PENNEY J C FUNDING CORP, 10-K405, 2000-04-26

PENNEY J C FUNDING CORP
10-K405, 2000-04-26
SHORT-TERM BUSINESS CREDIT INSTITUTIONS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the 52 weeks ended January 29, 2000 Commission file number 1-4947-1

J. C. PENNEY FUNDING CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)

DELAWARE 51-0101524
------------------------ ------------------------
(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 April 1, 2000.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's 1999 Annual Report ("1999 Annual Report") are
incorporated into Parts I, II, and IV. Portions of J. C. Penney Company, Inc.'s
1999 Annual Report to Stockholders ("JCPenney's 1999 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.

JCPenney, a company founded by James Cash Penney in 1902 and
incorporated in 1924, is a major retailer operating approximately 1,140 JCPenney
department stores in all 50 states, Puerto Rico, and Mexico. In addition, the
Company operates 37 department stores in Brazil 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 2,600 drugstores located
throughout the Southeast, Sunbelt and Northeast regions of the United States.
JCPenney, through its wholly-owned subsidiary, J. C. Penney Direct Marketing
Services, Inc., also has several subsidiaries 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 29, 2000 were $32.510 billion and net income was
$336 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" below.) The earnings to fixed charges coverage ratio has
historically been, and in fiscal 1999 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. Funding also has in place arrangements for short-term bank borrowings.
Short-term debt in fiscal 1999 averaged $2,475 million compared to $1,938
million in fiscal 1998 and $2,247 million in fiscal 1997. Short-term debt rates
averaged 5.5 percent in fiscal 1999, compared to 5.5 percent in

2
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fiscal 1998 and 5.6 percent in fiscal 1997. Interest expense increased in
fiscal 1999 compared to fiscal 1998 due to higher average borrowing levels
with flat short-term interest rates. Interest expense decreased in fiscal
1998 compared to fiscal 1997 due to lower borrowing levels and lower
short-term interest rates.

CREDIT OPERATIONS OF JCPENNEY. Virtually all types of merchandise and
services sold by JCPenney in the United States, Puerto Rico, and Mexico 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, and Brazil. On
December 6, 1999, JCPenney completed its sale to General Electric Capital
Corporation and certain of its affiliates of substantially all of the assets
relating to JCPenney's consumer and commercial private label credit card
business. For additional information regarding the credit card operations of
JCPenney, see "Net Interest Expense and Credit Operations" (page 20), which
appears in the section of JCPenney's 1999 Annual Report entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations".

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

3
<PAGE>

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.

COMMITTED BANK CREDIT FACILITIES. Committed bank credit facilities
available to Funding and JCPenney as of January 29, 2000 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. (See page 3 of Funding's 1999 Annual Report which
is incorporated herein by reference.)

EMPLOYMENT. Funding has had no employees since April 30, 1992.

2. PROPERTIES.

Funding owns no physical properties.

3. LEGAL PROCEEDINGS.

Funding has no material legal proceedings pending against it.

PART II

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.

4
<PAGE>

8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Balance Sheets of Funding as of January 29, 2000 and January 30,
1999, and the related statements of income, reinvested earnings, and cash flows
for each of the years in the three-year period ended January 29, 2000, appearing
on pages 4 through 6 of Funding's 1999 Annual Report, together with the related
notes and the Independent Auditors' Report of KPMG LLP, independent certified
public accountants, appearing on page 7 of Funding's 1999 Annual Report, the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing on page 3 thereof, the section of Funding's 1999 Annual
Report entitled "Five Year Financial Summary" appearing on page 8 thereof, and
the unaudited quarterly financial highlights ("Quarterly Data") appearing on
page 9 thereof, are incorporated herein by reference in response to Item 8 of
Form 10-K.

9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

PART IV

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 1999 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
1999 Annual Report.

5
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(a)(3) Exhibits.

See separate Exhibit Index on pages G-1 through G-5.

(b) Reports on Form 8-K filed during the fourth quarter of fiscal
1999.

None.

6
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

J. C. PENNEY FUNDING CORPORATION
(Registrant)

By: /s/ M. P. Dastugue
---------------------------------
M. P. Dastugue
Chairman of the Board

Dated: April 25, 2000

7
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Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ M. P. Dastugue Chairman of the Board April 25, 2000
- -------------------- (principal executive
M. P. Dastugue officer); Director

M. D. Porter* President April 25, 2000
- -------------------- (principal financial
M. D. Porter officer)

W. J. Alcorn* Controller (principal April 25, 2000
- -------------------- accounting officer)
W. J. Alcorn

D. A. Mckay* Director April 25, 2000
- --------------------
D. A. McKay
</TABLE>

*By: /s/ M. P. Dastugue
--------------------
M. P. Dastugue
Attorney in Fact

8
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EXHIBIT INDEX

EXHIBIT

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*).

G-1
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(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, 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 October 1, 1999, among J. C.
Penney Company, Inc., J. C. Penney Funding Corporation, the
Lenders party thereto, The Chase Manhattan Bank, as
Administrative Agent, Salomon Smith Barney Inc., as
Syndication Agent, and Bank of America, N.A. and Credit Suisse
First Boston, as Co-Documentation Agents (incorporated by
reference to Exhibit 4(a) to Funding's Quarterly Report on
Form 10-Q for the 13 and 39 weeks ended October 30, 1999*).

(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*).

G-2
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EXHIBIT INDEX

EXHIBIT
-------

(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*).

(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.

G-3
<PAGE>

EXHIBIT INDEX

EXHIBIT

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) 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*).

(b) 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*).

(c) 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*).

13. ANNUAL REPORT TO SECURITY HOLDERS

Excerpt from Funding's 1999 Annual Report.

23. INDEPENDENT AUDITORS' CONSENT

24. POWER OF ATTORNEY

27. FINANCIAL DATA SCHEDULE

Financial Data Schedule for the 52 week period ended January 29, 2000.

G-4
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99. ADDITIONAL EXHIBITS

Excerpt from JCPenney's 1999 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-5

<PAGE>

Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 1999 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 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 agreement 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 "A2" by Standard & Poor's
Corporation, "P2" by Moody's Investors Service, and "F2" by Fitch Investors
Service, Inc. at the end of fiscal 1999.

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.

Net income was $46 million in 1999 as compared with $35 million in 1998 and
$43 million in 1997. The increase in 1999 is attributed to higher borrowing
levels. The decrease in 1998 is attributed to lower borrowing levels and lower
interest rates. Interest expense was $137 million in 1999 compared with $106
million in 1998 and $127 million in 1997. Interest earned from JCPenney was
$208 million in 1999 compared to $160 million in 1998 and $193 million in 1997.

Commercial paper borrowings averaged $2,477 million in 1999 compared to $1,922
million in 1998 and $2,129 million in 1997. The average interest rate on
commercial paper was 5.5 percent for each of the last three fiscal years.

On December 6, 1999 JCPenney completed the sale of its credit card receivables
and credit facilities to General Electric Capital Corporation (GECC). JCPenney
used a part of the proceeds to repay a portion of its loan from Funding.
Funding in turn used the proceeds to pay down its short term commercial paper
debt.

At year end 1999, the Loan to JCPenney balance was $1,588 million as compared
with $3,129 million at the end of the prior year. Short term debt was $330
million as compared with $1,924 million at the end of the prior year.

Committed bank credit facilities available to Funding and JCPenney as of
January 29, 2000 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 expiring 9/29/2000, and a $1.5 billion,
five-year revolver expiring 11/21/2002. There were no outstanding borrowings
under these credit facilities during fiscal 1999.

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 1999.

<PAGE>

STATEMENTS OF INCOME J. C. PENNEY FUNDING CORPORATION
($ in millions)

FOR THE YEAR 1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>

INTEREST INCOME FROM JCPENNEY....................................... $ 208 $ 160 $ 193

INTEREST EXPENSE.................................................... 137 106 127
--------- ---------- ---------

INCOME BEFORE INCOME TAXES ........................................ 71 54 66
Income taxes ................................................ 25 19 23
--------- ---------- ---------
NET INCOME ........................................................ $ 46 $ 35 $ 43
========= ========== =========

STATEMENTS OF REINVESTED EARNINGS
($ in millions)
1999 1998 1997
-------------------------------------------

BALANCE AT BEGINNING OF YEAR ....................................... $ 1,042 $ 1,007 $ 964
NET INCOME ......................................................... 46 35 43
---------- --------- ---------
BALANCE AT END OF YEAR ............................................. $ 1,088 $ 1,042 $ 1,007
========== ========= =========
</TABLE>

See Notes to Financial Statements on page 7

<PAGE>

BALANCE SHEETS J. C. PENNEY FUNDING CORPORATION
(In millions except share data)

1999 1998
--------------------------
<S> <C> <C>

ASSETS
Loans to JCPenney .................................................. $ 1,588 $ 3,129
========= ==========

LIABILITIES AND EQUITY OF JCPENNEY
CURRENT LIABILITIES
Short term debt ................................................... $ 330 $ 1,924
Due to JCPenney ................................................... 25 18
--------- ----------
TOTAL CURRENT LIABILITIES..................................... 355 1,942

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 ............................................... 1,088 1,042
--------- ----------
TOTAL EQUITY OF JCPENNEY...................................... 1,233 1,187
--------- ----------
TOTAL LIABILITIES AND EQUITY OF JCPENNEY...................... $ 1,588 $ 3,129
========= ==========
</TABLE>

See Notes to Financial Statements on page 7

<PAGE>

STATEMENTS OF CASH FLOWS J. C. PENNEY FUNDING CORPORATION
($ in millions)

FOR THE YEAR 1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>

OPERATING ACTIVITIES
Net income ........................................................ $ 46 $ 35 $ 43
(Increase)Decrease in loans to JCPenney............................. 1,541 (538) 2,471
Increase(Decrease) in amount due to JCPenney ....................... 7 (5) 22
--------- ----------- ----------
$ 1,594 $ (508) $ 2,536

FINANCING ACTIVITIES
Increase(Decrease) in short term debt ............................. $ (1,594) $ 508 $ (2,536)

SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid ..................................................... $ 137 $ 106 $ 127
Income taxes paid .................................................. $ 19 $ 23 $ 2

</TABLE>

See Notes to Financial Statements on page 7

<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 29, 2000 and January 30, 1999, and the related
statements of income, reinvested earnings, and cash flows for each of the
years in the three-year period ended January 29, 2000. 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 29, 2000 and January 30, 1999, and the results of
its operations and its cash flows for each of the years in the three-year
period ended January 29, 2000 in conformity with generally accepted accounting
principles.

/s/ KPMG LLP
Dallas, Texas
February 24, 2000

- -------------------------------------------------------------------------------
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 1999 ended
January 29, 2000, fiscal 1998 ended January 30, 1999, and fiscal 1997 ended
January 31, 1998. Fiscal 1997 was a 53-week year and Fiscal 1998 and 1999 were
52-week years.

COMMERCIAL PAPER PLACEMENT
Funding places commercial paper solely through dealers. The average interest
rate on commercial paper at year end 1999, 1998, and 1997 was 6.3%, 5.1%, and
5.7%, respectively.

SUMMARY OF ACCOUNTING POLICIES

INCOME TAXES
Funding's taxable income is included in the consolidated federal income tax
return of JCPenney. Income taxes in Funding's statement of income are computed
as if Funding filed a separate federal income tax return.

USE OF ESTIMATES
Funding's financial statements have been prepared in conformity with generally
accepted accounting principles. Certain amounts included in the financial
statements are estimated based on currently available information and
management's judgment as to the outcome of future conditions and circumstances.
While every effort is made to ensure the integrity of such estimates, including
the use of third party specialists where appropriate, actual results could
differ from these estimates.

LOANS TO JCPENNEY
Funding and JCPenney are parties to a Loan Agreement which provides for
unsecured loans, payable on demand, to be made from time to time by Funding to
JCPenney for the general business purposes of JCPenney, subject to the terms
and conditions of the Loan Agreement. Under the terms of the Loan Agreement,
Funding and JCPenney agree upon a mutually-acceptable earnings coverage of
Funding's interest and other fixed charges. The earnings to fixed charges
ratio has historically been at least one and one-half times.

