-----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, Snfj5BUiGDxA6iaqUtQx4hguAbrcoyUWBr1oMJjxD6KAAL/IinUf43Y7aOWW74tX +sPmeVSV0r5ERUYEqf/xlA== 0000930661-01-500250.txt : 20010425 0000930661-01-500250.hdr.sgml : 20010425 ACCESSION NUMBER: 0000930661-01-500250 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20010127 FILED AS OF DATE: 20010424 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: 1609787 BUSINESS ADDRESS: STREET 1: 6501 LEGACY DR CITY: PLANO STATE: TX ZIP: 75024-3698 BUSINESS PHONE: 9724311000 10-K405 1 d10k405.txt FORM 10-K405 CONFORMED COPY -------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the 52 weeks ended January 27, 2001 Commission file number 1-777 J. C. PENNEY COMPANY, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-5583779 - ----------------------------------------------------- -------------- (State of incorporation) (I.R.S. Employer ID No.) 6501 LEGACY DRIVE, PLANO, TEXAS 75024-3698 - ----------------------------------------------------- -------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 431-1000 - ----------------------------------------------------- -------------- Securities registered pursuant to Section 12(b) of the Act: - ---------------------------------------------------------- Name of each exchange on Title of each class which registered ------------------- ---------------- Common Stock of 50c par value New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None - ---------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant: $5,018,624,610 as of April 19, 2001. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 263,030,640 shares of Common Stock of 50c par value, as of April 19, 2001. 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 2000 Annual Report to Stockholders Part IV 2. J. C. Penney Company, Inc. Part III 2001 Proxy Statement 3. J. C. Penney Funding Corporation Part I and Part IV Form 10-K for fiscal year 2000 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 1,111 JCPenney department stores in all 50 states, Puerto Rico, and Mexico. In addition, the Company operates 49 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. Department stores, catalog and the Internet generally serve the same customers, have virtually the same mix of merchandise and the majority of catalog sales are completed in department stores. In addition, department stores accept returns from sales initiated in department stores, catalog and by the Internet. The Company markets predominantly family apparel, jewelry, shoes, accessories, and home furnishings. In addition, the Company, through its subsidiary, Eckerd Corporation ("Eckerd"), operates a chain of 2,640 drugstores located throughout the Southeast, Sunbelt, and Northeast regions of the United States. On March 7, 2001, the Company signed a definitive agreement with a U.S. subsidiary of AEGON N.V. for the sale of the assets of its J. C. Penney Direct Marketing Services, Inc. ("DMS") business consisting of the stock of its insurance subsidiaries and related businesses. At closing the Company will receive cash proceeds of approximately $1.3 billion plus settlements from intercompany accounts. Concurrent with the closing, the Company will enter into a 15-year marketing and licensing arrangement with the AEGON N.V. subsidiary, pursuant to which the Company or its agent will receive cash payments with a present value of up to $300 million. The Company's financial statements are presented to reflect DMS as a discontinued operation. The business of marketing merchandise and services is highly competitive. Although the Company is one of the largest department store and drugstore retailers in the United States, it has numerous competitors. Many factors enter into the competition for the consumer's patronage, including price, quality, style, service, product mix, convenience, and credit availability. The Company's annual earnings depend to a significant extent on the results of operations for the last quarter of its fiscal year. Sales for that period average approximately 30 per cent of annual sales. Information about certain aspects of the business of the Company included under the captions of "Discontinued Operations" (page 20), "Restructuring and Other Charges, Net", (pages 25 to 27), and "Segment Reporting" (pages 29 to 30), which appear in the section of the Company's 2000 Annual Report to Stockholders entitled "Notes to the Consolidated Financial Statements", "Five Year Financial Summary" (page 31), "Five Year Operations Summary" (page 32), and "Supplemental Data (unaudited)" (pages 33 to 34), which appear in the Company's 2000 Annual Report to Stockholders on the pages indicated in the parenthetical references, is incorporated 3 herein by reference and filed hereto as Exhibit 13 in response to Item 1 of Form 10-K. In addition, information about J. C. Penney Funding Corporation, a wholly owned consolidated subsidiary of the Company, which appears in Item 1 of its separate Annual Report on Form 10-K for the fiscal year ended January 27, 2001, 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 2,200 --------- domestic and foreign suppliers, many of which have done business with the Company for many years. In addition, Eckerd purchases merchandise and pharmaceuticals from approximately 3,700 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 sixteen foreign countries and quality assurance inspection offices in an additional six foreign countries as of January 27, 2001. Employment. The Company and its consolidated subsidiaries employed ---------- approximately 267,000 persons as of January 27, 2001. Environment. Environmental protection requirements did not have a material ----------- effect upon the Company's operations during fiscal 2000. 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. Forward-Looking Statements. This Annual Report on Form 10-K may contain -------------------------- forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, which reflect the Company's current views of future events and financial performance, involve known and unknown risks and uncertainties that may cause the Company's actual results to be materially different from planned or expected results. Those risks and uncertainties include, but are not limited to, competition, consumer demand, seasonality, economic conditions, and government activity. Investors should take such risks into account when making investment decisions. 2. Properties. ---------- At January 27, 2001, the Company operated 3,800 retail stores, comprised of 1,111 JCPenney department stores, 49 Renner department stores and 2,640 drugstores, in all 50 states, Puerto Rico, Brazil, and Mexico, of which 210 JCPenney department stores, one Renner department store and 49 drugstores were owned. The Company also operated six catalog fulfillment centers, of which five were owned. The Company operated eight store distribution centers of which four were owned. Eckerd operated and owned eight drugstore distribution centers. The Company also owned the Company's Home Office facility, 4 DMS and Eckerd corporate offices, and Renner's corporate headquarters in Porto Allegre, Brazil. In addition, the Company owned as part of its Home Office 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 32 of the Company's 2000 Annual Report to Stockholders, is incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 2 of Form 10-K. 3. Legal Proceedings. ----------------- The Company has no material legal proceedings pending against it. 4. Submission of Matters to a Vote of Security Holders. --------------------------------------------------- No matter was submitted to a vote of stockholders during the fourth quarter of fiscal 2000. Executive Officers of the Registrant ------------------------------------ The following is a list, as of April 1, 2001, 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 18, 2001. There is no family relationship between any of the named persons. Offices and other positions Name held with the Company Age - ---- --------------------- --- Allen Questrom Chairman of the Board and Chief Executive Officer; Director 61 Vanessa J. Castagna Executive Vice President and Chief Operating Officer, JCPenney Stores, Merchandising and Catalog 50 Robert B. Cavanaugh Executive Vice President and Chief Financial Officer 49 Gary L. Davis Executive Vice President, Chief Human Resources and Administration Officer 57 J. Wayne Harris Chairman of the Board and Chief Executive Officer, Eckerd Corporation 61 Charles R. Lotter Executive Vice President, Secretary and General Counsel 63 Stephen F. Raish Executive Vice President and Chief Information Officer 50 ______________________ Mr. Questrom has served as Chairman of the Board and Chief Executive Officer of the Company since September 13, 2000. Prior to joining the Company, Mr. Questrom served as Chairman of the Board from 5 1999 to January 2001, and Chief Executive Officer from 1999 to 2000, of Barney's New York, Inc., Chairman of the Board and Chief Executive Officer of Federated Department Stores, Inc. from 1990 to 1997, and President and Chief Executive Officer of Neiman Marcus Stores from 1988 to 1990. He was the senior policy maker in these positions. Prior to assuming these positions, Mr. Questrom held executive, senior management, and senior merchandise manager positions at Federated Department Stores. Ms. Castagna was elected Executive Vice President and Chief Operating Officer of JCPenney Stores, Merchandising and Catalog in 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- 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. Cavanaugh was elected Executive Vice President and Chief Financial Officer of the Company effective January 2, 2001. He was elected Senior Vice President and Chief Financial Officer of Eckerd Corporation, a subsidiary of the Company, in 1999. From 1995 to 1999 he served as Vice President of the Company and from 1996 to 1999 he served as Vice President and Treasurer of the Company. He was elected to serve as a director of Eckerd Corporation in 2001. 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. Harris was elected Chairman of the Board and Chief Executive Officer of Eckerd Corporation, a subsidiary of the Company, effective October 1, 2000. Prior to joining the Company, Mr. Harris served as Chairman of the Board and Chief Executive Officer of The Grand Union Company from 1997 to 2000, and he served as Chairman of the Board and Chief Executive Officer of Canadian Co./GAP from 1995 to 1997, and held various other executive and senior management positions with the Great Atlantic & Pacific Company, and also The Kroger Co. Mr. Lotter was elected an Executive Vice President of the Company in 1993. He was elected Senior Vice President, General Counsel and Secretary in 1987. He has served also as a director of Eckerd Corporation since 1996. 6 Mr. Raish was elected Executive Vice President and Chief Information Officer of the Company effective January 2, 2001. In 1996 he was named Director of Coordination, JCPenney Stores. He was elected Divisional Vice President in 1997. In 1998 he was elected President, Home and Leisure Division and in 1999 he was named President of the Accelerating Change Together (ACT) initiative, the Company's centralized merchandising process in department stores and catalog. 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 664,314 shares of Series B ESOP Convertible Preferred Stock were issued and outstanding at January 27, 2001. Additional information relating to the Common Stock and Preferred Stock of the Company included under the captions "Consolidated Statements of Stockholders' Equity" (page 16), "Capital Stock" (pages 22 to 23), and "Quarterly Data (Unaudited)" (page 31), which appear in the Company's 2000 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 1996-2000 included in the "Five Year Financial Summary" on page 31 of the Company's 2000 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 2000 Annual Report to Stockholders on pages 6 through 12 thereof, is incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 7 of Form 10-K. Forward-Looking Statements. -------------------------- This Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, which reflect the Company's current views of future events and financial performance, involve 7 known and unknown risks and uncertainties that may cause the Company's actual results to be materially different from planned or expected results. Those risks and uncertainties include, but are not limited to, competition, consumer demand, seasonality, economic conditions, and government activity. Investors should take such risks into account when making investment decisions. 7A. Quantitative and Qualitative Disclosures About Market Risk. ---------------------------------------------------------- The Company maintains a majority of its cash and cash equivalents in short term financial instruments with original maturities of three months or less. Such investments are subject to interest rate risk and may have a small decline in value if interest rates increase. Since the financial instruments are of short duration, a change of 100 basis points in interest rates would not have a material effect on the Company's financial condition. The Company's outstanding long-term debt as of January 27, 2001 is at fixed interest rates and would not be affected by interest rate changes. Future borrowings under the Company's five-year revolving credit facility, to the extent that fluctuating rate loans were used, would be affected by interest rate changes. As of January 27, 2001 no borrowings had been made under this facility. The Company does not believe that a change of 100 basis points in interest rates would have a material effect on the Company's financial condition. See the discussion and analysis under "Effect of new accounting standards" (page 20), "Fair Value of Financial Instruments" (page 22),and "Short Term Debt" (page 22) which appear in the Company's 2000 Annual Report to Stockholders on the pages indicated in the parenthetical references which are incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 7A of Form 10-K. 8. Financial Statements and Supplementary Data. ------------------------------------------- The Consolidated Balance Sheets of the Company and subsidiaries as of January 27, 2001 and January 29, 2000, and the related Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for each of the years in the three-year period ended January 27, 2001, appearing on pages 14 through 17 of the Company's 2000 Annual Report to Stockholders, together with the Independent Auditors' Report of KPMG LLP, independent certified public accountants, appearing on page 13 of the Company's 2000 Annual Report to Stockholders, the Notes to the Consolidated Financial Statements on pages 18 through 30, and the quarterly financial highlights ("Quarterly Data (unaudited)")appearing on page 31 thereof, are incorporated herein by reference and filed hereto as Exhibit 13 in response to Item 8 of Form 10-K. 8 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 2001 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 11, 2001. 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 2000 Annual Report to Stockholders. (a) 2. Financial Statement Schedules. Schedule II (Valuation and Qualifying Accounts and Reserves) is attached on Page F-1. See Independent Auditors' Report of KPMG LLP, independent certified public accountants, appearing on page 13 of this Annual Report on Form 10-K. All other schedules have been omitted as they are inapplicable or not required under the rules, or the information has been submitted in the consolidated financial statements and related financial information included in the Company's 2000 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 27, 2001, which financial statements, together with the Independent Auditors' 9 Report of KPMG LLP thereon, are incorporated herein by reference and filed hereto as Exhibit 99(b). (a) 3. Exhibits. See separate Exhibit Index on pages G-1 through G-10. (b) Reports on Form 8-K during the fourth quarter of fiscal 2000. None. (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. 10 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. J. C. PENNEY COMPANY, INC. --------------------------------- (Registrant) By: /s/ R. B. Cavanaugh ---------------------------- R. B. Cavanaugh Executive Vice President and Chief Financial Officer Dated: April 24, 2001 11 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date ---------- ----- ---- A. I. Questrom* Chairman of the Board and April 24, 2001 - --------------------- Chief Executive Officer A. I. Questrom (principal executive officer); Director /s/ R. B. Cavanaugh Executive Vice President and April 24, 2001 - --------------------- Chief Financial Officer R. B. Cavanaugh (principal financial officer) W. J. Alcorn* Vice President and Controller April 24, 2001 - --------------------- (principal accounting officer) W. J. Alcorn M. A. Burns* Director April 24, 2001 - --------------------- M. A. Burns T. J. Engibous* Director April 24, 2001 - --------------------- T. J. Engibous K. B. Foster* Director April 24, 2001 - --------------------- K. B. Foster V. E. Jordan, Jr.* Director April 24, 2001 - --------------------- V. E. Jordan, Jr. J. C. Pfeiffer* Director April 24, 2001 - --------------------- J. C. Pfeiffer A. W. Richards* Director April 24, 2001 - --------------------- A. W. Richards F. Sanchez-Loaeza* Director April 24, 2001 - --------------------- F. Sanchez-Loaeza C. S. Sanford, Jr.* Director April 24, 2001 - --------------------- C. S. Sanford, Jr. R. G. Turner* Director April 24, 2001 - --------------------- R. G. Turner *By: /s/ R. B. Cavanaugh --------------------- R. B. Cavanaugh Attorney-in-fact 12 INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors of J. C. Penney Company, Inc.: Under date of February 22, 2001, we reported on the consolidated balance sheets of J. C. Penney Company, Inc. and Subsidiaries as of January 27, 2001 and January 29, 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended January 27, 2001, as contained in the 2000 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 2000 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 22, 2001 13 SCHEDULE II J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (Amounts in millions)
====================================================================================================================== 52 Weeks 52 Weeks 52 Weeks Ended Ended Ended January 27, January 29, January 30, Description 2001 2000 1999 ====================================================================================================================== Reserves deducted from assets - ----------------------------- Allowance for doubtful accounts (1) Balance at beginning of period $ - $ 118 $ 105 Additions charged to costs and expenses - 105 241 Deductions of write-offs, less recoveries - (147) (228) Reduction in reserves related to the sale of the bank receivables portfolio - (76) - --------- ----------- -------- Balance at end of period $ - $ - $ 118 ========= =========== ======== (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 Other receivables 30 20 33 Restructuring and other charges, net 258 111 135 State tax valuation allowance 30 - - --------- ----------- -------- $ 318 $ 131 $ 183 ========= =========== ========
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 14, 2001. ------ 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*). (e) Agreement dated as of September 30, 2000 between the Company and J. E. Oesterreicher (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 28, 2000*). (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 G-4 Report on Form 10-K for the 52 weeks ended January 25, 1997*). (d) July 1997 Amendment to Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc. (incorporated by reference to Exhibit 10(b) to Company's Quarterly Report on Form 10-Q for the 13 and 39 week periods ended October 25, 1997*). (e) December 1997 Amendment to Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc. (incorporated by reference to Exhibit 10 (ii)(e) to Company's Annual Report on Form 10-K for the 53 weeks ended January 31, 1998*). (f) March 1998 Amendment to Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc. (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 G-5 Report on Form 10-K for the 52 week period ended January 27, 1996*). (m) J. C. Penney Company, Inc. 1993 Equity Compensation Plan (incorporated by reference to Exhibit A to Company's definitive Proxy Statement for its Annual Meeting of Stockholders held on May 21, 1993*). (n) February 1995 Amendment to J. C. Penney Company, Inc. 1993 Equity Compensation Plan (incorporated by reference to Exhibit 10(ii)(l) to Company's Annual Report on Form 10-K for the 52 week period ended January 28, 1995*). (o) November 1995 Amendment to J. C. Penney Company, Inc. 1993 Equity Compensation Plan, as amended (incorporated by reference to Exhibit 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 G-6 definitive Proxy Statement for its Annual Meeting of Stockholders held on May 29, 1987*). (v) Form of Indemnification Agreement between Company and individual Indemnitees (incorporated by reference to Exhibit B to Company's definitive Proxy Statement for its Annual Meeting of Stockholders held on May 29, 1987*). (w) J. C. Penney Company, Inc. Benefit Restoration Plan (incorporated by reference to Exhibit 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 G-7 to Exhibit 10(ii)(ab) to Company's Annual Report on Form 10-K for the 52 weeks ended January 25, 1997*). (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) 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*). (ah) 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*). (ai) 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*). (aj) 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*). (ak) 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*). (al) 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*). (am) Employment Agreement dated as of August 1, 1999 between the Company and V. J. Castagna (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*). (an) Form of Severance Agreement (incorporated by references to Exhibit 10(p) to Company's Annual Report on Form 10-K for the 52 week period ended January 29, 2000*). G-8 (ao) December 10, 1999 Amendments to Mirror Savings Plans I, II, and III (incorporated by reference to Exhibit 10(aq) to Company's Annual Report on Form 10-K for the 52 week period ended January 29, 2000*). (ap) March 7, 2000 Amendment to Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc. (incorporated by reference to Exhibit 10(a) to Company's Quarterly Report on Form 10-Q for the 13 week period ended April 29, 2000*). (aq) Form of Succession Severance Agreement dated May 19, 2000, as amended June 1, 2000 and June 14, 2000 (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 29, 2000*). (ar) Employment Agreement dated as of July 21, 2000 between the Company and A. I. Questrom (incorporated by reference to Exhibit 10 to Company's Current Report on Form 8-K dated July 21, 2000*). (as) J. C. Penney Company, Inc. 2000 New Associate Equity Plan (incorporated by reference to Exhibit 10(a) to Company's Quarterly Report on Form 10-Q for the 13 and 39 week periods ended October 28, 2000*). (at) Employment Agreement dated as of September 25, 2000 between the Company and J. W. Harris (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 28, 2000*). (au) December 11, 2000 Amendments to Mirror Savings Plans I, II, and III. (av) Amendment No.1, dated as of May 19, 2000, to the Employment Agreement dated as of August 1, 1999 between the Company and V. J. Castagna. (aw) Incentive Compensation Agreements dated as of January 2, 2001, between the Company and G. L. Davis, C. R. Lotter, and M. W. Taxter. * SEC file number 1-777 G-9 11. Statement re: Computation of per share earnings ----------------------------------------------- See Calculation of Earnings Per Share on page 21 of Company's 2000 Annual Report to Stockholders. 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 2000 Annual Report to Stockholders. 21. Subsidiaries of the registrant ------------------------------ List of certain subsidiaries of the Company at April 1, 2001. 23. Independent Auditors' Consent ----------------------------- 24. Power of Attorney ----------------- 99. Additional Exhibits ------------------- (a) Item 1 of J. C. Penney Funding Corporation Annual Report on Form 10-K for the 52 weeks ended January 27, 2001 (incorporated by reference to J. C. Penney Funding Corporation Annual Report on Form 10-K for the 52 weeks ended January 27, 2001 filed concurrently herewith, SEC File No. 1-4947-1). (b) Excerpt from J. C. Penney Funding Corporation Annual Report. G-10 EX-3.II 2 dex3ii.txt BYLAWS OF THE COMPANY Exhibit 3(ii) ================================================================================ J. C. PENNEY COMPANY, INC. (A Delaware Corporation) ------------------------------- BYLAWS As amended to February 14, 2001 ------------------------------- ================================================================================ INDEX -----
