
Retail operations 8 119 84
Equity capital 131 144 138
- -------------------------------------------------------------------------------------------------------
Total - economic basis 139 263 222
Per cent of JCPenney credit sales 1.8% 3.0% 2.4%
- -------------------------------------------------------------------------------------------------------
</TABLE>
Department stores and catalog
<TABLE>
<CAPTION>
- ---------------------------------
($ in billions) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Per cent of Per cent of Per cent of
Eligible Eligible Eligible
Sales Sales Sales Sales Sales Sales
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JCPenney credit card $ 7.6 39.4% $ 8.6 43.4% $ 9.1 46.9%
Third-party credit cards 5.0 26.1% 4.7 23.5% 4.1 21.2%
- -------------------------------------------------------------------------------------------------------------
Total $ 12.6 65.4% $ 13.3 66.9% $ 13.2 68.1%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Key JCPenney credit card information
<TABLE>
<CAPTION>
- -----------------------------------------------
(in millions, except where noted) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of accounts serviced with balances 14.1 16.4 18.9
Total customer receivables serviced $ 4,149 $ 4,721 $ 5,006
Average customer receivables serviced $ 4,123 $ 4,576 $ 4,428
Average account balance (in dollars) $ 295 $ 287 $ 265
Average account maturity (in months) 4.7 4.5 4.5
90-day delinquency rate 3.0% 3.9% 3.7%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
Capital structure. The Company's objective is to maintain a capital structure
that will assure continuing access to financial markets so that it can, at
reasonable cost, provide for future needs and capitalize on attractive
opportunities for growth.
The debt to capital per cent shown in the table below includes both debt
recorded on the Company's consolidated balance sheets as well as
off-balance-sheet debt related to operating leases and the securitization of a
portion of the Company's customer accounts receivable (asset-backed
certificates).
Debt to capital per cent
- ------------------------
($ in millions) 1998 1997 1996
- ---------------------------------------------------------
Short-term debt,
net of cash investments $ 1,602 $ 1,209 $ 3,818
Long-term debt,
including current
maturities 7,581 7,435 4,815
-----------------------------
9,183 8,644 8,633
Off-balance-sheet debt:
Present value of
operating leases 2,715 2,250 1,800
Securitization of
receivables, net 146 343 374
-----------------------------
Total debt 12,044 11,237 10,807
Consolidated equity 7,169 7,357 5,952
- ---------------------------------------------------------
Total capital $ 19,213 $ 18,594 $ 16,759
Per cent of total debt
to capital 62.7%* 60.4% 64.5%**
- ---------------------------------------------------------
* Upon completion of the Genovese acquisition, the Company's debt to capital
ratio decreased to 61.9 per cent.
** Upon completion of the Eckerd acquisition, the Company's debt to capital
ratio decreased to 60.1 per cent.
The Company's debt to capital per cent has increased over the past three years
which is reflective of its drugstore acquisitions. The Company currently expects
the per cent to improve over the next several years.
Financing costs incurred by the Company to finance its operations, including
those costs related to off-balance-sheet liabilities, were as follows:
- --------------------------
($ in millions) 1998 1997 1996
- ----------------------------------------------------------
Interest expense, net $ 611 $ 581 $ 359
Interest portion of
LESOP debt payment 2 10 17
Off-balance-sheet
financing costs:
Interest imputed
on operating leases 225 180 110
Asset-backed
certificate interest 46 68 68
- ----------------------------------------------------------
Total $ 884 $ 839 $ 554
- ----------------------------------------------------------
Economic Value Added (EVA(R)). During 1998 the Company put the EVA concept in
place as a key decision-making criterion for management. EVA is a tool that
enables companies to measure the creation of financial value. Since the changes
in EVA are often closely related to the changes in a company's stock price, the
Company believes that management of the business on the basis of EVA will
maximize the return on capital invested by its stockholders. Training for all
management employees, focusing on the use of EVA as a management measurement
tool, will be completed in 1999.
The Company's principal aim is the continual improvement in EVA, which directs
attention to long-term performance. EVA principles are being incorporated into
decision-making processes, including acquisition analyses, capital expenditure
allocations, inventory management, and other strategic plans.
The Company has begun linking EVA performance with incentive compensation
programs. In 1998, approximately 400 senior management employees had EVA
performance as a component of their incentive compensation. 1998's EVA
performance plan award was zero because the EVA growth target for 1998 was not
met. In 1999, incentive compensation that includes an EVA component will be
expanded to cover additional management employees who participate in the
Company's incentive compensation program.
43
<PAGE>
EBITDA. Earnings before interest, taxes, depreciation, and amortization (EBITDA)
is a key measure of cash flow generated and is provided as an alternative
assessment of operating performance. It is not intended to be a substitute for
GAAP measurements. Following is a calculation of EBITDA by operating segment on
an individual and combined basis (excludes other unallocated); calculations may
vary for other companies:
Department Eckerd
- ----------------- stores & drug- Direct Total
($ in millions) catalog stores Marketing Segments
- --------------------------------------------------------
1998
Revenue $ 19,331 $ 10,325 $ 1,022 $ 30,678
Operating
profit 1,013 254 233 1,500
Depreciation
and amortization 380 138 6 524
Credit operating
results 131 - - 131
Other(1) 139 134 - 273
---------------------------------------
EBITDA 1,663 526 239 2,428
% of
revenue 8.6% 5.1% 23.4% 7.9%
- --------------------------------------------------------
1997
Revenue $ 19,955 $9,663 $ 928 $30,546
Operating
profit 1,368 347 214 1,929
Depreciation
and amortization 366 112 5 483
Credit operating
results 35 - - 35
Other(1) 160 97 - 257
---------------------------------------
EBITDA $ 1,929 $ 556 $ 219 $ 2,704
% of
revenue 9.7% 5.8% 23.6% 8.9%
- --------------------------------------------------------
1996
Revenue $ 19,506 $ 3,147 $ 818 $23,471
Operating
profit 1,183 99 186 1,468
Depreciation
and amortization 325 41 6 372
Credit operating
results 81 - - 81
Other(1) 165 30 - 195
---------------------------------------
EBITDA $ 1,754 $ 170 $ 192 $ 2,116
% of
revenue 9.0% 5.4% 23.5% 9.0%
- --------------------------------------------------------
(1) Consists of interest on operating leases and the ESOP, and the impact of
asset-backed certificates.
Credit ratings. The Company's objective is to maintain a strong investment grade
rating on its senior long-term debt and commercial paper. As of March 1999, the
Company's credit ratings were under review for possible downgrade. Credit
ratings at year end were:
Long-Term Commercial
Debt Paper
- -----------------------------------------------------
Standard & Poor's
Corporation A A1
Moody's Investors
Service A2 P1
Fitch Investors
Service, Inc. A F1
- -----------------------------------------------------
44