COMMITTED BANK CREDIT FACILITIES
Committed bank credit facilities available to Funding and JCPenney as of
January 29, 2000 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 expiring 9/29/2000, and a $1.5 billion,
five-year revolver expiring 11/21/2002. There were no outstanding borrowings
under these credit facilities at January 29, 2000.

FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of short term debt (commercial paper) at January 29, 2000 and
January 30, 1999 approximates the amount as reflected on the balance sheet due
to its short average maturity.

The fair value of loans to JCPenney at January 29, 2000, and January 30, 1999
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.

<PAGE>

FIVE YEAR FINANCIAL SUMMARY J. C. PENNEY FUNDING CORPORATION
($ in millions)

AT YEAR END 1999 1998 1997 1996 1995
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>

CAPITALIZATION
Short term debt
Commercial paper .................... $ 330 $ 1,924 $ 1,416 $ 2,049 $ 1,482
Credit line advance................... 0 0 0 1,903 0
---------- --------- -------- --------- ---------
Total short term debt ........... 330 1,924 1,416 3,952 1,482

Equity of JCPenney ....................... 1,233 1,187 1,152 1,109 1,071
---------- --------- -------- --------- ---------

TOTAL CAPITALIZATION ........................... $ 1,563 $ 3,111 $ 2,568 $ 5,061 $ 2,553
========== ========= ======== ========= =========

COMMITTED BANK CREDIT FACILITIES ............... $ 3,000 $ 3,000 $ 3,000 $ 6,000 $ 3,000

FOR THE YEAR

INCOME ............................. $ 208 $ 160 $ 193 $ 169 $ 194
EXPENSES ............................. $ 137 $ 106 $ 127 $ 111 $ 128
NET INCOME ............................. $ 46 $ 35 $ 43 $ 38 $ 43
FIXED CHARGES - TIMES EARNED ................... 1.52 1.52 1.52 1.52 1.52

PEAK SHORT TERM DEBT ........................... $ 3,582 $ 3,117 $ 4,295 $ 4,010 $ 2,771

AVERAGE DEBT ............................. $ 2,475 $ 1,938 $ 2,247 $ 2,041 $ 2,145

AVERAGE INTEREST RATES........................... 5.5% 5.5% 5.6% 5.5% 5.9%

</TABLE>

<PAGE>

QUARTERLY DATA J. C. PENNEY FUNDING CORPORATION
($ in millions) (Unaudited)

FIRST SECOND THIRD FOURTH
----------------- ----------------- ----------------- -----------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Income ..................... $ 47 34 82 47 33 29 63 46 35 51 47 47
Expenses ................... $ 31 22 54 31 22 19 41 30 23 34 32 31
Income before taxes ........ $ 16 12 28 16 11 10 22 16 12 17 15 16
Net income ................. $ 10 8 18 10 7 7 15 10 8 11 10 10
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>

<PAGE>

EXHIBIT 23

INDEPENDENT AUDITORS' 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, 33-66070, 33-66072, 333-13949, 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 24, 2000, relating to the
balance sheets of J. C. Penney Funding Corporation as of January 29, 2000 and
January 30, 1999, and the related statements of income, reinvested earnings,
and cash flows for each of the years in the three-year period ended January
29, 2000, which report appears in the 1999 Annual Report of J. C. Penney
Funding Corporation and is incorporated by reference in the Annual Report on
Form 10-K of J. C. Penney Funding Corporation for the year ended January 29,
2000.

/s/ KPMG LLP

Dallas, Texas
April 25, 2000

<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 29, 2000, hereby constitutes and appoints W. J. Alcorn, M. P.
Dastugue, and M. D. Porter, 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 18th day of April, 2000.

/s/ M. P. Dastugue /s/ W. J. Alcorn
- ------------------------------------- ----------------------------------
M. P. Dastugue W. J. Alcorn
Chairman of the Board Controller
(principal executive officer); (principal accounting officer)
Director

/s/ M. D. Porter /s/ D. A. McKay
- ------------------------------------- ----------------------------------
M. D. Porter D. A. McKay
President Director
(principal financial officer)

<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 29, 2000, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> JAN-29-2000
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,588
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,588
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,588
<CURRENT-LIABILITIES> 355
<BONDS> 0
0
0
<COMMON> 145
<OTHER-SE> 1,088
<TOTAL-LIABILITY-AND-EQUITY> 1,588
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (71)
<INCOME-PRETAX> 71
<INCOME-TAX> 25
<INCOME-CONTINUING> 46
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46
<EPS-BASIC> 0
<EPS-DILUTED> 0

</TABLE>

<PAGE>

Exhibit 99

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

J. C. PENNEY COMPANY, INC.

- --------------------------------------------- 52 WEEKS 52 WEEKS 53 WEEKS
($ IN MILLIONS EXCEPT EPS) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Segment profit

Department stores and catalog(1) $ 670 $ 920 $ 1,275

Eckerd drugstores 183 254 347

Direct Marketing(2) 247 237 217
---------------------------------------------------------------------

Total segments 1,100 1,411 1,839

Real estate and other 28 26 39

Net interest expense and credit
operations(1,2) (299) (391) (457)

Acquisition amortization (129) (113) (117)

Other charges and credits, net (169) 22 (379)
---------------------------------------------------------------------

Income before income taxes 531 955 925

Income taxes (195) (361) (359)
---------------------------------------------------------------------

Net income $ 336 $ 594 $ 566

Earnings per share (EPS) $ 1.16 $ 2.19 $ 2.10
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) REFLECTS THE RECLASSIFICATION OF CERTAIN CREDIT COSTS, PRIMARILY THIRD-PARTY
CREDIT FEES OF $91 MILLION IN 1999 AND $93 MILLION IN BOTH 1998 AND 1997
FROM NET INTEREST EXPENSE AND CREDIT OPERATIONS TO DEPARTMENT STORES AND
CATALOG SG&A EXPENSES.

(2) REFLECTS THE RECLASSIFICATION OF INTEREST CHARGES OF $5 MILLION, $4 MILLION
AND $3 MILLION FOR 1999, 1998 AND 1997, RESPECTIVELY, FROM DIRECT MARKETING
OPERATING EXPENSES TO NET INTEREST EXPENSE AND CREDIT OPERATIONS.

Net income in 1999 totaled $336 million, or $1.16 per share, compared with $594
million, or $2.19 per share, in 1998, and $566 million, or $2.10 per share, in
1997. Consolidated results reflect non-comparable items as shown below.
Excluding non-comparable items, earnings per share totaled $1.69 in 1999
compared with $2.14 in 1998 and $2.96 in 1997. All references to earnings per
share are on a diluted basis.

1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------

($, NET OF TAX, IN MILLIONS EXCEPT EPS) $ EPS $ EPS $ EPS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings before non-comparable items $ 474 $ 1.69 $ 581 $ 2.14 $ 797 $ 2.96

Non-comparable items

Asset impairment charges (169) (0.65) -- -- (44) (0.16)

Gain on the sale of assets 33 0.13 -- -- 38 0.14

Workforce reduction programs -- -- -- -- (126) (0.47)

Store closing costs -- -- -- -- (37) (0.14)

Drugstore integration costs -- -- -- -- (62) (0.23)

Other (2)(1) (0.01) 13 0.05 -- --
---------------------------------------------------------------------------
Total non-comparable items (138) (0.53) 13 0.05 (231) (0.86)
---------------------------------------------------------------------------
Net income $ 336 $ 1.16 $ 594 $ 2.19 $ 566 $ 2.10
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) INCLUDES A $12 MILLION AFTER-TAX CHARGE, OR FIVE CENTS PER SHARE, FOR THE
IMPACT OF CHANGES IN CERTAIN REVENUE RECOGNITION POLICIES TO COMPLY WITH SAB
NO. 101 THAT IS INCLUDED AS A COMPONENT OF DEPARTMENT STORES AND CATALOG
SEGMENT PROFIT. ALL OTHER ITEMS ARE REPORTED AS OTHER CHARGES AND CREDITS,
NET.

These non-comparable items are discussed in more detail within management's
discussion of Department stores and catalog results and Other charges and
credits, net, as well as in Note 14 to the consolidated financial statements.

16
<PAGE>

Total segment profit was $1,100 million in 1999 compared to $1,411 million in
1998 and $1,839 million in 1997. Segment profit has declined principally as a
result of lower sales volumes in department stores coupled with declining
Department stores and catalog gross profit margins and lower pharmacy gross
profit margins coupled with higher shrinkage rates within the drugstore segment.
Consolidated results reflect continued improvement in proprietary credit
operating costs for both 1999 and 1998 primarily as a result of declining bad
debt expense throughout the three-year period.

The following discussion addresses results of operations on a segment basis.

DEPARTMENT STORES AND CATALOG

- -------------------------------- 52 WEEKS 52 WEEKS 53 WEEKS
($ IN MILLIONS) 1999 1998 1997
- ---------------------------------------------------------------
<S> <C> <C> <C>
Retail sales, net $ 18,964 $ 19,114 $ 19,819
------------------------------
FIFO gross margin 5,607 5,697 6,152

LIFO credit 9 35 20
------------------------------
Total gross margin 5,616 5,732 6,172

SG&A expenses (4,946) (4,812) (4,897)
------------------------------
Segment profit $ 670 $ 920 $ 1,275
------------------------------
Sales percent inc/(dec)

Department stores(1) (1.4)% (3.1)% 0.9%

Comparable stores (1.1)% (1.9)% (0.3)%

Catalog(1) 1.5% 0.3% 3.2%

Ratios as a percent of sales

FIFO gross margin 29.6% 29.8% 31.0%

LIFO gross margin 29.6% 30.0% 31.1%

SG&A expenses 26.1% 25.2% 24.7%

LIFO segment profit 3.5% 4.8% 6.4%

LIFO EBITDA(2) 7.2% 8.0% 8.9%
- ---------------------------------------------------------------
</TABLE>

(1) SALES COMPARISONS ARE SHOWN ON A 52-WEEK BASIS FOR ALL PERIODS PRESENTED.
INCLUDING 1997'S 53RD WEEK, DEPARTMENT STORE SALES DECLINED BY 4.3 PERCENT
IN 1998 AND INCREASED 2.2 PERCENT IN 1997, WHILE CATALOG SALES DECREASED BY
0.6 PERCENT IN 1998 AND INCREASED BY 4.2 PERCENT IN 1997.

(2) EARNINGS BEFORE INTEREST, 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.

Department stores and catalog operating results have been restated for all years
presented to reflect the following:

a) In 1999, after giving consideration to guidance provided by SEC Staff
Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS, the Company changed certain revenue recognition policies,
primarily those affecting the reporting of sales for licensed departments
and catalog orders shipped to various Company facilities for customer
pickup. These changes reduced sales by $152 million, $217 million and $136
million in 1999, 1998 and 1997, respectively, and resulted in a $67 million
reduction of reinvested earnings, net of tax, as of January 28, 1995. The
impact on earnings and cash flows for the intervening periods presented in
this report is not material. Accordingly, the cumulative effects of the
changes have been reflected as a $20 million pre-tax charge to cost of goods
sold in the statement of income for fiscal 1999, the period in which the
change was made.

b) Third-party credit fees of $91 million in 1999 and $93 million in both 1998
and 1997 have been reclassified from Net interest expense and credit
operations to Department stores and catalog SG&A expenses to reflect these
costs as operating expenses.

1999 COMPARED WITH 1998. Segment profit for Department stores and catalog
totaled $670 million in 1999 compared with $920 million in 1998. The decline for
the year was attributable primarily to lower sales volumes in department stores.
Total department store sales of $15.0 billion declined 1.4 percent for the year
while sales in comparable department stores (those open at least one year)
declined by 1.1 percent. Sales were strongest in women's casual sportswear,
which benefited from the introduction of additional supplier exclusive product
offerings, primarily Crazy Horse by Liz Claiborne, and window coverings. Sales
were especially soft in athletic apparel and adult athletic shoes. Sales were
led by private brand merchandise; Arizona Jean, the JCPenney Home Collection,
and Delicates-TM- all produced double-digit sales gains. In general, sales of
national brand merchandise were below expectations. Total department store sales
were weak across all regions of the country. Sales in the Company's
international stores totaled $432 million in 1999, an increase of $169 million
compared with the prior year. The increase is predominantly the result of the
acquisition of a majority interest in Lojas Renner S.A. (Renner), a Brazilian
department store chain, in January 1999. Sales were also impacted by the exit of
the Chilean market in 1999's third quarter. Catalog sales were

<PAGE>

approximately $3.9 billion in both 1999 and 1998. For the year, specialty media,
which includes targeted merchandise offerings like special sizes, enjoyed a
double-digit sales increase. Big book sales were basically flat in 1999 versus
1998. Catalog sales were strongest in merchandise for the home, and were weakest
in apparel. Internet sales, which are reported as a component of catalog sales,
increased from $15 million in 1998 to $102 million in 1999.