Article Pages ------- ----- Amendments..................................................... XVI 40 Board of Directors............................................. III 11-19 Books and Records.............................................. VII 30-31 Committees..................................................... IV 19-23 Contracts, Loans, Checks, Drafts, Bank Accounts, etc........................................... VI 28-30 Dividends and Reserves......................................... IX 33 Emergency Bylaws............................................... XV 37-39 Fiscal Year.................................................... XIII 36 Indemnification of Directors, Officers, Employees, and Agents.............................. X 33-35 Meetings of Stockholders....................................... II 2-11 Officers....................................................... V 23-28 Offices........................................................ I 1 Ratification................................................... XI 35 Seal........................................................... XII 35 Shares of Stock and Their Transfer............................. VIII 31-33 Waiver of Notice............................................... XIV 30
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 Delaware or by the certificate of incorporation, 3 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 meeting at which the adjournment is taken. If, however, the 4 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 meeting. 5 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 matter upon which the stockholders will vote at a meeting shall be 6 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 the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with 7 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 proposing such business, (2) a representation that such stockholder is a record owner of stock of the Company entitled to 8 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 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 9 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 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 10 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 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 11 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 attaining 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 12 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 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 13 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 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 14 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. 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 15 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 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. 16 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 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 17 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 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 18 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 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 19 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. 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 20 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 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 21 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 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 22 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. 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 23 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 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, and members of the Company's executive or senior management committee, or successor committee then in place (the number and titles thereof to be determined by the Board of Directors). In addition, there may be such other officers, agents, and employees of the Company 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. 24 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 disqualification. SECTION 3. Appointed 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, 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 other 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. 25 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. 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, 26 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 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 27 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. 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 28 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 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 29 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 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 30 special bank and custodial accounts with such banks, trust companies, and other depositories as it may select. Rules, 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 31 mailed to each stockholder at his or her address as it appears on the records of the Company. 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 32 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 33 surrender of the certificate or certificates for such shares 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 investigative, by reason of the fact that such person is or was a 34 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 35 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". 36 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. 37 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 meeting, and shall be required to be given only to such of the 38 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 39 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, all Bylaws of the Company shall be subject to alteration, amendment, or repeal, in whole or in part, and new bylaws not 40 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. TABLE OF CONTENTS -----------------
Article Title Pages - ------- ----- ----- I Offices 1 II Meetings of Stockholders 2-11 III Board of Directors 11-19 IV Committees 19-23 V Officers 23-28 VI Contracts, Loans, Checks, Drafts, Bank Accounts, Etc. 28-30 VII Books and Records 30-31 VIII Shares of Stock and Their Transfer 31-33 IX Dividends and Reserves 33 X Indemnification of Directors, Officers, Employees, and Agents 33-35 XI Ratification 35 XII Seal 35 XIII Fiscal Year 36 XIV Waiver of Notice 36 XV Emergency Bylaws 37-39 XVI Amendments 39-40
EX-10.II.AU 3 dex10iiau.txt AMENDMENTS TO MIRROR SAVINGS PLANS I, II, AND III Exhibit 10(ii)(au) AMENDMENTS TO MIRROR SAVINGS PLAN I, II and III 1. Section 2.02 (Eligible Associate) of the J. C. Penney Company, Inc. Mirror Savings Plan III is amended effective August 1, 1999 to revise paragraph two to read as follows: An Associate shall not be designated as an Eligible Associate unless he (a) is employed with the Company at a position responsibility level of 15 or above, or with an Employer at a comparable position responsibility level as determined by the Vice President and Director of Human Resources (or his successor by title or position) in his sole discretion and (b) is expected to have projected earnings of at least $100,000 for his first year of employment based on his Compensation as of his date of hire. 2. Section 2.04 (Election to Defer) of the J. C. Penney Company, Inc. Mirror Savings Plan III is amended effective August 1, 1999 to revise subparagraph (b) of paragraph two and to add a new paragraph after subparagraph (c) of paragraph two to read as follows: (b) For a Plan Year beginning after December 31, 1999, on or before the last day of the 30-day period ("election period") beginning on the Eligible Associate's date of hire and shall be effective on the first day of the next calendar month beginning after the end of the election period, or The election period described in (b) above shall begin on the date of the written offer to participate in the Plan if the Vice President and Director of Human Resources (or his successor by title or position) determines in his sole discretion that the Eligible Associate did not have adequate time after his date of hire to make an Election to Defer. 3. Section 4.02 (Company Accounts) of the J. C. Penney Company, Inc. Mirror Savings Plans I and II is amended effective March 1, 2001 to delete the words "who has attained age 55 and is 100% vested in his Company Accounts under the Plan" from the first sentence. 4. Section 7.03 (Death) of the J. C. Penney Company, Inc. Mirror Savings Plans I, II and III is amended effective January 1, 1999 for Plans I and II and August 1, 1999 for Plan Ill to restate the first two paragraphs to read as follows: The Beneficiary of a Participant who (1) has a Separation from Service because of death, or (2) dies after his Separation from Service but before receiving all of his vested Plan benefits shall be entitled to receive the remaining annual installments to which the Participant was entitled as of the date of death. The first annual installment payable to the Beneficiary shall be paid in January following the Participant's date of death, or, if later, after satisfactory proof of death is received by the Plan Administrator. Each annual installment thereafter shall be paid in January of each year. Payment dates shall be determined by a Plan Administrator. A single-sum distribution shall be paid to the estate of the Participant if as of the date of death (1) no valid beneficiary designation by the Participant is on file with the Plan Administrator, or (2) the Beneficiary has predeceased the Participant, or (3) the Beneficiary has died within 30 days after the Participant's date of death. 5. The J. C. Penney Company, Inc. Mirror Savings Plan III is amended effective August 1, 1999 to delete the words "Personnel and Compensation Committee" in each place in which they appear and to substitute therefor the words "Benefit Plans Review Committee" In each such place. EX-10.II.AV 4 dex10iiav.txt AMENDMENT NO. 1 TO V. J. CASTAGNA EMPLOYMENT AGR. Exhibit 10(ii)(av) AMENDMENT TO EMPLOYMENT AGREEMENT This Agreement amends that certain Employment Agreement dated August 1, 1999 ("Employment Agreement"), between J.C. Penney Company, Inc. a Delaware corporation ("Employer") and Vanessa Castagna ("Employee"), and shall be effective as of May 19, 2000 ("Effective Date"). 1. The second sentence of Section 5.1 of the Employment Agreement is amended to provide as follows: The Restricted Stock will be held in escrow and will be subject to forfeiture upon the termination of Employee's employment for any reason (subject to Section 7); provided however, that on the third, fifth, and sixth anniversaries of the Start Date, 14,333, 14,333, and 14,334 (respectively) shares of Restricted Stock will no longer be subject to forfeiture and will be released from escrow. 2. The following sentence is added to Section 5.1 of the Employment Agreement: In addition, on the Effective Date, the Employer will grant to the Employee 100,000 shares of the Employer's common stock (the "2000 Restricted Stock"), to be held in escrow and subject to forfeiture upon termination of Employee's employment for any reason (subject to Section 7); provided however, that on each annual anniversary of the Effective Date, through and including May 19, 2004, 25,000 shares of 2000 Restricted Stock will no longer be subject to forfeiture and will be released from escrow. 3. Section 7.5(i) is amended to add the following sentence at the end thereof: Notwithstanding the provisions of (4) above, during the Succession Severance Period (as defined herein), if the Employee's involuntary termination other than for Cause occurs during the six-month period following the date that a new Chief Executive Officer of the Company is in place, then the payment provided for in (4) above shall be increased from two times Grand Total Earnings to three times Grand Total Earnings. As used herein, the Succession Severance Period shall mean a period of one year beginning May 19, 2000; such Period may be extended for an additional one year if a new Chief Executive Officer is not in place and if the Board delivers written notice to Employee not less than thirty (30) days prior to May 19, 2001. SCHEDULE A CASTAGNA RESTRICTED STOCK VESTING DATES AND NUMBERS OF SHARES ----------------------------------- Date of Employment: August 1, 1999 May 19, 2001 25,000 shares May 19, 2002 25,000 shares August 1, 2002 14,333 shares May 19, 2003 25,000 shares May 19, 2004 25,000 shares August 1, 2004 14,333 shares August 1, 2005 14,334 shares YEAR: 2001 2002 2003 2004 2005 SHARES VESTING 25,000 39,333 25,000 39,333 14,334 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. J.C. PENNEY CO., INC. By: /s/ James E. Oesterreicher --------------------------------- James E. Oesterreicher Its Chairman and Chief Executive Officer /s/ Vanessa Castagna -------------------------------------- Vanessa Castagna EX-10.II.AW 5 dex10iiaw.txt INCENTIVE COMP. AGR. FOR DAVIS, LOTTER & TAXTER Exhibit 10(ii)(aw) INCENTIVE COMPENSATION AGREEMENT -------------------------------- INCENTIVE COMPENSATION AGREEMENT (this "Agreement") dated as of January 2, 2001 by and between Gary L. Davis (the "Executive") and J.C. Penney Company, Inc. (the "Company"). WHEREAS, the Executive and the Company entered into a Succession Severance Agreement, dated as of the date set forth on Appendix A hereto (as amended, the "Succession Agreement"); and WHEREAS, the Executive, desiring to continue in the employment of the Company, has agreed to cancel the Succession Agreement in exchange for the incentive compensation and other benefits set forth herein, and WHEREAS, the Company also desires that the Executive continue in the employ of the Company; NOW THEREFORE, in consideration of the representations, covenants and mutual promises set forth in this Agreement (the sufficiency of which is hereby acknowledged) and intending legally to be bound, it is hereby agreed as follows: 1) Termination of Succession Agreement. Effective as of the date hereof, the ----------------------------------- Succession Agreement is terminated and cancelled and shall be of no further force and effect and the Company and the Executive shall have no further rights or obligations under such agreement. 2) Incentive Compensation Payments. In consideration of the termination of the ------------------------------- Succession Agreement and the execution of this Agreement, the Executive shall be entitled to the compensation and benefits set forth in this Section 2. a) Restricted Stock Unit Grant. As of the date hereof, the Executive is --------------------------- hereby granted the number of restricted stock units (the "Restricted Stock Units") set forth on Appendix A hereto (the "Restricted Stock Unit Grant"), pursuant to the Company's 1997 Equity Compensation Plan (the "Plan"). Subject to the provisions hereof, the Restricted Stock Units shall become fully vested on December 31, 2003. Notwithstanding the foregoing, the Restricted Stock Units shall become fully vested on the date on which there occurs an "Acceleration Event" (as hereinafter defined). An Acceleration Event shall occur on such date, prior to December 31, 2003, as the Executive's employment with the Company terminates by reason of death or "Disability" (as hereinafter defined), termination by the Company without Cause (as hereinafter defined), the Executive's retirement on or following the date set forth on Appendix A hereto, a termination of employment by the Executive for Good Reason (as hereinafter defined) or upon a change of control of the Company, as defined in the 1997 Equity Compensation Plan. Upon any other termination of the Executive's employment prior to December 31, 2003, the Restricted Stock Units shall be forfeited. Except as set forth herein, the terms and conditions applicable to the Restricted Stock Units shall be governed by the terms of the Plan and the standard agreement evidencing the grant of Restricted Stock Units pursuant to the Plan. As soon as practicable following the date upon which the Restricted Stock Units become fully vested (the "Vesting Date"), the Company shall issue to the Executive, in cancellation of the Restricted Stock Units, a number of shares of Company common stock equal to the number of Restricted Stock Units. Notwithstanding the foregoing, the Executive may elect to defer the receipt of such common stock until a date after December 31, 2003, provided that such election is made at least six months prior to the Vesting Date. Any such deferral shall be evidenced by a deferral agreement entered into by the Executive and the Company. b) Stock Option Grant. As of the date hereof, the Executive is hereby ------------------ granted a non-qualified stock option to purchase 50,000 shares of Company common stock (the "Option") pursuant to the Plan. The Option shall have a maximum term of ten years from the date hereof and shall have the per share exercise price set forth on Appendix A hereto. Subject to the provisions hereof, the Option shall vest and become exercisable on December 31, 2003. Notwithstanding the foregoing, the Option shall become fully vested and exercisable if, prior to December 31, 2003, there occurs an Acceleration Event with respect to the Executive. Upon any termination of the Executive's employment prior to December 31, 2003, other than pursuant to an Acceleration Event, the Option shall be forfeited and in the event of a termination of the Executive's employment for Cause at any time prior to the expiration of the Option term, the unexercised portion of the Option shall be immediately forfeited. Following any termination of the Executive's employment after December 31, 2003, other than a termination for Cause, the Option shall remain exercisable for one year (but not beyond the expiration of the Option's term). The terms and conditions applicable to the Option shall otherwise be governed by the terms of the Plan and the standard agreement evidencing the grant of an Option pursuant to the Plan. 2 c) Bonus Payment. With respect to the Company's 2000 fiscal year, unless ------------- the Executive is terminated for Cause prior to the payment date, the Executive shall receive a minimum cash bonus pursuant to the Company's EVAPP and 1989 Management Incentive Compensation Plan plans equal to 50% of the Executive's target award level for such year. d) Make-Whole Payment. Except as otherwise provided herein, during the ------------------ 20-day period ending upon the earlier of(i) December 31, 2003 or (ii) the date upon which the Option becomes fully vested and exercisable (such earlier date being referred to hereinafter as the "Election Date"), the Executive shall be entitled to elect irrevocably to receive the Make-Whole Payment (as hereinafter defined). For purposes of this Section 2(d), the Make-Whole Payment shall equal the amount (if any) by which the Minimum Payout (as set forth on Appendix A hereto) exceeds the aggregate fair market value (as defined in the Plan) of the shares of Company common stock represented by the Restricted Stock Unit Grant, measured as of the Election Date. The Executive shall not be entitled to elect to receive the Make-Whole Payment if, prior to the Election Date, the Executive's employment with the Company is terminated other than pursuant to an Acceleration Event or the Executive has exercised any portion of the Option. An election by the Executive to receive the Make- Whole Payment shall result in the immediate cancellation of the Option and the Executive agrees that he will have no further rights with respect to the Option following such election. e) Pension Guarantee. Following (i) any termination of Executive's ----------------- employment by the Company other than a termination for Cause, (ii) a termination of employment by the Executive for Good Reason or (iii) a termination of employment by the Executive for any reason after the retirement date noted on Appendix A, the Company agrees to pay the Executive an additional monthly pension supplement if, and to the extent that, the aggregate monthly pension payments (expressed as a life annuity commencing at age 60) for which the Executive is eligible pursuant to the Company's qualified and non-qualified pension plans (the JCPenney Pension Plan, Supplemental Retirement Plan, and Benefits Restoration Plan) following such termination are less than the monthly pension payment set forth on Appendix A hereto. The payment to the Executive of the pension supplement described in the preceding sentence shall commence immediately upon termination of the Executive's employment in a manner which qualifies the Executive for the pension supplement. 3 3) Certain Definitions. For purposes of this Agreement only (i) "Cause" means ------------------- that the Executive (A) has been convicted of a felony involving theft or moral turpitude, or (B) has engaged in conduct that constitutes willful gross neglect or willful gross misconduct with respect to his employment duties, which, in either case, results in, or can reasonably be expected to result in, material economic harm to the Company, (ii) "Disability" means that the Executive is disabled within the meaning of the Company's long-term disability policy and (iii) the Executive shall be entitled to terminate his employment for "Good Reason" within thirty days following (a) any reduction in the Executive's current base salary or (b) any reduction in the aggregate annual bonus opportunity available to the Executive under the Company's incentive bonus plans and arrangements (except for across-the-board reductions in annual bonus opportunity similarly affecting all senior executives of the Company). 4) Tax Withholding. The Company may withhold from amounts or benefits due or --------------- shares issuable hereunder to the Executive such amounts as are required to satisfy applicable withholding obligations. 5) Successors. This Agreement is personal to the Executive and, without the ---------- prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, the "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. 6) Miscellaneous. ------------- a) The Executive and the Company agree that nothing contained in this Agreement shall confer any rights to continued employment upon the Executive or alter the Executive's status as an "at-will" employee of the Company. 