-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AnwuHd91UPK9sx8dgInc6PI0YhHuexjyTwhVYHpvplSbNXVB3IbiXaktls9/5a5a KboAmlGyGT9HUpfHgccLmQ== 0000912057-00-019635.txt : 20000427 0000912057-00-019635.hdr.sgml : 20000427 ACCESSION NUMBER: 0000912057-00-019635 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20000129 FILED AS OF DATE: 20000426 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENNEY J C CO INC CENTRAL INDEX KEY: 0000077182 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 135583779 STATE OF INCORPORATION: DE FISCAL YEAR END: 0126 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-00777 FILM NUMBER: 608580 BUSINESS ADDRESS: STREET 1: 6501 LEGACY DR CITY: PLANO STATE: TX ZIP: 75024-3698 BUSINESS PHONE: 9724311000 10-K405 1 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the 52 weeks ended January 29, 2000 Commission file number 1-777 J. C. PENNEY COMPANY, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 13-5583779 - ------------------------ ------------------------ (State of incorporation) (I.R.S. Employer ID No.) 6501 LEGACY DRIVE, PLANO, TEXAS 75024-3698 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 431-1000 - -------------------------------------------------- -------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of each exchange on TITLE OF EACH CLASS which registered ------------------- ---------------- Common Stock of 50(cent) par value New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None - ---------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant: $4,096,164,153 as of April 1, 2000. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 261,278,737 shares of Common Stock of 50(cent) par value, as of April 1, 2000. DOCUMENTS INCORPORATED BY REFERENCE Documents from which portions Parts of the Form 10-K are incorporated by reference into which incorporated ----------------------------- ----------------------- 1. J. C. Penney Company, Inc. Part I, Part II, and 1999 Annual Report to Stockholders Part IV 2. J. C. Penney Company, Inc. Part III 2000 Proxy Statement 3. J. C. Penney Funding Corporation Part I and Part IV Form 10-K for fiscal year 1999 2 PART I 1. BUSINESS. J. C. Penney Company, Inc. ("Company") was founded by James Cash Penney in 1902. Incorporated in Delaware in 1924, the Company has grown to be a major retailer, operating approximately 1,140 JCPenney department stores in all 50 states, Puerto Rico, and Mexico. In addition, the Company operates 37 Renner department stores in Brazil. The major portion of the Company's business consists of providing merchandise and services to consumers through department stores, catalog departments, and the Internet. The Company markets predominantly family apparel, jewelry, shoes, accessories, and home furnishings. In addition, the Company, through its wholly-owned subsidiary, Eckerd Corporation ("Eckerd"), operates a chain of approximately 2,600 drugstores located throughout the Southeast, Sunbelt, and Northeast regions of the United States. The Company, 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. The business of marketing merchandise and services is highly competitive. Although the Company is one of the largest department store and drugstore retailers in the United States, it has numerous competitors. Many factors enter into the competition for the consumer's patronage, including price, quality, style, service, product mix, convenience, and credit availability. The Company's annual earnings depend to a significant extent on the results of operations for the last quarter of its fiscal year. Sales for that period average in excess of 30 per cent of annual sales. In the normal course of its business, the Company accepts merchandise returns from customers. This policy, which has been in place for many years, is designed to enhance the customer's shopping experience and build customer loyalty. Although not material to the Company's results of operations or financial condition, the Company has established an allowance for estimated merchandise returns. Information about certain aspects of the business of the Company included under the captions of "Investments and Fair Value of Financial Instruments" (page 32) and "Segment Reporting" (page 40), which appear in the section of the Company's 1999 Annual Report to Stockholders entitled "Notes to the Consolidated Financial Statements", "Five Year Financial Summary" (page 41), "Five Year Operations Summary" (page 42), and "Supplemental Data (unaudited)" (pages 43 to 44), which appear in the Company's 1999 Annual Report to Stockholders on the pages indicated in the parenthetical references, is incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 1 of Form 10-K. 3 In addition, information about J. C. Penney Funding Corporation, a wholly owned consolidated subsidiary of the Company, which appears in Item 1 of its separate Annual Report on Form 10-K for the fiscal year ended January 29, 2000, is incorporated herein by reference and filed hereto as Exhibit 99(a) in response to Item 1 of Form 10-K. SUPPLIERS. The Company purchases its merchandise from approximately 3,900 domestic and foreign suppliers, many of whom have done business with the Company for many years. In addition, Eckerd purchases merchandise and pharmaceuticals from approximately 4,500 suppliers, substantially all of which are domestic. The majority of Eckerd's suppliers have done business with Eckerd for many years. In addition to its Plano, Texas home office, the Company, through its international purchasing subsidiary, maintained buying offices in thirteen foreign countries and quality assurance inspection offices in an additional six foreign countries as of January 29, 2000. EMPLOYMENT. The Company and its consolidated subsidiaries employed approximately 291,000 persons as of January 29, 2000. ENVIRONMENT. Environmental protection requirements did not have a material effect upon the Company's operations during fiscal 1999. While management believes it unlikely, it is possible that compliance with such requirements will lengthen lead time in expansion plans and increase construction, and therefore operating, costs due in part to the expense and time required to conduct environmental and ecological studies and related remediation. 2. PROPERTIES. At January 29, 2000, the Company operated 4,076 retail stores, comprised of 1,143 JCPenney department stores, 35 Renner department stores and 2,898 drugstores, in all 50 states, Puerto Rico, Brazil, and Mexico, of which 283 JCPenney department stores and 57 drugstores were owned. In addition, the Company owns six store locations that are leased to other tenants and not operated as units of the Company. The Company also operated six catalog fulfillment centers, of which five were owned, and owned two store distribution centers, eight drugstore distribution centers, J. C. Penney Direct Marketing Services, Inc. and Eckerd corporate offices, and the Company's home office facility and approximately 240 acres of property in Plano, Texas, adjacent to the facility. Information relating to certain of the Company's facilities included under the caption "Five Year Operations Summary", which appears on page 42 of the Company's 1999 Annual Report to Stockholders, is incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 2 of Form 10-K. 4 3. LEGAL PROCEEDINGS. The Company has no material legal proceedings pending against it. 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of stockholders during the fourth quarter of fiscal 1999. EXECUTIVE OFFICERS OF THE REGISTRANT The following is a list, as of April 1, 2000, of the names and ages of the executive officers of the Company and of the offices and other positions held by each such person with the Company. The terms of all executive officers will expire on May 19, 2000. There is no family relationship between any of the named persons.
OFFICES AND OTHER POSITIONS NAME HELD WITH THE COMPANY AGE - ----------------------- ---------------------------- --- James E. Oesterreicher Chairman of the Board and Chief Executive Officer; Director 58 Vanessa J. Castagna Executive Vice President and Chief Operating Officer, JCPenney Stores, Merchandising and Catalog 49 Gary L. Davis Executive Vice President, Chief Human Resources and Administration Officer 56 David V. Evans Senior Vice President, Chief Information Officer 54 John E. Fesperman President and Chief Operating Officer, JCPenney Direct Marketing Services, Credit, International and Facilities Services 54 Charles R. Lotter Executive Vice President, Secretary and General Counsel 62 Donald A. McKay Executive Vice President and Chief Financial Officer 54 Michael W. Taxter Senior Vice President, Director of JCPenney Stores 48
- ---------- Mr. Oesterreicher has served as Chairman of the Board since 1997 and as Chief Executive Officer since 1995. He served as Vice Chairman of the Board from 1995 to 1997. From 1992 to 1995, he served as President of JCPenney Stores and Catalog. Ms. Castagna was elected Executive Vice President and Chief Operating Officer of JCPenney Stores, Merchandising and Catalog, effective August 1, 1999. Prior to joining the Company, Ms. Castagna served as senior vice president and general merchandise manager for women's and children's accessories and apparel at Wal- 5 Mart Stores Division since 1996. Ms. Castagna's responsibilities at Wal-Mart also included product, trend, and brand development for family apparel. She joined Wal-Mart in 1994 as senior vice president and general merchandising manager for home decor, furniture, crafts and children's apparel. Prior to joining Wal-Mart, Ms. Castagna served in several senior level positions in the retailing industry, including senior vice president, general merchandising manager for women's and juniors for Marshalls stores, a division of TJX Companies and vice president, merchandising -- women's at Target Stores, a division of Dayton Hudson Corporation (now known as Target Corporation). Mr. Davis has served as Executive Vice President, Chief Human Resources and Administration Officer, since 1998 and served as Senior Vice President, Director of Human Resources and Administration from 1997 to 1998. From 1996 to 1997, he served as Senior Vice President and Director of Personnel and Administration. He was elected President of the Northwestern Region in 1992 and served in that capacity until 1996. Mr. Evans was elected Senior Vice President, Chief Information Officer, in 1997. Immediately prior to that, he served as Senior Vice President, Director of Information Systems and from 1995 to 1997 he served as Senior Vice President, Director of Planning and Information Systems. He was elected a Vice President in 1987 and served as Director of Information Systems from 1987 to 1995. Mr. Fesperman has served as President and Chief Operating Officer, JCPenney Direct Marketing Services, Credit, and Facilities Services since 1997 and, in 2000, added International to his areas of responsibility. Immediately prior to being elected to his current position, he served as Senior Vice President, Director of Planning, Facilities, and International Development and from 1996 to 1997 he served as Senior Vice President and Director of Support Services and Subsidiary Operations. He was elected a Vice President in 1993 and served as Director of Insurance from 1991 to 1996. Mr. Lotter was elected an Executive Vice President in 1993. He was elected Senior Vice President, General Counsel and Secretary in 1987. He has also served as a director of Eckerd Corporation since December 1996. Mr. McKay was elected an Executive Vice President in 1997. He was elected Senior Vice President and Chief Financial Officer in 1996. From 1994 to 1996, he served as Vice President and Controller. He has also served as a director of Eckerd Corporation since December 1996. Mr. Taxter has served as Senior Vice President, Director of JCPenney Stores, since 1999. In 1998, he was elected Senior Vice President and served as Director of Strategic Development. In 1995, he was elected Regional President and served as President of the South and Southeastern Region from 1996 to 1998. Prior to that, he served as Director of Coordination between 1993 and 1996. 6 PART II 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded principally on the New York Stock Exchange, as well as on other exchanges in the United States. In addition, the Company has authorized 25 million shares of Preferred Stock, of which 743,259 shares of Series B ESOP Convertible Preferred Stock were issued and outstanding at January 29, 2000. Additional information relating to the Common Stock and Preferred Stock of the Company included under the captions "Consolidated Statements of Stockholders' Equity" (page 27), "Capital Stock" (page 33), and "Quarterly Data (Unaudited)" (page 41), which appear in the Company's 1999 Annual Report to Stockholders on the pages indicated in the parenthetical references, is incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 5 of Form 10-K. 6. SELECTED FINANCIAL DATA. Information for the fiscal years 1995-1999 included in the "Five Year Financial Summary" on page 41 of the Company's 1999 Annual Report to Stockholders is incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 6 of Form 10-K. 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The discussion and analysis included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", which appears in the Company's 1999 Annual Report to Stockholders on pages 16 through 23 thereof, is incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 7 of Form 10-K. 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company holds an interest rate swap with a notional principal amount of $375 million entered into in connection with the issuance of asset-backed certificates in 1990. This swap presents no material risk to the Company's results of operations. 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Consolidated Balance Sheets of the Company and subsidiaries as of January 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, appearing on pages 25 through 28 of the Company's 1999 Annual Report to Stockholders, together with the Independent Auditors' Report of KPMG LLP, independent certified public accountants, appearing on page 24 of the Company's 1999 Annual Report to Stockholders, the Notes to the Consolidated Financial Statements on pages 29 through 40, and the 7 quarterly financial highlights ("Quarterly Data (unaudited)")appearing on page 41 thereof, are incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 8 of Form 10-K. 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III* 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.* 11. EXECUTIVE COMPENSATION.* 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.* 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.