Gross margin as a percent of sales declined by 40 basis points compared with
1998 levels, with 20 basis points attributable to a smaller LIFO credit this
year. The margin decline was due primarily to higher levels of promotional and
clearance markdowns in the fourth quarter which were partially offset by the
shift in sales to higher margin private brands. Gross margin included LIFO
credits of $9 million in 1999 and $35 million in 1998. The LIFO credits for both
years resulted from a combination of flat to declining retail prices as measured
by the Company's internally developed inflation index, and improved markup. SG&A
expenses increased by 90 basis points as a percent of sales versus last year.
The increase was principally a function of lower sales volumes coupled with
additional investments in Internet infrastructure and higher selling salaries in
department stores.

1998 COMPARED WITH 1997. Segment profit totaled $920 million in 1998 compared
with $1,275 million in 1997. The decline for the year was primarily
attributable to lower sales coupled with a lower gross margin ratio. Sales in
comparable department stores declined by 1.9 percent in 1998. Department
store sales were strongest in women's apparel, while athletic apparel and
footwear were particularly hard hit by softening sales throughout 1998.
Catalog sales increased by 0.3 percent on a 52-week basis.

Gross margin as a percent of sales for Department stores and catalog declined by
110 basis points compared with 1997, principally as a result of 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 to reduce seasonal inventory levels, it had a negative impact on the
gross margin ratio. 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 included LIFO credits of $35 million in 1998 and $20
million in 1997. SG&A expenses, while controlled, were not leveraged as a
percent of sales due to sales declines. In 1998 the Company realized savings of
approximately $95 million related to the early retirement and workforce
reduction 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.

ECKERD DRUGSTORES

- --------------------------- 52 WEEKS 52 WEEKS 53 WEEKS
($ IN MILLIONS) 1999 1998 1997
- -------------------------------------------------------------
<S> <C> <C> <C>
Retail sales, net $ 12,427 $ 10,325 $ 9,663
-------------------------------
FIFO gross margin 2,453 2,110 2,048

LIFO charge (52) (45) (32)
-------------------------------
Total gross margin 2,401 2,065 2,016

SG&A expenses (2,218) (1,811) (1,669)
-------------------------------
Segment profit $ 183 $ 254 $ 347
-------------------------------
Sales percent increase

Total sales(1) 20.4% 8.9% 11.2%(2)

Comparable stores 10.7% 9.2% 7.4%

Ratios as a percent of sales

FIFO gross margin 19.7% 20.4% 21.2%

LIFO gross margin 19.3% 20.0% 20.9%

SG&A expenses 17.8% 17.5% 17.3%

LIFO segment profit 1.5% 2.5% 3.6%

LIFO EBITDA(3) 3.0% 3.8% 4.7%
- -------------------------------------------------------------
</TABLE>

(1) SALES COMPARISONS ARE SHOWN ON A 52-WEEK BASIS FOR ALL PERIODS PRESENTED.
INCLUDING 1997'S 53RD WEEK, DRUGSTORE SALES INCREASED BY 6.9 PERCENT AND
13.3 PERCENT FOR 1998 AND 1997, RESPECTIVELY.

(2) 1997 SALES INCREASE IS CALCULATED BASED UPON 1996 PRO FORMA SALES, ASSUMING
ECKERD WAS ACQUIRED AT THE BEGINNING OF 1996.

(3) EARNINGS BEFORE INTEREST, INCOME TAXES, DEPRECIATION, AND AMORTIZATION.
EBITDA IS PROVIDED AS AN ALTERNATIVE ASSESSMENT OF OPERATING PERFORMANCE AND
IS NOT INTENDED TO BE A SUBSTITUTE FOR GAAP MEASUREMENTS. CALCULATIONS MAY
VARY FOR OTHER COMPANIES.

1999 COMPARED WITH 1998. Segment profit for the drugstore segment totaled $183
million in 1999 compared with $254 million in 1998. The decline in operating
profit was attributable to both lower gross margins and higher SG&A expense.
Sales growth was strong the entire year. Total sales for 1999 increased by 20.4
percent over the prior year and include approximately $830 million in sales
attributable to the Genovese drugstores acquired in March 1999. Comparable store
sales were strong, increasing 10.7 percent (including the pro forma results of
the Genovese drugstores) compared to a 9.2 percent increase in the prior year.
Comparable store sales growth was led by a 15.6 percent increase in pharmacy
sales, which accounted for 62 percent of total drugstore sales. Pharmacy sales
were particularly strong in the managed care

<PAGE>

segment, which accounted for 87 percent of total pharmacy sales. Comparable
non-pharmacy merchandise sales increased 3.0 percent for the year and were
strongest in one-hour photo processing and over-the-counter drugs. 1999 sales
also benefited from the relocation of 208 stores to more convenient freestanding
locations. Relocated stores typically generate sales increases of approximately
30 percent in their first full year of operation.

Gross margin as a percent of sales declined by 70 basis points. The decline was
principally related to (i) a higher proportion of lower gross margin managed
care and mail-order pharmacy sales, (ii) a higher percentage of new,
lower-margin drug introductions and (iii) higher shrinkage. Gross margin
included LIFO charges of $52 million in 1999 and $45 million in 1998.

SG&A expenses as a percent of sales in 1999 increased by 30 basis points over
the prior year. Current year expenses include $45 million of charges recorded in
the second quarter related to systems upgrades and increases in certain balance
sheet reserves. SG&A expenses in 1999 also reflect integration costs for the
Genovese acquisition as well as costs associated with opening more new and
relocated stores in 1999 than in the prior year.

1998 COMPARED WITH 1997. Segment profit totaled $254 million in 1998 compared
with $347 million for the prior year. Total sales increased 8.9 percent over
1997 levels on a 52-week basis and increased 9.2 percent for comparable stores.
Sales growth was fueled by a 15.0 percent gain in comparable pharmacy sales
which accounted for approximately 60 percent of total drugstore sales. Managed
care sales grew at a particularly strong pace, increasing to 85 percent of
pharmacy sales from 80 percent in the prior year. Non-pharmacy merchandise sales
increased 1.5 percent for the year and strengthened as the year progressed.
Sales also benefited from the relocation of 175 stores to more convenient,
freestanding locations during the year.

Gross margin as a percent of sales declined by 90 basis points in 1998. 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. Gross margin for
non-pharmacy merchandise improved for the year. Gross margin included a LIFO
charge of $45 million in 1998 compared with a $32 million charge in 1997.

SG&A expenses as a percent of sales increased by 20 basis points in 1998 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.

DIRECT MARKETING

- ------------------------------
($ IN MILLIONS) 1999 1998 1997
- --------------------------------------------------------------
<S> <C> <C> <C>
Revenue

Insurance premiums, net $ 937 $ 872 $ 800

Membership fees 93 65 50

Investment income 89 85 78
------------------------------

Total revenue 1,119 1,022 928

Claims and benefits (372) (340) (332)

Deferred acquisition costs (227) (195) (170)

Other operating expenses(1) (273) (250) (209)
------------------------------

Segment profit $ 247 $ 237 $ 217

Revenue percent increase 9.5% 10.1% 13.4%

Segment profit increase 4.2% 9.2% 14.8%

Segment profit as a percent
of revenue 22.1% 23.2% 23.4%
- --------------------------------------------------------------
</TABLE>

(1) REFLECTS THE RECLASSIFICATION OF INTEREST CHARGES OF $5 MILLION, $4 MILLION
AND $3 MILLION FOR 1999, 1998 AND 1997, RESPECTIVELY, FROM OPERATING
EXPENSES TO NET INTEREST EXPENSE AND CREDIT OPERATIONS.

Results for J. C. Penney Direct Marketing Services, Inc. (Direct Marketing) for
1999 reflect the 12th consecutive year of both revenue and profit improvement.
Segment profit for Direct Marketing was $247 million in 1999 compared with $237
million in 1998 and $217 million in 1997. Total revenue exceeded $1.1 billion in
1999, increasing from $1.0 billion in 1998 and $.9 billion in 1997. Health
insurance premiums account for the majority of the revenue increases in both
1999 and 1998, and represent in excess of 70 percent of total insurance premiums
and 60 percent of total revenue. Revenue growth for the three-year period is
primarily attributable to successfully maintaining and enhancing marketing
relationships with businesses, principally banks, oil companies and retailers,
for the sale of insurance products throughout the United States and Canada.

<PAGE>

1999 marked the first year that more than 50 percent of total revenue was
generated through non-JCPenney business relationships. Direct Marketing
continued its international expansion in 1999 with active programs with two
United Kingdom banks, programs launched in Australia and activity initiated in
South Korea.

Membership services contributed eight percent of total revenues in 1999 and
continued to be a growing component of the segment, increasing 43 percent and 30
percent in 1999 and 1998, respectively. Memberships include dental, pharmacy,
vision and hearing benefits, as well as auto and travel services.

NET INTEREST EXPENSE AND
CREDIT OPERATIONS

- -------------------------------
($ IN MILLIONS) 1999 1998 1997
- -----------------------------------------------------------
<S> <C> <C> <C>
Finance charge revenue,
net of operating expenses $ (313) $ (224) $ (127)

Interest expense, net 612 615 584
---------------------------
Net interest expense
and credit operations $ 299 $ 391 $ 457
- -----------------------------------------------------------
</TABLE>

Net interest expense and credit operations totaled $299 million in 1999 compared
with $391 million in 1998 and $457 million in 1997. 1999 includes the Company's
proprietary credit card operation through December 6, 1999, when the operation
was sold to General Electric Capital Corporation (GE Capital). 1998 and 1997
include the proprietary credit card operation for the full year. As noted
previously, third-party credit costs of $91 million in 1999 and $93 million in
both 1998 and 1997 have been reclassified to Department stores and catalog SG&A
expense.

Declines in Net interest expense and credit operations in both 1999 and 1998 are
related to improvements in credit operating performance, principally bad debt
expense, throughout both years. The improvement was the 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. These
factors resulted in a steady decline in delinquency rates throughout 1999 and
1998. Interest expense declined slightly in 1999 compared with 1998 levels.
Interest expense increased by approximately $30 million in 1998 as a result of
higher borrowing levels.

OTHER CHARGES AND CREDITS, NET

In the fourth quarter of 1999, the Company recorded net pre-tax charges of $169
million comprised of three components. In December, the Company completed the
sale of its proprietary credit card receivables to GE Capital. The total value
of the transaction was $4.0 billion, including debt that was assumed by GE
Capital related to previous receivable securitization transactions. The Company
recognized a pre-tax gain of $55 million on the transaction, net of an allowance
for final settlement. The Company also recorded pre-tax asset impairment charges
of $240 million related to underperforming store locations in both its
department stores ($130 million) and drugstores ($110 million) in accordance
with Statement of Financial Accounting Standards (FAS) No. 121, ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
The impairment charges represent the excess of the carrying values of the
assets, including intangible assets, over estimated fair values. The department
store charge relates to ten stores, with the majority attributable to seven
stores in the Washington, D.C. market that were acquired in 1995. The
Washington, D.C. stores have performed substantially below levels anticipated at
the time of the acquisition, and the impairment charge generally represents
goodwill associated with the acquisition. Drugstore impairment charges represent
the write-off of fixed assets, including intangibles, associated with 289 stores
located throughout Eckerd's operating area, with concentrations in Pennsylvania,
Virginia, New Jersey and New York. The impaired stores generally represent
smaller, low-volume stores that were former independent units and chains
acquired over the last several years that do not meet Eckerd's performance
standards and cannot be relocated. In addition, the Company recorded a pre-tax
credit of $16 million related to restructuring charges recorded in 1996 and
1997.