4 b) This Agreement may not be altered, amended, or modified except by written instrument executed by the Company and the Executive. A waiver of any term, covenant, agreement or condition contained in this Agreement shall not be deemed a waiver of any other term, covenant, agreement or condition and any waiver of any default in any such term, covenant, agreement or condition shall not be deemed a waiver of any later default thereof or of any other term, covenant, agreement or condition. c) This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same instrument. d) This Agreement (including Appendix A hereto) forms the entire agreement between the parties hereto with respect to with respect to the subject matter contained in the Agreement. This Agreement shall supersede all prior agreements, promises, and representations regarding severance or other payments contingent upon termination of employment, whether in writing or otherwise, including, without limitation, the Succession Agreement. The Executive agrees that, in the event that the Executive's employment with the Company terminates pursuant to an Acceleration Event, the Executive shall not be entitled to severance payments under any severance plan, program or arrangement maintained by the Company, notwithstanding anything to the contrary in any such plan, program or arrangement. e) All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Executive: (b) To the address set forth on Appendix A hereto (c) If to the Company: (d) J. C. Penney Company, Inc. (e) 6501 Legacy Drive (f) Plano, Texas 75024-3699 (g) Attention: Director of Human Resources and Administration 5 ii) or to such other address as either party furnishes to the other in writing in accordance with this paragraph (e) of Section 6. Notices and communications shall be effective when actually received by the addressee. f) Notwithstanding anything to the contrary contained herein, in connection with any termination of the Executive's employment or in connection with the payment of benefits under Section 2(d) hereof, the Executive and the Company agree to execute a customary mutual release from liability and it is understood that the payment of benefits pursuant to Section 2(d) or 2(e) hereof, as applicable, are conditioned upon the execution of such release. g) All disputes arising under, related to, or in connection with this Agreement shall be settled by expedited arbitration conducted before a panel of three arbitrators sitting in Dallas, Texas, in accordance with the rules of the American Arbitration Association then in effect. The decision of the arbitrators in that proceeding shall be binding on the Company and the Executive. Judgment may be entered on the award of the arbitrators in any court having jurisdiction. All expenses of such arbitration, including legal fees, shall be borne by the non-prevailing party in such arbitration. h) The captions of this Agreement are not part of the provisions hereof and shall not have any force or effect. i) The provisions of this Agreement shall be interpreted and construed in accordance with the laws of the State of Texas, without regard to its choice of law principles. 6 IN WITNESS WHEREOF, the parties have executed this Agreement as of the dates specified below. J.C. PENNEY COMPANY, INC. /s/ Allen Questrom --------------------------------- Name: Allen Questrom Title: Chief Executive Officer /s/ Gary L. Davis --------------------------------- Gary L. Davis 7 Appendix A Date of Succession Agreement May 18, 2000 Restricted Stock Units 96,406 Approved Retirement Date June 30, 2002 Option Exercise Price $10.85 per share Minimum Payout $2,092,008 Succession Agreement Pension $30,746.97 Executive's Address: [intentionally omitted] 8 INCENTIVE COMPENSATION AGREEMENT -------------------------------- INCENTIVE COMPENSATION AGREEMENT (this "Agreement") dated as of January 2, 2001 by and between Charles R. Lotter (the "Executive") and J.C. Penney Company, Inc. (the "Company"). WHEREAS, the Executive and the Company entered into a Succession Severance Agreement, dated as of the date set forth on Appendix A hereto (as amended, the "Succession Agreement"); and WHEREAS, the Executive, desiring to continue in the employment of the Company, has agreed to cancel the Succession Agreement in exchange for the incentive compensation and other benefits set forth herein, and WHEREAS, the Company also desires that the Executive continue in the employ of the Company; NOW THEREFORE, in consideration of the representations, covenants and mutual promises set forth in this Agreement (the sufficiency of which is hereby acknowledged) and intending legally to be bound, it is hereby agreed as follows: 1) Termination of Succession Agreement. Effective as of the date hereof, the ----------------------------------- Succession Agreement is terminated and cancelled and shall be of no further force and effect and the Company and the Executive shall have no further rights or obligations under such agreement. 2) Incentive Compensation Payments. In consideration of the termination of the ------------------------------- Succession Agreement and the execution of this Agreement, the Executive shall be entitled to the compensation and benefits set forth in this Section 2. a) Restricted Stock Unit Grant. As of the date hereof, the Executive is --------------------------- hereby granted the number of restricted stock units (the "Restricted Stock Units") set forth on Appendix A hereto (the "Restricted Stock Unit Grant"), pursuant to the Company's 1997 Equity Compensation Plan (the "Plan"). Subject to the provisions hereof, the Restricted Stock Units shall become fully vested on December 31, 2003. Notwithstanding the foregoing, the Restricted Stock Units shall become fully vested on the date on which there occurs an "Acceleration Event" (as hereinafter defined). An Acceleration Event shall occur on such date, prior to December 31, 2003, as the Executive's employment with the Company terminates by reason of death or "Disability" (as hereinafter defined), termination by the Company without Cause (as hereinafter defined), the Executive's retirement on or following the date set forth on Appendix A hereto, a termination of employment by the Executive for Good Reason (as hereinafter defined) or upon a change of control of the Company, as defined in the 1997 Equity Compensation Plan. Upon any other termination of the Executive's employment prior to December 31, 2003, the Restricted Stock Units shall be forfeited. Except as set forth herein, the terms and conditions applicable to the Restricted Stock Units shall be governed by the terms of the Plan and the standard agreement evidencing the grant of Restricted Stock Units pursuant to the Plan. As soon as practicable following the date upon which the Restricted Stock Units become fully vested (the "Vesting Date"), the Company shall issue to the Executive, in cancellation of the Restricted Stock Units, a number of shares of Company common stock equal to the number of Restricted Stock Units. Notwithstanding the foregoing, the Executive may elect to defer the receipt of such common stock until a date after December 31, 2003, provided that such election is made at least six months prior to the Vesting Date. Any such deferral shall be evidenced by a deferral agreement entered into by the Executive and the Company. b) Stock Option Grant. As of the date hereof, the Executive is hereby ------------------ granted a non-qualified stock option to purchase 50,000 shares of Company common stock (the "Option") pursuant to the Plan. The Option shall have a maximum term of ten years from the date hereof and shall have the per share exercise price set forth on Appendix A hereto. Subject to the provisions hereof, the Option shall vest and become exercisable on December 31, 2003. Notwithstanding the foregoing, the Option shall become fully vested and exercisable if, prior to December 31, 2003, there occurs an Acceleration Event with respect to the Executive. Upon any termination of the Executive's employment prior to December 31, 2003, other than pursuant to an Acceleration Event, the Option shall be forfeited and in the event of a termination of the Executive's employment for Cause at any time prior to the expiration of the Option term, the unexercised portion of the Option shall be immediately forfeited. Following any termination of the Executive's employment after December 31, 2003, other than a termination for Cause, the Option shall remain exercisable for one year (but not beyond the expiration of the Option's term). The terms and conditions applicable to the Option shall 2 otherwise be governed by the terms of the Plan and the standard agreement evidencing the grant of an Option pursuant to the Plan. c) Bonus Payment. With respect to the Company's 2000 fiscal year, unless ------------- the Executive is terminated for Cause prior to the payment date, the Executive shall receive a minimum cash bonus pursuant to the Company's EVAPP and 1989 Management Incentive Compensation Plan plans equal to 50% of the Executive's target award level for such year. d) Make-Whole Payment. Except as otherwise provided herein, during the ------------------ 20-day period ending upon the earlier of (i) December 31, 2003 or (ii) the date upon which the Option becomes fully vested and exercisable (such earlier date being referred to hereinafter as the "Election Date"), the Executive shall be entitled to elect irrevocably to receive the Make-Whole Payment (as hereinafter defined). For purposes of this Section 2(d), the Make-Whole Payment shall equal the amount (if any) by which the Minimum Payout (as set forth on Appendix A hereto) exceeds the aggregate fair market value (as defined in the Plan) of the shares of Company common stock represented by the Restricted Stock Unit Grant, measured as of the Election Date. The Executive shall not be entitled to elect to receive the Make-Whole Payment if, prior to the Election Date, the Executive's employment with the Company is terminated other than pursuant to an Acceleration Event or the Executive has exercised any portion of the Option. An election by the Executive to receive the Make- Whole Payment shall result in the immediate cancellation of the Option and the Executive agrees that he will have no further rights with respect to the Option following such election. e) Pension Guarantee. Following (i) any termination of Executive's ----------------- employment by the Company other than a termination for Cause, (ii) a termination of employment by the Executive for Good Reason or (iii) a termination of employment by the Executive for any reason after the retirement date noted on Appendix A, the Company agrees to pay the Executive an additional monthly pension supplement if, and to the extent that, the aggregate monthly pension payments (expressed as a life annuity commencing at age 60) for which the Executive is eligible pursuant to the Company's qualified and non-qualified pension plans (the JCPenney Pension Plan, Supplemental Retirement Plan, and Benefits Restoration Plan) following such termination are less than the monthly pension payment set forth on Appendix A hereto. The payment to the Executive of the pension supplement described in the 3 preceding sentence shall commence immediately upon termination of the Executive's employment in a manner which qualifies the Executive for the pension supplement. 3) Certain Definitions. For purposes of this Agreement only (i) "Cause" means ------------------- that the Executive (A) has been convicted of a felony involving theft or moral turpitude, or (B) has engaged in conduct that constitutes willful gross neglect or willful gross misconduct with respect to his employment duties, which, in either case, results in, or can reasonably be expected to result in, material economic harm to the Company, (ii) "Disability" means that the Executive is disabled within the meaning of the Company's long-term disability policy and (iii) the Executive shall be entitled to terminate his employment for "Good Reason" within thirty days following (a) any reduction in the Executive's current base salary or (b) any reduction in the aggregate annual bonus opportunity available to the Executive under the Company's incentive bonus plans and arrangements (except for across-the-board reductions in annual bonus opportunity similarly affecting all senior executives of the Company). 4) Tax Withholding. The Company may withhold from amounts or benefits due or --------------- shares issuable hereunder to the Executive such amounts as are required to satisfy applicable withholding obligations. 5) Successors. This Agreement is personal to the Executive and, without the ---------- prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, the "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. 4 6) Miscellaneous. ------------- a) The Executive and the Company agree that nothing contained in this Agreement shall confer any rights to continued employment upon the Executive or alter the Executive's status as an "at-will" employee of the Company. b) This Agreement may not be altered, amended, or modified except by written instrument executed by the Company and the Executive. A waiver of any term, covenant, agreement or condition contained in this Agreement shall not be deemed a waiver of any other term, covenant, agreement or condition and any waiver of any default in any such term, covenant, agreement or condition shall not be deemed a waiver of any later default thereof or of any other term, covenant, agreement or condition. c) This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same instrument. d) This Agreement (including Appendix A hereto) forms the entire agreement between the parties hereto with respect to with respect to the subject matter contained in the Agreement. This Agreement shall supersede all prior agreements, promises, and representations regarding severance or other payments contingent upon termination of employment, whether in writing or otherwise, including, without limitation, the Succession Agreement. The Executive agrees that, in the event that the Executive's employment with the Company terminates pursuant to an Acceleration Event, the Executive shall not be entitled to severance payments under any severance plan, program or arrangement maintained by the Company, notwithstanding anything to the contrary in any such plan, program or arrangement. e) All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Executive: (b) To the address set forth on Appendix A hereto 5 (c) If to the Company: (d) J. C. Penney Company, Inc. (e) 6501 Legacy Drive (f) Plano, Texas 75024-3699 (g) Attention: Director of Human Resources and Administration ii) or to such other address as either party furnishes to the other in writing in accordance with this paragraph (e) of Section 6. Notices and communications shall be effective when actually received by the addressee. f) Notwithstanding anything to the contrary contained herein, in connection with any termination of the Executive's employment or in connection with the payment of benefits under Section 2(d) hereof, the Executive and the Company agree to execute a customary mutual release from liability and it is understood that the payment of benefits pursuant to Section 2(d) or 2(e) hereof, as applicable, are conditioned upon the execution of such release. g) All disputes arising under, related to, or in connection with this Agreement shall be settled by expedited arbitration conducted before a panel of three arbitrators sitting in Dallas, Texas, in accordance with the rules of the American Arbitration Association then in effect. The decision of the arbitrators in that proceeding shall be binding on the Company and the Executive. Judgment may be entered on the award of the arbitrators in any court having jurisdiction. All expenses of such arbitration, including legal fees, shall be borne by the non-prevailing party in such arbitration. h) The captions of this Agreement are not part of the provisions hereof and shall not have any force or effect. i) The provisions of this Agreement shall be interpreted and construed in accordance with the laws of the State of Texas, without regard to its choice of law principles. 6 IN WITNESS WHEREOF, the parties have executed this Agreement as of the dates specified below. J.C. PENNEY COMPANY, INC. /s/ Allen Questrom -------------------------------- Name: Allen Questrom Title: Chief Executive Officer /s/ Charles R. Lotter -------------------------------- Charles R. Lotter 7 Appendix A Date of Succession Agreement May 18, 2000 Restricted Stock Units 125,050 Approved Retirement Date June 30, 2002 Option Exercise Price $10.85 per share Minimum Payout $2,713,566 Succession Agreement Pension $27,193.86 Executive's Address: [intentionally omitted] 8 INCENTIVE COMPENSATION AGREEMENT -------------------------------- INCENTIVE COMPENSATION AGREEMENT (this "Agreement") dated as of January 2, 2001 by and between Michael W. Taxter (the "Executive") and J.C. Penney Company, Inc. (the "Company"). WHEREAS, the Executive and the Company entered into a Succession Severance Agreement, dated as of the date set forth on Appendix A hereto (as amended, the "Succession Agreement"); and WHEREAS, the Executive, desiring to continue in the employment of the Company, has agreed to cancel the Succession Agreement in exchange for the incentive compensation and other benefits set forth herein, and WHEREAS, the Company also desires that the Executive continue in the employ of the Company; NOW THEREFORE, in consideration of the representations, covenants and mutual promises set forth in this Agreement (the sufficiency of which is hereby acknowledged) and intending legally to be bound, it is hereby agreed as follows: 1) Termination of Succession Agreement. Effective as of the date hereof, the ----------------------------------- Succession Agreement is terminated and cancelled and shall be of no further force and effect and the Company and the Executive shall have no further rights or obligations under such agreement. 2) Incentive Compensation Payments. In consideration of the termination of the ------------------------------- Succession Agreement and the execution of this Agreement, the Executive shall be entitled to the compensation and benefits set forth in this Section 2. a) Restricted Stock Unit Grant. As of the date hereof, the Executive is --------------------------- hereby granted the number of restricted stock units (the "Restricted Stock Units") set forth on Appendix A hereto (the "Restricted Stock Unit Grant"), pursuant to the Company's 1997 Equity Compensation Plan (the "Plan"). Subject to the provisions hereof, the Restricted Stock Units shall become fully vested on December 31, 2003. Notwithstanding the foregoing, the Restricted Stock Units shall become fully vested on the date on which there occurs an "Acceleration Event" (as hereinafter defined). An Acceleration Event shall occur on such date, prior to December 31, 2003, as the Executive's employment with the Company terminates by reason of death or "Disability" (as hereinafter defined), termination by the Company without Cause (as hereinafter defined), the Executive's retirement on or following the date set forth on Appendix A hereto, a termination of employment by the Executive for Good Reason (as hereinafter defined) or upon a change of control of the Company, as defined in the 1997 Equity Compensation Plan. Upon any other termination of the Executive's employment prior to December 31, 2003, the Restricted Stock Units shall be forfeited. Except as set forth herein, the terms and conditions applicable to the Restricted Stock Units shall be governed by the terms of the Plan and the standard agreement evidencing the grant of Restricted Stock Units pursuant to the Plan. As soon as practicable following the date upon which the Restricted Stock Units become fully vested (the "Vesting Date"), the Company shall issue to the Executive, in cancellation of the Restricted Stock Units, a number of shares of Company common stock equal to the number of Restricted Stock Units. Notwithstanding the foregoing, the Executive may elect to defer the receipt of such common stock until a date after December 31, 2003, provided that such election is made at least six months prior to the Vesting Date. Any such deferral shall be evidenced by a deferral agreement entered into by the Executive and the Company. b) Stock Option Grant. As of the date hereof, the Executive is hereby ------------------ granted a non-qualified stock option to purchase 50,000 shares of Company common stock (the "Option") pursuant to the Plan. The Option shall have a maximum term of ten years from the date hereof and shall have the per share exercise price set forth on Appendix A hereto. Subject to the provisions hereof, the Option shall vest and become exercisable on December 31, 2003. Notwithstanding the foregoing, the Option shall become fully vested and exercisable if, prior to December 31, 2003, there occurs an Acceleration Event with respect to the Executive. Upon any termination of the Executive's employment prior to December 31, 2003, other than pursuant to an Acceleration Event, the Option shall be forfeited and in the event of a termination of the Executive's employment for Cause at any time prior to the expiration of the Option term, the unexercised portion of the Option shall be immediately forfeited. Following any termination of the Executive's employment after December 31, 2003, other than a termination for Cause, the Option shall remain exercisable for one year (but not beyond the expiration of the Option's term). The terms and conditions applicable to the Option shall otherwise be governed by the terms of the Plan and the standard agreement evidencing the grant of an Option pursuant to the Plan. 2 c) Bonus Payment. With respect to the Company's 2000 fiscal year, unless ------------- the Executive is terminated for Cause prior to the payment date, the Executive shall receive a minimum cash bonus pursuant to the Company's EVAPP and 1989 Management Incentive Compensation Plan plans equal to 50% of the Executive's target award level for such year. d) Make-Whole Payment. Except as otherwise provided herein, during the ------------------ 20-day period ending upon the earlier of (i) December 31, 2003 or (ii) the date upon which the Option becomes fully vested and exercisable (such earlier date being referred to hereinafter as the "Election Date"), the Executive shall be entitled to elect irrevocably to receive the Make-Whole Payment (as hereinafter defined). For purposes of this Section 2(d), the Make-Whole Payment shall equal the amount (if any) by which the Minimum Payout (as set forth on Appendix A hereto) exceeds the aggregate fair market value (as defined in the Plan) of the shares of Company common stock represented by the Restricted Stock Unit Grant, measured as of the Election Date. The Executive shall not be entitled to elect to receive the Make-Whole Payment if, prior to the Election Date, the Executive's employment with the Company is terminated other than pursuant to an Acceleration Event or the Executive has exercised any portion of the Option. An election by the Executive to receive the Make- Whole Payment shall result in the immediate cancellation of the Option and the Executive agrees that he will have no further rights with respect to the Option following such election. e) Pension Guarantee. Following (i) any termination of ------- --------- Executive's employment by the Company other than a termination for Cause, (ii) a termination of employment by the Executive for Good Reason or (iii) a termination of employment by the Executive for any reason after December 31, 2003, the Company agrees to pay the Executive an additional monthly pension supplement if, and to the extent that, the aggregate monthly pension payments (expressed as a life annuity commencing at age 60) for which the Executive is eligible pursuant to the Company's qualified and non-qualified pension plans (the JCPenney Pension Plan, Supplemental Retirement Plan, and Benefits Restoration Plan) following such termination are less than the monthly pension payment set forth on Appendix A hereto. The payment to the Executive of the pension supplement described in the preceding sentence shall commence immediately upon termination of the Executive's employment in a manner which qualifies the Executive for the pension supplement. 3 3) Certain Definitions. For purposes of this Agreement only (i) "Cause" means ------------------- that the Executive (A) has been convicted of a felony involving theft or moral turpitude, or (B) has engaged in conduct that constitutes willful gross neglect or willful gross misconduct with respect to his employment duties, which, in either case, results in, or can reasonably be expected to result in, material economic harm to the Company, (ii) "Disability" means that the Executive is disabled within the meaning of the Company's long-term disability policy and (iii) the Executive shall be entitled to terminate his employment for "Good Reason" within thirty days following (a) any reduction in the Executive's current base salary or (b) any reduction in the aggregate annual bonus opportunity available to the Executive under the Company's incentive bonus plans and arrangements (except for across-the-board reductions in annual bonus opportunity similarly affecting all senior executives of the Company). 