* - ---------- * Pursuant to General Instruction G to Form 10-K, the information called for by Items 10, with respect to directors of the Company (to the extent not set forth in Part I hereof), 11, 12, and 13 is incorporated by reference to the Company's 2000 Proxy Statement, which involves the election of directors, the final copy of which the Company filed with the Securities and Exchange Commission, pursuant to Regulation 14A, on April 14, 2000. PART IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) All Financial Statements. See Item 8 of this Annual Report on Form 10-K for financial statements incorporated by reference to the Company's 1999 Annual Report to Stockholders. (a)(2) Financial Statement Schedules. Schedule II (Valuation and Qualifying Accounts and Reserves) is attached on Page F-1. See Independent Auditors' Report of KPMG LLP, independent certified public accountants, appearing on page 12 of this Annual Report on Form 10-K. All other schedules have been omitted as they are inapplicable or not required under the rules, or the information has been submitted in the consolidated financial statements and related financial information included in the Company's 1999 Annual Report to Stockholders incorporated herein by reference and filed hereto as Exhibit 13. Separate financial statements are filed for J. C. Penney Funding Corporation, a wholly owned consolidated subsidiary, in its separate Annual Report on Form 10-K for the 52 weeks ended January 29, 2000, 8 which financial statements, together with the Independent Auditors' Report of KPMG LLP thereon, are incorporated herein by reference and filed hereto as Exhibit 99(b). (a)(3) Exhibits. See separate Exhibit Index on pages G-1 through G-9. (b) Current Reports on Form 8-K. During the last quarter of the period covered by this Annual Report on Form 10-K, the Company filed a Current Report on Form 8-K (Item 2 - Acquisition or Disposition of Assets, Item 7 - Financial Statements and Exhibits) dated December 6, 1999. (c) Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this form is filed as part of the separate Exhibit Index on pages G-1 through G-9 and specifically identified as such beginning on page G-4. 9 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. J. C. PENNEY COMPANY, INC. (Registrant) By: /s/ D. A. MCKAY ---------------------------- D. A. McKay Executive Vice President and Chief Financial Officer Dated: April 25, 2000 10 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- J. E. OESTERREICHER* Chairman of the Board and April 25, 2000 - -------------------- Chief Executive Officer J. E. Oesterreicher (principal executive officer); Director /s/ D. A. MCKAY Executive Vice President and April 25, 2000 - -------------------- Chief Financial Officer D. A. McKay (principal financial officer) W. J. ALCORN* Vice President and Controller April 25, 2000 - -------------------- (principal accounting officer) W. J. Alcorn M. A. BURNS* Director April 25, 2000 - -------------------- M. A. Burns T. J. ENGIBOUS* Director April 25, 2000 - -------------------- T. J. Engibous K. B. FOSTER* Director April 25, 2000 - -------------------- K. B. Foster V. E. JORDAN, JR.* Director April 25, 2000 - -------------------- V. E. Jordan, Jr. J. C. PFEIFFER* Director April 25, 2000 - -------------------- J. C. Pfeiffer A. W. RICHARDS* Director April 25, 2000 - -------------------- A. W. Richards F. SANCHEZ-LOAEZA* Director April 25, 2000 - -------------------- F. Sanchez-Loaeza C. S. SANFORD, JR.* Director April 25, 2000 - -------------------- C. S. Sanford, Jr. R. G. TURNER* Director April 25, 2000 - -------------------- R. G. Turner *By: /s/ D. A. MCKAY - -------------------- D. A. McKay Attorney-in-fact
11 INDEPENDENT AUDITORS' REPORT The Board of Directors of J. C. Penney Company, Inc.: Under date of February 24, 2000, we reported on the 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, as contained in the 1999 Annual Report to Stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the Company's Annual Report on Form 10-K for the 1999 fiscal year. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule listed in Item 14(a)(2) of the Annual Report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Dallas, Texas February 24, 2000 12
Schedule II J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (Amounts in millions) - -------------------------------------------------------------------------------------------------- 52 Weeks 52 Weeks 53 Weeks Ended Ended Ended January 29, January 30, January 31, Description 2000 1999 1998 - -------------------------------------------------------------------------------------------------- RESERVES DEDUCTED FROM ASSETS Allowance for doubtful accounts (1) Balance at beginning of period $ 118 $ 105 $ 77 Additions charged to costs and expenses 105 241 249 Deductions of write-offs, less recoveries (147) (228) (221) Reduction in reserves related to the sale of the bank receivables portfolio (76) - - ------- ------- ------- Balance at end of period $ - $ 118 $ 105 ======= ======= ======= (1) Excludes amounts related to the Company's retained interest in JCP Master Credit Card Trust. Other reserves Valuation reserve - retained interest in JCP Master Credit Card Trust $ - $ 15 $ 40 Other receivables 20 33 32 Other charges, net 86 110 216 ------- ------- ------- $ 106 $ 158 $ 288 ======= ======= =======
F-1 EXHIBIT INDEX EXHIBIT ------- 3. (i) ARTICLES OF INCORPORATION Restated Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3(i) to Company's Annual Report on Form 10-K for the 52 week period ended January 30, 1999*). (ii) BYLAWS Bylaws of Company, as amended to February 9, 2000. 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES (a) Indenture, dated as of October 1, 1982, between the Company and U.S. Bank Trust National Association (formerly First Trust of California, National Association) (as Successor Trustee to Bank of America National Trust and Savings Association) (incorporated by reference to Exhibit 4(a) to Company's Annual Report on Form 10-K for the 52 week period ended January 29, 1994*). (b) First Supplemental Indenture, dated as of March 15, 1983, between the Company and U.S. Bank Trust National Association (formerly First Trust of California, National Association) (as Successor Trustee to Bank of America National Trust and Savings Association)(incorporated by reference to Exhibit 4(b) to Company's Annual Report on Form 10-K for the 52 week period ended January 29, 1994*). (c) Second Supplemental Indenture, dated as of May 1, 1984, between the Company and U.S. Bank Trust National Association (formerly First Trust of California, National Association)(as Successor Trustee to Bank of America National Trust and Savings Association)(incorporated by reference to Exhibit 4(c) to Company's Annual Report on Form 10-K for the 52 week period ended January 29, 1994*). (d) Third Supplemental Indenture, dated as of March 7, 1986, between the Company and U.S. Bank Trust National Association (formerly First Trust of California, National Association) (as Successor Trustee to Bank of America National Trust and Savings Association)(incorporated by reference to Exhibit 4(d) to Company's Registration Statement on Form S-3, SEC File No. 33-3882). G-1 (e) Fourth Supplemental Indenture, dated as of June 7, 1991, between the Company and U.S. Bank Trust National Association (formerly First Trust of California, National Association) (as Successor Trustee to Bank of America National Trust and Savings Association)(incorporated by reference to Exhibit 4(e) to Registrant's Registration Statement on Form S-3, SEC File No. 33-41186). (f) Indenture, dated as of April 1, 1994, between the Company and U.S. Bank Trust National Association (formerly First Trust of California, National Association) (as Successor Trustee to Bank of America National Trust and Savings Association) (incorporated by reference to Exhibit 4(a) to Company's Registration Statement on Form S-3, SEC File No. 33-53275). (g) Rights Agreement, dated as of March 26, 1999, by and between the Company and ChaseMellon Shareholder Services L.L.C. as Rights Agent (incorporated by reference to Exhibit 4 to Company's Current Report on Form 8-K, Date of Report - March 10, 1999*). (h) Amended and Restated 364-Day Revolving Credit Agreement dated as of December 3, 1996, among J. C. Penney Company, Inc., J. C. Penney Funding Corporation, the Lenders party thereto, Morgan Guaranty Trust Company of New York, as Agent for the Lenders, and Bank of America Illinois, Bankers Trust Company, The Chase Manhattan Bank, Citibank, N.A., Credit Suisse First Boston, and NationsBank of Texas, N.A., as Co-Agents for the Lenders (incorporated by reference to Exhibit 4(d) to J. C. Penney Funding Corporation's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997, SEC File No. 1-4947-1). (i) Amended and Restated Five-Year Revolving Credit Agreement dated as of December 3, 1996, among J. C. Penney Company, Inc., J. C. Penney Funding Corporation, the Lenders party thereto, Morgan Guaranty Trust Company of New York, as Agent for the Lenders, and Bank of America Illinois, Bankers Trust Company, The Chase Manhattan Bank, Citibank, N.A., Credit Suisse First Boston, and NationsBank of Texas, N.A., as Co-Agents for the Lenders (incorporated by reference to Exhibit 4(e) to J. C. Penney Funding Corporation's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997, SEC File No. 1-4947-1). G-2 (j) 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 J. C. Penney Funding Corporation's Quarterly Report on Form 10-Q for the 39 weeks ended October 30, 1999, SEC File No. 1-4947-1). (k) Amendment and Restatement Agreement to Five-Year Revolving Credit Agreement, dated as of November 21, 1997, among J. C. Penney Company, Inc., J. C. Penney Funding Corporation, the Lenders party thereto, Morgan Guaranty Trust Company of New York, as Agent, and Bank of America National Trust and Savings Association, Bankers Trust Company, The Chase Manhattan Bank, Citibank, N.A., Credit Suisse First Boston and NationsBank of Texas, N.A., as Managing Agents (incorporated by reference to Exhibit 4(g) to J. C. Penney Funding Corporation's Annual Report on Form 10-K for the 53 weeks ended January 31, 1998, SEC File No. 1-4947-1). (l) Guaranty dated as of February 17, 1997, executed by J. C. Penney Company, Inc. (incorporated by reference to Exhibit 4(c) to J. C. Penney Funding Corporation's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997, SEC File No. 1-4947-1). (m) Guaranty dated as of December 3, 1996, executed by J. C. Penney Company, Inc. with respect to the Amended and Restated 364-Day and Five-Year Revolving Credit Agreements, each dated as of December 3, 1996 (incorporated by reference to Exhibit 4(m) to J. C. Penney Funding Corporation's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997, SEC File No. 1-4947-1). Other instruments evidencing long-term debt have not been filed as exhibits hereto because none of the debt authorized under any such instrument exceeds 10 percent of the total assets of the Registrant and its consolidated subsidiaries. The Registrant agrees to furnish a copy of any of its long-term debt instruments to the Securities and Exchange Commission upon request. G-3 10. MATERIAL CONTRACTS i) OTHER THAN COMPENSATORY PLANS OR ARRANGEMENTS (a) Loan Agreement dated as of January 28, 1986 between Company and J. C. Penney Funding Corporation (incorporated by reference to Exhibit 4 to Company's Current Report on Form 8-K, Date of Report - January 28, 1986*). (b) Amendment No. 1 to Loan Agreement dated as of January 28, 1986 between Company and J. C. Penney Funding Corporation (incorporated by reference to Exhibit 1 to Company's Current Report on Form 8-K, Date of Report - December 31, 1986*). (c) Amendment No. 2 to Loan Agreement dated as of January 28, 1986 between Company and J. C. Penney Funding Corporation (incorporated by reference to Exhibit 10(i)(e) to Company's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997*). (d) Personal Services Agreement dated as of February 12, 1997 between Company and W. R. Howell (incorporated by reference to Exhibit 10(i)(f) to Company's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997*). (ii) COMPENSATORY PLANS OR ARRANGEMENTS REQUIRED TO BE FILED AS EXHIBITS TO THIS REPORT PURSUANT TO ITEM 14 (C) OF THIS REPORT. (a) J. C. Penney Company, Inc. 1989 Management Incentive Compensation Program as amended through March 27, 1990 (incorporated by reference to Exhibit 10(e) to Company's Annual Report on Form 10-K for the 52 week period ended January 27, 1990*). (b) September 1995 Amendment to J. C. Penney Company, Inc. 1989 Management Incentive Compensation Program, as amended (incorporated by reference to Exhibit 10(ii)(b)to Company's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997*). (c) Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc., as amended through April 1, 1996 (incorporated by reference to Exhibit 10(ii)(c) to Company's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997*). G-4 (d) July 1997 Amendment to Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc. (incorporated by reference to Exhibit 10(b) to Company's Quarterly Report on Form 10-Q for the 13 and 39 week periods ended October 25, 1997*). (e) December 1997 Amendment to Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc. (incorporated by reference to Exhibit 10 (ii)(e) to Company's Annual Report on Form 10-K for the 53 weeks ended January 31, 1998*). (f) March 1998 Amendment to Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc. (incorporated by reference to Exhibit 10(ii)(f) to Company's Annual Report on Form 10-K for the 52 weeks ended January 30, 1999*). (g) January 1999 Amendment to Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc. (incorporated by reference to Exhibit 10(ii)(g) to Company's Annual Report on Form 10-K for the 52 weeks ended January 30, 1999*) (h) July 14, 1999 Amendment to Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc. (incorporated by reference to Exhibit 10(b) to Company's Quarterly Report on Form 10-Q for the 13 and 26 weeks ended July 31, 1999*). (i) J. C. Penney Company, Inc. Directors' Equity Program Tandem Restricted Stock Award/Stock Option Plan (incorporated by reference to Exhibit 10(k) to Company's Annual Report on Form 10-K for the 52 week period ended January 28, 1989*). (j) J. C. Penney Company, Inc. 1989 Equity Compensation Plan (incorporated by reference to Exhibit A to Company's definitive Proxy Statement for its Annual Meeting of Stockholders held on May 19, 1989*). (k) February 1995 Amendment to J. C. Penney Company, Inc. 1989 Equity Compensation Plan (incorporated by reference to Exhibit 10(ii)(k) to Company's Annual Report on Form 10-K for the 52 week period ended January 28, 1995*). (l) February 1996 Amendment to J. C. Penney Company, Inc. 1989 Equity Compensation Plan, as amended (incorporated by reference to Exhibit 10(ii)(k) to Company's Annual Report on Form 10-K for the 52 week period ended January 27, 1996*). G-5 (m) J. C. Penney Company, Inc. 1993 Equity Compensation Plan (incorporated by reference to Exhibit A to Company's definitive Proxy Statement for its Annual Meeting of Stockholders held on May 21, 1993*). (n) February 1995 Amendment to J. C. Penney Company, Inc. 1993 Equity Compensation Plan (incorporated by reference to Exhibit 10(ii)(l) to Company's Annual Report on Form 10-K for the 52 week period ended January 28, 1995*). (o) November 1995 Amendment to J. C. Penney Company, Inc. 1993 Equity Compensation Plan, as amended (incorporated by reference to Exhibit 10(ii)(n) to Company's Annual Report on Form 10-K for the 52 week period ended January 27, 1996*). (p) J. C. Penney Company, Inc. 1993 Non-Associate Directors' Equity Plan (incorporated by