Other credits in 1998 also related to the reversal of store closing reserves
established in 1997. In 1997, the Company recorded pre-tax charges of $379
million related to early retirement and workforce reduction programs, the
closing of underperforming department stores and drugstore integration charges.

INCOME TAXES

The effective income tax rate before considering the impact of Other charges and
credits, net decreased to 34.3 percent in 1999 compared with 37.8 percent in
1998 and 38.8 percent in 1997. Declines over the three-year period are related
primarily to the effects of tax planning strategies that have significantly
reduced state and local effective income tax rates.

<PAGE>

FINANCIAL CONDITION

Cash flow from operating activities was $1,258 million in 1999 compared with
$1,058 million in 1998 and $1,218 million in 1997. Efforts to reduce inventory
levels and declines in capital expenditures had a positive impact on cash flow
for the year. While net income has declined in recent years, cash flow has
remained strong as a result of the impact of declines in customer accounts
receivable and the increases in non-cash charges, primarily related to drugstore
acquisitions, store closings and asset impairments. 1999 cash flow from
operations was sufficient to fund 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. Although its
credit ratings have declined over the past two years, the Company's liquidity
position improved with the sale of its proprietary credit card receivables.
Additionally, the Company continues to have access to the commercial paper
market along with maintaining $3.0 billion in committed bank credit facilities.

MERCHANDISE INVENTORY. Total LIFO inventory was $5,947 million in 1999 compared
with $6,060 million in 1998 and $6,191 million in 1997. FIFO merchandise
inventory for Department stores and catalog was $3,806 million at the end of
1999, a decrease of 7.4 percent on an overall basis and approximately eight
percent for comparable stores. The decline was primarily the result of the
Company's efforts to improve the merchandise procurement process and increase
inventory turnover, coupled with aggressive clearance activities at the end of
the year. Eckerd FIFO merchandise inventory was $2,411 million at the end of
1999, an increase of 10.8 percent compared with the prior year. The increase was
principally related to the acquisition of Genovese and growth in sales volumes.

PROPERTIES. Property, plant and equipment, net of accumulated depreciation,
totaled $5,312 million at January 29, 2000, compared with $5,458 million and
$5,329 million at the ends of fiscal 1998 and 1997, respectively.

At the end of 1999, the Company operated 1,143 JCPenney department stores
(including two stores in Mexico and six in Puerto Rico), 35 Renner department
stores in Brazil and 2,898 Eckerd drugstores, which altogether represented in
excess of 145 million gross square feet of retail space. JCPenney department
store counts have declined recently principally as a result of the closing of
underperforming stores. Eckerd store counts reflect the addition of 141 Genovese
drugstores in March of 1999; the closing of underperforming and overlapping
stores during the conversion of former drugstore formats to Eckerd; and the
addition of 266 new and relocated stores in 1999 and nearly 700 over the past
three years.

CAPITAL EXPENDITURES

- ------------------------
($ IN MILLIONS) 1999 1998 1997
- ---------------------------------------------------
<S> <C> <C> <C>
Department stores
and catalog $ 318 $ 420 $ 443

Eckerd drugstores 283 256 341

Other corporate 5 20 26
---------------------------
Total $ 606 $ 696 $ 810
- ---------------------------------------------------
</TABLE>

1999 capital spending levels for property, plant and equipment declined for
Department stores and catalog. In 1999, the Company spent approximately $108
million on existing department store locations compared with $150 million in
1998 and $200 million in 1997. It is expected that capital spending for
Department stores and catalog will approximate $500 million in 2000, with
approximately $120 million dedicated to the improvement of general store
appearance. Capital spending for Eckerd drugstores increased in 1999,
principally in the area of technology to strengthen its financial and operating
systems. It is expected that spending within Eckerd drugstores will be in the
$300 million range, with substantial investments continuing to be made in
systems and technology enhancements. While attention is focused on systems and
technology, Eckerd`s new and relocated store program will be reduced to
approximately 200 stores, including about 150 relocations, for 2000 from the
previous plan of about 300 stores. Total capital spending for 2000 is currently
projected at approximately $850 million.

ACQUISITIONS. The Company has completed several acquisitions in recent years as
noted below. In all cases, the purchase price was allocated to assets acquired
and liabilities assumed based on estimated fair values. The excess of the
purchase price over the fair value of assets acquired, including intangible
assets, and liabilities assumed is accounted for as goodwill and is generally
amortized over 40 years. All acquisitions have been accounted for under the
purchase method. Accordingly, their results of operations are included in the
Company's statements of income as of the date of the acquisition.

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. The acquisition was accomplished through the 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

<PAGE>

approximately 550 thousand common stock options of the Company. The total value
of the transaction, including the assumption of $60 million of debt, was $414
million, of which $263 million represented goodwill.

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 was $139 million, of which $67 million represented
goodwill.

During fiscal 1998, Direct Marketing formed Quest Membership Services, Inc. and
acquired Insurance Consultants, Inc., strengthening its access to other business
relationships. The total purchase price was approximately $72 million, of which
$53 million represented goodwill.

INTANGIBLE ASSETS. At the end of 1999, Goodwill and other intangible assets,
net, totaled $3,056 million compared with $2,941 million in 1998 and $2,940
million in 1997. Intangible assets consist principally of favorable lease
rights, prescription files, software, trade name and goodwill, representing the
excess of the purchase price over the fair value of net assets acquired,
including intangible assets.

RESTRUCTURING RESERVES. At the end of 1999, the consolidated balance sheet
included reserves totaling $86 million which are included as a component of
Accounts payable and accrued expenses and $25 million in Other assets. These
reserves consist principally of the present value of future lease obligations
for closed department stores and drugstores. Reserve balances were established
based upon estimated costs to exit the properties. Actual costs were below the
original estimates for certain closed stores. Consequently, reserves were
adjusted in the fourth quarters of 1999 and 1998, resulting in pre-tax credits
of $12 million and $22 million, respectively. Reserve balances were reduced by
$12 million in 1999 for cash payments made during the year. Also, in connection
with the Company's 1997 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 that are discussed in Note 13 to
the consolidated financial statements, Retirement Plans, on page 35. Payments
for both lease obligations and pension benefits will be paid out over an
extended period of time. See Note 15, Restructuring Reserves, on page 37 for
additional information.

DEBT TO CAPITAL

1999 1998 1997
- ----------------------------------------------------------
<S> <C> <C> <C>
Debt to capital percent 54.3% 62.9%* 60.7%
- ----------------------------------------------------------
</TABLE>

* UPON COMPLETION OF THE GENOVESE ACQUISITION, THE DEBT TO CAPITAL RATIO
DECLINED TO 62.1 PERCENT.

Total debt, including the present value of operating leases, was $8,602 million
at the end of 1999 compared with $12,044 million at the end of 1998 and $11,237
million in 1997. In December 1999, the Company received $3.2 billion in proceeds
from the sale of its proprietary credit card receivables. Proceeds from the sale
were used to pay down short-term debt and the balance was invested in short-term
investments, pending the maturity of long-term debt issues. In conjunction with
the sale, GE Capital also assumed $729 million, including $79 million of
off-balance- sheet debt. Also during 1999, the Company retired $225 million of
long-term debt at the normal maturity date and redeemed $199 million of Eckerd
Notes due 2004.

During the fourth quarter of 1998, JCP Receivables, Inc., an indirect wholly
owned subsidiary of the Company, completed a public offering of $650 million
aggregate principal amount of 5.5 percent 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 percent and the average maturity was 30 years.

During the past three years, the Company has issued 32.8 million shares of
common stock related to its drugstore acquisitions. The Company repurchased five
million shares of its common stock in the fourth quarter of 1998 for $270
million as part of previously approved share repurchase programs. The Company
has the authority to repurchase an additional five million shares under these
programs.

DIVIDENDS. In December 1999, the Company reduced the quarterly dividend rate
from the previous rate of $0.545 per share to $0.2875 per share. The change was
effective for the dividend payable February 1, 2000 to stockholders of record at
the close of business on January 10, 2000. In determining this dividend rate,
the Company considered the overall

<PAGE>

performance of its several businesses and the need to reinvest earnings in those
businesses. It also took into account, on a preliminary basis, the potential
balance sheet and financial reporting implications of creating a tracking stock
for the higher-growth Eckerd drugstore operation as discussed below.

TRACKING STOCK. In May 1999, the Company announced a tracking stock initiative
that would create a separate class of stock that will reflect the performance of
Eckerd drugstores and another class of stock that will reflect the performance
of Department stores and catalog and Direct Marketing. The Company currently
anticipates that, subject to performance and market conditions, the initial
public offering of approximately 20 percent of the Eckerd tracking stock will
take place during the third or fourth quarter 2000.

ECONOMIC VALUE ADDED (EVA-Registered Trademark-). The Company uses the
principles of EVA as a tool to evaluate potential investments and other
financing opportunities. The year-to-year change in EVA is used as a component
in calculating amounts to be paid under selected management incentive
compensation plans. Beginning in 2000, EVA measurements will be used as a
component in all incentive compensation plans.

YEAR 2000 READINESS. The Year 2000 issue existed because many computer systems
store and process dates using only the last two digits of the year. Such
systems, if not changed, could have interpreted "00" as "1900" instead of the
year "2000." The Company began working to identify and address Year 2000 issues
in January 1995. The scope of this effort included internally developed
information technology systems, purchased and leased software, embedded systems
and electronic data interchange transaction processing.

The Company did not experience any significant disruptions to its operations.
Based on operations since January 1, 2000, the Company does not expect any
significant impact to its ongoing business as a result of the Year 2000 date
change. However, it is possible that the full impact of the date change has not
been fully recognized. The Company believes that any such problems, however, are
likely to be minor and correctable. In addition, the Company could still be
negatively affected if its customers or suppliers are adversely affected by the
Year 2000 or similar issues. The Company currently is not aware of any
significant Year 2000 or similar problems that have arisen for its customers or
suppliers. Total costs for Year 2000 remediation were $51 million, $19 million
of which was incurred in fiscal 1999, and did not 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 EVENT. In February 2000, the Company announced that it was evaluating
underperforming assets and as a result, expected to close 40 to 45 department
stores and 289 drugstores. The majority of department store closings are
expected to occur by July 1, 2000, while the majority of drugstore closings are
expected to occur by May 1, 2000. Charges associated with department store
closings are expected to total approximately $125 million and charges associated
with drugstore closings are expected to total approximately $200 million,
including inventory liquidation costs and store operating costs during the
shut-down period of approximately $80 million which will be reported within
drugstore segment results. Exit costs are expected to consist principally of the
write-off of asset values, the present value of future lease obligations, and
severance and outplacement costs. In addition, the Company expects to finalize
other cost saving initiatives that will result in a first quarter 2000 charge of
$16 million.

<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 below. 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 29, 2000 and January 30, 1999, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three-year period ended January 29, 2000.
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 29, 2000 and January 30, 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended January 29, 2000, in conformity with generally
accepted accounting principles.

/s/ KPMG LLP
KPMG LLP
Dallas, Texas
February 24, 2000

24
<PAGE>

CONSOLIDATED STATEMENTS OF INCOME

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

- -------------------------------------------------------
($ IN MILLIONS) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE

Retail sales, net $ 31,391 $ 29,439 $ 29,482

Direct Marketing revenue 1,119 1,022 928
---------------------------------------------------
Total revenue 32,510 30,461 30,410

COSTS AND EXPENSES

Cost of goods sold 23,374 21,642 21,294

Selling, general, and administrative expenses 7,164 6,623 6,566

Costs and expenses of Direct Marketing 872 785 711

Real estate and other (28) (26) (39)

Net interest expense and credit operations 299 391 457

Acquisition amortization 129 113 117

Other charges and credits, net 169 (22) 379
---------------------------------------------------
Total costs and expenses 31,979 29,506 29,485

INCOME BEFORE INCOME TAXES 531 955 925

Income taxes 195 361 359
---------------------------------------------------
NET INCOME $ 336 $ 594 $ 566
- -----------------------------------------------------------------------------------------------------------
</TABLE>

EARNINGS PER COMMON SHARE

AVERAGE
- ------------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) INCOME SHARES EPS
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Net income $ 336

Less: preferred stock dividends (36)
------------------------------------------------------------
Basic EPS 300 259 $ 1.16

Stock options and convertible preferred stock 36 16
------------------------------------------------------------
Diluted EPS $ 336 275 $ 1.16(1)
------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) CALCULATION EXCLUDES THE EFFECTS OF THE POTENTIAL CONVERSION OF OUTSTANDING
PREFERRED SHARES INTO COMMON SHARES, AND RELATED DIVIDENDS, BECAUSE THEIR
INCLUSION WOULD HAVE AN ANTI-DILUTIVE EFFECT ON EPS.