4) Tax Withholding. The Company may withhold from amounts or benefits due or --------------- shares issuable hereunder to the Executive such amounts as are required to satisfy applicable withholding obligations. 5) Successors. This Agreement is personal to the Executive and, without the ---------- prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, the "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. 6) Miscellaneous. ------------- a) The Executive and the Company agree that nothing contained in this Agreement shall confer any rights to continued employment upon the Executive or alter the Executive's status as an "at-will" employee of the Company. 4 b) This Agreement may not be altered, amended, or modified except by written instrument executed by the Company and the Executive. A waiver of any term, covenant, agreement or condition contained in this Agreement shall not be deemed a waiver of any other term, covenant, agreement or condition and any waiver of any default in any such term, covenant, agreement or condition shall not be deemed a waiver of any later default thereof or of any other term, covenant, agreement or condition. c) This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same instrument. d) This Agreement (including Appendix A hereto) forms the entire agreement between the parties hereto with respect to with respect to the subject matter contained in the Agreement. This Agreement shall supersede all prior agreements, promises, and representations regarding severance or other payments contingent upon termination of employment, whether in writing or otherwise, including, without limitation, the Succession Agreement. The Executive agrees that, in the event that the Executive's employment with the Company terminates pursuant to an Acceleration Event, the Executive shall not be entitled to severance payments under any severance plan, program or arrangement maintained by the Company, notwithstanding anything to the contrary in any such plan, program or arrangement. e) All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Executive: (b) To the address set forth on Appendix A hereto (c) If to the Company: (d) J. C. Penney Company, Inc. (e) 6501 Legacy Drive (f) Plano, Texas 75024-3699 (g) Attention: Director of Human Resources and Administration 5 ii) or to such other address as either party furnishes to the other in writing in accordance with this paragraph (e) of Section 6. Notices and communications shall be effective when actually received by the addressee. f) Notwithstanding anything to the contrary contained herein, in connection with any termination of the Executive's employment or in connection with the payment of benefits under Section 2(d) hereof, the Executive and the Company agree to execute a customary mutual release from liability and it is understood that the payment of benefits pursuant to Section 2(d) or 2(e) hereof, as applicable, are conditioned upon the execution of such release. g) All disputes arising under, related to, or in connection with this Agreement shall be settled by expedited arbitration conducted before a panel of three arbitrators sitting in Dallas, Texas, in accordance with the rules of the American Arbitration Association then in effect. The decision of the arbitrators in that proceeding shall be binding on the Company and the Executive. Judgment may be entered on the award of the arbitrators in any court having jurisdiction. All expenses of such arbitration, including legal fees, shall be borne by the non-prevailing party in such arbitration. h) The captions of this Agreement are not part of the provisions hereof and shall not have any force or effect. i) The provisions of this Agreement shall be interpreted and construed in accordance with the laws of the State of Texas, without regard to its choice of law principles. 6 IN WITNESS WHEREOF, the parties have executed this Agreement as of the dates specified below. J.C. PENNEY COMPANY, INC. /s/ Allen Questrom --------------------------------- Name: Allen Questrom Title: Chief Executive Officer /s/ Michael W. Taxter --------------------------------- Michael W. Taxter 1/8/01 7 Appendix A Date of Succession Agreement May 18, 2000 Restricted Stock Units 96,775 Approved Retirement Date June 30, 2011 Option Exercise Price $10.85 per share Minimum Payout $2,100,003 Succession Agreement Pension $10,112.74 Executive's Address: [intentionally omitted] 8 EX-12.A 6 dex12a.txt COMP OF RATIOS - AVAIL. INC. TO COMB. FIXED CHARGES Exhibit 12 (a) J. C. Penney Company, Inc. and Consolidated Subsidiaries Computation of Ratios of Available Income to Combined Fixed Charges and Preferred Stock Dividend Requirement
52 Weeks 52 Weeks 52 Weeks 53 Weeks 52 Weeks Ended Ended Ended Ended Ended ($ Millions) 01/27/01 01/29/00 01/30/99 01/31/98 01/25/97 ----------- ----------- ------------ ------------ ----------- Income from continuing operations $ (920) $ 237 $ 674 $ 647 $ 660 (before income taxes, before capitalized interest, but after preferred stock dividend) Fixed charges Interest (including capitalized interest) on: Operating leases 320 272 225 180 110 Short term debt 13 137 106 121 102 Long term debt 464 538 557 527 312 Capital leases 3 2 4 7 6 Other, net 2 (5) 1 (5) 14 ----------- ----------- ------------ ------------ ----------- Total fixed charges 802 944 893 830 544 Preferred stock dividend, before taxes 33 36 37 40 46 ----------- ----------- ------------ ------------ ----------- Combined fixed charges and preferred stock dividend requirement 835 980 930 870 590 Total available income $ (85) $ 1,217 $ 1,604 $ 1,517 $ 1,250 =========== =========== ============ ============ =========== Ratio of available income to combined fixed charges and preferred stock dividend requirement * 1.2 1.7 1.7 2.1 =========== =========== ============ ============ ===========
The interest cost of the LESOP notes guaranteed by the Company is not included in fixed charges above. The LESOP notes were repaid in July 1998. * Income from continuing operations (before income taxes, before capitalized interest, but after preferred stock dividend) was not sufficient to cover combined fixed charges and preferred stock dividend by $920 million. EX-12.B 7 dex12b.txt COMP RATIOS - AVAILABLE INCOME TO FIXED CHARGES Exhibit 12 (b) J. C. Penney Company, Inc. and Consolidated Subsidiaries Computation of Ratios of Available Income to Fixed Charges
52 Weeks 52 Weeks 52 Weeks 53 Weeks 52 Weeks Ended Ended Ended Ended Ended ($ Millions) 01/27/01 01/29/00 01/30/99 01/31/98 01/25/97 ---------- ---------- ---------- ---------- ---------- Income from continuing operations $ (887) $ 273 $ 711 $ 687 $ 706 (before income taxes and capitalized interest) Fixed charges Interest (including capitalized interest) on: Operating leases 320 272 225 180 110 Short term debt 13 137 106 121 102 Long term debt 464 538 557 527 312 Capital leases 3 2 4 7 6 Other, net 2 (5) 1 (5) 14 ------- ------- ------- ------- ------- Total fixed charges 802 944 893 830 544 ------- ------- ------- ------- ------- Total available income $ (85) $ 1,217 $ 1,604 $ 1,517 $ 1,250 ======= ======= ======= ======= ======= Ratio of available income to fixed charges * 1.3 1.8 1.8 2.3 ======= ======= ======= ======= =======
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. * Income from continuing operations (before income taxes and capitalized interest) was not sufficient to cover fixed charges by $887 million. EX-13 8 dex13.txt ANNUAL REPORT TO SECURITY HOLDERS EXHIBIT 13 Management's Discussion and Analysis of Financial Condition and Results of Operations The discussion and analysis that follows, consistent with all other financial data throughout this Annual Report, focuses on the results of operations and financial condition from the Company's continuing operations and reflects the reclassifications for rent and occupancy costs from cost of goods sold to selling, general and administrative expenses (SG&A), and for catalog shipping and handling fees charged to customers and associated costs, which were reclassified from SG&A to sales and cost of sales, respectively. See page 18 for further discussion of reclassifications. This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto and the five year financial summary. Discontinued operations. On March 7, 2001, the Company signed a definitive agreement with a U.S. subsidiary of AEGON N.V. (AEGON) to sell the assets of its J. C. Penney Direct Marketing Services, Inc. (DMS) business, consisting of the stock of its insurance subsidiaries and related businesses. The Company will receive cash proceeds at closing of approximately $1.3 billion plus settlements from intercompany accounts. The sale generated a book loss, net of tax of $296 million. The Company's financial statements, footnotes and other information provided in this Annual Report reflect DMS as a discontinued operation for all periods presented. Concurrent with the closing, the Company will enter into a 15-year strategic marketing alliance with AEGON N.V. designed to offer an expanded range of financial and membership services products to JCPenney customers. Under this agreement, the Company will receive annual cash payments over the next 15 years pursuant to the terms of licensing and marketing services arrangements. The present value of these cash payments is estimated to be up to $300 million and such amounts will be recognized as earned in the Company's financial statements. Consolidated Results of Operations
($ in millions except EPS) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------ Segment operating profit/(loss) Department stores and catalog $ 254 $ 670 $ 920 Eckerd drugstores (76) 183 254 --------------------------------------------- Total segments 178 853 1,174 Corporate and other unallocated (27) 13 18 Net interest expense and credit operations (427) (294) (387) Acquisition amortization (122) (125) (112) Restructuring and other charges, net (488) (169) 22 - ------------------------------------------------------------------------------------------------------------------- (Loss)/income from continuing operations before income taxes (886) 278 715 Income taxes (318) 104 277 - ------------------------------------------------------------------------------------------------------------------- (Loss)/income from continuing operations $ (568) $ 174 $ 438 (Loss)/earnings per share from continuing operations $ (2.29) $ 0.54 $ 1.58 - -------------------------------------------------------------------------------------------------------------------
Loss from continuing operations in 2000 totaled $568 million, or $2.29 per share, compared with income from continuing operations of $174 million, or $0.54 per share and $438 million, or $1.58 per share, in 1999 and 1998, respectively. Over the past several years, the Company has implemented a number of initiatives to improve its competitive position and future financial performance, including closing underperforming stores, reducing headcount in the corporate offices as well as in field operations, and centralizing the merchandising process in department stores and catalog under the ACT (Accelerating Change Together) initiative. These initiatives, along with the integration of several drugstore formats with the Eckerd Corporation (Eckerd) drugstore business acquired in 1997, have resulted in non-comparable items for each of the three years presented. These non-comparable items are shown on the following page. Before the effects of these items, (loss) or earnings per share (EPS) would have been $(0.44), $1.36, and $1.81, for 2000, 1999 and 1998, respectively. All references to EPS are on a diluted basis. 6
2000 1999 1998 ----------------------------------------------------------------------------------- ($ in millions except EPS) Pre-tax $ EPS Pre-tax $ EPS Pre-tax $ EPS - ------------------------------------------------------------------------------------------------------------------- (Loss)/earnings from continuing operations before the effects of non-comparable items $ (135) $ (0.44) $ 586 $ 1.36 $ 807 $ 1.81 ---------------------------------------------------------------------------------- Restructuring and other charges, net JCPenney store closings (206) -- -- Eckerd drugstore closings (111) -- -- Asset impairments (91) (240) -- Contract cancellations (84) -- -- Headcount reductions (35) -- -- Gain on the sale of assets 13 55 -- Adjustments to prior period re- structuring reserves and other 26 16 22 ---------------------------------------------------------------------------------- Total restructuring and other charges, net (488) (1.19) (169) (0.48) 22 0.05 ---------------------------------------------------------------------------------- Other non-comparable items Department store incremental markdowns (92) -- -- Eckerd inventory adjustments (104) (74) (98) Incremental Eckerd integration and other costs (12) (45) (16) Centralized merchandising process costs (ACT) (55) -- -- Revenue recognition -- (20) -- ---------------------------------------------------------------------------------- Total other non- comparable items (263) (0.66) (139) (0.34) (114) (0.28) ---------------------------------------------------------------------------------- Total non-comparable items (751) (1.85) (308) (0.82) (92) (0.23) ---------------------------------------------------------------------------------- (Loss)/income from continuing operations $ (886) $ (2.29) $ 278 $ 0.54 $ 715 $ 1.58 ----------------------------------------------------------------------------------
Earnings from continuing operations in 2000 before the effects of all non-comparable items were significantly lower than the prior two years due to a decline in the operating performance of department stores and catalog as well as Eckerd drugstores. Sales in department stores and catalog in 2000 declined $558 million, or 2.9% from 1999, 2.3% on a comparable store basis, and were accompanied by a significant decline in gross margin. While total sales for Eckerd improved, comparable store non-pharmacy merchandise sales were flat with last year. Weak non-pharmacy merchandise sales, coupled with lower gross margin and increased selling, general and administrative (SG&A) expenses in 2000 resulted in a significant decline in Eckerd operating profit. Non-comparable items. Restructuring and other charges are discussed in more detail in Note 14 on page 25. Fiscal 2000. The Company's results were impacted by the effects of non- comparable items totalling $751 million net, as follows: Restructuring and other charges, net ($488 million) . JCPenney store closings ($206 million) - During fiscal 2000, 92 underperforming stores were approved for closing. These stores generated sales of approximately $950 million and incurred operating losses of $28 million in fiscal 1999. The Company's estimate for transfer sales to nearby JCPenney stores is approximately $160 million. By the end of 2000, 48 stores were closed, and the remainder are expected to be closed by the end of 2001. The charge was recorded for fixed asset impairments ($113 million), present value of future lease obligations ($77 million) and employee severance costs ($16 million). . Eckerd drugstore closings ($111 million) - 279 drugstores were approved for closing under the Eckerd store closing 7 plan. These stores generated sales and operating losses of approximately $650 million and $30 million, respectively, in fiscal 1999. 274 of these stores were closed by the end of 2000, and the remainder are expected to be closed by the end of first quarter 2001. Charges were comprised of present value of future lease obligations ($90 million), employee severance costs ($4 million) and other exit costs ($17 million). . Asset impairments ($91 million) - Asset impairments include $64 million for 13 department stores that, due to restrictive covenants, will remain open, $14 million for Eckerd assets related to relocated stores, and $13 million for non-strategic business investments, including the Eckerd e-commerce web site. . Contract cancellations ($84 million) - Cancellations include termination fees and asset impairments associated with Eckerd's contract with its information technology service provider ($72 million) and a buyout fee for the remaining lease obligations ($12 million) related to a cancelled JCPenney hardware contract. . Headcount reductions ($35 million) - Approximately 995 home office and field positions for both department stores and catalog and Eckerd drugstores were eliminated. . Gain on the sale of assets ($13 million) - A gain was recognized on the sale of notes receivable that had been issued in 1997 in connection with the divestiture of certain drugstores pursuant to an agreement with the Federal Trade Commission. . Adjustments to prior period restructuring reserves and other (net credit of $26 million) - Actual costs were less than previously estimated. Other non-comparable items ($263 million) . Department store incremental markdowns ($92 million) - represented incremental markdowns recorded in cost of goods sold on discontinued merchandise from the decision to narrow the merchandise assortment as a result of the centralization of the merchandising process (ACT). . Eckerd inventory adjustments ($104 million) - represented incremental markdowns recorded in cost of goods sold on discontinued merchandise in order to reposition the merchandise mix ($43 million), and to liquidate merchandise under the store closing plan ($61 million). . Incremental Eckerd other costs ($12 million) - represents costs incurred for store closing activities in connection with the store closing plan. . Centralized merchandising process (ACT) costs ($55 million) - represents costs associated with ACT, a fundamental rebuilding of the department store and catalog merchandising process and organization, creating a centralized buying organization. ACT requires process and organizational restructuring throughout the Company's corporate and field structure. Total expenditures associated with this initiative are expected to be approximately $150 million, including approximately $26 million that have been or will be capitalized. Approximately half of the costs were incurred in fiscal 2000. Fiscal 1999. The Company's results were impacted by non-comparable items totalling $308 million, net, as follows: Restructuring and other charges, net ($169 million) . JCPenney stores asset impairments ($130 million) - Charge represents the excess of the carrying values of the assets, including intangible assets, over fair values, related to 10 stores, the majority of which were acquired in 1995 in the Washington, D.C., market. . Eckerd asset impairments ($110 million) - Charge represents the excess of the carrying values of the assets, including intangible assets, over fair value related to underperforming stores that were closed in fiscal 2000. . Gain on the sale of assets ($55 million) - In December 1999, the Company sold its proprietary credit card accounts and receivables to General Electric Capital Corporation and its subsidiaries (GE Capital). For more information about this transaction, see Note 4. . Adjustments to prior year restructuring reserves (net credit of $16 million) - Actual costs were less than previously estimated. Other non-comparable items ($139 million) . Eckerd inventory adjustments ($74 million) - As a result of the integration of the Company's several drugstore formats, a cost of goods sold adjustment of $74 million was recorded in the second quarter of 1999 to reflect the difference between the estimated value of book inventories and physical inventories that were completed by the end of the second quarter. . Incremental Eckerd integration and other costs ($45 million) - Incremental costs incurred to upgrade the communications system that linked all drugstores with Eckerd's home office. In addition, related to the integration of the drugstores, certain allowances for the collectibility of accounts receivable and insurance reserves were adjusted. . Revenue recognition ($20 million) - In the fourth quarter of 1999, in response to the guidance provided by SEC Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," the Company changed certain revenue recognition policies affecting stores and catalog. A $20 million charge to cost of goods sold was recorded for the cumulative effects of the changes. Fiscal 1998. The Company's results were impacted by non-comparable items totalling $92 million, net. Adjustments (net credit of $22 million) were made to prior year restructuring reserves. Actual costs were less than previously estimated. Other non-comparable items ($114 million) consisted of the following: . Eckerd inventory adjustments ($98 million) - Incremental adjustments to cost of goods sold were primarily related to the disposition of non-conforming merchandise as a result of the integration of several drugstore formats. . Incremental Eckerd integration and other costs ($16 million) - Incremental integration costs related primarily to the complexities of combining three separate accounting systems into one system. 8 Department Stores and Catalog Operating Results ($ in millions) 2000 1999 1998 - ------------------------------------------------------------------- Retail sales, net $18,758 $19,316 $19,436 -------------------------------- FIFO gross margin 5,978 6,536 6,600 LIFO (charge)/credit (14) 9 35 -------------------------------- Total gross margin 5,964 6,545 6,635 SG&A expenses (5,710) (5,875) (5,715) -------------------------------- Segment operating profit $ 254 $ 670 $ 920 -------------------------------- Gross margin impact from non-compara- ble items $ 92 $ 20 $ - -------------------------------- Sales percent inc/(dec) Department stores (2.9)% (1.3)% (3.1)%/(1)/ Comparable stores (2.4)% (1.1)% (1.9)% Catalog (2.7)% 1.9% 0.4%/(1)/ Ratios as a percent of sales: FIFO gross margin 31.9% 33.8% 34.0% LIFO gross margin 31.8% 33.9% 34.1% SG&A expenses 30.4% 30.4% 29.4% LIFO segment operating profit 1.4% 3.5% 4.7% LIFO EBITDA/(2)/ 3.3% 7.1% 7.8% Ratios as a percent of sales, before the effects of non-comparable items: FIFO gross margin 32.4% 33.9% 34.0% LIFO gross margin 32.3% 34.0% 34.1% SG&A expenses 30.4% 30.4% 29.4% LIFO segment operating profit 1.8% 3.6% 4.7% LIFO EBITDA/(2)/ 3.8% 7.2% 7.8% ======== ==== ==== /(1)/ Calculated on a 52-week basis to exclude the effect of the 53rd week of 1997's full year. /(2)/ EBITDA includes segment operating profit before depreciation and amortization and including credit operating results in 1999 and 1998. 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. The following discusses the operating results of department stores and catalog before the effects on gross margins of non-comparable items, as discussed previously, to provide more meaningful comparisons. 