reference to Exhibit B to Company's definitive Proxy Statement for its Annual Meeting of Stockholders held on May 21, 1993*). (q) February 1995 Amendment to J. C. Penney Company, Inc. 1993 Non-Associate Directors' Equity Plan (incorporated by reference to Exhibit 10(ii)(m) to Company's Annual Report on Form 10-K for the 52 week period ended January 28, 1995*). (r) J. C. Penney Company, Inc. Deferred Compensation Plan as amended through July 14, 1993 (incorporated by reference to Exhibit 10(a) to Company's Quarterly Report on Form 10-Q for the 13 and 26 week periods ended July 31, 1993*). (s) J. C. Penney Company, Inc. Deferred Compensation Plan for Directors, as amended effective April 9, 1997 (incorporated by reference to Exhibit 10(a) to Company's Quarterly Report on Form 10-Q for the 13 week period ended April 26, 1997*). (t) Directors' Charitable Award Program (incorporated by reference to Exhibit 10(r) to Company's Annual Report on Form 10-K for the 52 week period ended January 27, 1990*). (u) Form of Indemnification Trust Agreement between Company and The Chase Manhattan Bank (formerly Chemical Bank) dated as of July 30, 1986, as amended (incorporated by reference to Exhibit 1 to Exhibit B to Company's definitive Proxy Statement for its Annual Meeting of Stockholders held on May 29, 1987*). G-6 (v) Form of Indemnification Agreement between Company and individual Indemnitees (incorporated by reference to Exhibit B to Company's definitive Proxy Statement for its Annual Meeting of Stockholders held on May 29, 1987*). (w) J. C. Penney Company, Inc. Benefit Restoration Plan (incorporated by reference to Exhibit 10(ii)(y) to Company's Annual Report on Form 10-K for the 52 week period ended January 27, 1996*). (x) February 1996 Amendment to J. C. Penney Company, Inc. Benefit Restoration Plan (incorporated by reference to Exhibit 10(ii)(z) to Company's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997*). (y) July 1997 Amendment to J. C. Penney Company, Inc. Benefit Restoration Plan (incorporated by reference to Exhibit 10(c) to Company's Quarterly Report on Form 10-Q for the 13 and 39 week periods ended October 25, 1997*). (z) December 1997 Amendment to J. C. Penney Company, Inc. Benefit Restoration Plan (incorporated by reference to Exhibit 10(ii)(ac) to Company's Annual Report on Form 10-K for the 53 weeks ended January 31, 1998*). (aa) December 1998 Amendment of J. C. Penney Company, Inc. Benefit Restoration Plan (incorporated by reference to Exhibit 10(ii)(aa) to Company's Annual Report on Form 10-K for the 52 weeks ended January 30, 1999*). (ab) January 1999 Amendment to J. C. Penney Company, Inc. Benefit Restoration Plan (incorporated by reference to Exhibit 10(ii)(ab) to Company's Annual Report on Form 10-K for the 52 weeks ended January 30, 1999*). (ac) July 14, 1999 Amendment to J. C. Penney Company, Inc. Benefit Restoration Plan (incorporated by reference to Exhibit 10(c) to Company's Quarterly Report on Form 10-Q for the 13 and 26 weeks ended July 31, 1999*). (ad) Supplemental Term Life Insurance Plan for Management Profit-Sharing Associates of J. C. Penney Company, Inc. (incorporated by reference to Exhibit 10(ii)(aa) to Company's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997*). (ae) January 1995 Amendment to Supplemental Term Life Insurance Plan for Management Profit-Sharing Associates of J. C. Penney Company, Inc.(incorporated by reference to Exhibit 10(ii)(ab) to Company's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997*). G-7 (af) November 1997 Amendment to Supplemental Term Life Insurance Plan for Management Profit-Sharing Associates of J. C. Penney Company, Inc. (incorporated by reference to Exhibit 10(ii)(af) to Company's Annual Report on Form 10-K for the 53 weeks ended January 31, 1998*). (ag) Employment Agreement dated as of February 4, 1996 between Eckerd Corporation and Francis A. Newman (incorporated by reference to Exhibit 10.26 to Eckerd Corporation's Annual Report on Form 10-K for the fiscal year ended February 3, 1996, SEC File No. 1-4844). (ah) Amendment No. 1, dated as of November 2, 1996, to the Employment Agreement dated as of February 4, 1996, by and between Eckerd Corporation and Francis A. Newman (incorporated by reference to Exhibit (c)(3) to Company's Schedule 14D-1 dated November 2, 1996*). (ai) J. C. Penney Company, Inc. 1997 Equity Compensation Plan (incorporated by reference to Exhibit A to Company's definitive proxy statement for its Annual Meeting of Stockholders held on May 16, 1997*). (aj) J. C. Penney Company, Inc. 1998 EVA Performance Plan (incorporated by reference to Exhibit 10(ii)(aj) to Company's Annual Report on Form 10-K for the 53 weeks ended January 31, 1998*). (ak) J. C. Penney Company, Inc. Mirror Savings Plan I and II as amended through January 1, 1999 (incorporated by reference to Exhibit 10(ii)(aj) to Company's Annual Report on Form 10-K for the 52 weeks ended January 30, 1999*). (al) July 14, 1999 Amendment to J. C. Penney Company, Inc. Mirror Savings Plan I and II (incorporated by reference to Exhibit 10(d) to Company's Quarterly Report on Form 10-Q for the 13 and 26 weeks ended July 31, 1999*). (am) J. C. Penney Company, Inc. 1999 Separation Allowance Program for Profit-Sharing Management Associates, effective July 14, 1999, as amended September 8, 1999 (incorporated by reference to Exhibit 10(a) to Company's Quarterly Report on Form 10-Q for the 13 and 26 weeks ended July 31, 1999*). (an) J. C. Penney Company, Inc. Mirror Savings Plan III, effective August 1, 1999 (incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the 13 and 39 weeks ended October 30, 1999*). (ao) Employment Agreement dated as of August 1, 1999 (incorporated by reference to Exhibit 10(b) to Company's Quarterly Report on Form 10-Q for 13 and 39 weeks ended October 30, 1999*). G-8 (ap) Form of Severance Agreement. (aq) January 2000 Amendments to Mirror Savings Plans I, II, and III. * SEC file number 1-777 11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Computation of Net Income Per Common Share. 12. STATEMENT RE: COMPUTATION OF RATIOS (a) Computation of Ratios of Available Income to Combined Fixed Charges and Preferred Stock Dividend Requirement. (b) Computation of Ratios of Available Income to Fixed Charges. 13. ANNUAL REPORT TO SECURITY HOLDERS Excerpt from Company's 1999 Annual Report to Stockholders. 21. SUBSIDIARIES OF THE REGISTRANT List of certain subsidiaries of the Company at April 1, 2000. 23. INDEPENDENT AUDITORS' CONSENT 24. POWER OF ATTORNEY 27. FINANCIAL DATA SCHEDULE (a) Financial Data Schedule for the 52 week period ended January 29, 2000. (b) Restated Financial Data Schedule for the 52 week period ended January 30, 1999. (c) Restated Financial Data Schedule for the 53 week period ended January 31, 1998. 99. ADDITIONAL EXHIBITS (a) Item 1 of J. C. Penney Funding Corporation Annual Report on Form 10-K for the 52 weeks ended January 29, 2000 (incorporated by reference to J. C. Penney Funding Corporation Annual Report on Form 10-K for the 52 weeks ended January 29, 2000 filed concurrently herewith, SEC File No. 1-4947-1). (b) Excerpt from J. C. Penney Funding Corporation Annual Report. G-9 EX-3 2 EXHIBIT 3 Exhibit 3(ii) ================================================================================ J. C. PENNEY COMPANY, INC. (A Delaware Corporation) ------------------------------ BYLAWS As amended to February 9, 2000 ------------------------------ ================================================================================ TABLE OF CONTENTS
ARTICLE TITLE PAGES ------- ----- ----- I Offices 1 II Meetings of Stockholders 2-11 III Board of Directors 11-19 IV Committees 20-24 V Officers 24-29 VI Contracts, Loans, Checks, Drafts, Bank Accounts, Etc. 29-31 VII Books and Records 31-32 VIII Shares of Stock and Their Transfer 32-34 IX Dividends and Reserves 34 X Indemnification of Directors, Officers, Employees, and Agents 34-36 XI Ratification 36 XII Seal 36 XIII Fiscal Year 37 XIV Waiver of Notice 37 XV Emergency Bylaws 38-40 XVI Amendments 40-41
J. C. PENNEY COMPANY, INC. (A Delaware Corporation) BYLAWS ------------------------ ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office of J. C. Penney Company, Inc. (hereinafter called the Company) in the State of Delaware shall be at 1209 Orange Street, City of Wilmington, County of New Castle. The name of the registered agent in charge thereof is The Corporation Trust Company. SECTION 2. OTHER OFFICES. The Company may also have an office or offices at such other place or places either within or without the State of Delaware as from time to time the Board of Directors may determine or the business of the Company may require. 2 ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. ANNUAL MEETINGS. The annual meeting of stockholders for the election of directors and for the transaction of such other business as may come before the meeting shall be held at such place and time as shall be fixed by the Board of Directors and specified in the notice of the meeting, on the third Tuesday in May in each year, or on such other day as shall be fixed by the Board of Directors and specified in the notice of the meeting. If the election of directors shall not be held on the day designated herein or the day fixed by the Board, as the case may be, for any annual meeting, or on the day of any adjourned session thereof, the Board of Directors shall cause the election to be held at a special meeting as soon thereafter as convenient. At such special meeting, the stockholders may elect the directors and transact other business with the same force and effect as at an annual meeting duly called and held. SECTION 2. SPECIAL MEETINGS. Any action required or permitted to be taken by the holders of the Common Stock of the Company must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders. A special meeting of stockholders for any purpose or purposes, unless otherwise prescribed by the laws of the State of 3 Delaware or by the certificate of incorporation, may be called at any time only by the Board of Directors pursuant to a resolution approved by a majority of the Board of Directors. Special meetings of stockholders may be held at such place, on such date, and at such time as shall be designated by resolution of the Board of Directors. SECTION 3. NOTICE OF MEETINGS. Except as otherwise required by the laws of the State of Delaware or the certificate of incorporation, notice of each annual or special meeting of stockholders shall be given not less than 10 nor more than 60 days before the day on which the meeting is to be held to each stockholder of record entitled to vote at the meeting by delivering a written notice thereof to him or her personally, or by depositing a copy of the notice in the United States mail, postage prepaid, directed to him or her at his or her address as it appears on the records of the Company, or by transmitting the notice thereof to him or her at such address by telegram, cable, radiogram, telephone facsimile, or other appropriate written communication. Except when expressly required by the laws of the State of Delaware, no publication of any notice of a meeting of stockholders shall be required. Every such notice shall state the place, date, and time of the meeting, and in the case of a special meeting, the purpose or purposes thereof. Notice of any adjourned session of a meeting of stockholders shall not be required to be given if the place, date, and time thereof are announced at the 4 meeting at which the adjournment is taken. If, however, the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 4. LIST OF STOCKHOLDERS. It shall be the duty of the officer who shall have charge of the stock ledger of the Company to prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected, for any purpose germane to the meeting, by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine such list or to vote in person or by proxy at the 5 meeting. SECTION 5. QUORUM. At each meeting of stockholders, the holders of a majority of the issued and outstanding shares of stock of the Company entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business. In the absence of a quorum at any meeting, or any adjourned session thereof, the stockholders of the Company present in person or represented by proxy and entitled to vote, by majority vote, or in the absence of all the stockholders, any officer entitled to preside or act as secretary at the meeting, may adjourn the meeting from time to time until a quorum shall be present. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally called. SECTION 6. ORGANIZATION AND CONDUCT OF MEETING. At each meeting of stockholders, the Chairman of the Board or in his or her absence a Vice Chairman of the Board or in his or her absence a chairman chosen by the vote of a majority in interest of the stockholders present in person or represented by proxy and entitled to vote thereat, shall act as chairman. The Secretary or in his or her absence an Assistant Secretary or in the absence of the Secretary and all Assistant Secretaries a person whom the chairman of the meeting shall appoint shall act as secretary of the meeting and keep a record of the proceedings thereof. The date and time of the opening and the closing of the polls for each 6 matter upon which the stockholders will vote at a meeting shall be announced at the meeting by the person presiding over the meeting. The Board of Directors may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem necessary, appropriate, or convenient. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chairman of any meeting of stockholders shall have the right and authority to prescribe such rules, regulations, and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate, or convenient for the proper conduct of the meeting. Such rules, regulations, or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting, (ii) rules and procedures for maintaining order at the meeting and the safety of those present, (iii) limitations on attendance at or participation in the meeting to stockholders of record of the Company, their duly authorized and constituted proxies, or such other persons as the chairman of the meeting shall determine, (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof, and (v) limitations on the time allotted to questions or comments by participants. Unless, and to the extent determined by 7 the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure. SECTION 7. NOTIFICATION OF STOCKHOLDER BUSINESS. At a meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a meeting, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) in the case of an annual meeting of stockholders, otherwise properly requested to be brought before the meeting by a stockholder of record entitled to vote at the meeting and otherwise a proper subject to be brought before such meeting. For business to be properly requested to be brought before an annual meeting of stockholders, any stockholder who desires to bring any matter (other than the election of directors, which is provided for in Section 15 of Article III of these Bylaws) before such meeting and who is entitled to vote on such matter must give timely written notice of such stockholder's desire to bring such matter before the meeting, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Company not later than 90 days in advance of such meeting. A stockholder's notice to the Secretary in this regard shall set forth: (1) the name and address of the stockholder 8 proposing such business, (2) a representation that such stockholder is a record owner of stock of the Company entitled to vote at the meeting and intends to appear in person at the meeting to present the described business, (3) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, and (4) any material interest of the stockholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business may be conducted at a meeting except in accordance with the procedures set forth in this Article II of these Bylaws. The chairman of a meeting may, if the facts warrant, or if not in accordance with applicable law, determine and declare to the meeting that business proposed to be brought before a meeting was not a proper subject therefor or was not properly brought before the meeting in accordance with the provisions of this Section 7, and if he should so determine, he may so declare to the meeting, and any such business not a proper subject matter or not properly brought before the meeting shall not be transacted. SECTION 8. VOTING; PROXIES; BALLOTS. Except as otherwise provided in the laws of the State of Delaware or the certificate of incorporation, at every meeting of stockholders, each stockholder of the Company shall be entitled to one vote at the meeting in person or by proxy for each share of stock having 9 voting rights registered in his or her name on the books of the Company on the date fixed pursuant to Section 3 of Article VII of these Bylaws as the record date for the determination of stockholders entitled to vote at the meeting. Shares of its own stock belonging to the Company shall not be voted directly or indirectly (except for shares of stock held by the Company in a fiduciary capacity). The vote of any stockholder entitled thereto may be cast in person or by his or her proxy appointed by an instrument in writing, or by a telegram, cablegram, or other means of electronic transmission, to the full extent permitted by the laws of the State of Delaware; provided, however, that no proxy shall be voted after three years from its date, unless the proxy provides for a longer period. At all meetings of stockholders, each question (except where other provision is made in the laws of the State of Delaware, in the certificate of incorporation, or in these Bylaws) shall be decided by the vote of the holders of shares of stock having a majority of the votes which could be cast by the holders of all shares of stock outstanding and entitled to vote thereon. All elections of directors and all votes on matters set forth in the notice of meeting shall be by written ballot stating the number of shares voted, but except as otherwise provided in the laws of the State of Delaware, the vote on any other matter need not be by ballot unless directed by the chairman of the meeting. On a vote by ballot, each ballot shall be signed by the stockholder voting, or by his or her proxy, if there be 10 such proxy, and shall state the number of shares voted. SECTION 9. INSPECTORS OF ELECTION. The Company shall, in advance of any meeting of stockholders, appoint one or more inspectors of election, who may be employees of the Company, to act at the meeting or any adjournment thereof and to make a written report thereof. The Company may designate one or more persons as alternate inspectors to replace any inspector who fails to act. In the event that no inspector so appointed or designated is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath to execute faithfully the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector or inspectors so appointed or designated shall (i) ascertain the number of shares of stock of the Company outstanding and the voting power of each such share, (ii) determine the shares of stock of the Company represented at the meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares of stock of the Company 11 represented at the meeting and such inspectors' count of all votes and ballots. Such certification and report shall specify such other information as may be required by law. In determining the validity and counting of proxies and ballots cast at any meeting of stockholders of the Company, the inspectors may consider such information as is permitted by applicable law. No person who is a candidate for an office at an election may serve as an inspector at such election. ARTICLE III BOARD OF DIRECTORS SECTION 1. GENERAL POWERS. The business, property, and affairs of the Company shall be managed by or under the direction of the Board of Directors. In addition to the powers and authorities expressly conferred upon the Board of Directors by the certificate of incorporation and these Bylaws, the Board of Directors may exercise all such powers of the Company and do all such lawful acts and things as are not by the laws of the State of Delaware, the certificate of incorporation, or these Bylaws directed or required to be exercised or done by the stockholders. SECTION 2. ELIGIBILITY AND RETIREMENT. No person may serve as a director unless he or she is a stockholder of the Company. Notwithstanding the expiration of a director's term as set forth in Section 3 of this Article III, no person shall be qualified or may continue to serve as a director after the Company's annual 12 meeting of its stockholders in the calendar year in which, at any time during such year, such person has attained age 70. SECTION 3. NUMBER AND CLASSIFICATION OF DIRECTORS. Except as otherwise provided for or fixed by or pursuant to the provisions of Article Fourth of the certificate of incorporation relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect additional directors under specified circumstances, the number of directors of the Company which shall constitute the whole Board of Directors shall be such number, not less than three, as from time to time shall be fixed by the Board of Directors. The directors, other than those who may be elected pursuant to the aforesaid provisions of said Article Fourth, shall be classified by the Board of Directors, with respect to the duration of the term for which they severally hold office, into three classes as nearly equal in number as possible. Such classes shall originally consist of a first class of four directors who shall be elected at the annual meeting of stockholders held in 1985 for a term expiring at the annual meeting of stockholders to be held in 1986, and election and qualification of their respective successors; a second class of five directors who shall be elected at the annual meeting of stockholders held in 1985 for a term expiring at the annual meeting of stockholders to be held 13 in 1987, and election and qualification of their respective successors; and a third class of five directors who shall be elected at the annual meeting of stockholders held in 1985 for a term expiring at the annual meeting of stockholders to be held in 1988, and election and qualification of their respective successors. At each annual meeting of stockholders beginning in 1986, the successors of the class of directors whose term expires at that meeting shall be elected for a term expiring at the annual meeting of stockholders held in the third year following the year of election of such directors and election and qualification of their respective successors. The Board of Directors shall increase or decrease the number of directors in one or more classes as may be appropriate whenever it increases or decreases the number of directors pursuant to this Section 3, in order to ensure that the three classes shall be as nearly equal in number as possible. Each director of the Company shall hold office as provided above and until his or her successor shall have been duly elected and qualified. SECTION 4. QUORUM AND MANNER OF ACTING. A majority of the directors at the time in office shall constitute a quorum for the transaction of business at any meeting, which in no case shall be less than one third of the total number of directors. Except as otherwise provided in the laws of the State of Delaware, the certificate of incorporation, or these Bylaws, the affirmative vote of a majority of the directors present at any meeting at 14 which a quorum is present shall be required for the taking of any action by the Board of Directors. In the absence of a quorum at any meeting of the Board, the meeting need not be held, or a majority of the directors present thereat or if no director be present, the Secretary, may adjourn the meeting from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. At any adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally called. Members of the Board of Directors may participate in a meeting of the Board by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in the meeting by such means shall constitute presence in person at the meeting. SECTION 5. OFFICES; PLACES OF MEETINGS. The Board of Directors may hold meetings and have an office or offices at such place or places within or without the State of Delaware as the Board may from time to time determine, and in the case of meetings, as shall be specified or fixed in the respective notices or waivers of notice thereof, except where other provision is made in the laws of the State of Delaware, the certificate of incorporation, or these Bylaws. 15 SECTION 6. ANNUAL MEETING. The Board of Directors shall meet for the purpose of organization, the election of officers, and the transaction of other business, at the time of each annual election of directors. Such meeting may be held prior to the stockholders' meeting, if deemed necessary and appropriate, and if so held, would be held subject to the election of directors at the upcoming stockholders' meeting; provided, however, that no individual not then a director may act as a director prior to his or her election at the upcoming stockholders' meeting. Such meeting shall be called and held at the place and time specified in the notice or waiver and held at the place and time specified in the notice or waiver of notice thereof as in the case of a special meeting of the Board of Directors. SECTION 7. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held as the Board of Directors shall determine, at such times and places as shall from time to time be determined by the Board, except that in May, the regular meeting shall be held immediately following the adjournment of the annual meeting of the Board. Notice of regular meetings need not be given. SECTION 8. SPECIAL MEETINGS; NOTICE. Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board or a Vice Chairman of the Board or by any two of the directors. Notice of each such meeting shall be mailed to each director, addressed to such director at his or her residence or usual place of business, at least two days before the day on which 16 the meeting is to be held, or shall be sent to such director at his or her residence or such place of business by telegram, cable, radiogram, telephone facsimile, or other appropriate written communication, or delivered personally or by telephone, not later than the day before the day on which the meeting is to be held. Each such notice shall state the time and place of the meeting but need not state the purposes thereof except as otherwise herein expressly provided. SECTION 9. ORGANIZATION. At each meeting of the Board of Directors, the Chairman of the Board or in his or her absence, a Vice Chairman of the Board or in his or her absence, a director chosen by a majority of the directors present, shall act as chairman. The Secretary or in his or her absence, an Assistant Secretary or in the absence of the Secretary and all Assistant Secretaries, a person whom the chairman of the meeting shall appoint, shall act as secretary of the meeting and keep a record of the proceedings thereof. SECTION 10. ORDER OF BUSINESS. At all meetings of the Board of Directors, business shall be transacted in the order determined by the Board. SECTION 11. RESIGNATION. Any director may resign at any time by giving written notice of his or her resignation to the Board of Directors or to the Chairman of the Board, a Vice Chairman of the 17 Board, or the Secretary. Such resignation shall take effect at the date of receipt of the notice or at any later time specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 12. REMOVAL OF DIRECTORS. Any director may be removed, either with or without cause, at any time, by the affirmative vote of at least 80% of the combined voting power of the then-outstanding shares of all classes and series of stock of the Company entitled to vote generally in the election of directors, voting together as a single class, at a special meeting of stockholders duly called and held for the purpose or at an annual meeting of stockholders. SECTION 13. VACANCIES. Any vacancy in the Board of Directors caused by death, resignation, removal, disqualification, increase in the number of directors, or any other cause, shall be filled by a majority vote of the remaining directors, even though less than a quorum, or by the stockholders at a special meeting duly called and held for the purpose or at an annual meeting, and each director so elected shall hold office for the remainder of the full term of the class in which the new directorship was created or the vacancy occurred. SECTION 14. REMUNERATION. Directors and members of any committee may receive such fixed sum per meeting attended, or such annual sum or sums, and such reimbursement for expenses of attendance at meetings, as may be determined from time to time by 18 resolution of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the Company in any other capacity and receiving proper compensation therefor. SECTION 15. NOTIFICATION OF NOMINATIONS. Nominations for the election of directors may be made by the Board of Directors or by any stockholder entitled to vote for the election of directors. Any stockholder entitled to vote for the election of directors at a meeting may nominate persons for election as directors only if written notice of such stockholder's intent to make such nomination is given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Company, not later than (i) with respect to an election to be held at an annual meeting of stockholders, 90 days in advance of such meeting, and (ii) with respect to an election to be held at a special meeting of stockholders for the election of directors, the close of business on the seventh day following the date on which notice of such meeting is first given to stockholders. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated, (b) a representation that such stockholder is a holder of record of stock of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to 19 nominate the person or persons specified in the notice, (c) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder, (d) such other information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated by the Board of Directors, and (e) the consent of each nominee to serve as a director of the Company if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedures. SECTION 16. ACTION OF THE BOARD OF DIRECTORS BY CONSENT. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or of such committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board or such committee. 20 ARTICLE IV COMMITTEES SECTION 1. EXECUTIVE COMMITTEE. The Board of Directors may, by resolution passed by a majority of the whole Board, designate directors of the Company, in such number as the Board shall see fit, but not less than two, as an Executive Committee which shall have and may exercise, during intervals between meetings of the Board, the powers and authority of the Board of Directors in the management of the business and affairs of the Company, and may authorize the seal of the Company to be affixed to all papers which may require it; but the Executive Committee shall not have the power or authority in reference to filling vacancies in its membership, amending the certificate of incorporation (except that the Executive Committee (or any committee designated pursuant to Section 6 of this Article IV) may, to the full extent permitted by the laws of the State of Delaware, make determinations with respect to the issuance of stock of the Company), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease, or exchange of all or substantially all the Company's property and assets, recommending to the stockholders a dissolution of the Company or a revocation of a dissolution, amending these Bylaws, or declaring a dividend. The Executive Committee (or any committee designated pursuant to 21 Section 6 of this Article IV) shall have the power or authority to authorize the issuance of stock of the Company. The Board of Directors shall designate one of the members of the Executive Committee to be the Chairman of the Committee. Each member of the Executive Committee shall continue to act as such only so long as he or she shall be a director of the Company and only during the pleasure of a majority of the whole Board of Directors. SECTION 2. MEETINGS. Regular meetings of the Executive Committee, of which no notice shall be necessary, shall be held on such days and at such places, within or without the State of Delaware, as shall be fixed by resolution adopted by a majority of, and communicated to all, the members of the Executive Committee. Special meetings of the Committee may be called at the request of any member. Notice of each special meeting of the Committee shall be mailed to each member thereof, addressed to such member at his or her residence or usual place of business, at least two days before the day on which the meeting is to be held, or shall be sent to such member at his or her residence or such place of business by telegram, cable, radiogram, telephone facsimile, or other appropriate written communication, or delivered personally or by telephone, not later than the day before the day on which the meeting is to be held. Each such notice shall state the time and place of the meeting but need not state the purposes thereof except as otherwise herein expressly provided. Subject to the provisions of this Article IV, the 22 Executive Committee, by resolution of a majority of all its members, shall fix its own rules of procedure. The Executive Committee shall keep a record of its proceedings and report them to the Board of Directors at the next regular meeting thereof after such proceedings shall have been taken. SECTION 3. QUORUM AND MANNER OF ACTING. Not less than a majority of the members of the Executive Committee then in office shall constitute a quorum for the transaction of business, and the act of a majority of those present at a meeting thereof at which a quorum is present shall be the act of the Executive Committee. The directors comprising the Committee shall act only as a committee, and such directors, individually, shall have no power as such. Members of the Executive Committee, or any committee designated by the Board of Directors, may participate in a meeting of such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in the meeting by such means shall constitute presence in person at the meeting. SECTION 4. VACANCIES. The Board of Directors, by vote of a majority of the whole Board, shall have power to fill any vacancy in the Executive Committee due to death, resignation, removal, disqualification, or any other cause. 23 SECTION 5. RESIGNATION. Any director may resign from the Executive Committee at any time by giving written notice of his or her resignation to the Board of Directors or to the Chairman of the Board, the Chairman of the Executive Committee, a Vice Chairman of the Board, or the Secretary. Such resignation shall take effect at the date of receipt of the notice or at any later time specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 6. OTHER COMMITTEES. The Board of Directors may, by resolution or resolutions passed by a majority of the whole Board, designate one or more other committees, each such committee to consist of one or more directors of the Company, which shall have and may exercise such powers and authority (subject to the limitations specified in Section 1 of this Article IV) as the Board of Directors may determine and specify in such resolution or resolutions, such committee or committees to have such name or names as may be determined from time to time by the Board of Directors. A majority of all the members of any such committee may fix its rules of procedure, determine its actions, and fix the time and place (whether within or without the State of Delaware) of its meetings and specify what notice thereof, if any, shall be given, unless the Board of Directors shall otherwise by resolution provide. The Board of Directors shall have the power, either with or without cause, at any time, to change the members of any such 24 committee, to fill vacancies, and to discharge any such committee. ARTICLE V OFFICERS SECTION 1. PRINCIPAL OFFICERS. The principal officers of the Company may be a Chairman of the Board and one or more Vice Chairmen of the Board, each of whom shall be members of the Board of Directors, one or more Presidents of divisions, regions, or other units, functions, or activities, one or more Vice Presidents (the number thereof to be determined by the Board of Directors), a Treasurer, a Secretary, and a Controller. In addition, there may be such subordinate officers, agents, and employees as may be appointed in accordance with the provisions of Section 3 of this Article V. Any two or more offices may be held by the same person. SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the Company, except such officers as may be appointed in accordance with the provisions of Section 3 of this Article V, shall be elected annually by the Board of Directors. Each officer, except such officers as may be appointed in accordance with the provisions of Section 3 of this Article V, shall hold office until his or her successor shall have been duly elected and qualified, or until his or her earlier death, resignation, removal, or 25 disqualification. SECTION 3. SUBORDINATE OFFICERS. In addition to the principal officers enumerated in Section 1 of this Article V, the Company may have such other officers, agents, and employees as the Board of Directors may deem necessary, including one or more Assistant Treasurers, one or more Assistant Secretaries, and one or more Assistant Controllers, each of whom shall hold office for such period, have such authority, and perform such duties as the Board of Directors, the Chairman of the Board, or a Vice Chairman of the Board may from time to time determine. The Board of Directors may delegate to any principal officer the power to appoint or remove any such subordinate officers, agents, or employees. SECTION 4. REMOVAL. Any officer may be removed, either with or without cause, by the vote of a majority of the whole Board of Directors at a special meeting called for the purpose or except in case of any officer elected by the Board of Directors, by any officer upon whom the power of removal may be conferred by the Board of Directors. SECTION 5. RESIGNATION. Any officer may resign at any time by giving written notice of his or her resignation to the Board of Directors or to the Chairman of the Board, a Vice Chairman of the Board, or the Secretary. Such resignation shall take effect at the date of receipt of the notice or at any later time specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 26 SECTION 6. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification, or any other cause shall be filled for the unexpired portion of the term in the manner prescribed in these Bylaws for regular election or appointment to such office. SECTION 7. CHAIRMAN OF THE BOARD. The Chairman of the Board may be the chief executive officer of the Company. The Chairman of the Board shall preside at all meetings of the Board of Directors and of the stockholders at which he or she is present. The Chairman of the Board shall have the general supervision of the affairs of the Company, and perform all such duties as are incident to the office or as are properly required of him or her by the Board of Directors. The Chairman of the Board shall have authority to enter into any contract or execute and deliver any instrument in the name and on behalf of the Company, when authorized by the Board of Directors, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or these Bylaws to some other officer, agent, or employee of the Company. SECTION 8. VICE CHAIRMEN OF THE BOARD. The Board of Directors may establish the office of Vice Chairman of the Board. In the absence or disability of the Chairman of the Board, a Vice Chairman of the Board shall perform the duties and exercise the 27 powers of the Chairman of the Board. A Vice Chairman of the Board shall have authority to enter into any contract or execute and deliver any instrument in the name and on behalf of the Company, when authorized by the Board of Directors, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or these Bylaws to some other officer, agent, or employee of the Company. In addition, a Vice Chairman of the Board shall have such further powers and perform such further duties as may, from time to time, be assigned to him or her by the Board of Directors or the Chairman of the Board or as may be prescribed by these Bylaws. SECTION 9. PRESIDENTS. The Board of Directors may establish the office of President of a division, region, or other unit, function, or activity of the Company. A President shall have such powers and perform such duties as may, from time to time, be assigned to him or her by the Board of Directors, the Chairman of the Board, or a Vice Chairman of the Board. SECTION 10. VICE PRESIDENTS. The Board of Directors may establish several classifications of Vice Presidents, such as Executive Vice Presidents, Senior Vice Presidents, Regional Vice Presidents, and Divisional Vice Presidents. Each Vice President shall have such powers and perform such duties as shall, from time to time, be assigned to him or her by the Board of Directors, the Chairman of the Board, or a Vice Chairman of the Board. 28 SECTION 11. THE TREASURER. The Treasurer shall have charge and custody of, and be responsible for, all funds and securities of the Company, and shall deposit or cause to be deposited all such funds in the name of the Company in such banks, trust companies, and other depositories as shall be selected in accordance with the provisions of these Bylaws; shall render to the Board of Directors, whenever the Board may require him or her so to do, a report of all his or her transactions as Treasurer; and in general, shall perform all duties as may, from time to time, be assigned to him or her by the Board of Directors, the Chairman of the Board, or a Vice Chairman of the Board. SECTION 12. THE SECRETARY. The Secretary shall record or cause to be recorded in books kept for the purpose the proceedings of the meetings of the stockholders, the Board of Directors, and all committees, if any; shall see that all notices are duly given in accordance with the provisions of these Bylaws and as required by law; shall be custodian of the seal of the Company; and in general, shall perform all duties incident to the office of Secretary and such other duties as may, from time to time, be assigned to him or her by the Board of Directors, the Chairman of the Board, or a Vice Chairman of the Board. SECTION 13. THE CONTROLLER. The Controller shall have charge of the books and records of account of the Company; shall keep or 29 cause to be kept, and shall be responsible for the keeping of, correct and adequate records of the assets, liabilities, business, and transactions of the Company; shall at all reasonable times exhibit his or her books and records of account to any director of the Company upon application at the office of the Company where such books and records are kept; shall be responsible for the preparation and filing of all reports and returns relating to or based upon the books and records of the Company kept by him or her or under his or her direction; and in general, shall perform all duties incident to the office of Controller and such other duties as may, from time to time, be assigned to him or her by the Board of Directors, the Chairman of the Board, or a Vice Chairman of the Board. ARTICLE VI CONTRACTS, LOANS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC. SECTION 1. EXECUTION OF CONTRACTS. The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers or other person or persons to enter into any contract or execute and deliver any instrument in the name and on behalf of the Company, and such authority may be general or confined to specific instances, and unless so authorized by the Board of Directors or by the provisions of these Bylaws, no officer or other person shall have any power or authority to bind the Company by any contract or engagement or to pledge its credit 30 or to render it liable pecuniarily for any purpose or to any amount. SECTION 2. LOANS. No loan shall be contracted on behalf of the Company, and no negotiable papers shall be issued in its name, except by such officer or officers or other person or persons as may be designated by the Board of Directors from time to time. If and to the extent authorized by the Board of Directors, the power to contract loans or issue negotiable papers may be delegated by any such officer or officers or other person or persons. SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts, bills of exchange, and other orders for the payment of money, letters of credit, acceptances, obligations, notes, and other evidences of indebtedness, bills of lading, warehouse receipts, and insurance certificates of the Company shall be signed or endorsed by such officer or officers or other person or persons as may be designated by the Board of Directors from time to time. If and to the extent authorized by the Board of Directors, the power to sign or endorse any such instrument may be delegated by any such officer or officers or other person or persons. SECTION 4. BANK ACCOUNTS. The Board of Directors may from time to time authorize the opening and maintenance of general and special bank and custodial accounts with such banks, trust companies, and other depositories as it may select. Rules, 31 regulations, and agreements applicable to such accounts may be made, and changed from time to time, by the Board of Directors, including, but without limitation, rules, regulations, and agreements with respect to the use of facsimile and printed signatures. Any of such powers of the Board of Directors with respect to bank and custodial accounts may be delegated by the Board of Directors to any officer or officers or other person or persons as may be designated by the Board of Directors, and if and to the extent authorized by the Board of Directors, any such power may be further delegated by any such officer or officers or other person or persons. ARTICLE VII BOOKS AND RECORDS SECTION 1. LOCATION. The books and records of the Company may be kept at such place or places within or without the State of Delaware as the Board of Directors or the respective officers in charge thereof may from time to time determine. The stock record books shall be kept by such officer or agent as shall be designated by the Board of Directors. SECTION 2. ADDRESSES OF STOCKHOLDERS. Notices of meetings and all other corporate notices may be delivered personally or mailed to each stockholder at his or her address as it appears on the records of the Company. 