See Notes to the Consolidated Financial Statements on pages 29 through 40.

<PAGE>

CONSOLIDATED BALANCE SHEETS

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

- ------------------------------------------------------------------------
($ IN MILLIONS) 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS

Current assets

Cash (including short-term investments of $1,233 and $95) $ 1,233 $ 96

Retained interest in JCP Master Credit Card Trust -- 415

Receivables, net (bad debt reserve of $20 and $149) 1,138 4,268

Merchandise inventory (including LIFO reserves of $270 and $227) 5,947 6,060

Prepaid expenses 154 168
------------------------------------------
Total current assets 8,472 11,007

Property and equipment

Land and buildings 3,089 3,109

Furniture and fixtures 3,955 4,045

Leasehold improvements 1,151 1,179

Accumulated depreciation (2,883) (2,875)
------------------------------------------
Property and equipment, net 5,312 5,458

Investments, principally held by Direct Marketing 1,827 1,961

Deferred policy acquisition costs 929 847

Goodwill and other intangible assets, net (accumulated
amortization of $340 and $227) 3,056 2,941

Other assets 1,292 1,294
------------------------------------------
TOTAL ASSETS $ 20,888 $ 23,508
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>

<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable and accrued expenses $ 3,351 $ 3,443

Short-term debt 330 1,924

Current maturities of long-term debt 625 438

Deferred taxes 159 107
----------------------------------------
Total current liabilities 4,465 5,912

Long-term debt 5,844 7,143

Deferred taxes 1,461 1,512

Insurance policy and claims reserves 1,017 946

Other liabilities 873 893
----------------------------------------
TOTAL LIABILITIES 13,660 16,406

Stockholders' Equity

Preferred stock authorized, 25 million shares; issued and outstanding,
0.7 million and 0.8 million shares Series B ESOP convertible preferred 446 475

Common stock, par value 50 cents: authorized, 1,250 million shares;
issued and outstanding 261 million and 250 million shares 3,266 2,850

Reinvested earnings 3,590 3,791

Accumulated other comprehensive income/(loss) (74) (14)
----------------------------------------
TOTAL STOCKHOLDERS' EQUITY 7,228 7,102

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,888 $ 23,508
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to the Consolidated Financial Statements on pages 29 through 40.

<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

ACCUMULATED
GUARANTEED OTHER TOTAL
- ----------------------- COMMON PREFERRED LESOP REINVESTED COMPREHENSIVE STOCKHOLDERS'
($ IN MILLIONS) STOCK STOCK OBLIGATION EARNINGS INCOME/(LOSS)(1) EQUITY
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JANUARY 25, 1997 $ 1,416 $ 568 $ (142) $ 4,006(2) $ 37 $ 5,885
-----------------------------------------------------------------------------------------
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) 3,999 48 7,290
-----------------------------------------------------------------------------------------
Net income -- -- -- 594 -- 594

Net unrealized change
in investments -- -- -- -- (1) (1)

Currency translation
adjustments -- -- -- -- (61)(3) (61)
-----------------------------------------------------------------------------------------
Total comprehensive
income/(loss) -- -- -- 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 -- 3,791 (14) 7,102
-----------------------------------------------------------------------------------------
Net income -- -- -- 336 -- 336

Net unrealized change
in investments -- -- -- -- (76) (76)

Currency translation
adjustments -- -- -- -- 16 16
-----------------------------------------------------------------------------------------
Total comprehensive
income/(loss) -- -- -- 336 (60) 276

Dividends declared -- -- -- (537) -- (537)

Common stock issued 416 -- -- -- -- 416

Preferred stock retired -- (29) -- -- -- (29)
-----------------------------------------------------------------------------------------
JANUARY 29, 2000 $ 3,266 $ 446 $ -- $ 3,590 $ (74) $ 7,228
-----------------------------------------------------------------------------------------
</TABLE>

(1) CUMULATIVE NET UNREALIZED CHANGES IN INVESTMENTS ARE SHOWN NET OF DEFERRED
TAXES OF $(5) MILLION, $36 MILLION, AND $39 MILLION IN 1999, 1998 AND 1997,
RESPECTIVELY. A DEFERRED TAX ASSET HAS NOT BEEN ESTABLISHED FOR CURRENCY
TRANSLATION ADJUSTMENTS.

(2) BEGINNING REINVESTED EARNINGS HAS BEEN REDUCED BY $67 MILLION, NET OF TAX,
TO REFLECT CHANGES TO CERTAIN REVENUE RECOGNITION POLICIES.

(3) 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 29 through 40.

<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

- ------------------------------------------------------
($ IN MILLIONS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES

Net income $ 336 $ 594 $ 566

Gain on the sale of business units -- -- (52)

Other charges and credits, net 169 (22) 371

Depreciation and amortization, including
intangible assets 710 637 584

Deferred taxes (11) 219 1

Change in cash from:

Customer receivables 13 258 215

Other receivables (134) (163) (94)

Inventory, net of trade payables 169 64 (395)

Current taxes payable (97) (171) 116

Other assets and liabilities, net 103 (358) (94)
------------------------------------------------------------
1,258 1,058 1,218
------------------------------------------------------------
INVESTING ACTIVITIES

Capital expenditures (631) (744) (824)

Proceeds from the sale of assets 3,179 -- 276

Acquisitions(1) -- (247) --

Purchases of investment securities (860) (611) (401)

Proceeds from the sale of investment securities 874 447 252
------------------------------------------------------------
2,562 (1,155) (697)
------------------------------------------------------------
FINANCING ACTIVITIES

Change in short-term debt (1,650) 507 (2,533)

Proceeds from the issuance of long-term debt -- 644 2,990

Payment of long-term debt (467) (478) (343)

Common stock issued, net 32 89 79

Common stock purchased and retired -- (270) --

Dividends paid, preferred and common (598) (586) (558)
------------------------------------------------------------
(2,683) (94) (365)
------------------------------------------------------------
NET INCREASE/(DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS 1,137 (191) 156

Cash and short-term investments at beginning of year 96 287 131
------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS AT END OF YEAR $ 1,233 $ 96 $ 287
------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION

Interest paid $ 673 $ 649 $ 571

Interest received 61 45 71

Income taxes paid 245 307 225
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) REFLECTS TOTAL CASH CHANGES RELATED TO ACQUISITIONS.

NON-CASH TRANSACTIONS: IN 1999, THE COMPANY ISSUED 9.6 MILLION SHARES OF COMMON
STOCK HAVING A VALUE OF $354 MILLION TO COMPLETE THE ACQUISITION OF GENOVESE.
ALSO IN 1999, GE CAPITAL ASSUMED $650 MILLION OF BALANCE SHEET DEBT AS PART OF
THE COMPANY'S SALE OF PROPRIETARY CREDIT CARD RECEIVABLES. 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.

See Notes to the Consolidated Financial Statements on pages 29 through 40.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF ACCOUNTING POLICIES 1

ACQUISITIONS AND SALE OF RECEIVABLES 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 AND CREDITS, NET 14

RESTRUCTURING RESERVES 15

SUBSEQUENT EVENT 16

TAXES 17

SEGMENT REPORTING 18

<PAGE>

1 SUMMARY OF
ACCOUNTING POLICIES

BASIS OF PRESENTATION. In 1999, after giving consideration to guidance provided
by SEC Staff Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS, the Company changed certain revenue recognition policies affecting
Department stores and catalog. Changes primarily affected the reporting of sales
for licensed departments and catalog orders shipped to various Company
facilities for customer pickup. These changes reduced sales by $152 million,
$217 million and $136 million in 1999, 1998 and 1997, respectively, and resulted
in a $67 million reduction of reinvested earnings, net of tax, as of January 28,
1995. The impact on earnings and cash flows for the intervening periods
presented in this report is not material. Accordingly, the cumulative effects of
the changes have been reflected as a $20 million pre-tax charge to cost of goods
sold in the statement of income for fiscal 1999, the period in which the change
was made.

Third-party credit fees of $91 million in 1999 and $93 million in both 1998 and
1997 have been reclassified from Net interest expense and credit operations to
Department stores and catalog SG&A expenses to reflect these costs as operating
expenses. Certain other 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 1999 ended January 29, 2000; fiscal 1998 ended January 30,
1999; and fiscal 1997 ended January 31, 1998. Fiscal 1999 and 1998 were 52-week
years; fiscal 1997 was a 53-week year. The accounts of Direct Marketing and
Renner are on a calendar-year basis.

REVENUE RECOGNITION. Retail sales include merchandise and services, net of
returns, and exclude all taxes. Commissions earned on sales generated by
licensed departments are included as a component of retail sales; layaway sales
and catalog orders delivered to catalog departments located in department stores
and other Company facilities are recorded as sales at the time customers pick up
the merchandise. An allowance has been established to provide for projected
merchandise returns.

Insurance premiums are recognized according to the type of product sold. Revenue
is recognized for life insurance when premiums become due and for credit,
accident and health insurance over the coverage period. Premiums earned but not
paid within 90 days are reversed.

Membership services revenue is recognized over the contract period, less amounts
subject to money back guarantees, if any.

EARNINGS PER COMMON SHARE. Basic earnings per share are 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 assume the exercise of stock options and the conversion of
the Series B ESOP Convertible Preferred Stock into the Company's common stock.

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 sheet.

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 estimated useful lives. The primary
useful life for buildings is 50 years, and ranges between three and 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. Intangible assets, other than trade name, are amortized over periods
ranging from five to seven years. Trade name and goodwill are generally
amortized over 40 years.

ASSET RECOVERABILITY. The Company assesses the recoverability of asset values,
including goodwill and other intangible assets, on a periodic basis by comparing
undiscounted cash flows to carrying value. Impaired assets are written down to
estimated fair value. Fair value is generally determined based on discounted
expected future cash flows.

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 membership.

<PAGE>

CAPITALIZED SOFTWARE COSTS. Expenses 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
between three and ten years.

INVESTMENTS. The Company's investments, the majority of which are held by Direct
Marketing, 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. Realized gains and losses are determined
on a first-in, first-out basis.

INSURANCE POLICY AND CLAIMS 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. The liability for claims includes
estimated unpaid claims that have been reported to the Company and claims
incurred but not yet reported.

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.

PRE-OPENING EXPENSES. Costs associated with the opening of new stores are
expensed in the period incurred.

FOREIGN CURRENCY TRANSLATION. Foreign currency assets and liabilities are
translated into U.S. dollars at the exchange rates in effect at the balance
sheet date and revenues and expenses are translated using average currency rates
during the reporting period.

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 one 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. The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles requires
that management estimate certain amounts that are reported. Actual results may
differ from these estimates.

NEW ACCOUNTING RULES. The Financial Accounting Standards Board issued FAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, in June 1998.
The new rules are effective for quarters beginning after June 15, 2000. The
Company has a limited exposure to derivative products and does not expect these
new rules to have a material impact on reported results.

2 ACQUISITIONS AND
SALE OF RECEIVABLES

On December 6, 1999, the Company completed the sale of its proprietary credit
card receivables, including its Retained Interest in the JCP Master Credit Card
Trust and its credit facilities, to GE Capital. The total value of the
transaction, including $729 million of debt, $79 million of which was
off-balance-sheet debt, assumed by GE Capital, related to previous receivable
securitization transactions, was $4.0 billion. Proceeds from the sale were used
to pay down short-term debt with the balance invested in short-term investments
pending the maturity of long-term debt issues. The sale resulted in a pre-tax
gain of $55 million, net of an allowance for final settlement, which is included
as a component of Other charges and credits, net, in the consolidated statement
of income. As a part of the overall transaction, the Company also outsourced the
management of its proprietary credit card business to GE Capital.