2000 compared with 1999. Segment operating profit for department stores and catalog was $346 million in 2000 compared with $690 million in 1999. The decline for the year was attributable to decreases in both sales and gross margin. Gross margin declined as a result of higher markdowns required to clear seasonal merchandise, and promotional activity intended to stimulate sales. The promotional activity became particularly heavy in the fourth quarter as the economy slowed. Total department store sales of $14.6 billion declined by 2.9% for the year while sales in comparable department stores (those open at least one year) declined by 2.4%. The largest sales declines were in athletic apparel, where sales have declined 60% since they peaked in 1997. In addition, young men's sportswear sales decreased and were impacted by a decline in demand for shorts and particular brands of jeans. Included in total department store sales are sales in the Company's international stores which totaled $547 million in 2000, compared to $432 million in 1999, an increase of 26.6%. This increase is primarily the result of the addition of 14 Renner stores in Brazil. Catalog sales were $4.2 billion in 2000 compared with $4.3 billion in 1999. Internet merchandise sales, which are reported as a component of Catalog sales, increased to $294 million, from $102 million in 1999. LIFO gross margin as a percent of sales declined by 170 basis points compared with 1999 levels. The margin decline was due primarily to higher levels of promotional and clearance markdowns, particularly in the fourth quarter. In addition, gross margin was impacted by the implementation of centralized pricing decisions for aged and seasonal merchandise under the new ACT centralized merchandising process. Under this process, clearance decisions, both in terms of timing and pricing, are made by the central buying unit rather than by approximately 1,100 individual stores. Gross margin included a LIFO charge of $14 million in 2000 and a LIFO credit of $9 million in 1999. The LIFO charge in 2000 resulted from declines in higher cost inventory added in prior years. The LIFO credit for 1999 resulted from a combination of flat to declining retail prices as measured by the Company's internally developed inflation index. SG&A expenses decreased by $165 million, but were flat with last year when compared as a percentage of sales. The dollar improvement was primarily a result of cost savings initiatives, including outsourcing and process redesign, implemented over the last several years. 1999 compared with 1998. Segment operating profit for department stores and catalog totaled $690 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 billion declined 1.3% for the year while sales in comparable department stores declined by 1.1%. Sales were also impacted by the exit from the Chilean market in 1999's third quarter. Catalog sales were approximately $4.3 billion in 1999 and $4.2 billion in 1998. Internet merchandise sales, reported as a component of catalog sales, increased from $15 million in 1998 to $102 million in 1999. LIFO gross margin as a percent of sales declined by 10 basis points compared with 1998 levels. This was primarily a result of a LIFO credit of $9 million in 1999 compared to a LIFO credit of $35 million in 1998. Higher levels of promotional and clearance markdowns in the fourth quarter were partially offset by a shift in sales to higher margin private brands. 9 LIFO credits for both years resulted from a combination of flat to declining retail prices as measured by the Company's internally developed inflation index and improved markup. SG&A expenses increased by 100 basis points as a percent of sales versus 1998. The increase was principally a function of lower sales volume coupled with additional investments in Internet infrastructure and higher selling salaries in department stores. Eckerd Drugstores Operating Results ($ in millions) 2000 1999 1998 - --------------------------------------------------------------------------- Retail sales, net $13,088 $12,427 $10,325 ------------------------------------ FIFO gross margin 2,906 2,965 2,550 LIFO charge (55) (52) (45) ------------------------------------ Total gross margin 2,851 2,913 2,505 SG&A expenses (2,927) (2,730) (2,251) ------------------------------------ Segment operating (loss)/profit $ (76) $ 183 $ 254 ==================================== Gross margin impact from non-comparable items $ 104 $ 74 $ 98 SG&A impact from non-comparable items 12 45 16 ------------------------------------ Sales percent increase: Total sales 5.3% 20.4% 8.9%/(1)/ Comparable stores 8.5% 10.7% 9.2% Ratios as a percent of sales: FIFO gross margin 22.2% 23.9% 24.7% LIFO gross margin 21.8% 23.5% 24.3% SG&A expenses 22.4% 22.0% 21.8% LIFO segment operating (loss)/profit (0.6)% 1.5% 2.5% LIFO EBITDA/(2)/ 1.0% 3.0% 3.8% Ratios as a percent of sales, before the effects of non- comparable items: FIFO gross margin 23.0% 24.5% 25.6% LIFO gross margin 22.6% 24.0% 25.2% SG&A expenses 22.3% 21.6% 21.6% LIFO segment operating profit 0.3% 2.4% 3.6% LIFO EBITDA/(2)/ 1.9% 4.0% 4.9% ========= ===== ===== /(1)/ Calculated on a 52-week basis to exclude the effect of the 53rd week of 1997's full year. /(2)/ EBITDA includes segment operating profit before 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. The following discussion reviews Eckerd drugstores operating results before the effects on gross margin and SG&A of non-comparable items, as discussed previously, to provide more meaningful comparisons. 2000 compared with 1999. Segment operating profit for drugstores in 2000 was $40 million compared with $302 million in 1999. The decline in operating profit was attributable to weak non-pharmacy merchandise sales, coupled with lower gross margin and increased SG&A expenses. Sales for 2000 increased 5.3% over 1999. Total sales in 1999, which included sales from the Genovese drugstores acquired in March 1999, increased by 20.4% over the prior year. Comparable store sales increased 8.5%, compared to a 10.7% increase in the prior year (including the pro forma results of the Genovese drugstores). Comparable store sales growth for 2000 was led by a 14% increase in pharmacy sales, which accounted for 64% of total drugstore sales. Pharmacy sales were particularly strong in the managed care segment, which accounted for 89% of total pharmacy sales. Comparable non- pharmacy merchandise sales were flat for the year and were strongest in one-hour photo processing, skin care/fashion accessories and toiletries. Sales for 2000 benefited from the relocation of 136 stores to more convenient freestanding locations. LIFO gross margin, as a percent of sales, declined by 140 basis points. The decline was principally related to a higher proportion of lower gross margin managed care and mail order pharmacy sales and a reduced level of higher-margin general merchandise sales. Gross margin included LIFO charges of $55 million in 2000 and $52 million in 1999. SG&A expenses as a percent of sales increased by 70 basis points. Expenses in 2000 were negatively impacted by the higher expense levels associated with the opening of new and relocated drugstores. Expenses in 1999 reflect integration costs for the Genovese acquisition as well as costs associated with opening new and relocated stores. 1999 compared with 1998. Segment operating profit for drugstores in 1999 was $302 million compared with $368 million in 1998. The decline in operating profit was attributable to both lower gross margin and higher SG&A expenses. Total sales for 1999 increased by 20.4% over 1998 and include approximately $830 million in sales attributable to the Genovese drugstores acquired in March 1999. Comparable store sales were strong, increasing 10.7% (including the pro forma results of the Genovese drugstores) compared to a 9.2% increase in 1998. Comparable store sales growth was led by a 15.6% increase in pharmacy sales, which accounted for 62% of total drugstore sales. Comparable store non-pharmacy sales increased approximately 3% for the year. 1999 sales also benefited from the relocation of 208 stores to more convenient freestanding locations. LIFO gross margin, as a percent of sales, declined by 120 basis points. The decline was principally related to a higher proportion of lower gross margin managed care and mail order pharmacy sales, a higher percentage of new, lower- margin drug introductions, and higher shrinkage. Gross margin included LIFO charges of $52 million in 1999 and $45 million in 1998. SG&A expenses as a percent of sales in 1999 were flat with 1998. 10 Net Interest Expense and Credit Operations ($ in millions) 2000 1999 1998 - ---------------------------------------------------------------------- Finance charge revenue, net of operating expenses $ -- $ (313) $ (224) Interest expense, net 427 607 611 ---------------------------------- Net interest expense and credit operations $ 427 $ 294 $ 387 ======= ====== ====== Net interest expense and credit operations totaled $427 million in 2000 compared with $294 million in 1999 and $387 million in 1998. 1999 includes the Company's proprietary credit card operation through December 6, 1999, when the operation was sold to GE Capital. 1998 includes the proprietary credit card operation for the full year. Interest expense declined in 2000 primarily as a result of the reduction in short-term debt from the proceeds of the sale of the proprietary credit card receivables. Also during 2000, $805 million of long-term debt was retired or paid off. In addition, borrowing levels were lower due to declines in inventory levels. The improvement from 1998 to 1999 in finance charge revenue was related to improvements in credit operating performance, principally lower bad debt expense. Income taxes. The overall effective tax rate was (35.9%), 37.4% and 38.7% in 2000, 1999 and 1998, respectively. In the prior two years, the rate was favorably impacted by tax planning strategies that significantly reduced state and local income tax rates. Due to the loss from continuing operations in 2000, certain tax planning benefits were not utilized. Losses that resulted from these benefits will be carried forward to future years. Based on the short time periods for carryforwards in certain states, a valuation allowance of $60 million was established for those benefits not expected to be realized. Financial Condition Liquidity. The Company began 2000 with a cash position of $1.2 billion. In a difficult year, after meeting all of its cash requirements for capital expenditures, dividends and repayments of long-term debt, the Company ended the year with a cash balance of approximately $1 billion. Cash flow from operating activities was $1.5 billion in 2000 compared with $1.1 billion in 1999 and $0.9 billion in 1998. Efforts to reduce inventory levels and to secure more competitive terms with vendors, as well as declines in cash 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. Over the past several years, results have been impacted by non-cash charges relating to store closings and asset impairments as well as non-cash charges for the amortization of goodwill and other intangible assets related to drugstore acquisitions. Operating cash flow in 2000 benefited significantly from the decline in inventory levels, net of trade accounts payable. Cash flow from operations in fiscal 2000 was sufficient to fund the Company's operating needs - working capital, capital expenditures and dividends. Management expects cash flow and existing cash balances to cover the Company's operating needs, including payments related to restructuring reserves, for the foreseeable future. The Company's liquidity position at the end of 2000, coupled with the expected proceeds from the sale of DMS as well as other sources of funding, are adequate to cover debt maturities over the next several years. 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 in 1999. The Company's liquidity position will be further strengthened upon the expected mid-year 2001 closing of the sale of DMS which is expected to generate cash proceeds after tax of approximately $1.1 billion. It is anticipated that these proceeds will be used primarily for debt reduction. Additionally, the Company has $1.5 billion in unused committed bank credit facilities, which will remain in effect until November 2002. Merchandise inventory. Total LIFO inventory was $5,269 million in 2000 compared with $5,947 million in 1999 and $6,060 million in 1998. FIFO merchandise inventory for department stores and catalog was $3,289 million at the end of 2000, a decrease of 13.6% on an overall basis and approximately 13% for comparable stores, compared with the prior year. The decline was primarily the result of the Company's efforts to streamline inventory, improve the productivity of the merchandise assortments and improve the efficiency of the procurement process, all leading to increased inventory turnover. In addition, the conversion in department stores to a centralized buying process emphasized clearing seasonal, aged and other unproductive inventory. Eckerd FIFO merchandise inventory was $2,319 million at the end of 2000, a decrease of 4% compared with the prior year. The decrease was related to the decline in the number of Eckerd drugstores as well as an emphasis on repositioning the Eckerd merchandise mix. Properties. Property, plant and equipment, net of accumulated depreciation, totaled $5,114 million at January 27, 2001, compared with $5,271 million and $5,415 million at the end of fiscal 1999 and 1998, respectively. At the end of 2000, the Company operated 1,111 JCPenney department stores (including three stores in Mexico and eight in Puerto Rico), 49 Renner department stores in Brazil and 2,640 Eckerd drugstores, which together represented approximately 141 million gross square feet of retail space. The number of JCPenney department stores has declined recently principally as a result of the closing of underperforming stores over the last three years. Over the last three years, the number of Eckerd drugstores reflects the addition of 141 new stores, and 205 acquisitions, principally Genovese drugstores acquired in March of 1999, and the closing of 484 underperforming and overlapping stores during the conversion of former drugstore formats to Eckerd. 11 Capital expenditures. Capital expenditures, including capitalized software costs, during the past three years are as follows: ($ in millions) 2000 1999 1998 - ------------------------------------------------------------- Department stores and catalog $ 398 $ 344 $ 460 Eckerd drugstores 301 325 283 --------------------------------------- Total $ 699 $ 669 $ 743 --------------------------------------- Cash capital expenditures $ 648 $ 686 $ 776 ====== ===== ====== 2000 capital spending levels for property, plant and equipment increased from 1999 levels principally as a result of emphasis placed on systems development. The Company's plan for capital expenditures in 2001 is approximately $500 million ($325 million for department stores and catalog, and $175 million for Eckerd), and is designed to provide a balance between funding future growth and an adequate level of cash flow for liquidity purposes. While the absolute level of spending is less than prior years, priority is being given to maximize the allocation of capital to those projects which directly impact the customer and will positively impact profitability in the near term, such as store updates and renewals in both department stores and Eckerd drugstores. 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. All acquisitions have been accounted for under the purchase method. Accordingly, their results of operations are included in the Company's statements of operations as of the date of the acquisition. In March 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 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. Goodwill and other intangible assets. At the end of 2000, goodwill and other intangible assets, net, totaled $2,870 million, compared with $2,999 million in 1999 and $2,879 million in 1998. Intangible assets consist principally of favorable lease rights, prescription files, trade name and goodwill, represent- ing the excess of the purchase price over the fair value of net assets acquired. The Company believes the remaining balance of goodwill, which relates principally to its drugstore acquisitions, at January 27, 2001, is recoverable. The Company's ability to fully recover the carrying amount of goodwill through undiscounted future cash flows assumes that results of operations will improve from current levels and provide positive cash flows in future periods greater than current results. However, should events or economic conditions arise that hinder the Company's ability to achieve its business objectives, a portion of the goodwill may become impaired in the near term, and such amount of impairment may be material. Debt to Capital ($ in millions) 2000 1999 1998 - ---------------------------------------------------------------- Debt to capital percent 56.8% 54.5% 63.0%* ---- ---- ---- * Upon completion of the Genovese acquisition, the debt to capital ratio declined to 62.3%. Total debt, including the present value of operating leases, was $8,232 million at the end of 2000 compared with $8,670 million at the end of 1999 and $12,113 million in 1998. During 2000, the Company retired $805 million of long-term debt, $625 million through scheduled maturities and the call of $180 million of the 9.45% notes due in 2002. In December 1999, the Company received $3.2 billion in proceeds from the sale of its proprietary credit card accounts receivable. 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 debt totalling $729 million, including $79 million of off-balance-sheet debt. During 1999, the Company retired $225 million of long-term debt at the normal maturity date and redeemed $199 million of Eckerd Notes due in 2004. In 1999 and 1998, the Company issued 9.6 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. Dividends. The Company paid quarterly dividends of $0.2875 in the first three quarters of 2000 and $0.125 in the final quarter of the year, reflecting a reduction from the $0.545 quarterly dividend paid in 1999. The Company considered the overall performance of its businesses and the need to reinvest earnings in those businesses in the determination to reduce the quarterly dividend rate. 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. 12 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 accounting principles generally accepted in the United States of America 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 auditing standards generally accepted in the United States of America, 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, performance, independence 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. Robert B. Cavanaugh Robert B. Cavanaugh 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 27, 2001 and January 29, 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended January 27, 2001. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of J. C. Penney Company, Inc. and Subsidiaries as of January 27, 2001 and January 29, 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended January 27, 2001, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Dallas, Texas February 22, 2001 13 Consolidated Statements of Operations J. C. Penney Company, Inc. and Subsidiaries
($ in millions, except per share data) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------- Retail sales, net $31,846 $ 31,743 $ 29,761 Costs and expenses Cost of goods sold 23,031 22,286 20,621 Selling, general and administrative expenses 8,637 8,604 7,966 Other unallocated 27 (13) (18) Net interest expense and credit operations 427 294 387 Acquisition amortization 122 125 112 Restructuring and other charges, net 488 169 (22) -------------------------------------- Total costs and expenses 32,732 31,465 29,046 -------------------------------------- (Loss)/income from continuing operations before income taxes (886) 278 715 Income taxes (318) 104 277 -------------------------------------- (Loss)/income from continuing operations (568) 174 438 - -------------------------------------------------------------------------------------------------------------- Income from discontinued operations (net of income tax of $90, $91, and $84) 159 162 156 Loss on sale of discontinued operations (including income taxes of $200) (296) -------------------------------------- Net (loss)/income $ (705) $ 336 $ 594 - -------------------------------------------------------------------------------------------------------------- (Loss)/earnings per share Basic Continuing operations (2.29) 0.54 1.58 Discontinued operations 0.61 0.62 0.62 (Loss) on sale of discontinued operations (1.13) Net (loss)/income (2.81) 1.16 2.20 Diluted Continuing operations (2.29) 0.54 1.58 Discontinued operations 0.61 0.62 0.61 (Loss) on sale of discontinued operations (1.13) Net (loss)/income (2.81) 1.16 2.19 Weighted average number of common shares outstanding during the period Basic 262 259 253 Diluted 262 259 254 - -------------------------------------------------------------------------------------------------------------------
See Notes to the Consolidated Financial Statements on pages 18 through 30. 14 Consolidated Balance Sheets J. C. Penney Company, Inc. and Subsidiaries
($ in millions) 2000 1999 - --------------------------------------------------------------------------------------------------------------- Assets Current assets Cash (including short-term investments of $935 and $1,155) $ 944 $ 1,155 Receivables, net (bad debt reserve of $30 and $20) 893 921 Merchandise inventory (including LIFO reserves of $339 and $270) 5,269 5,947 Prepaid expenses 151 151 ---------------------- Total current assets 7,257 8,174 Property and equipment Land and buildings 2,949 3,047 Furniture and fixtures 3,919 3,930 Leasehold improvements 1,194 1,151 Accumulated depreciation (2,948) (2,857) ---------------------- Property and equipment, net 5,114 5,271 Goodwill and other intangible assets, net (accumulated amortization of $452 and $333) 2,870 2,999 Other assets 1,474 1,617 Assets of discontinued operations (including cash and short-term investments of $156 and $105) 3,027 2,847 ---------------------- Total Assets $19,742 $20,908 - -------------------------------------------------------------------------------------------------------------- Liabilities and stockholders' equity Current liabilities Accounts payable and accrued expenses $ 3,877 $ 3,158 Short-term debt -- 330 Current maturities of long-term debt 250 625 Deferred taxes 108 159 ---------------------- Total current liabilities 4,235 4,272 Long-term debt 5,448 5,844 Deferred taxes 1,136 1,180 Other liabilities 978 873 Liabilities of discontinued operations 1,686 1,511 ---------------------- Total liabilities 13,483 13,680 Stockholders' equity Preferred stock authorized, 25 million shares; issued and outstanding, 0.6 million and 0.7 million shares Series B ESOP convertible preferred 399 446 Common stock, par value 50 cents: authorized, 1,250 million shares; issued and outstanding 263 million and 261 million shares 3,294 3,266 Reinvested earnings 2,636 3,590 Accumulated other comprehensive (loss) (70) (74) ---------------------- Total stockholders' equity 6,259 7,228 ---------------------- Total liabilities and stockholders' equity $19,742 $20,908 - --------------------------------------------------------------------------------------------------------------
See Notes to the Consolidated Financial Statements on pages 18 through 30. 15 Consolidated Statements of Stockholders' Equity J. C. Penney Company, Inc. and Subsidiaries
Common Preferred Guaranteed Reinvested Accumulated Other Total Stock Stock LESOP Earnings Comprehensive Stockholders' ($ in millions) Obligation (Loss)/Income/(1)/ Equity - ------------------------------------------------------------------------------------------------------------------- January 31, 1998 $ 2,766 $ 526 $ (49) $ 3,999 $ 48 $ 7,290 ---------------------------------------------------------------------------- Net income 594 594 Net unrealized change in investments (19) (19) Currency translation adjustments(2) (57) (57) Other comprehensive income from discontinued operations 14 14 ---------------------------------------------------------------------------- Total comprehensive (loss)/income 594 (62) 532 Dividends declared (588) (588) Common stock issued 140 140 Common stock retired (56) (214) (270) Preferred stock retired (51) (51) LESOP payment 49 49 ---------------------------------------------------------------------------- January 30, 1999 2,850 475 -- 3,791 (14) 7,102 ---------------------------------------------------------------------------- Net income 336 336 Net unrealized change in investments (14) (14) Currency translation adjustments 13 13 Other comprehensive loss from discontinued operations (59) (59) ---------------------------------------------------------------------------- Total comprehensive (loss)/income 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 ---------------------------------------------------------------------------- Net loss (705) (705) Net unrealized change in investments 2 2 Currency translation adjustments (14) (14) Other comprehensive income from discontinued operations 16 16 ---------------------------------------------------------------------------- Total comprehensive (loss)/income (705) 4 (701) Dividends declared (249) (249) Common stock issued 28 28 Preferred stock retired (47) (47) ---------------------------------------------------------------------------- January 27, 2001 $ 3,294 $ 399 $ -- $ 2,636 $ (70) $ 6,259 - ----------------------------------------------------------------------------------------------------------------