32 SECTION 3. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD. In order that the Company may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any other change, conversion, or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. ARTICLE VIII SHARES OF STOCK AND THEIR TRANSFER SECTION 1. CERTIFICATES OF STOCK. Every holder of stock of the Company shall be entitled to have a certificate in such form as the Board of Directors shall prescribe certifying the number of shares owned by him or her in the Company. Each such certificate shall be signed by, or in the name of the Company by, the Chairman 33 of the Board, a Vice Chairman of the Board, a President, or a Vice President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Company. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent, or registrar who has signed, or whose facsimile signature has been placed upon, a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, the certificate may, nevertheless, be issued by the Company with the same effect as if such person were such officer, transfer agent, or registrar at the date of issue. SECTION 2. RECORD, ETC. A record shall be kept of the name of the person, firm, or corporation owning the stock represented by each certificate of stock of the Company issued, the number of shares represented by each such certificate, and the date thereof, and in the case of cancellation, the date of cancellation. The person in whose name shares of stock stand on the books of the Company shall be deemed the owner of record thereof for all purposes as regards the Company. SECTION 3. TRANSFER OF STOCK. Transfers of shares of the stock of the Company shall be made only on the books of the Company by the owner of record thereof, or by his or her attorney thereunto authorized by power of attorney duly executed and filed with such officer or agent as shall be designated by the Board of Directors or with the transfer agent of the Company, and on the surrender of the certificate or certificates for such shares 34 properly endorsed and the payment of all taxes thereon. ARTICLE IX DIVIDENDS AND RESERVES The Board of Directors may, from time to time, determine whether any, and if any, what part, of the net profits of the Company or of its surplus, available therefor pursuant to law and to the certificate of incorporation, shall be declared as dividends on the stock of the Company. The Board of Directors may, in its discretion, set apart out of any of such net profits or surplus a reserve or reserves for any proper purpose and may abolish any such reserve. ARTICLE X INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS The Company may indemnify, in accordance with and to the full extent permitted by the laws of the State of Delaware as in effect at the time of the adoption of this Article X or as such laws may be amended from time to time, and shall so indemnify to the full extent required by such laws, any person (and the heirs and legal representatives of such person) made or threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or 35 investigative, by reason of the fact that such person is or was a director, officer, employee, or agent of the Company or any constituent corporation absorbed in a consolidation or merger, or serves or served as such with another corporation, partnership, joint venture, trust, or other enterprise at the request of the Company or any such constituent corporation. Notwithstanding any other provision of this Article X or the laws of the State of Delaware to the contrary, no such person shall be entitled to indemnification or the advancement of expenses pursuant to this Article X with respect to any action, suit, or proceeding, or part thereof, brought or made by such person against the Company, unless such indemnification or advancement of expenses (i) is due to such person pursuant to the specific provisions of any agreement in writing between such person and the Company approved by the Company's Board of Directors or (ii) has been approved in writing in advance of the commencement of such action, suit, or proceeding, or part thereof, by or at the direction of the Company's Board of Directors. Any indemnification or advancement of expenses pursuant to this Article X shall only be made in the specific case by a separate determination made (i) by a majority vote of the directors who are not parties to such action, suit, or proceeding, even though less than a quorum, or (ii) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (iii) by the Company's stockholders, as to entitlement to advancement of expenses and/or 36 indemnification, as the case may be. ARTICLE XI RATIFICATION Any transaction, questioned in any stockholders' derivative suit on the ground of lack of authority, defective or irregular execution, adverse interest of director, officer, or stockholder, non-disclosure, miscomputation, or the application of improper principles or practices of accounting, may be ratified, before or after judgment, by the Board of Directors or by the stockholders in case less than a quorum of directors are qualified, and if so ratified, shall have the same force and effect as if the questioned transaction had been originally duly authorized. Such ratification shall be binding upon the Company and its stockholders and shall constitute a bar to any claim or execution of any judgment in respect of such questioned transaction. ARTICLE XII SEAL The Board of Directors shall provide a corporate seal, which shall be in the form of a circle and shall bear the name of the Company and the words and figures "Corporate Seal 1924 Delaware". 37 ARTICLE XIII FISCAL YEAR The fiscal year of the Company shall end at the close of business on the last Saturday in January and shall, in each case, begin at the opening of business on the day next succeeding the last day of the preceding fiscal year. ARTICLE XIV WAIVER OF NOTICE Whenever notice is required to be given under any provision of these Bylaws, the certificate of incorporation, or the laws of the State of Delaware, a written waiver thereof, whether in the form of a writing signed by, or a telegram, cable, radiogram, telephone facsimile, or other appropriate written communication from, the person entitled to notice and whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of the meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the stockholders or directors or a committee of directors need be specified in any written waiver of notice. 38 ARTICLE XV EMERGENCY BYLAWS SECTION 1. GENERAL. Notwithstanding any other provisions of the certificate of incorporation and these Bylaws, the emergency bylaws (hereinafter called Emergency Bylaws) provided in this Article XV shall be operative during any emergency resulting from an attack on the United States or on any locality in which the Company conducts its business or customarily holds meetings of its Board of Directors or its stockholders, or during any nuclear or atomic disaster, or during the existence of any catastrophe, or other similar emergency condition (any such condition being hereinafter called an Emergency), as a result of which a quorum of the Board of Directors or the Executive Committee cannot readily be convened for action. To the extent not inconsistent with these Emergency Bylaws, the Bylaws of the Company shall remain in effect during any Emergency. Upon termination of the Emergency, these Emergency Bylaws shall cease to be operative unless and until another Emergency shall occur. SECTION 2. MEETINGS AND NOTICE OF MEETINGS. During any Emergency any meeting of the Board of Directors or of the Executive Committee may be called by any director or officer of the Company. Notice of the meeting shall be given by the person calling the meeting, shall state the time and place of the 39 meeting, and shall be required to be given only to such of the directors or members of the Executive Committee, as the case may be, and the persons referred to in Section 3 of this Article XV as it may be feasible to reach at the time and by any means as may then be feasible at the time. SECTION 3. QUORUM, EMERGENCY DIRECTORS, AND MANNER OF ACTING. The directors and members of the Executive Committee, as the case may be, in attendance at a meeting pursuant to Section 2 of this Article XV, which in no case shall be less than two, shall constitute a quorum of the Board of Directors or the Executive Committee, as the case may be, and they may take any action at the meeting, by majority vote, as they shall, in their sole discretion, deem to be in the best interests of the Company. Notwithstanding the foregoing, if the number of directors or members of the Executive Committee, as the case may be, available to constitute a quorum at any such meeting, shall be less than two, additional directors, or additional members of the Executive Committee, as the case may be, in whatever number shall be necessary to constitute a Board or Executive Committee, as the case may be, of at least two members, shall be deemed selected automatically from the officers or other persons designated on a list approved by the Board of Directors before the Emergency, all in such order of priority and subject to such conditions and for such period or periods as may be provided in the resolution approving the list. The Board of Directors or Executive 40 Committee, as the case may be, as so constituted shall continue until the termination of the Emergency. The Board of Directors, either before or during any Emergency, may provide, and from time to time modify, lines of succession in the event that during such Emergency any or all officers of the Company shall for any reason be rendered incapable of discharging their duties. Any additional director or additional member of the Executive Committee, as the case may be, may be removed, either with or without cause, by a majority vote of the remaining directors or members of the Executive Committee, as the case may be, then in office. SECTION 4. OFFICES; PLACES OF MEETING. The Board of Directors, either before or during any Emergency, may, effective during the Emergency, change the head office of the Company or designate several alternative head offices or regional offices of the Company or authorize the officers to do so. SECTION 5. LIABILITY DURING AN EMERGENCY. No officer, director, or employee shall be personally liable for acting in accordance with these Emergency Bylaws, except for wilful misconduct. ARTICLE XVI AMENDMENTS Subject to the provisions of the certificate of incorporation, 41 all Bylaws of the Company shall be subject to alteration, amendment, or repeal, in whole or in part, and new bylaws not inconsistent with the laws of the State of Delaware or any provision of the certificate of incorporation may be made, either by the affirmative vote of a majority of the whole Board of Directors at any regular or special meeting of the Board, or by the affirmative vote of the holders of record of a majority of the issued and outstanding stock of the Company entitled to vote in respect thereof, given at an annual meeting or at any special meeting at which a quorum shall be present, provided that in each case notice of the proposed alteration, amendment, or repeal or the proposed new bylaws be included in the notice of the meeting of the Board or the stockholders, or the form of consent thereof, as the case may be. INDEX
ARTICLE PAGES ------- ----- Amendments...................................................................... XVI 40 Board of Directors.............................................................. III 11-19 Books and Records............................................................... VII 31-32 Committees...................................................................... IV 20-24 Contracts, Loans, Checks, Drafts, Bank Accounts, etc......................................................... VI 29-31 Dividends and Reserves.......................................................... IX 34 Emergency Bylaws................................................................ XV 38-40 Fiscal Year..................................................................... XIII 37 Indemnification of Directors, Officers, Employees, and Agents............................................ X 34-36 Meetings of Stockholders........................................................ II 2-11 Officers........................................................................ V 24-29 Offices......................................................................... I 1 Ratification.................................................................... XI 36 Seal ........................................................................... XII 36 Shares of Stock and Their Transfer.............................................. VIII 32-34 Waiver of Notice................................................................ XIV 37