The Company has completed several acquisitions in recent years as noted below.
In all cases, the purchase price was allocated to assets acquired and
liabilities assumed based on estimated fair values. The excess of the purchase
price over the fair value of assets acquired, including intangible assets, and
liabilities assumed is accounted for as goodwill and is generally amortized over
40 years. All acquisitions have been accounted for under the purchase method.
Accordingly, their results of operations are included in the Company's
statements of income as of the date of the acquisition.

On March 1, 1999, the Company completed the acquisition of Genovese, a
141-drugstore chain with locations in New York, New Jersey and Connecticut. The
acquisition was accomplished through the 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 $60 million of debt, was $414 million, of which $263
million represented goodwill.

The Company completed the acquisition of a majority interest in Renner, a
21-store Brazilian department store chain, in

<PAGE>

January 1999. The total purchase price was $139 million, of which $67 million
represented goodwill.

3 RETAINED INTEREST IN JCP
MASTER CREDIT CARD TRUST

The Company previously transferred portions of its customer receivables to a
trust which, in turn, sold certificates in public offerings representing
undivided interests in the trust. The Company owned the remaining undivided
interest not represented by the certificates. The retained interest in the trust
was transferred to GE Capital as part of the sale of the Company's credit card
receivables in the fourth quarter of 1999.

The retained interest in the trust was 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 at the end of 1998
included a valuation reserve of $15 million.

(4) INVESTMENTS AND FAIR VALUE
OF FINANCIAL INSTRUMENTS

1999 1998
-------------------------------------

- ------------------- AMORTIZED FAIR AMORTIZED FAIR
($ IN MILLIONS) COST VALUE COST VALUE
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed income
securities $ 1,433 $ 1,396 $ 1,269 $ 1,322

Asset-backed
certificates 267 268 431 449

Equity securities 143 163 159 190
-------------------------------------
Total $ 1,843 $ 1,827 $ 1,859 $ 1,961
- ---------------------------------------------------------
</TABLE>

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.

FINANCIAL LIABILITIES. Financial liabilities are carried in the consolidated
balance sheets at historical cost. At January 29, 2000, long-term debt,
including current maturities, had a carrying value of $6.4 billion and a fair
value of $5.9 billion, and at January 30, 1999, had a carrying value of $7.5
billion and a fair value of $7.8 billion. Carrying value approximates fair value
for short-term debt. These 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 ratings. All
long-term debt is fixed rate debt 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, with a notional principal amount of $375
million, which was entered into in connection with the issuance of asset-backed
certificates with the same principal amount. The purpose of the swap was to lock
in a fixed rate of interest over the life of the financing. Both the swap and
the asset-backed certificates will mature June 15, 2000. The Company's total
exposure resulting from the swap is not material. The cost associated with this
swap is recorded as interest expense.

CONCENTRATIONS OF CREDIT RISK. The Company has no significant concentrations of
credit risk.

5 ACCOUNTS PAYABLE AND
ACCRUED EXPENSES

- ----------------------------------
($ IN MILLIONS) 1999 1998
- -----------------------------------------------------------
<S> <C> <C>
Trade payables $ 1,480 $ 1,471

Accrued salaries, vacation,
and bonus 463 444

Taxes payable 179 232

Interest payable 155 165

Workers' compensation and general
liability insurance 90 77

Common dividends payable 79 140

Other(1) 905 914
-------------------------
Total $ 3,351 $ 3,443
- -----------------------------------------------------------
</TABLE>

(1) INCLUDES $86 MILLION AND $110 MILLION FOR 1999 AND 1998, RESPECTIVELY,
RELATED TO OTHER CHARGES AND CREDITS, NET, PRINCIPALLY FUTURE LEASE
OBLIGATIONS.

6 SHORT-TERM DEBT

- ---------------------------------------
($ IN MILLIONS) 1999 1998
- -------------------------------------------------------------
<S> <C> <C>
Commercial paper $ 330 $ 1,924

Average interest rate at year-end 6.3% 5.1%
- -------------------------------------------------------------
</TABLE>

<PAGE>

The decline in short-term debt as of the end of 1999 is the result of paying
down commercial paper balances with the proceeds from the sale of the Company's
proprietary credit card receivables in December 1999. Committed bank credit
facilities available to the Company as of January 29, 2000 totaled $3.0 billion.
The facilities, as amended and restated in 1999, support the Company's
short-term borrowing program and are comprised of a $1.5 billion, 364-day
revolver (expires September 29, 2000) and a $1.5 billion, five-year revolver
(expires November 21, 2002). None of the borrowing facilities was in use as of
January 29, 2000.

The Company also has $1 billion of uncommitted credit lines in the form of
letters of credit with seven banks to support its direct import merchandise
program. As of January 29, 2000, $404 million of letters of credit issued by the
Company were outstanding.

7 LONG-TERM DEBT

JAN. 29, 2000 JAN. 30, 1999
--------------------------------------
- ---------------------- AVG. AVG.
($ IN MILLIONS) RATE BALANCE RATE BALANCE
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
Notes and debentures

Due: Year 1 6.7% $ 625 8.0% $ 424

Year 2 9.1% 250 6.7% 625

Year 3 7.5% 1,100 9.1% 250

Year 4 6.3% 350 7.5% 1,100

Year 5 7.5% 300 5.8% 1,000

Years 6 - 10 8.2% 1,172 8.0% 1,441

Years 11 - 15 9.0% 117 9.0% 125

Years 16 - 20 7.6% 763 7.6% 767

Years 21 - 30 7.5% 862 7.5% 875

Thereafter 7.5% 900 7.5% 900
--------------------------------------------
Total notes and
debentures 7.6% 6,439 7.4% 7,507

Capital lease
obligations and other -- 30 -- 74

Less current
maturities -- (625) -- (438)
--------------------------------------------
Total long-term debt -- $ 5,844 -- $ 7,143
- ------------------------------------------------------------------
</TABLE>

ALL NOTES AND DEBENTURES HAVE SIMILAR CHARACTERISTICS REGARDLESS OF DUE DATE AND
THEREFORE ARE GROUPED BY MATURITY DATE IN THE ABOVE SCHEDULE.

In the first quarter of 1999, the Company redeemed approximately $199 million
principal amount of Eckerd Notes, due 2004, having a coupon rate of 9.25
percent. The Company recognized a pre-tax gain of $5 million on the early
extinguishment of the Notes which is classified as a component of Net interest
expense and credit operations in the consolidated statements of income. In the
fourth quarter of 1999, GE Capital assumed $650 million of debt, described
below, in conjunction with the purchase of the Company's proprietary credit card
receivables. During 1998, JCP Receivables, Inc., an indirect wholly owned
subsidiary of the Company, completed a public offering of $650 million aggregate
principal amount of Series E asset-backed certificates of JCP Master Credit Card
Trust. The certificates had a maturity of five years and an interest rate of 5.5
percent. The transaction did not meet the criteria for sale accounting under FAS
No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES, and accordingly was accounted for as a secured
borrowing.

8 CAPITAL STOCK

At January 29, 2000, there were approximately 55 thousand stockholders of
record. On a combined basis, the Company's savings plans, including the
Company's employee stock ownership plan (ESOP), held 46.5 million shares of
common stock or 16.8 percent 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;
261 million shares were issued and outstanding as of January 29, 2000, and 250
million shares were issued and outstanding as of January 30, 1999.

PREFERRED STOCK. The Company has authorized 25 million shares; 743 thousand
shares of Series B ESOP Convertible Preferred Stock were issued and outstanding
as of January 29, 2000, and 792 thousand shares were issued and outstanding as
of January 30, 1999. Each share is convertible into 20 shares of the Company's
common stock at a guaranteed minimum price of $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 percent. 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

<PAGE>

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.

9 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 ten-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 ten 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 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 25 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

1999 1998 1997
- -----------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 3.8% 3.8% 4.0%

Expected volatility 25.1% 20.5% 21.3%

Risk-free interest rate 5.5% 5.7% 6.3%

Expected option term 7 years 6 years 6 years

Fair value per share of
options granted $ 8.41 $ 13.66 $ 9.76
- -----------------------------------------------------------
</TABLE>

Compensation expense recorded under FAS No. 123 would have been approximately
$40 million in 1999, $21 million in 1998 and $11 million in 1997, reducing
earnings per share by approximately 15 cents in 1999, eight cents in 1998 and
four cents in 1997.

- -------------------------------------------------------------------------------

The following table summarizes the status of the Company's fixed stock option
plans for the three years ended January 29, 2000, January 30, 1999 and January
31, 1998:

OPTIONS

1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
(SHARES IN THOUSANDS, PRICE IS WEIGHTED AVERAGE) SHARES PRICE SHARES PRICE SHARES PRICE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 6,972 $ 48 7,583 $ 40 8,633 $ 36

Granted 5,619 36 1,643 71 1,413 45

Exercised (479) 23 (2,100) 36 (2,347) 30

Expired and cancelled (280) 40 (154) 61 (116) 48
----------------------------------------------------------------
Outstanding at end of year 11,832 $ 43 6,972 $ 48 7,583 $ 40
----------------------------------------------------------------
Exercisable at end of year 6,913 $ 48 5,418 $ 41 6,428 $ 38
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

OPTIONS AS OF JANUARY 29, 2000

OUTSTANDING EXERCISABLE
- ------------------------------------ -------------------------------------------------------------
(SHARES IN THOUSANDS, PRICE AND TERM REMAINING
ARE WEIGHTED AVERAGES) SHARES PRICE TERM (YRS.) SHARES PRICE
- -------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C>
Under $25 27 $ 16 5.8 27 $ 16

$25 - $35 1,779 28 1.9 1,768 28

$35 - $45 5,897 37 8.4 1,087 42

$45 - $55 1,828 48 6.6 1,825 48

Over $55 2,301 66 7.3 2,206 66
-----------------------------------------------------------------
Total 11,832 $ 43 6.9 6,913 $ 48
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

10 INTEREST EXPENSE, NET

- ------------------------
($ IN MILLIONS) 1999 1998 1997
- ------------------------------------------------------
<S> <C> <C> <C>
Short-term debt $ 137 $ 106 $ 121

Long-term debt 536 557 527

Other, net * (61) (48) (64)
------------------------------
Interest expense, net $ 612 $ 615 $ 584
- ------------------------------------------------------
</TABLE>

* INCLUDES $34 MILLION IN BOTH 1999 AND 1997, AND $39 MILLION IN 1998 FOR
INTEREST INCOME FROM THE COMPANY'S INVESTMENT IN ASSET-BACKED CERTIFICATES.

11 LEASE COMMITMENTS

The Company conducts the major part of its operations from leased premises that
include retail stores, catalog fulfillment centers, warehouses, offices and
other facilities. Almost all leases will expire during the next 20 years;
however, most leases will be renewed or replaced by leases on other premises.
Rent expense for real property operating leases totaled $667 million in 1999,
$585 million in 1998, and $541 million in 1997, including contingent rent, based
on sales, of $64 million, $66 million and $72 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 $127 million in 1999, $123 million in 1998, and
$126 million in 1997.

Future minimum lease payments for non-cancelable operating and capital leases,
net of executory costs, principally real estate taxes, maintenance and
insurance, and subleases, as of January 29, 2000 were:

- ----------------------------------------------------------
($ IN MILLIONS) OPERATING CAPITAL
- ----------------------------------------------------------
<S> <C> <C>
2000 $ 620 $ 10

2001 568 10

2002 521 6

2003 492 1

2004 454 --

Thereafter 3,099 --
---------------------------
Total minimum lease payments $ 5,754 $ 27
---------------------------
Present value $ 3,302 $ 24

Weighted average interest rate 9.7% 10.0%
- ----------------------------------------------------------
</TABLE>

12 ADVERTISING COSTS

Advertising costs consist principally of newspaper, television, radio and
catalog book costs. In 1999, the total cost of advertising was $1,054 million
compared with $1,077 million in 1998, and $977 million in 1997. The consolidated
balance sheets include deferred advertising costs, primarily catalog book costs,
of $84 million as of January 29, 2000, and $87 million as of January 30, 1999,
classified as Other Assets.