(1) Cumulative net unrealized changes in investments are shown net of deferred taxes of $2 million, $1 million and $8 million, in 2000, 1999 and 1998, respectively. A deferred tax asset has not been established for currency translation adjustments due to immateriality of amounts. (2) 1998 currency translation adjustments include $(49) million associated with assets acquired and liabilities assumed in the purchase of Renner. See Notes to the Consolidated Financial Statements on pages 18 through 30. 16 Consolidated Statements of Cash Flows
($ in millions) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------- Cash flows from operating activities (Loss)/income from continuing operations $ (568) $ 174 $ 438 Restructuring and other charges, net 488 169 (22) Depreciation and amortization, including intangible assets 695 702 633 Deferred taxes (95) (8) 178 Change in cash from: Customer receivables -- 13 258 Other receivables 29 (113) (116) Inventory, net of trade payables 1,147 169 64 Current income taxes payable 50 (83) (148) Other assets and liabilities, net (241) 108 (359) ---------------------------------------- 1,505 1,131 926 ---------------------------------------- Cash flows from investing activities Capital expenditures (648) (686) (776) Proceeds from the sale of assets 30 3,179 -- Acquisitions/(1)/ -- -- (184) Proceeds from the sale of investment securities 268 164 -- ---------------------------------------- (350) 2,657 (960) ---------------------------------------- Cash flows from financing activities Change in short-term debt (330) (1,650) 507 Proceeds from the issuance of long-term debt -- -- 644 Payment of long-term debt (816) (467) (478) Common stock issued, net 28 62 140 Common stock purchased and retired -- -- (270) Preferred stock redemption (47) (29) (51) Dividends paid, preferred and common (294) (598) (586) ---------------------------------------- (1,459) (2,682) (94) ---------------------------------------- Cash received from/(paid to) discontinued operations 93 -- (41) ---------------------------------------- Net increase/(decrease) in cash and short-term investments (211) 1,106 (169) Cash and short-term investments at beginning of year 1,155 49 218 Cash and short-term investments at end of year $ 944 $ 1,155 $ 49 Supplemental cash flow information Interest paid $ 439 $ 673 $ 649 Interest received 49 61 45 Income taxes (received) paid (97) 194 255 - --------------------------------------------------------------------------------------------------------------
(1) Reflects total cash changes related to acquisitions. Non-cash transactions: In 2000, Eckerd entered into capital leases for store photo processing equipment totaling $40 million. 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. See Notes to the Consolidated Financial Statements on pages 18 through 30. 17 Notes to the Consolidated Financial Statements 1 Summary of Accounting Policies Basis of presentation. The consolidated financial statements present the results of J. C. Penney Company, Inc. and its subsidiaries. All significant inter- company transactions and balances have been eliminated in consolidation. The accompanying financial statements have been presented to reflect the assets, liabilities, income and expenses of J. C. Penney Direct Marketing Services, Inc. (DMS) as a discontinued operation. The accompanying consolidated statements of operations present as a separate item the income and estimated loss on disposal of DMS. The assets to be disposed of, and related liabilities, are presented as separate items in the accompanying consolidated balance sheets. Use of estimates. The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While actual results could differ from these estimates, management does not expect the differences, if any, to have a material effect on the financial statements. Some of the more significant estimates include inventory valuation as determined under the retail method of accounting, depreciation, amortization and recoverability of long-lived assets, restructuring and other reserves, pensions and income taxes. Fiscal year. The Company's fiscal year ends on the last Saturday in January. Fiscal 2000 ended January 27, 2001; fiscal 1999 ended January 29, 2000; and fiscal 1998 ended January 30, 1999. All three years contained 52 weeks. The accounts of Renner are on a calendar-year basis. Reclassifications. 2000 reflects two primary reclassifications, neither of which had an impact on reported results or stockholders' equity. Amounts reported for prior periods have been reclassified to conform to the 2000 presentation. The Company has reclassified amounts billed to customers for shipping and handling from selling, general and administrative expense (SG&A) to retail sales with related costs reclassified from SG&A to cost of goods sold in accordance with Emerging Issues Task Force (EITF) Issue 00-10, "Accounting for Shipping and Handling Fees and Costs." Expenses related to rent and occupancy costs were reclassified from cost of sales to SG&A. Certain other reclassifications have been made to prior years' income and expense amounts to conform with the current year presentation. Merchandise sales and services. Revenues from merchandise sales and services (retail sales), including delivery fees, are reported net of returns and allowances and exclude sales tax. 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 estimated merchandise returns. In 1999, in response 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 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 for fiscal 1999, the period in which the change was made. Advertising. Advertising costs, which include newspaper, television, radio and other media advertising, are either expensed as incurred or the first time the advertising occurs, and were $967 million, $995 million and $1,043 million for fiscal years 2000, 1999 and 1998, respectively. 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. Included in other assets are deferred advertising costs, primarily catalog book costs, of $87 million as of January 27, 2001, and $84 million as of January 29, 2000. Pre-opening expenses. Costs associated with the opening of new stores are expensed in the period incurred. Income taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities 18 are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are 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 effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized. Earnings/(loss) per common share. Basic earnings/(loss) per share is computed by dividing net income/(loss) less dividend requirements on the Series B ESOP Convertible Preferred Stock, net of tax as applicable, by the weighted average number of common shares outstanding. Diluted earnings/(loss) 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 unless their inclusion would be anti-dilutive. Stock-based compensation. The Company accounts for stock-based compensation by applying Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed under Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-based Compensation." Under APB No. 25, if the exercise price of employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recorded. Under the provisions of the Company's equity compensation plan, stock options cannot be granted below market. Cash and short-term investments. The Company's short-term investments consist principally of commercial paper which has a maturity at date of purchase of three months or less. Merchandise inventories. Substantially all merchandise inventory is valued at the lower of cost (using the last-in, first-out or "LIFO" method) 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. To estimate the effects of inflation on inventories, the Company utilizes internally developed price indices. Property and equipment. Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided principally by the straight-line method over the estimated useful lives of the related assets, generally three to 20 years for furniture and equipment and 50 years for buildings. Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the term of the lease. Routine maintenance and repairs are charged to expense when incurred. Major replacements and improvements are capitalized. The cost of assets sold or retired and the related accumulated depreciation or amortization are removed from the accounts with any resulting gain or loss included in net income. Goodwill and other intangible assets and long-lived assets. Goodwill, which represents the cost in excess of fair value of net assets acquired, and trade name associated with the Eckerd acquisition are generally amortized over 40 years. Other intangible assets are amortized over periods ranging from five to seven years. In assessing and measuring the impairment of long-lived assets, the Company applies the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the long-lived asset or identifiable intangible being tested for impairment was acquired in a purchase business combination, the goodwill that arose in that transaction is included in the asset grouping in determining whether an impairment has occurred. If some but not all of the assets acquired in that transaction are being tested, goodwill is allocated to the assets being tested for impairment based on their relative fair values of the long-lived assets and identifiable intangibles acquired at the acquisition date. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Additionally, if an impairment loss is recognized for long-lived assets and identifiable intangibles where goodwill has been allocated to an asset grouping, as described immediately above, the carrying amount of the allocated goodwill is adjusted before reducing the carrying amounts of impaired long-lived assets. Assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. With respect to the carrying amounts of goodwill remaining after the testing for impairment of long-lived assets and identifiable intangibles, including enterprise level goodwill not subject to impairment testing under SFAS No. 121, the Company assesses such carrying value for impairment whenever events or circumstances indicate that the carrying amount of such goodwill may not be recoverable. The Company assesses the recoverability of goodwill by determining whether the amortization of goodwill over its remaining life can be recovered through undiscounted future operating cash flows of the acquired business. The amount of goodwill impairment, if any, is measured based on projected discounted operating cash flows compared to the carrying value of such goodwill. The Company believes the remaining balance of goodwill, which relates principally to its drugstore acquisitions, at January 27, 2001, is recoverable. The Company's ability to fully 19 recover the carrying amount of goodwill through undiscounted future cash flows assumes that results of operations will improve from current levels and provide positive cash flows in future periods greater than current results. However, should events or economic conditions arise that hinder the Company's ability to achieve its business objectives, a portion of the goodwill may become impaired in the near term, and such amount of impairment may be material. Capitalized software costs. Costs associated with the acquisition or development of software for internal use are capitalized and amortized over the expected useful life of the software. The amortization period generally ranges between three and ten years. 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. Effect of new accounting standards. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company has reviewed financial instruments that may be impacted by these new rules, principally long-term debt, purchase commitments and real estate leases, and has determined that current instruments do not contain terms or conditions that would be of a derivative nature. Accordingly, these new rules will not have a material impact on the consolidated financial position or results of operations upon adoption. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," a replacement of SFAS No. 125 with the same title. It revises the standards for securitizations and other transfers of financial assets and collateral and requires certain additional disclosures, but otherwise retains most of SFAS No. 125's provisions. SFAS No. 140 is effective for transfers after March 31, 2001. Adoption of the accounting provisions of this standard is not expected to have a material impact on the Company's consolidated financial position or results of operations. 2 Discontinued operations On March 7, 2001, the Company signed a definitive agreement with a U.S. subsidiary of AEGON N.V. (AEGON) to sell the assets of its DMS business, consisting of the stock of its insurance subsidiaries and related businesses. The Company will receive cash proceeds at closing of approximately $1.3 billion plus settlements from intercompany accounts. The sale generated a book loss, net of tax, of $296 million. Concurrent with the closing, the Company will enter into a 15-year strategic marketing alliance with AEGON designed to offer an expanded range of financial and membership services products to JCPenney customers. Under this agreement, the Company will receive annual cash payments over the next 15 years pursuant to the terms of licensing and marketing services arrangements. Such amounts will be recognized as earned in the Company's financial statements. The Company's financial statements have been presented to reflect DMS as a discontinued operation for all periods. Operating results of the discontinued operation are summarized below: ($ in millions) 2000 1999 1998 - --------------------------------------------------------- Net revenue $1,164 $1,119 $1,022 --------------------------- Income from discontinued operations (net of income tax of $90, $91, and $84) 159 162 156 Loss on sale of discontinued operations (including income taxes of $200) (296) -- -- --------------------------- (Loss)/income from discontinued operations $(137) $ 162 $ 156 ----- ----- ------- The amount of income tax expense recorded on the sale transaction has been impacted by book/tax basis differences arising during periods in which separate tax returns were filed for DMS. Deferred tax liabilities historically have not been provided on such earnings because management expected that such earnings would be permanently invested in these businesses. Assets and liabilities of the discontinued operation were as follows: ($ in millions) 2000 1999 - ----------------------------------------------------- Current assets $ 403 $ 318 Investments 1,495 1,484 Deferred policy acquisition costs 999 929 Other assets 130 116 --------------- Total assets 3,027 2,847 --------------- Current liabilities 287 494 Long-term liabilities 1,399 1,017 --------------- Total liabilities 1,686 1,511 --------------- Net assets of discontinued operations $1,341 $1,336 ------- ------- 20 Notes to ther Consolidated Financial Statements 3 Calculation of earnings per share
Average ($ in millions except per share data) (Loss)/Income Shares EPS - ----------------------------------------------------------------------------------------------------------------------- 2000 Loss from continuing operations $ (568) Less preferred stock dividends (33) -------- Basic and diluted loss per share - continuing operations (601) 262 (2.29) Basic and diluted loss per share - discontinuing operations (137) 262 (0.52) ----------------------------------- Basic and diluted loss per share $ (738) 262 $ (2.81) 1999 Income from continuing operations $ 174 Less preferred stock dividends (36) ------- Basic and diluted EPS - continuing operations 138 259 0.54 Basic and diluted EPS - discontinued operations 162 259 0.62 ----------------------------------- Basic and diluted EPS $ 300 259 $ 1.16 1998 Income from continuing operations $ 438 Less preferred stock dividends (38) ------- Basic EPS - continuing operations 400 253 1.58 Stock options -- 1 ------------------------------------ Diluted EPS - continuing operations 400 254 1.58 EPS - discontinued operations Basic 156 253 0.62 Diluted 156 254 0.61 EPS Basic 556 253 2.20 Diluted $ 556 254 $ 2.19 - ------------------------------------------------------------------------------------------------------------------------
Calculation excludes diluted the effects of the potential conversion of outstanding preferred shares of 14, 15, and 17 million common shares and their related dividends in 2000, 1999 and 1998, because their inclusion would have an anti-dilutive effect on EPS. In addition, in each period, certain options were excluded from the computation of diluted earnings per share because they would have been anti- dilutive. At January 27, 2001, January 29, 2000, and January 30, 1999, options to purchase 18, 12 and 2 million shares of stock at prices ranging from $9 to $71, $11 to $71 and $55 to $71 per share were excluded from the 2000, 1999 and 1998 calculations, respectively. 4 Sale of Receivables and Acquisitions On December 6, 1999, the Company sold its proprietary credit card accounts and 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 was $4 billion, and included the assumption by GE Capital of $729 million of debt related to previous receivable securitization transactions, $79 million of which was off-balance-sheet. 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 restructuring and other charges, net, in the consolidated statements of operations. In the current year, the allowance for final settlement was reduced by $9 million and is reflected in restructuring and other charges, net. As a part of the overall transaction, the Company also outsourced the management of its private label credit card business to GE Capital. In recent years, the Company has completed several acquisitions, all of which were recorded using the purchase method of accounting. Accordingly, the results of operations of the acquired businesses have been included in the consolidated statements of operations from their respective acquisition dates. Goodwill has been recognized for the amount of the excess of the purchase price paid over the fair market value of the net assets acquired. On March 1, 1999, the Company acquired 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 Company common stock for the outstanding shares of Genovese, and the conversion of outstanding Genovese stock options into 21 Notes to the Consolidated Financial Statements 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 January 1999. The total purchase price was $139 million, of which $67 million represented goodwill. 5 FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used in estimating the fair values of financial instruments: Cash and short-term investments. The carrying amount approximates fair value because of the short maturity of these instruments. Short-term and long-term debt. Carrying value approximates fair value for short-term debt. The fair value of long-term debt, excluding capital leases, is estimated by obtaining quotes from brokers or based on current rates offered for similar debt. At January 27, 2001, long-term debt, including current maturities, had a carrying value of $5.6 billion and a fair value of $4.0 billion. At January 29, 2000, long-term debt, including current maturities, had a carrying value of $6.4 billion and a fair value of $5.9 billion. Concentrations of credit risk. The Company has no significant concentrations of credit risk. 6 ACCOUNTS PAYABLE AND ACCRUED EXPENSES ($ in millions) 2000 1999 - ------------------------------------------------------------------------- Trade payables $1,948 $1,480 Accrued salaries, vacation and bonus 446 463 Taxes payable 195 175 Interest payable 136 155 Workers' compensation and general liability insurance 74 90 Common dividends payable 34 79 Other 1,044 716 --------------------- Total $3,877 $3,158 ======= ======= 7 SHORT-TERM DEBT The Company did not have any short-term debt outstanding at January 27, 2001, a decrease of $330 million from the prior year end. The Company has a committed bank credit line in the form of a $1.5 billion, five-year revolving credit facility, which expires November 21, 2002. No borrowings have been made under this facility. The Company also has $480 million of uncommitted credit lines in the form of letters of credit with seven banks to support its direct import merchandise program. As of January 27, 2001, $353 million of letters of credit issued by the Company were outstanding. 8 LONG-TERM DEBT Jan. 27, 2001 Jan. 29, 2000 Avg. Avg. ($ in millions) Rate Balance Rate Balance - ------------------------------------------------------------------------- Notes and debentures Due: 2000 -- $ -- 6.7% $ 625 2001 9.1% 250 9.1% 250 2002 7.1% 920 7.5% 1,100 2003 6.3% 350 6.3% 350 2004 7.5% 300 7.5% 300 2005 7.3% 218 7.3% 218 2006-2010 8.4% 987 8.4% 979 2011-2015 7.6% 305 7.6% 305 2016-2020 7.9% 562 7.9% 562 2021-2027 7.5% 850 7.5% 850 Thereafter 7.5% 900 7.5% 900 - ------------------------------------------------------------------------- Total notes and debentures 7.6% 5,642 7.6% 6,439 Capital lease obligations and other -- 56 -- 30 Less current maturities -- (250) -- (625) - ------------------------------------------------------------------------- Total long-term debt -- $ 5,448 -- $ 5,844 ======= All notes and debentures have similar characteristics regardless of due date and therefore are grouped by maturity date in the above schedule. During fiscal 2000, the Company redeemed at par $625 million principal amount of notes ($300 million of 6.375% notes and $325 million of 6.95% notes) at their normal maturity dates. In addition, the Company called and redeemed at par approximately $180 million principal amount of 9.45% notes that had a normal maturity date of July 2002. 9 CAPITAL STOCK At January 27, 2001, there were approximately 53 thousand stockholders of record. On a combined basis, the Company's savings plans, including the Company's employee stock ownership plan (ESOP), held 51.2 million shares of common stock, or 18.6% 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 of common stock; par value $.50; 263 million shares were issued and outstanding as of January 27, 2001, and 261 million shares were issued and outstanding as of January 29, 2000. Preferred stock. The Company has authorized 25 million shares of preferred stock; 664 thousand shares of Series B ESOP Convertible Preferred Stock were issued and outstanding as of January 27, 2001, and 743 thousand shares were issued and outstanding as of January 29, 2000. 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%. 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. 22 Preferred stock purchase rights. In March 1999, the Board of Directors declared a dividend distribution of one preferred stock purchase right on each outstanding share of common stock in connection with the redemption of the Company's then existing preferred stock purchase rights program. These rights entitle the holder to purchase, for each right held, 1/1000 of a share of Series A Junior Participating Preferred Stock at a price of $140. The rights are exercisable by the holder upon the occurrence of certain events and are redeemable by the Company under certain circumstances as described by the rights agreement. The rights agreement contains a three-year independent director evaluation provision. This "TIDE" feature provides that a committee of the Company's independent directors will review the rights agreement at least every three years and, if they deem it appropriate, may recommend to the Board a modification or termination of the rights agreement. 10 STOCK-BASED COMPENSATION The Company's current stock plans (the 1997 plan approved by stockholders and the 2000 New Associate Equity Plan) reserved 19.5 million shares of common stock to be granted to associates as either stock awards or options to purchase the Company's common stock. At January 27, 2001, 4.8 million shares of stock were available for future grant. The number of option shares is fixed at the grant date, and the exercise price of stock options is generally set as the average market price on the date of the grant. (Of the 7.3 million options granted in 2000, 3.5 million were granted to the Company's new chairman pursuant to his employment agreement at an exercise price of $16.06, while the market price on the date of the grant was $13.63. These options vest over a period of five years.) Options have a maximum term of ten years. The 1997 plan also provides for grants of stock awards and stock options to outside members of the Board of Directors. Shares acquired by such directors are not transferable until a director terminates service. Approximately 1.5 million restricted stock units and stock awards, with market values at the date of grant of $20.3 million, were granted in fiscal 2000. The weighted-average grant-date fair value of these awards was $13.85. Restricted stock grants vest in one to five years. The market value of restricted shares is being amortized as compensation expense over the vesting period. Compensation expense related to these restricted stock awards was $2.3 million in 2000. Prior to fiscal 2000, awards of restricted stock were not significant, and compensation expense was recognized in the year the awards were granted. In accordance with SFAS 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, with assumptions as follows: 2000 1999 1998 - -------------------------------------------------------------------------------- Dividend yield 4.2% 3.8% 3.8% Expected volatility 35.2% 25.1% 20.5% Risk-free interest rate 6.2% 5.5% 5.7% Expected option term 5 years 7 years 6 years Fair value per share of options granted $3.78 $8.41 $13.66 ------ ------ ------ Compensation expense recorded under SFAS No. 123 would have been approximately $26 million in 2000, $40 million in 1999 and $21 million in 1998, reducing earnings per share by eight cents in 2000, fourteen cents in 1999 and seven cents in 1998. The Board of Directors approved a new 2001 Equity Compensation Plan (2001 Plan) subject to stockholder approval at the annual meeting on May 18, 2001. The 2001 Plan will initially reserve 16 million shares for issuance, plus shares reserved but not subject to awards under the 1997 and 2000 equity plans, and also provides for cash incentive awards if certain performance criteria are met. The 2001 Plan provides for grants of stock options and stock awards to members of the Board of Directors not otherwise employed by the Company. If the 2001 Plan is approved, no future grants will be made under the existing 1997 and 2000 plans. - -------------------------------------------------------------------------------- The following table summarizes the status of the Company's fixed stock option plans for the three years ended January 27, 2001, January 29, 2000 and January 30, 1999:
2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- (shares in thousands, price is weighted average) Shares Price Shares Price Shares Price Outstanding at beginning of year 11,832 $ 43 6,972 $ 48 7,583 $ 40 Granted 7,294 16 5,619 36 1,643 71 Exercised -- -- (479) 23 (2,100) 36 Expired and cancelled (959) 35 (280) 40 (154) 61 --------------------------------------------------------------- Outstanding at end of year 18,167 $ 33 11,832 $ 43 6,972 $ 48 --------------------------------------------------------------- Exercisable at end of year 6,592 $ 48 6,913 $ 48 5,418 $ 41 --------------- ------- ----- ----- -----
Options as of January 27, 2001 Outstanding Exercisable - ------------------------------------------------------------------------------------------------------------------- Remaining (shares in thousands, price and term are weighted averages) Shares Price Term (Yrs) Shares Price - ------------------------------------------------------------------------------------------------------------------- $9.22 - $25 7,106 $16 9.4 27 $16 $25.01 - $35 1,565 28 1.1 1,553 28 $35.01 - $45 5,499 37 7.3 1,018 42 $45.01 - $55 1,871 48 5.6 1,868 48 Over $55 2,126 66 5.8 2,126 66 ----------------------------------------------------- Total 18,167 $33 7.2 6,592 $48 - -----------------------------------------------------------------------------------------------------------------
23 Notes to the Consolidated Financial Statements 11 INTEREST EXPENSE, NET ($ in millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Short-term debt $ 13 $ 137 $ 106 Long-term debt 464 538 557 Other, net * (50) (68) (52) --------------------------------- Interest expense, net $ 427 $ 607 $ 611 ===== ===== ===== * Primarily income on short-term investments in 2000. Includes $8 million, $34 and $39 million in 2000, 1999 and 1998, respectively, for interest income from the Company's investment in asset-backed certificates. 12 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 $711 million in 2000, $667 million in 1999, and $585 million in 1998, including contingent rent, based on sales, of $59 million, $64 million, and $66 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 $131 million in 2000, $123 million in 1999, and $123 million in 1998. Future minimum lease payments for non-cancelable operating and capital leases, net of executory costs, principally real estate taxes, maintenance and insurance, and subleases, as of January 27, 2001 were: ($ in millions) Operating Capital - -------------------------------------------------------------------------------- 2001 $ 647 $ 20 2002 605 16 2003 566 12 2004 514 10 2005 467 8 Thereafter 4,084 -- ------------------------------ Total minimum lease payments $ 6,883 $ 66 ------------------------------ Present value $ 3,469 $ 53 Weighted average interest rate 8.8% 10% - -------------------------------------------------------------------------------- 13 RETIREMENT PLANS The Company's retirement plans consist principally of a noncontributory pension plan, noncontributory supplemental retirement, benefit restoration and deferred compensation plans for certain management associates, contributory medical and dental plans, a contributory 401(k) and employee stock ownership plan, and contributory mirror savings plans for certain management associates. 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 and Genovese have noncontributory pension plans. As of December 31, 1998, all Eckerd retirement benefit plans were frozen and employees began to accrue benefits under the Company's retirement plans on January 1, 1999. As of December 31, 1999, all Genovese retirement benefit plans were frozen and all Genovese associates began to accrue benefits under the Company's retirement plans on January 1, 2000. In 2000, the Company adopted a change in the measurement date of the pension and post-retirement health care benefits plans from December 31 to October 31. Prior periods have not been restated, as the impact of the change is not material. The components of net periodic benefit costs are shown below: Expense ($ in millions) 2000 1999 1998 - ------------------------------------------------------------------------ Pension and health care Service cost $ 97 $ 109 $ 76 Interest cost 236 220 221 Projected return on assets (354) (314) (283) Net amortization (17) 13 14 ------------------------- Total pension and health care (38) 28 28 Savings plan expense 3 37 76 ------------------------- Net periodic benefit (income)/cost $ (35) $ 65 $ 104 ----- ----- ----- The following table sets forth the change in projected benefit obligation, change in plan assets and funded status of the pension plans at fiscal year end 2000 and 1999: ($ in millions) 2000 1999 - --------------------------------------------------------------------------- Change in projected benefit obligation Beginning of year $2,737 $3,006 Service and interest cost 254 303 Actuarial loss/(gain) 69 (375) Benefits paid (170) (201) Amendments and other -- 4 --------------------- End of year 2,890 2,737 --------------------- Change in fair value of plan assets Beginning of year 3,791 3,393 Company contributions 25 35 Net gains 107 560 Benefits paid (170) (201) Amendments and other -- 4 --------------------- End of year 3,753 3,791 - --------------------------------------------------------------------------- Funded status of plan Excess of fair value over projected benefits 863 1,054 Unrecognized gains and prior service cost (278) (563) --------------------- Prepaid pension cost $ 585 $ 491 ====== ====== 24 Assumptions 2000 1999 1998 - -------------------------------------------------------------------------------- Discount rate 7.75% 7.75% 6.75% Expected return on assets 9.50% 9.50% 9.50% Salary progression rate 4.00% 4.00% 4.00% For the medical and dental plans, at year end 2000 the accumulated post- retirement benefit obligation, unrecognized net gain and net liability were $334 million, $14 million and $320 million, respectively. At year end 1999, the accumulated post-retirement benefit obligation, unrecognized net loss and net liability were $322 million, $17 million and $339 million, respectively. A 1% increase (or decrease) in assumed health care cost trend rates would have increased (or decreased) the accumulated postretirement benefit obligation as of year-end 2000 by $26 million and the aggregate service and interest cost for fiscal 2000 by $2.5 million. For measurement purposes, a 6.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2001. The rate was assumed to decrease gradually to 5.0% by 2004 and remain at that level thereafter. 14 Restructuring And Other Charges, Net Over the past several years, the Company has implemented a number of initiatives to improve its competitive position and future financial performance, including closing underperforming stores and reducing headcount in corporate offices and field locations. These initiatives, along with the integration of several drugstore formats with the Eckerd drugstore business acquired in 1997, have resulted in restructuring and other charges. As it relates to store closing restructuring charges, the major actions comprising the plan to close stores consisted of the identification of stores that did not meet the Company's profit objectives, closing dates (to coincide with termination rights/and or other trigger dates contained in leases, if applicable), and notification of affected parties (e.g., employees, landlords, and community representatives) in accordance with the Company's store closing procedures. These closings were over and above the normal course of store closures within a given year, which are typically relocations. Substantially all of the stores were leased, and as such, the Company will not be responsible for the disposal of property, other than fixtures, which for the most part will be abandoned. During 2000, 1999, and 1998 the Company recorded $488 million, $169 million and $(22) million of restructuring and other charges, net. The following table summarizes these charges for the last three years: ($ in millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Department stores and catalog Store closing costs $ 206 $ -- $ -- Asset impairments 68 130 -- Contract cancellations 12 -- -- Headcount reductions 30 -- -- Gain on sale of assets -- (55) -- Adjustments to prior period reserves and other (12) (11) (22) Eckerd drugstores Store closing costs 111 -- -- Asset impairments 23 110 -- Contract cancellations 72 -- -- Headcount reductions 5 -- -- Gain on sale of assets (13) -- -- Adjustments to prior period reserves and other (14) (5) -- ------------------------- $ 488 $ 169 $ (22) ===== ===== ===== The status of reserves established in conjunction with these charges is discussed in Note 15. 2000 Restructuring and Other Charges, Net Department Stores and Catalog Store closing costs ($206 million) First quarter 2000. In the first quarter of 2000, the Company approved a plan to close 45 underperforming JCPenney stores. These stores generated sales of approximately $450 million and incurred operating losses of approximately $20 million in 1999. All but one of these stores were closed as of January 27, 2001. The remaining store is expected to close by April 2001. Store closing costs of $115 million include asset impairments ($60 million), present value of future lease obligations ($45 million), and severance ($10 million). Store assets consist primarily of furniture and fixtures, and buildings and improvements. The Company recorded an asset impairment charge of $60 million, in accordance with SFAS No. 121. The impairment charge represents the excess of the carrying value of the assets over their estimated fair value. The store closing plan anticipated that the Company would remain liable for all future lease payments. The present value of the future lease obligations was calculated, net of assumed sublease income, using a discount rate of 6.7%. A charge of $45 million was recorded and a corresponding reserve was established based on an average of three years of lease payments or a negotiated termination fee. 25 Approximately 4,500 store employees were expected to be impacted by the scheduled store closings, with approximately 1,800 eligible for severance benefits, all of whom were terminated by January 27, 2001. A charge of $10 million was recorded for severance benefits to be paid to these employees and a corresponding reserve was established. Fourth quarter 2000. In the fourth quarter of 2000, the Company approved a plan to close 47 underperforming JCPenney stores. These stores generated sales of approximately $500 million and incurred operating losses of approximately $8 million in 1999. The majority of these stores are scheduled to close by the end of June 2001 and the remainder by year end 2001. Store closing costs of $91 million include asset impairments ($53 million), present value of future lease obligations ($32 million), and severance ($6 million). Store assets consist primarily of furniture and fixtures, and buildings and improvements. The Company recorded an asset impairment charge of $53 million, in accordance with SFAS No. 121. The impairment charge represented the excess of the carrying value of the assets over estimated fair value. The store closing plan anticipated that the Company would remain liable for all future lease payments. The present value of the future lease obligations was calculated, net of assumed sublease income, using a discount rate of 5.2%. A charge of $32 million was recorded and a corresponding reserve was established based on an average of three years of lease payments or a negotiated termination fee. Approximately 5,000 store employees are expected to be impacted by the scheduled store closings. A charge of $6 million was recorded for severance benefits to be paid to these employees and a corresponding reserve was established. Asset impairments. During the fourth quarter of 2000, the Company evaluated its investments in long-lived assets to be held and used in operations on an individual store basis, and determined that, based on historical operating results and updated operating projections, asset carrying values on thirteen stores were not supported by projected undiscounted cash flows. Accordingly, an impairment charge of $64 million was recorded to write-down the carrying value of store assets to their estimated fair value. Fair value was determined based on projected discounted cash flows using a discount rate of 11%. Additionally, a charge of $4 million was recorded for the permanent impairment of a non-strategic business investment. Contract cancellations. In the fourth quarter of 2000, the Company recorded a charge of $12 million for the remaining lease payments associated with the termination of a computer hardware contract. A corresponding reserve was established. Headcount reductions. In the first quarter of 2000, the Company approved a plan to eliminate 430 JCPenney Home Office and field positions. Substantially all of these employees had been terminated as of January 27, 2001. A charge of $11 million was recorded in the first quarter for severance benefits to be paid to these employees and a corresponding reserve was established. In the fourth quarter of 2000, the Company approved a plan to eliminate 300 JCPenney Home Office and field positions, and provide for certain senior management severance packages. A charge of $19 million was recorded in the fourth quarter for severance benefits for these employees. Adjustments to prior period reserves and other. A net credit of $12 million was recorded, comprised principally of the reversal of $9 million of the allowance established in connection with the sale of the proprietary credit card receivables due to lower closing costs than anticipated. Eckerd Drugstores Store closing costs ($111 million) First quarter 2000. In the first quarter of 2000, Eckerd approved a plan to close 289 underperforming drugstores that did not meet the Company's profit objectives. These stores generated sales of approximately $650 million and incurred operating losses of approximately $30 million in 1999. The number of stores was reduced to 279 in the second quarter as a result of restrictive lease terms on certain stores. These closings are over and above the normal course of store closures within a given year, which are typically relocations. 274 of these stores had been closed as of January 27, 2001, and the remainder will be closed by the end of April 2001. Store closing costs of $106 million include future lease obligations ($90 million), severance ($4 million), and other exit costs ($16 million), offset by a $4 million net gain on the disposal of fixed/intangible assets. The drugstore closing plan anticipated that Eckerd would remain liable for all future lease payments. The present value of the future lease obligations was calculated net of assumed sublease income using a discount rate of 7%. A charge of $90 million was recorded and a corresponding reserve was established. On average the remaining lease term for closed stores was approximately six years, and payments during the next five years are expected to be approximately $14 million per year. Approximately 600 drugstore employees were expected to be impacted by the scheduled store closings, 560 of whom were terminated by January 27, 2001. A charge of $4 million was recorded for severance benefits to be paid to these employees and a corresponding reserve was established. A charge of $16 million was recorded for other exit costs related to exiting the Puerto Rico market and store equipment leases and a corresponding reserve was established. Fourth quarter 2000. In the fourth quarter of 2000, Eckerd recorded a charge of $5 million for exit costs related to closing approximately 250 JCPenney catalog desks currently in Eckerd drugstores. Asset impairments. In the fourth quarter of 2000, Eckerd recorded an impairment charge of $23 million consisting of $14 million related to fixtures associated with relocated drugstores, and $9 million of capitalized costs for Eckerd's e- commerce web site, which is no longer a near-term focus. Contract cancellations. In the fourth quarter of 2000, Eckerd 26 terminated a contract with its primary third party information technology service provider. A charge of $72 million was recorded for asset impairments ($48 million) and termination costs ($24 million) for which a corresponding reserve was established. Headcount reductions. In the fourth quarter of 2000, Eckerd approved a plan to reduce headcount by 265 headquarter and field employees. About 100 employees had been terminated as of January 27, 2001. A charge of $5 million was recorded for severance benefits to be paid to these employees and a corresponding reserve was established. Gain on the sale of assets. The Company sold a note receivable that was associated with the divestiture of certain drugstore locations, pursuant to a Federal Trade Commission agreement. The sale of the note generated cash proceeds of $16 million, the note had a net book value of $3 million, resulting in a net gain of $13 million. Adjustments to prior period reserves and other. A credit of $16 million was recorded for adjustments related to reserves established in prior periods. In addition, a charge of $2 million was recorded for termination costs paid to developers for cancelled projects. 1999 Restructuring and Other Charges, Net Department Stores and Catalog Asset impairments. An asset impairment charge of $130 million was recorded for underperforming department stores in accordance with SFAS No. 121. The impairment charge represents the excess of the carrying values of the assets, including intangible assets, over the estimated fair values. The 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 were written down to fair value. These three stores were sold in the first quarter of 2000 for cash proceeds of $36 million, which approximated the Company's carrying value of the fixed assets at the sale date. Fair values for department stores were determined based on the established sales prices for the three stores that were sold, independent appraisals on three other stores, and discounted cash flows for the remaining stores. Gain on the sale of assets. In December 1999, the Company sold its private-label credit card accounts receivable, including its credit facilities, to GE Capital at a gain of $55 million (see Note 4 for further discussion of the sale). Adjustments to prior period reserves and other. 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 impaired 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. Eckerd Drugstores Asset impairments. An asset impairment charge of $110 million was recorded for 289 underperforming drugstores located throughout the Eckerd operating area, with concentrations in Pennsylvania, Virginia, New Jersey, and New York in accordance with SFAS No. 121. The impairment charge represents the excess of the carrying values of the assets over the estimated fair values. The impaired drugstores generally represent smaller, low-volume stores that were former independent units and chains acquired over the years that do not meet Eckerd performance standards and cannot be relocated. In the first quarter of 2000, a plan was approved to close these drugstores as discussed on page 26. Fair values were based on projected discounted cash flows. Adjustments to prior period reserves. A credit of $5 million was recorded for adjustments related to reserves recorded in prior periods. 1998 Restructuring and Other Charges, Net Department Stores and Catalog Adjustments to prior year reserves. A credit of $22 million was recorded for adjustments related to reserves recorded in prior years. $11 million related to the reversal of reserves established in 1997 for severance costs related to a reduction in force. The plan was completed in the fourth quarter of 1998 at less cost than originally estimated. Other adjustments to the reserves in 1998 included reversals of approximately $5 million due to reduced lease obligations stemming from subleased facilities, and $6 million for employment-related costs. 27 15 ROLLFORWARD OF RESTRUCTURING RESERVES The following tables present the activity and balances of the reserves established in connection with the 1996, 1997 and 2000 restructuring charges:
Balance Cash Other Balance Cash Other Balance ($ in millions) 1/31/98 Payments Adjustments 1/30/99 Payments Adjustments 1/29/00 - ------------------------------------------------------------------------------------------------------------------- 1996 and 1997 Charges Department stores and catalog Reduction in force $ 55 $ (44) $ (11) $ -- $ -- $ -- $ -- Future lease obligations 55 (24) (11) 20 (5) (7) 8 Eckerd drugstores Future lease obligations and severance 105 (15) 90 (7) (5) 78 Allowance for notes receivable/(1)/ 25 25 25 Headquarters severance 1 (1) -- -- - ------------------------------------------------------------------------------------------------------------------- Total all charges $ 241 $ (84) $ (22) $ 135 $ (12) $ (12) $ 111 ===================================================================================================================
(1) The allowance for notes receivable is included as a reduction of Other assets.