EX-10.(II)(AP) 3 EXHIBIT 10(II)(AP) Exhibit 10(ii)(ap) J. C. PENNEY COMPANY, INC. FORM OF SEVERANCE AGREEMENT [Date] PERSONAL AND CONFIDENTIAL Dear ______________________: As you are aware, the Board of Directors of J. C. Penney Company, Inc. ("Company") has adopted the 1999 Separation Allowance Program for Profit-Sharing Management Associates ("Program") to protect associates and their families in the event their jobs are negatively affected by a Change of Control of the Company. The Company considers you a key officer and needs your best efforts, skills and dedication in the event of a Change of Control of the Company to assure that the best interests of all its stockholders are protected, as determined by the Board of Directors. The Company recognizes that the course of action which it decides upon and which you will be responsible to implement may be contrary to your own personal interests and needs. For the purpose of assuring the continued availability of your best efforts, skills and dedication which are now and will be required in such difficult circumstances to obtain the most beneficial outcome for the Company's stockholders, the Company offers, in consideration of your continued services, to provide you with a separate lump sum severance payment in lieu of the lump sum severance payment under the Program or your employment contract, as the case may be, in the event of a Change of Control of the Company, as follows: 1. ALTERNATIVE SEVERANCE ARRANGEMENT. If, within six months following a Change of Control of the Company (as defined in Exhibit A attached hereto), your employment by the Company terminates, voluntarily or involuntarily, for any reason other than disability or death, you shall receive the Severance Payment, together with all the other benefits provided for in the Program or your employment contract, as the case may be. (a) The Severance Payment will be paid to you immediately upon your termination of employment in one lump sum, subject to applicable withholding taxes. (b) This alternative severance arrangement shall terminate upon the expiration of six months from the date of a Change of Control. For the purposes of this agreement, Severance Payment shall mean an amount equal to the sum of the following: I. Three times your then current annual base rate of salary, plus II. Three times the Management Incentive Compensation Plan award for which you are eligible based on your salary at the time the Severance Payment is computed, payable at the target level ($1.00 unit value), plus III. Three times the Economic Value Added Performance Plan award for which you are eligible, payable at the target level ($1.00 unit value) calculated on your salary at the time the Severance Payment is computed, without regard to any negative balance in your Bonus Reserve Account under that Plan. IV. If you become entitled to the Severance Payment and/or other benefits under the Program, you shall also be entitled to receive the Code Section 280G Gross-Up Payment described in Section 4.10 of the Program, if applicable. 2. TERM OF THIS AGREEMENT. The term of this agreement is one year beginning February 8, 2000. This agreement shall be automatically renewed for additional one year terms unless terminated by the Board of Directors of the Company by the delivery of written notice to you not less than thirty (30) days prior to the end of the term. 3. MISCELLANEOUS. (a) The Severance Payment is in lieu of Severance Pay under Section 4.01 of the Program. If you receive a Severance Payment under this agreement, you shall also be entitled to receive immediately any other benefits to which you may be entitled under the Program without the need for an actual or constructive termination of employment. If you do not terminate your employment within six months after a Change of Control, then you shall continue to be entitled to all the benefits, including Severance Pay, provided for in the Program for the remaining term of the two year period provided for in the Program after a Change of Control. (b) You shall not be required to mitigate the amount of any Severance Payment paid to you by seeking other employment or otherwise, nor shall the amount of any Severance Payment be reduced by any compensation earned by you as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by you to the Company, or otherwise. 2 (c) The Company will require any successor (whether direct or indirect, by purchase, merger, share exchange, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and to agree to perform this agreement in the same manner and to the same extent that the Company would be required to perform it if no such successor existed. 4. NOTICES. Any notice required or permitted by this agreement shall be given by registered or certified mail, return receipt requested, addressed to the Company at its then principal office, or to you at your address specified on page 1 of this agreement, or to either party hereto at such other address or addresses as you or the Company may from time to time specify for such purpose in a notice similarly given. 5. GOVERNING LAW. This agreement shall be construed and governed in accordance with the laws of the State of Delaware (regardless of the law that might otherwise govern under applicable Delaware principles of conflict of laws). Please indicate your acceptance of this agreement by signing one copy of this letter in the space provided below and returning it to me. The other copy is for your files. Sincerely, J. C. PENNEY COMPANY, INC. By ----------------------------- J. E. Oesterreicher Chairman of the Board and Chief Executive Officer AGREED TO AND ACCEPTED this ____ day of ______________, _______. - ------------------------------ 3 EXHIBIT A A Change of Control shall be deemed to have occurred if the event set forth in any one of the following subparagraphs shall have occurred: (a) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 50% or more of the combined voting power of the Company's then outstanding securities; or (b) during any period of two consecutive calendar years, the following individuals cease for any reason to constitute a majority of the number of directors then serving as directors of the Company: individuals, who on July 14, 1999 constitute the Board of Directors of the Company and any new director (other than a director whose initial assumption of office is in connection with the settlement of an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board of Directors of the Company or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors on July 14, 1999 or whose appointment, election or nomination for election was previously so approved or recommended; or (c) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or entity, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any Parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 50% of the combined voting power of the securities of the Company, such surviving entity or any Parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected solely to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 50% or more of the combined voting power of the Company's then outstanding securities; or (d) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company, or there is consummated a sale or disposition by the Company or any of its subsidiaries of any assets which individually or as part of a series of related transactions constitute all or substantially all of the Company's consolidated assets, other than any such sale or disposition to an entity at least 50% of the combined 1 voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the voting securities of the Company immediately prior to such sale or disposition; or (e) the execution of a binding agreement that if consummated would result in a Change of Control of a type specified in subparagraphs (a) or (c) above (an "Acquisition Agreement") or of a binding agreement for the sale or disposition of assets that, if consummated, would result in a Change of Control of a type specified in subparagraph (d) above (an "Asset Sale Agreement") or the adoption by the Board of Directors of the Company of a plan of complete liquidation or dissolution of the Company that, if consummated, would result in a Change of Control of a type specified in subparagraph (d) above (a "Plan of Liquidation"), provided, however, that a Change of Control of the type specified in this subparagraph (e) shall not be deemed to exist or have occurred as a result of the execution of such Acquisition Agreement or Asset Sale Agreement, or the adoption of such a Plan of Liquidation, from and after the Abandonment Date. As used in this subparagraph (e), the term "Abandonment Date" shall mean the date on which (i) an Acquisition Agreement, Asset Sale Agreement or Plan of Liquidation is terminated (pursuant to its terms or otherwise) without having been consummated, (ii) the parties to an Acquisition Agreement or Asset Sale Agreement abandon the transactions contemplated thereby, (iii) the Company abandons a Plan of Liquidation, or (iv) a court or regulatory body having competent jurisdiction enjoins or issues a cease and desist or stop order with respect to or otherwise prevents the consummation of, or a regulatory body notifies the Company that it will not approve an Acquisition Agreement, Asset Sale Agreement or Plan of Liquidation or the transactions contemplated thereby and such injunction, order or notice has become final and not subject to appeal; or (f) the Board adopts a resolution to the effect that, for purposes of this Plan, a Change of Control has occurred. Notwithstanding the foregoing, a Change of Control shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity (i) which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions, (ii) which is intended to reflect or track the value or performance of a particular division, business segment or subsidiary of the Company, or (iii) which is an affiliated company, subsidiary, or spin-off entity owned by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company on the date of such spin-off. As used in connection with the foregoing definition of Change of Control, "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act; "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act; "Exchange Act" shall mean the Securities Exchange Act of 2 1934, as amended from time to time; "Parent" shall mean any entity that becomes the Beneficial Owner of at least 50% of the voting power of the outstanding voting securities of the Company or of an entity that survives any merger or consolidation of the Company or any direct or indirect subsidiary of the Company; and "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation or entity owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. 3 EX-10.(II)(AQ) 4 EXHIBIT 10(II)(AQ) Exhibit 10(ii)(aq) AMENDMENTS TO MIRROR PLANS 1. Section 7.02 (Separation from Service) is amended effective January 1, 2000 to add the following paragraph: Notwithstanding the foregoing, if the present value of the Participant's vested benefits does not exceed $5,000, such benefits shall be distributed to the Participant in a single sum payment in January following the year in which occurs the later of (a) his Separation from Service or (b) the date of receipt by the Plan Administrator of the Participant's notice of employment termination. Such present value shall be determined as of the date of receipt by the Plan Administrator of the Participant's notice of employment termination; provided, however, that if the Participant had a Separation from Service before January 1, 2000, such present value shall be determined as of December31, 1999. The payment date shall be determined by the Plan Administrator. 2. Section 7.03 (Death) is amended effective January 1, 2000 to add the following paragraph after the first paragraph: Notwithstanding the foregoing, if the present value of the Participant's vested benefits does not exceed $5,000, such benefits shall be distributed to the Beneficiary of the Participant in a single sum payment in January following the Participant's date of death, or, if later, after satisfactory proof of death is received by the Plan Administrator. The payment date shall be determined by the Plan Administrator. EX-11 5 EXHIBIT 11 Exhibit 11 J. C. PENNEY COMPANY, INC. and Consolidated Subsidiaries COMPUTATION OF NET INCOME PER COMMON SHARE (Amounts in millions except per common share data)
52 Weeks Ended 52 Weeks Ended 53 Weeks Ended January 29, 2000 January 30, 1999 January 31, 1998 ------------------------- ---------------------- ---------------------- Shares Income Shares Income Shares Income ------- ------- ------- ------ ------ ------ Basic - ----- Net income $336 $594 $566 Dividend on Series B ESOP convertible preferred stock (after-tax) (36) (38) (40) ---- ---- ---- Adjusted net income 300 556 526 Weighted average number of shares outstanding 259.4 252.8 247.4 ----- ---- ----- ---- ----- ---- 259.4 $300 252.8 $556 247.4 $526 ===== ==== ===== ==== ===== ==== Net income per common share $1.16 $2.20 $2.13 ===== ===== ==== Diluted - ------- Net income $336 $594 $566 Tax benefit differential on ESOP dividend assuming stock is fully converted (1) - - Assumed additional contribution to ESOP if preferred stock is fully converted - (1) (3) ---- ---- ---- Adjusted net income 336 593 562 Weighted average number of shares outstanding (basic) 259.4 252.8 247.4 Stock options and other 0.4 1.8 2.5 Convertible preferred stock 15.3 16.6 18.2 ------ ---- ----- ---- ----- ---- 275.1 $336 271.2 $593 268.1 $562 ====== ==== ===== ==== ===== ==== Net income per common share $1.16(1) $2.19 $2.10 ===== ===== =====
(1) Calculation excludes the effects of the potential conversion of outstanding preferred shares into common shares, and the related dividends, because their inclusion would have an anti-dilutive effect on EPS. EX-12.A 6 EXHIBIT 12(A)
Exhibit 12(a) J. C. Penney Company, Inc. and Consolidated Subsidiaries Computation of Ratios of Available Income to Combined Fixed Charges and Preferred Stock Dividend Requirement 52 Weeks 52 Weeks 53 Weeks 52 Weeks Ended Ended Ended Ended -------------- ($ Millions) 01/29/00 01/30/99 01/31/98 01/25/97 01/27/96 --------- --------- --------- -------- --------- Income from continuing operations $490 $914 $882 $853 $1,285 (before income taxes, before capitalized interest, but after preferred stock dividend) Fixed charges Interest (including capitalized interest) on: Operating leases 272 225 180 110 102 Short term debt 137 106 121 102 129 Long term debt 538 557 527 312 254 Capital leases 2 4 7 6 6 Other, net (5) 1 (5) 14 1 ------- ------- ------- ------- ------ Total fixed charges 944 893 830 544 492 Preferred stock dividend, before taxes 36 37 40 46 48 Combined fixed charges and preferred ------- ------- ------- ------- ------ stock dividend requirement 980 930 870 590 540 Total available income $1,470 $1,844 $1,752 $1,443 $1,825 ======= ======= ======= ======= ====== Ratio of available income to combined fixed charges and preferred stock dividend requirement 1.5 2.0 2.0 2.4 3.4 ======= ======= ======= ======= ======
The interest cost of the LESOP notes guaranteed by the Company is not included in fixed charges above. The LESOP notes were repaid in July 1998. EX-12.B 7 EXHIBIT 12(B)
Exhibit 12(b) J. C. Penney Company, Inc. and Consolidated Subsidiaries Computation of Ratios of Available Income to Fixed Charges 52 Weeks 52 Weeks 53 Weeks 52 Weeks Ended Ended Ended Ended -------------- ($ Millions) 01/29/00 01/30/99 01/31/98 01/25/97 01/27/96 --------- --------- --------- -------- --------- Income from continuing operations $526 $951 $922 $899 $1,333 (before income taxes and capitalized interest Fixed charges Interest (including capitalized interest) on: Operating leases 272 225 180 110 102 Short term debt 137 106 121 102 129 Long term debt 538 557 527 312 254 Capital leases 2 4 7 6 6 Other, net (5) 1 (5) 14 1 ------- ------- ------- ------- ------ Total fixed charges 944 893 830 544 492 ------- ------- ------- ------- ------ Total available income $1,470 $1,844 $1,752 $1,443 $1,825 ======= ======= ======= ======= ====== Ratio of available income to combined fixed charges and preferred stock dividend requirement 1.6 2.1 2.1 2.7 3.7 ======= ======= ======= ======= ======
The interest cost of the LESOP notes guaranteed by the Company is not included in fixed charges above. The LESOP notes were repaid in July 1998. EX-13 8 EXHIBIT 13 Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS J. C. PENNEY COMPANY, INC.