13 RETIREMENT PLANS

The Company's retirement plans consist principally of a noncontributory pension
plan, noncontributory supplemental retirement and deferred compensation plans
for certain management associates, a contributory medical and dental plan, and a
401(k) plan and employee stock ownership plan. In 1998, the Company adopted two
additional non-qualified savings plans. Pension plan assets are invested in a
balanced portfolio of equity and debt securities managed by third party
investment managers. In addition to the above, Eckerd has a noncontributory
pension plan. As of January 1, 1999, all Eckerd retirement benefit plans were
frozen and employees began to accrue benefits under the Company's retirement
plans. The cost of these programs and the December 31 balances of plan assets
and obligations are shown below:

EXPENSE

- -------------------------------
($ IN MILLIONS) 1999 1998 1997
- --------------------------------------------------------------
<S> <C> <C> <C>
PENSION AND HEALTH CARE

Service cost $ 109 $ 76 $ 68

Interest cost 220 221 200

Projected return on assets (314) (283) (488)

Net amortization 13 14 248
-------------------------------
Total pension and
health care 28 28 28

SAVINGS PLAN EXPENSE 35 76 71
-------------------------------
TOTAL RETIREMENT PLANS $ 63 $ 104 $ 99
- --------------------------------------------------------------
</TABLE>

<PAGE>

ASSUMPTIONS

1999 1998 1997
- -------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.75% 6.75% 7.25%

Expected return on 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%
- -------------------------------------------------------
</TABLE>

ASSETS AND OBLIGATIONS

PENSION PLANS*

- ---------------------------------
($ IN MILLIONS) 1999 1998
- -----------------------------------------------------
<S> <C> <C>
PROJECTED BENEFIT OBLIGATION

Beginning of year $ 3,006 $ 2,749

Service and interest cost 303 273

Actuarial (gain)/loss (375) 184

Benefits paid (201) (200)

Amendments and other 4 --
--------------------
End of year 2,737 3,006

FAIR VALUE OF PLAN ASSETS

Beginning of year 3,393 3,064

Company contributions 35 32

Net gains 560 497

Benefits paid (201) (200)

Amendments and other 4 --
--------------------
End of year 3,791 3,393

Excess of fair value over
projected benefits 1,054 387

Unrecognized gains and
prior service cost (563) 75
--------------------
PREPAID PENSION COST $ 491 $ 462
- -----------------------------------------------------
</TABLE>

* INCLUDES SUPPLEMENTAL RETIREMENT PLAN.

MEDICAL AND DENTAL

- ------------------------------------
($ IN MILLIONS) 1999 1998
- --------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation $ 322 $ 334

Net unrecognized losses 17 10
--------------------

Net medical and dental liability $ 339 $ 344
- --------------------------------------------------------
</TABLE>

A one percent change in the health care trend rate would change the accumulated
benefit obligation and expense by approximately $26 million and $2 million,
respectively.

14 OTHER CHARGES AND
CREDITS, NET

CHARGES/(CREDITS) BY CATEGORY

- ------------------------
($ IN MILLIONS) 1999 1998 1997
- ---------------------------------------------------
<S> <C> <C> <C>
Asset impairments $ 240 $ -- $ 72

Gain on the sale of
business units (55) -- (63)

Workforce reduction
programs -- -- 206

Store closing costs -- -- 61

Drugstore integration
costs -- -- 103

Other (16) (22) --
---------------------------
Total $ 169 $ (22) $ 379
---------------------------
Net income impact $ 126 $ (13) $ 231
- ---------------------------------------------------
</TABLE>

In 1999's fourth quarter the Company recorded items totaling $169 million on a
pre-tax basis that are reported as Other charges and credits, net. This charge
was comprised of three categories: (i) asset impairment charges of $240 million,
(ii) a $55 million gain on the sale of the Company's proprietary credit card
receivables and (iii) reversal of reserves and recognition of gains, together
totaling $16 million, related to 1996 and 1997 store restructuring provisions.

Asset impairments were recognized for underperforming department stores ($130
million) and drugstores ($110 million) in accordance with FAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF. The impairment charges represent the excess of the carrying
values of the assets, including intangible assets, over estimated fair values.
The department store charge relates to ten stores, with the majority
attributable to seven stores in the Washington, D.C. market that were acquired
in 1995. The Washington, D.C. stores have performed substantially below levels
anticipated at the time of the acquisition, and the impairment charge generally
represents goodwill associated with the acquisition. Three of the impaired
department stores had contracts of sale pending as of the end of fiscal 1999 and
are expected to close by the end of the first quarter of 2000. Fair values for
department stores were determined based on the established sales prices for the
three stores, independent appraisals of three other stores and projected cash
flows for the remaining stores. Stores held for sale were written down to net
realizable value. Drugstore impairment charges represent the write-off of fixed

<PAGE>

assets, including intangibles, associated with 289 underperforming stores
located throughout Eckerd's operating area, with concentrations in Pennsylvania,
Virginia, New Jersey and New York. The impaired stores generally represent
smaller, low-volume stores that were former independent units and chains
acquired over the years that do not meet Eckerd's performance standards and
cannot be relocated. Subsequent to year end, a plan was approved to close all of
the stores during the first half of fiscal 2000 with the majority closing by May
1. Fair values were based on projected cash flows for the expected remaining
operating periods for the individual stores.

In December 1999, the Company completed the sale of its proprietary credit card
receivables, including its credit facilities, to GE Capital at a gain of $55
million (see Note 2 for further discussion of the sale). The Company also
recorded credits related to restructuring charges recognized in 1996 and 1997.
Gains on the sale of two closed department store locations that had been written
off in 1997 totaled $4 million and reserves for future lease obligations were
reduced by $7 million based on the negotiation of lease terminations that were
lower than the reserves that had been established in 1997. In addition,
drugstore reserves were reduced by $5 million.

In 1998's fourth quarter, the Company recorded a $22 million pre-tax credit for
the reversal of reserves established in 1997 for future obligations for store
closings and workforce reduction programs. The reversals related to the final
settlement of obligations for amounts less than anticipated. In 1997, the
Company recorded pre-tax charges, net of $379 million, comprised of early
retirement and workforce reduction programs ($206 million), the closing of
underperforming department stores ($133 million), drugstore integration
activities ($103 million), and gains on the sale of business units ($63
million). Reserves for future obligations were established for certain
components of the 1997 charges which are discussed in Note 15 below.

15 RESTRUCTURING
RESERVES

During 1996 and 1997, the Company established reserves for future costs
associated with certain restructuring charges. These reserves were principally
related to future lease obligations for both department stores and drugstores
that were identified for closing. The following tables provide a roll forward of
reserves that were established for these charges. Reserves are reviewed for
adequacy on a periodic basis and are adjusted as appropriate based on those
reviews. The following schedules, and the accompanying discussion, provide the
status of the reserves as of January 29, 2000.

1997 OTHER CHARGES

1998 1999
- -----------------------------------------------------------------------------------------------------------
Y/E CASH OTHER Y/E
($ IN MILLIONS) RESERVE OUTLAYS CHANGES RESERVE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DEPARTMENT STORES AND CATALOG

Future lease obligations(1) $ 20 $ (5) $ (7) $ 8

ECKERD DRUGSTORES

Future obligations, primarily leases(1) 27 (4) -- 23
----------------------------------------------------------

Total $ 47 $ (9) $ (7) $ 31
- -----------------------------------------------------------------------------------------------------------
</TABLE>

(1) RESERVE BALANCES ARE INCLUDED AS A COMPONENT OF ACCOUNTS PAYABLE AND ACCRUED
EXPENSES.

<PAGE>

DEPARTMENT STORES AND CATALOG

FUTURE LEASE OBLIGATIONS. In 1997, the Company identified 97 underperforming
stores that did not meet the Company's profit objectives and several support
units (credit service centers and warehouses) which were no longer needed. All
of these facilities had closed by the end of fiscal 1998. The store-closing plan
anticipated that the Company would remain liable for all future lease
obligations. The reserve as of the end fiscal 1999 represents future lease
obligations, and costs are being charged against the reserve as incurred. During
fiscal 1999, approximately $5 million in lease payments had been charged against
the reserve. In the fourth quarter of 1999, reserves were reduced by $7 million
as a result of favorable lease termination settlements for certain stores.

ECKERD DRUGSTORES

FUTURE OBLIGATIONS, PRIMARILY LEASES. During 1997, the Company established
reserves for the present value of future lease payments for certain drugstores
that were identified for closure. In addition, reserves were established for
pending litigation and other miscellaneous charges, each individually
insignificant. During fiscal 1999, approximately $4 million in payments were
charged against the reserve. On a combined basis, the reserves totaled $23
million at the end of fiscal 1999.

1996 OTHER CHARGES

1998 1999
- -------------------------------------------------------------------------------------------------------------------
Y/E Cash Other Y/E
($ IN MILLIONS) Reserve Outlays Changes Reserve
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Eckerd Drugstores

Future lease obligations and severance(1) $ 59 $ (3) $ (5) $ 51

Allowance for notes receivable(2) 25 -- -- 25

Other(1) 4 -- -- 4
- -------------------------------------------------------------------------------------------------------------------
Total $ 88 $ (3) $ (5) $ 80
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) RESERVE BALANCES ARE INCLUDED AS A COMPONENT OF ACCOUNTS PAYABLE AND ACCRUED
EXPENSES.

(2) THE ALLOWANCE FOR NOTES RECEIVABLE IS INCLUDED AS A REDUCTION OF OTHER
ASSETS.

FUTURE LEASE OBLIGATIONS. In 1996 the Company identified certain drugstores that
would be closed in connection with its acquisition of Eckerd Corporation, and
established a reserve for the present value of future lease obligations for the
closed drugstores. Costs are being charged against the reserve as incurred; the
interest component related to lease payments is recorded as rent expense in the
period incurred with no corresponding increase in the reserve. During fiscal
year 1999, approximately $3 million in lease payments were charged against the
reserve. These reserves were reviewed for adequacy in 1999, and consequently,
were reduced by $5 million.

ALLOWANCE FOR NOTES RECEIVABLE. In connection with the Eckerd acquisition, the
Federal Trade Commission required that the Company divest certain drugstores in
North Carolina and South Carolina. The sale of these drugstores was partially
financed by the Company through a note receivable for $33 million. A reserve for
75 percent of the face value of the note receivable was established due to the
significant constraints on the Company's ability to collect on the note.

OTHER. The remaining charges, the majority of which have been expensed as
incurred, were related to integration activities for the Fay's drugstores
acquired by the Company in October 1996, and other activities such as contract
terminations.

38
<PAGE>

16 SUBSEQUENT EVENT

In February 2000, the Company announced that it was evaluating underperforming
assets and as a result, expected to close 40 to 45 department stores and 289
drugstores. The majority of department store closings are expected to occur by
July 1, 2000, while the majority of drugstore closings are expected to occur by
May 1, 2000. Charges associated with department store closings are expected to
total approximately $125 million and charges associated with drugstore closings
are expected to total approximately $200 million, including inventory
liquidation costs and store operating costs during the shut-down period of
approximately $80 million which will be reported within drugstore segment
results. Exit costs are expected to consist principally of the write-off of
asset values, the present value of future lease obligations, and severance and
outplacement costs. In addition, the Company expects to finalize other cost
saving initiatives that will result in a first quarter 2000 charge of $16
million.

17 TAXES

Deferred tax assets and liabilities reflected in the Company's consolidated
balance sheet as of January 29, 2000 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 29, 2000 and January 30, 1999
were as follows:

TEMPORARY DIFFERENCES

- --------------------------------
($ IN MILLIONS) 1999 1998
- -----------------------------------------------------
<S> <C> <C>
Depreciation and amortization $ 1,104 $ 1,084

Leases 318 312

Deferred acquisition costs 224 233

Retirement benefits 47 49

Other, including
comprehensive income/(loss) (73) (59)
---------------------
Total $ 1,620 $ 1,619
- -----------------------------------------------------
</TABLE>

INCOME TAX EXPENSE

- -------------------------
($ IN MILLIONS) 1999 1998 1997
- ----------------------------------------------------
<S> <C> <C> <C>
CURRENT

Federal and foreign $ 227 $ 111 $ 319

State and local (21) 31 39
---------------------------

Subtotal 206 142 358

DEFERRED

Federal and foreign (5) 219 3

State and local (6) -- (2)
---------------------------

Subtotal (11) 219 1
---------------------------
Total $ 195 $ 361 $ 359

Effective tax rate 36.8% 37.8% 38.8%
- ----------------------------------------------------
</TABLE>

1999 BALANCES INCLUDE $12 MILLION OF DEFERRED TAXES RELATED TO THE GENOVESE
ACQUISITION.

RECONCILIATION OF TAX RATES

- ----------------------------------
(PERCENT OF PRE-TAX INCOME) 1999 1998 1997
- -------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax
at statutory rate 35.0 35.0 35.0

State and local income
taxes, less federal income
tax benefit (3.4) 2.2 2.8

Tax effect of dividends
on allocated ESOP shares (2.8) (1.4) (1.3)

Tax credits and other 8.0 2.0 2.3
---------------------------
Total 36.8 37.8 38.8
- -------------------------------------------------------------
</TABLE>

Declines in the effective tax rate over the last three years are related
primarily to the effects of tax planning strategies that have significantly
reduced state and local effective income tax rates.