- --------------------------------------------- 52 WEEKS 52 WEEKS 53 WEEKS ($ IN MILLIONS EXCEPT EPS) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------
(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 - ------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------
(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 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 - --------------------------------------------------------------- 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% - ---------------------------------------------------------------
(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 17 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 - ------------------------------------------------------------- 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% - -------------------------------------------------------------
(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 18 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 - -------------------------------------------------------------- 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% - --------------------------------------------------------------
(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 $.9 billion in 1997. Health insurance premiums account for the majority of the revenue increases in both 1999 and 1998, and represent in excess of 70 percent of total insurance premiums and 60 percent of total revenue. Revenue growth for the three-year period is primarily attributable to successfully maintaining and enhancing marketing relationships with businesses, principally banks, oil companies and retailers, for the sale of insurance products throughout the United States and Canada. 19 1999 marked the first year that more than 50 percent of total revenue was generated through non-JCPenney business relationships. Direct Marketing continued its international expansion in 1999 with active programs with two United Kingdom banks, programs launched in Australia and activity initiated in South Korea. Membership services contributed eight percent of total revenues in 1999 and continued to be a growing component of the segment, increasing 43 percent and 30 percent in 1999 and 1998, respectively. Memberships include dental, pharmacy, vision and hearing benefits, as well as auto and travel services. NET INTEREST EXPENSE AND CREDIT OPERATIONS
- ------------------------------- ($ IN MILLIONS) 1999 1998 1997 - ----------------------------------------------------------- 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 - -----------------------------------------------------------
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. 20 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 - --------------------------------------------------- Department stores and catalog $ 318 $ 420 $ 443 Eckerd drugstores 283 256 341 Other corporate 5 20 26 --------------------------- Total $ 606 $ 696 $ 810 - ---------------------------------------------------
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 21 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 - ---------------------------------------------------------- Debt to capital percent 54.3% 62.9%* 60.7% - ----------------------------------------------------------
* 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 22 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. 23 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 CONSOLIDATED STATEMENTS OF INCOME J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES
- ------------------------------------------------------- ($ IN MILLIONS) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
AVERAGE - ------------------------------------------------------ (IN MILLIONS, EXCEPT PER SHARE DATA) INCOME SHARES EPS - ------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------
(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. 25 CONSOLIDATED BALANCE SHEETS J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------ ($ IN MILLIONS) 1999 1998 - ------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------
See Notes to the Consolidated Financial Statements on pages 29 through 40. 26 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES
ACCUMULATED GUARANTEED OTHER TOTAL - ----------------------- COMMON PREFERRED LESOP REINVESTED COMPREHENSIVE STOCKHOLDERS' ($ IN MILLIONS) STOCK STOCK OBLIGATION EARNINGS INCOME/(LOSS)(1) EQUITY - ------------------------------------------------------------------------------------------------------------------ JANUARY 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 -----------------------------------------------------------------------------------------
(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 $(49) MILLION ASSOCIATED WITH ASSETS ACQUIRED AND LIABILITIES ASSUMED IN THE PURCHASE OF RENNER. See Notes to the Consolidated Financial Statements on pages 29 through 40. 27 CONSOLIDATED STATEMENTS OF CASH FLOWS J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES
- ------------------------------------------------------ ($ IN MILLIONS) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------
(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. 28 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 29 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. 30 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 31 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. 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 - --------------------------------------------------------- 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 - ---------------------------------------------------------
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 - ----------------------------------------------------------- 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 - -----------------------------------------------------------
(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 - ------------------------------------------------------------- Commercial paper $ 330 $ 1,924 Average interest rate at year-end 6.3% 5.1% - -------------------------------------------------------------
32 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 - ------------------------------------------------------------ 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 - ------------------------------------------------------------------
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 33 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 - ----------------------------------------------------------- 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 - -----------------------------------------------------------
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 - ------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------
OPTIONS AS OF JANUARY 29, 2000
OUTSTANDING EXERCISABLE - ------------------------------------ ------------------------------------------------------------- (SHARES IN THOUSANDS, PRICE AND TERM REMAINING ARE WEIGHTED AVERAGES) SHARES PRICE TERM (YRS.) SHARES PRICE - ------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------
34 10 INTEREST EXPENSE, NET
- ------------------------ ($ IN MILLIONS) 1999 1998 1997 - ------------------------------------------------------ Short-term debt $ 137 $ 106 $ 121 Long-term debt 536 557 527 Other, net * (61) (48) (64) ------------------------------ Interest expense, net $ 612 $ 615 $ 584 - ------------------------------------------------------
* 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 - ---------------------------------------------------------- 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% - ----------------------------------------------------------
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 - -------------------------------------------------------------- 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 - --------------------------------------------------------------
35 ASSUMPTIONS
1999 1998 1997 - ------------------------------------------------------- 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% - -------------------------------------------------------
ASSETS AND OBLIGATIONS PENSION PLANS*
- --------------------------------- ($ IN MILLIONS) 1999 1998 - ----------------------------------------------------- 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 - -----------------------------------------------------
* INCLUDES SUPPLEMENTAL RETIREMENT PLAN. MEDICAL AND DENTAL
- ------------------------------------ ($ IN MILLIONS) 1999 1998 - -------------------------------------------------------- Accumulated benefit obligation $ 322 $ 334 Net unrecognized losses 17 10 -------------------- Net medical and dental liability $ 339 $ 344 - --------------------------------------------------------
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 - --------------------------------------------------- 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 - ---------------------------------------------------
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 36 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 - ----------------------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------------------
(1) RESERVE BALANCES ARE INCLUDED AS A COMPONENT OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES. 37 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 - ------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------
(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 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 - ----------------------------------------------------- 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 - -----------------------------------------------------
INCOME TAX EXPENSE
- ------------------------- ($ IN MILLIONS) 1999 1998 1997 - ---------------------------------------------------- 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% - ----------------------------------------------------
1999 BALANCES INCLUDE $12 MILLION OF DEFERRED TAXES RELATED TO THE GENOVESE ACQUISITION. RECONCILIATION OF TAX RATES
- ---------------------------------- (PERCENT OF PRE-TAX INCOME) 1999 1998 1997 - ------------------------------------------------------------- Federal income tax at statutory rate 35.0 35.0 35.0 State and local income taxes, less federal income tax benefit (3.4) 2.2 2.8 Tax effect of dividends on allocated ESOP shares (2.8) (1.4) (1.3) Tax credits and other 8.0 2.0 2.3 --------------------------- Total 36.8 37.8 38.8 - -------------------------------------------------------------
Declines in the effective tax rate over the last three years are related primarily to the effects of tax planning strategies that have significantly reduced state and local effective income tax rates. 39 18 SEGMENT REPORTING The Company operates in three business segments: Department stores and catalog, Eckerd drugstores, and Direct Marketing. The results of Department stores and catalog are combined because they generally serve the same customer, have virtually the same mix of merchandise, and the majority of catalog sales are completed in department stores. For more detailed descriptions of each business segment, including products sold, see page 2 and pages 5 through 13 of this report. Other items are shown in the table below for purposes of reconciling to total Company consolidated amounts.
- ---------------------------------------- Operating Total Capital Depr. & ($ IN MILLIONS) Year Revenue Profit(1) Assets Expenditures Amort. - ---------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------
(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. 40 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 - ---------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------
FIVE YEAR FINANCIAL SUMMARY J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES
- -------------------------------------------------- (IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------
(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. (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. 41 FIVE YEAR OPERATIONS SUMMARY J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES
1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------
* INCLUDES RELOCATIONS OF 208 DRUGSTORES IN 1999, 175 DRUGSTORES IN 1998 AND 127 DRUGSTORES IN 1997. 42 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 - ------------------------------------------------------------------------------------------------------------------- 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% - -------------------------------------------------------------------------------------------------------------------
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 - ----------------------------------------------------------------------------------------------------------- 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% - -----------------------------------------------------------------------------------------------------------
43 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
- -------------------------- ($ IN MILLIONS) 1999 1998 1997 - -------------------------------------------------------------- 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% - --------------------------------------------------------------
(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:
LONG-TERM COMMERCIAL DEBT PAPER - --------------------------------------------------------------------- Moody's Investors Service Baa2 P2 Standard & Poor's Corporation BBB+(1) A2(1) Fitch Investors Service, Inc. A-(1) F2 - ---------------------------------------------------------------------
(1) UNDER REVIEW. 44 EX-21 9 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Set forth below is a list of certain subsidiaries of the Company at April 1, 2000. All of the voting securities of each named subsidiary are owned by the Company or by another subsidiary of the Company. SUBSIDIARIES Eckerd Corporation (Delaware) J. C. Penney Direct Marketing Services, Inc. (Delaware) J. C. Penney Funding Corporation (Delaware) J. C. Penney Life Insurance Company (Vermont) J. C. Penney Properties, Inc. (Delaware) JCP Realty, Inc. (Delaware) JCP Receivables, Inc. (Delaware) Thrift Drug, Inc. (Delaware) Separate financial statements are filed for J. C. Penney Funding Corporation, which is a consolidated subsidiary, in a separate Annual Report on Form 10-K. The names of other subsidiaries have been omitted because these unnamed subsidiaries, considered in the aggregate as a single subsidiary, do not constitute a significant subsidiary. EX-23 10 EXHIBIT 23 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors of J. C. Penney Company, Inc.: We consent to incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-28390, 33-59666, 33-66070, 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 reports dated February 24, 2000, relating to the 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 and the financial statement schedule for each of the years in the three-year period ended January 29, 2000, which reports are included or incorporated by reference in the Annual Report on Form 10-K of J. C. Penney Company, Inc. for the year ended January 29, 2000 /s/ KPMG LLP Dallas, Texas April 25, 2000 EX-24 11 EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY Each of the undersigned directors and officers of J. C. PENNEY COMPANY, INC., a Delaware corporation ("Company"), which will file with the Securities and Exchange Commission, Washington, D.C. ("Commission"), under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the 52 weeks ended January 29, 2000 ("Annual Report"), hereby constitutes and appoints W. J. Alcorn, C. R. Lotter, and D. A. McKay, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power to each of them to act without the others, for him or her and in his or her name, place, and stead, in any and all capacities, to sign such Annual Report, which is about to be filed, and any and all subsequent amendments to such Annual Report, and to file such Annual Report so signed, with all exhibits thereto, and any and all documents in connection therewith, and any and all subsequent amendments to such Annual Report, and to appear before the Commission in connection with any matter relating to such Annual Report, hereby granting to the attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises as fully and to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney as of the 8th day of March, 2000. /s/ J. E. OESTERREICHER /s/ D. A. MCKAY - ------------------------------- ------------------------------- J. E. Oesterreicher D. A. McKay Chairman of the Board and Executive Vice President and Chief Executive Officer Chief Financial Officer (principal executive officer); (principal financial officer) Director /s/ W. J. ALCORN - ------------------------------- W. J. Alcorn Vice President and Controller (principal accounting officer) /s/ M. A. BURNS /s/ T. J. ENGIBOUS - ------------------------------- ------------------------------- M. A. Burns T. J. Engibous Director Director /s/ K. B. FOSTER /s/ V. E. JORDAN, JR. - ------------------------------- ------------------------------- K. B. Foster V. E. Jordan, Jr. Director Director /s/ J. C. PFEIFFER /s/ A. W. RICHARDS - ------------------------------- ------------------------------- J. C. Pfeiffer A. W. Richards Director Director /s/ FRANCISCO SANCHEZ-LOAEZA /s/ C. S. SANFORD, JR. - ------------------------------- ------------------------------- Francisco Sanchez-Loaeza C. S. Sanford, Jr. Director Director /s/ R. G. TURNER - ------------------------------- R. G. Turner Director EX-27 12 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENT OF INCOME OF J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES AS OF JANUARY 29, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS JAN-29-2000 JAN-29-2000 1,233 0 1,158 20 5,947 8,472 8,195 2,883 20,888 4,465 5,844 0 446 3,266 3,516 20,888 31,391 32,510 23,374 30,538 738 91 612 531 195 336 0 0 0 336 1.16 1.16
EX-27.1 13 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENT OF INCOME OF J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES AS OF JANUARY 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS JAN-30-1999 JAN-30-1999 96 415 4,417 149 6,060 11,007 8,333 2,875 23,508 5,907 7,143 0 475 2,850 3,777 23,508 29,439 30,461 21,642 28,265 397 229 615 955 361 594 0 0 0 594 2.20 2.19
EX-27.2 14 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENT OF INCOME OF J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES AS OF JANUARY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS JAN-31-1998 JAN-31-1998 287 1,073 3,807 135 6,191 11,366 8,274 2,945 23,363 5,978 6,986 0 526 2,766 3,998 23,363 29,482 30,410 21,294 27,860 734 307 584 925 359 566 0 0 0 566 2.13 2.10
EX-99.B 15 EXHIBIT 99.B Exhibit 99(b) 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 $1.5 billion, five-year revolver expiring 11/21/2002. There were no outstanding borrowings under these credit facilities during fiscal 1999. We would like to express our appreciation to the institutional investment community, as well as to our credit line participants and commercial paper dealers for their continued support during 1999. 3
STATEMENTS OF INCOME J. C. PENNEY FUNDING CORPORATION ($ in millions) FOR THE YEAR 1999 1998 1997 ------------------------------------------- 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 ========== ========= =========
See Notes to Financial Statements on page 7 4
BALANCE SHEETS J. C. PENNEY FUNDING CORPORATION (In millions except share data) 1999 1998 -------------------------- 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 ========= ==========
See Notes to Financial Statements on page 7 5
STATEMENTS OF CASH FLOWS J. C. PENNEY FUNDING CORPORATION ($ in millions) FOR THE YEAR 1999 1998 1997 ------------------------------------------- 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
See Notes to Financial Statements on page 7 6 INDEPENDENT AUDITORS' REPORT J. C. PENNEY FUNDING CORPORATION To the Board of Directors of J. C. Penney Funding Corporation: We have audited the accompanying balance sheets of J. C. Penney Funding Corporation as of January 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 $1.5 billion, five-year revolver expiring 11/21/2002. There were no outstanding borrowings under these credit facilities at January 29, 2000. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of short term debt (commercial paper) at January 29, 2000 and January 30, 1999 approximates the amount as reflected on the balance sheet due to its short average maturity. The fair value of loans to JCPenney at January 29, 2000, and January 30, 1999 also approximates the amount reflected on the balance sheet because the loan is payable on demand and the interest charged on the loan balance is adjusted to reflect current market interest rates. 7
FIVE YEAR FINANCIAL SUMMARY J. C. PENNEY FUNDING CORPORATION ($ in millions) AT YEAR END 1999 1998 1997 1996 1995 ----------------------------------------------------------------- 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%
8
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 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 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
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