<PAGE>

18 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 2 and pages 5 through 13 of this
report. Other items are shown in the table below for purposes of reconciling to
total Company consolidated amounts.

- ---------------------------------------- Operating Total Capital Depr. &
($ IN MILLIONS) Year Revenue Profit(1) Assets Expenditures Amort.
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Department stores and catalog(2) 1999 $ 18,964 $ 670 $ 10,906 $ 321 $ 386

1998 19,114 920 14,433 439 380

1997 19,819 1,275 14,850 464 366

Eckerd drugstores 1999 12,427 183 7,053 283 193

1998 10,325 254 6,361 256 139

1997 9,663 347 6,064 341 112

Direct Marketing 1999 1,119 247 2,842 2 2

1998 1,022 237 2,603 1 5

1997 928 217 2,283 5 5

Total segments 1999 32,510 1,100 20,801 606 581

1998 30,461 1,411 23,397 696 524

1997 30,410 1,839 23,197 810 483

Net interest expense and credit
operations 1999 -- (299) -- -- --

1998 -- (391) -- -- --

1997 -- (457) -- -- --

Real estate and other and
acquisition amortization 1999 -- (101) 87 -- 129

1998 -- (87) 111 -- 113

1997 -- (78) 166 -- 101

Other charges and credits, net 1999 -- (169) -- -- --

1998 -- 22 -- -- --

1997 -- (379) -- -- --

Total Company 1999 32,510 531 20,888 606 710

1998 30,461 955 23,508 696 637

1997 30,410 925 23,363 810 584
- ----------------------------------------------------------------------------------------------------------
</TABLE>

(1) TOTAL COMPANY OPERATING PROFIT EQUALS INCOME BEFORE INCOME TAXES AS SHOWN ON
THE COMPANY'S CONSOLIDATED STATEMENTS OF INCOME.

(2) INCLUDES CERTAIN AMOUNTS FOR CORPORATE DEPARTMENTS.

<PAGE>

QUARTERLY DATA (UNAUDITED)

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------------------------------------------------------------
($ IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998 1999 1998 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Retail sales, net $ 7,258 $ 6,755 $ 7,034 $ 6,483 $ 7,552 $ 7,129 $ 9,547 $ 9,072

Total revenue 7,532 7,001 7,310 6,734 7,834 7,381 9,834 9,345

LIFO gross margin 1,966 1,904 1,756 1,629 2,057 2,015 2,238 2,249

Net income/(loss) 167 174 39 27 142 186 (12) 207

Net income/(loss) per common share,
diluted 0.61 0.64 0.12(1) 0.08(1) 0.51 0.68 (0.08)(1) 0.77

Dividend per common share 0.545 0.545 0.545 0.545 0.545 0.545 0.2875 0.545

Price range

High 48.38 77.88 54.44 78.75 44.88 59.38 27.50 56.13

Low 35.38 64.69 43.75 58.00 25.31 42.63 17.69 38.13

Close 45.63 71.94 43.75 58.69 25.38 47.50 18.31 39.00
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>

FIVE YEAR FINANCIAL SUMMARY

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

- --------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS FOR THE YEAR

Total revenue $ 32,510 $ 30,461 $ 30,410 $ 23,292 $ 21,084

Retail sales, net 31,391 29,439 29,482 22,474 20,404

Percent increase 6.6% (0.1)% 31.2% 10.1% 1.5%

Net income $ 336 $ 594 $ 566 $ 565 $ 838

Return on beginning stockholders' equity 4.7% 8.2% 8.0%(2) 9.7% 15.1%(3)

Per common share

Net income, diluted $ 1.16(1) $ 2.19 $ 2.10 $ 2.25 $ 3.33

Dividends 1.92 2.18 2.14 2.08 1.92

Stockholders' equity 26.17 26.74 27.31 24.71 24.60

FINANCIAL POSITION

Capital expenditures 606 696 810 790 749

Total assets 20,888 23,508 23,363 21,958 16,972

Long-term debt 5,844 7,143 6,986 4,565 4,080

Stockholders' equity 7,228 7,102 7,290 5,885 5,817(3)

OTHER

Common shares outstanding at end of year 261 250 251 224 224

Weighted average common shares

Basic 259 253 247 226 226

Diluted 275 271 268 248 249

Number of employees at end of year (IN THOUSANDS) 291 268 260 252 205
- ------------------------------------------------------------------------------------------------------------
</TABLE>

(2) ASSUMES THE COMPLETION OF THE ECKERD ACQUISITION IN BEGINNING EQUITY.

(3) BEGINNING REINVESTED EARNINGS HAS BEEN REDUCED BY $67 MILLION, NET OF TAX,
TO REFLECT CHANGES TO CERTAIN REVENUE RECOGNITION POLICIES.

<PAGE>

FIVE YEAR OPERATIONS SUMMARY

J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES

1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DEPARTMENT STORES

Number of stores - JCPenney department stores

Beginning of year 1,148 1,203 1,228 1,238 1,233

Openings 14 12 34 36 43

Closings (19) (67) (59) (46) (38)
-----------------------------------------------------------
End of year 1,143 1,148 1,203 1,228 1,238

Renner department stores 35 21 -- -- --
-----------------------------------------------------------
Total department stores 1,178 1,169 1,203 1,228 1,238

Gross selling space (IN MILLIONS) 116.4 116.0 118.4 117.2 114.3

Sales (IN MILLIONS) $ 15,016 $ 15,224 $ 15,904 $ 15,568 $ 14,814

Sales including catalog desks (IN MILLIONS) 17,575 17,991 18,953 18,515 17,771

Sales per gross square foot 154 154 156 157 154
-----------------------------------------------------------
CATALOG

Number of catalog units

Department stores 1,142 1,139 1,199 1,226 1,228

Freestanding sales centers and other 509 512 554 569 565

Drugstores 410 139 110 107 106
-----------------------------------------------------------

Total 2,061 1,790 1,863 1,902 1,899

Sales (IN MILLIONS) $ 3,948 $ 3,890 $ 3,915 $ 3,759 $ 3,739
-----------------------------------------------------------
ECKERD DRUGSTORES

Number of stores

Beginning of year 2,756 2,778 2,699 645 526

Openings 266* 220* 199* 47 37

Acquisitions 163 36 200 2,020 97

Closings (287)* (278)* (320)* (13) (15)
-----------------------------------------------------------
End of year 2,898 2,756 2,778 2,699 645

Gross selling space (IN MILLIONS) 29.2 27.6 27.4 26.4 6.2

Sales (IN MILLIONS) $ 12,427 $ 10,325 $ 9,663 $ 3,147 $ 1,851

Sales per gross square foot 395 350 314 261 253
-----------------------------------------------------------
DIRECT MARKETING

Revenue (IN MILLIONS) $ 1,119 $ 1,022 $ 928 $ 818 $ 680

Distribution of revenue

JCPenney customers 48% 50% 53% 56% 65%

Other business relationships 52% 50% 47% 44% 35%

Policies, certificates, and memberships
in force at year end (IN MILLIONS) 14.8 14.7 13.2 11.3 9.6
- ------------------------------------------------------------------------------------------------------------
</TABLE>

* INCLUDES RELOCATIONS OF 208 DRUGSTORES IN 1999, 175 DRUGSTORES IN 1998 AND
127 DRUGSTORES IN 1997.

<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
credit sales penetration rates, capital structure and cash flows.

The following table presents the sales penetration rates of the Company's
proprietary/private-label and third-party credit cards.

DEPARTMENT STORES AND CATALOG

1999 1998 1997
-------------------------------------------------------------------------
PERCENT OF PERCENT OF PERCENT OF
- ------------------------------------------ ELIGIBLE ELIGIBLE ELIGIBLE
($ IN BILLIONS) SALES SALES SALES SALES SALES SALES
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JCPenney credit card $ 7.4 37.9% $ 7.6 39.4% $ 8.6 43.4%

Third-party credit cards 5.2 27.6% 5.0 26.1% 4.7 23.5%
-------------------------------------------------------------------------
Total $ 12.6 65.5% $ 12.6 65.5% $ 13.3 66.9%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

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; calculations may vary for other companies:

- ------------------------------------------- DEPARTMENT ECKERD DIRECT TOTAL
($ IN MILLIONS) STORES & CATALOG DRUGSTORES MARKETING SEGMENTS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999

Revenue $ 18,964 $ 12,427 $ 1,119 $ 32,510

Segment profit 670 183 247 1,100

Depreciation and amortization 386 193 2 581

Credit operating results 313 -- -- 313
-----------------------------------------------------------------
EBITDA $ 1,369 $ 376 $ 249 $ 1,994

% of revenue 7.2% 3.0% 22.3% 6.1%
-----------------------------------------------------------------
1998

Revenue $ 19,114 $ 10,325 $ 1,022 $ 30,461

Segment profit 920 254 237 1,411

Depreciation and amortization 380 139 5 524

Credit operating results 224 -- -- 224
-----------------------------------------------------------------
EBITDA $ 1,524 $ 393 $ 242 $ 2,159

% of revenue 8.0% 3.8% 23.7% 7.1%
-----------------------------------------------------------------
1997

Revenue $ 19,819 $ 9,663 $ 928 $ 30,410

Segment profit 1,275 347 217 1,839

Depreciation and amortization 366 112 5 483

Credit operating results 127 -- -- 127
-----------------------------------------------------------------
EBITDA $ 1,768 $ 459 $ 222 $ 2,449

% of revenue 8.9% 4.7% 23.9% 8.0%
- -----------------------------------------------------------------------------------------------------------
</TABLE>

<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 percentage shown in the table below includes both debt
recorded on the Company's consolidated balance sheet as well as
off-balance-sheet debt related to operating leases and the securitization of a
portion of the Company's customer accounts receivable (asset-backed
certificates).

DEBT TO CAPITAL

<TABLE>
<CAPTION>
- --------------------------
($ IN MILLIONS) 1999 1998 1997
- --------------------------------------------------------------
<S> <C> <C> <C>
Short-term debt,
net of cash investments $ (1,170)(1) $ 1,602 $ 1,209

Long-term debt,
including current
maturities 6,469 7,581 7,435
- --------------------------------------------------------------
5,299 9,183 8,644

Off-balance-sheet debt:

Present value of
operating leases 3,302 2,715 2,250

Securitization of
receivables, net -- 146 343
------------------------------------
Total debt 8,601 12,044 11,237

Consolidated equity 7,228 7,102 7,290
------------------------------------
Total capital $ 15,829 $ 19,146 $ 18,527

Percent of total debt
to capital 54.3% 62.9%(2) 60.7%
- --------------------------------------------------------------
</TABLE>

(1) INCLUDES ASSET-BACKED CERTIFICATES OF $267 MILLION.

(2) UPON COMPLETION OF THE GENOVESE ACQUISITION, THE COMPANY'S DEBT TO CAPITAL
RATIO DECREASED TO 62.1%.

The Company's debt to capital percentage improved in 1999 primarily as a result
of the sale of the Company's proprietary credit card receivables. The Company
currently expects the percentage to improve over the next several years.

CREDIT RATINGS. Ratings as of March 13, 2000 were as follows:

<TABLE>
<CAPTION>
LONG-TERM COMMERCIAL
DEBT PAPER
- ---------------------------------------------------------------------
<S> <C> <C>
Moody's Investors Service Baa2 P2

Standard & Poor's Corporation BBB+(1) A2(1)

Fitch Investors Service, Inc. A-(1) F2
- ---------------------------------------------------------------------
</TABLE>

(1) UNDER REVIEW.