Balance Cash Other Balance ($ in millions) 1/29/00 Additions Payments Adjustments 1/27/01 - ------------------------------------------------------------------------------------------------------------------- 1996 and 1997 Charges Department store and catalog Future lease obligations 8 -- (3) (1) 4 Eckerd drugstores Future lease obligations and other 78 -- (7) (3) 68 Allowance for notes receivable 25 -- -- (25) -- - ------------------------------------------------------------------------------------------------------------------- Total 1996 and 1997 charges $ 111 $ -- $ (10) $ (29) $ 72 =================================================================================================================== 2000 charges Department store and catalog Future lease obligations $ -- $ 77 $ (8) $ (1) $ 68 Severance -- 16 (8) (2) 6 Contract cancellations -- 12 (1) -- 11 Headcount reductions -- 30 (23) 2 9 Eckerd drugstores Future lease obligations -- 90 (20) (7) 63 Severance 4 (3) (1) -- Other exit costs -- 16 (9) (5) 2 Contract cancellations -- 24 -- -- 24 Headcount reductions -- 5 (2) -- 3 - ------------------------------------------------------------------------------------------------------------------- Total 2000 charges $ -- $ 274 $ (74) $ (14) $ 186 =================================================================================================================== Total all charges $ 111 $ 274 $ (84) $ (43) $ 258 ===================================================================================================================
As discussed in Note 14, the Company recorded restructuring and other charges, net, totaling $488 million in the first and fourth quarters of 2000. Liabilities of $274 were established related to these charges. During 1996 and 1997, the Company established reserves for future costs associated with certain restructuring charges. These reserves were principally related to the present value of future lease obligations for both department stores and drugstores that were identified for closing. The above table provides a rollforward of the reserves that were established for each of these charges and the status of the reserves at January 27, 2001. Costs are being charged against the reserves as incurred. Reserves are reviewed for adequacy on a periodic basis and are adjusted as appropriate based on those reviews. Cash payments related to these reserves are expected to be approximately $90 million in 2001 and the remaining cash payments are expected to be made by the end of 2005. 28 16 TAXES Deferred tax assets and liabilities reflected in the Company's consolidated balance sheets as of January 27, 2001 and January 29, 2000, were measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The major components of deferred tax (assets)/liabilities as of January 27, 2001 and January 29, 2000, were as follows: Temporary Differences ($ in millions) 2000 1999 - ---------------------------------------------------------------------------- Depreciation and amortization $1,120 $1,104 Leases 245 318 Retirement benefits 86 47 Other, including other comprehensive (loss) (207) (130) State net operating losses (60) -- Valuation allowance on state net operating losses 60 -- ------------------- Total $1,244 $1,339 ====== ====== Management's assessment is that the character and nature of future taxable income may not allow the Company to realize certain tax benefits of state net operating losses within the prescribed carryforward period. Accordingly, a valuation allowance has been established for the amount of deferred tax assets generated by state net operating losses not expected to be realized. U.S. income and foreign withholding taxes were not provided on certain unremitted earnings of international affiliates which the Company considers to be permanent investments. The components of the provision for income taxes are as follows: Income Tax Expense ($ in millions) 2000 1999 1998 - ------------------------------------------------------------------------------ Current Federal and foreign $ (223) $ 133 $ 68 State and local -- (21) 31 -------------------------- Subtotal (223) 112 99 Deferred Federal and foreign (68) (2) 178 State and local (27) (6) -- -------------------------- Subtotal (95) (8) 178 -------------------------- Total $ (318) $ 104 $ 277 Effective tax rate (35.9%) 37.4% 38.7% ====== ===== ===== A reconciliation of the statutory federal income tax rate to the effective rate is as follows: Reconciliation of Tax Rates (percent of pre-tax income) 2000 1999 1998 - ------------------------------------------------------------------------------- Federal income tax at statutory rate (35.0) 35.0 35.0 State and local income taxes, less federal income tax effect (2.0) (6.5) 2.8 Tax effect of dividends on allocated ESOP shares (1.1) (5.8) (1.7) Non-deductible goodwill and other 2.2 14.7 2.6 -------------------------- Total (35.9) 37.4 38.7 ====== ===== ===== The decline in the effective tax rate for 1999 is related primarily to the effects of tax planning strategies that have significantly reduced state and local effective income tax rates. The current year benefit decreased due to limitations on state net operating losses. 17 SEGMENT REPORTING Reportable segments were determined based on similar economic characteristics, the nature of products and services and the method of distribution. Performance of the segments is evaluated based on segment operating profit. Segment operating profit is gross margin less SG&A expenses. Segment assets include goodwill and other intangibles; however segment operating profit does not include the amortization related to these assets. A general description of products and services offered in each segment follows: Department stores and catalog. The majority of consolidated retail sales, net (59%, 61% and 65% for fiscal 2000, 1999 and 1998, respectively) is generated from providing merchandise and services to consumers through department stores, catalog and the Company's internet web site, JCPenney.com. Department stores, catalog and the internet generally serve the same customer, have virtually the same mix of merchandise, and the majority of catalog sales are completed in department stores. In addition, department stores accept returns from sales initiated in department stores, catalog and via the internet. JCPenney department stores, which are located principally in shopping malls, sell family apparel, jewelry, shoes, accessories and home furnishings. The Company operates approximately 1,100 department stores in all 50 states, Puerto Rico and Mexico as well as 49 Renner department stores in Brazil. Sales outside the United States were not significant. Eckerd drugstores. Through its indirect wholly-owned subsidiary, Eckerd, the Company operates a chain of approximately 2,600 drugstores located in the southwestern and southeastern Sunbelt states including the growing retirement destinations of Florida, Texas and the Carolinas as well as the heavily populated northeastern corridor of the country. Revenues for this segment represented 41%, 39% and 35% of consolidated retail sales, net, for fiscal 2000, 1999 and 1998, respectively. Other unallocated. Other unallocated includes Corporate unallocated expenses and real estate investment activities. 29
Segment Reporting Dept. Stores & Eckerd Other Total ($ in millions) Catalog Drugstores Unallocated Company - ------------------------------------------------------------------------------------------------------------------------ 2000 Retail sales, net $18,758 $13,088 $ -- $31,846 -------------------------------------------------- Segment operating profit 254 (76) -- 178 Net interest expense (427) (427) Other unallocated and acquisition amortization (149) (149) Restructuring and other charges, net (488) (488) ---------- Pretax loss from continuing operations (886) ---------- Total assets 9,659 6,967 3,116/(1)/ 19,742 Capital expenditures 398 301 -- 699 Depreciation and amortization expense 360 213 122 695 - ------------------------------------------------------------------------------------------------------------------------ 1999 Retail sales, net $19,316 $12,427 $ -- $31,743 -------------------------------------------------- Segment operating profit 670 183 853 Net interest expense and credit operations (294) (294) Other unallocated and acquisition amortization (112) (112) Restructuring and other charges, net (169) (169) ---------- Pretax income from continuing operations 278 ---------- Total assets 10,921 7,053 2,934/(1)/ 20,908 Capital expenditures 344 325 -- 669 Depreciation and amortization expense 386 193 125 704 - ------------------------------------------------------------------------------------------------------------------------ 1998 Retail sales, net $19,436 $10,325 $ -- $29,761 -------------------------------------------------- Segment operating profit 920 254 1,174 Net interest expense and credit operations (387) (387) Other unallocated and acquisition amortization (94) (94) Restructuring and other charges, net 22 22 ---------- Pretax income from continuing operations 715 ---------- Total assets 14,396 6,361 2,848/(1)/ 23,605 Capital expenditures 460 283 -- 743 Depreciation and amortization expense 380 139 112 631 - ------------------------------------------------------------------------------------------------------------------------
(1) Includes assets of discontinued operations of $3,027, $2,847 and $2,737 for 2000, 1999 and 1998, respectively. 30 Quarterly Data (unaudited) J. C. Penney Company, Inc. and Subsidiaries
First Second Third Fourth --------------------------------------------------------------------------- ($ in millions, except per share data) 2000 1999 2000 1999 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Retail sales, net $ 7,528 $ 7,339 $ 7,207 $ 7,104 $ 7,538 $ 7,639 $ 9,573 $ 9,661 LIFO gross margin 2,224 2,302 2,105 2,104 2,169 2,416 2,317 2,636 (Loss)/income from continuing operations (156) 131 (19) (1) (70) 97 (323) (53) (Loss)/income from continuing operations per common share, diluted/(1)/ (0.63) 0.48 (0.10) (0.04) (0.30) 0.34 (1.26) (0.24) Dividend per common share 0.2875 0.545 0.2875 0.545 0.125 0.545 0.125 0.2875 Price range High 19.75 48.38 19.69 54.44 18.25 44.88 13.38 27.50 Low 12.88 35.38 14.00 43.75 8.69 25.31 8.63 17.69 Close 13.88 45.63 16.58 43.75 10.63 25.38 12.81 18.31 - -------------------------------------------------------------------------------------------------------------------
All quarterly data has been restated for discontinued operations. (1) Calculation excludes the effects of the potential conversion of outstanding preferred shares into common shares, and related dividends for all periods, because their inclusion would have an anti-dilutive effect on EPS. Five Year Financial Summary (unaudited) J. C. Penney Company, Inc. and Subsidiaries
(In millions, except per share data) 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Results for the year Retail sales, net $ 31,846 $ 31,743 $ 29,761 $ 29,796 $ 22,804 Percent increase/(decrease) 0.3% 6.7% (0.1)% 30.7% 8.2% (Loss)/income from continuing operations (568) 174 438 413 440 Return on beginning stockholders' equity - continuing operations (7.9)% 2.5% 6.0% 7.0%/(2)/ 7.6% Per common share (Loss)/income from continuing operations (2.29)/(1)/ 0.54/(1)/ 1.58/(1)/ 1.49/(1)/ 1.75 Dividends 0.825 1.92 2.18 2.14 2.08 Stockholders' equity 23.76 26.17 26.74 27.31 24.71 Financial position Capital expenditures 699 669 743 803 783 Total assets 19,742 20,908 23,605 23,405 22,013 Long-term debt 5,448 5,844 7,143 6,986 4,565 Stockholders' equity 6,259 7,228 7,102 7,290 5,885 Other Common shares outstanding at end of year 263 261 250 251 224 Weighted average common shares Basic 262 259 253 247 226 Full dilution 276 275 271 268 248 Number of employees at end of year (in thousands) 267 287 267 259 251 - -------------------------------------------------------------------------------------------------------------------
(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. 31 Five Year Operations Summary (unaudited) J. C. Penney Company, Inc. and Subsidiaries
2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Department stores Number of stores - JCPenney department stores Beginning of year 1,143 1,148 1,203 1,228 1,238 Openings 10 14 12 34 36 Closings (42) (19) (67) (59) (46) ------------------------------------------------------------ End of year 1,111 1,143 1,148 1,203 1,228 Renner department stores 49 35 21 -- -- ------------------------------------------------------------ Total department stores 1,160 1,178 1,169 1,203 1,228 Gross selling space (square feet in millions) 114.1 116.4 116.0 118.4 117.2 Sales ($ in millions) $ 14,585 $ 15,026 $ 15,226 $ 15,904 $ 15,568 Sales including catalog desks (in millions) 17,451 18,063 18,436 19,143 18,699 Sales per gross square foot 153 155 156 157 158 Catalog Number of catalog units Department stores 1,108 1,142 1,139 1,199 1,226 Freestanding sales centers and other 508 489 512 554 569 Drugstores 92 430 139 110 107 ------------------------------------------------------------ Total 1,708 2,061 1,790 1,863 1,902 Sales ($ in millions) $ 4,173 $ 4,290 $ 4,210 $ 4,229 $ 4,076 ------------------------------------------------------------ Eckerd drugstores Number of stores Beginning of year 2,898 2,756 2,778 2,699 645 Openings/(1)/ 174 266 220 199 47 Acquisitions 6 163 36 200 2,020 Closings/(1)/ (438) (287) (278) (320) (13) ------------------------------------------------------------ End of year 2,640 2,898 2,756 2,778 2,699 Gross selling space (square feet in millions) 27.0 29.2 27.6 27.4 26.4 Sales ($ in millions) $ 13,088 $ 12,427 $ 10,325 $ 9,663 $ 3,160 Sales per gross square foot 444 395 350 314 261 - -------------------------------------------------------------------------------------------------------------------
(1) Includes relocations of 136, 208, 175 and 127 drugstores in 2000, 1999, 1998 and 1997, respectively. Supplemental Data (unaudited) 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 private-label and third-party credit cards for department stores and catalog:
2000 1999 1998 ----------------------------------------------------------------------------------------- % of % of % of Eligible Eligible Eligible ($ in billions) Sales Sales Sales Sales Sales Sales - ------------------------------------------------------------------------------------------------------------------- Private label card $ 6.9 37.5% $ 7.4 37.9% $ 7.6 39.4% Third-party credit cards 5.3 28.9% 5.2 27.6% 5.0 26.1% ----------------------------------------------------------------------------------------- Total $12.2 66.4% $12.6 65.5% $12.6 65.5% ======================= ===== ==== ===== ====
EBITDA. Earnings before interest, taxes, depreciation and amortization (EBITDA) is a measure of cash flow generated and is provided as an alternative assessment of operating performance. It is not intended to be a substitute for GAAP measurements. The following calculation of EBITDA includes segment operating profit before depreciation and amortization and non-comparable items, and includes credit operating results in 1999 and 1998. For a discussion of the effects of non-comparable items, see page 8.
Dept. Stores & Eckerd Total ($ in millions) Catalog Drugstores Segments - ----------------------------------------------------------------------------------------------------------------- 2000 Retail sales, net $18,758 $13,088 $31,846 Segment operating profit 254 (76) 178 Non-comparable items 92 116 208 Depreciation and amortization 360 213 573 ----------------------------------------- EBITDA $ 706 $ 253 $ 959 % of retail sales, net 3.8% 1.9% 3.0% ----------------------------------------- 1999 Retail sales, net $19,316 $12,427 $31,743 Segment operating profit 670 183 853 Non-comparable items 20 119 139 Depreciation and amortization 386 193 579 Credit operating results 313 -- 313 ----------------------------------------- EBITDA $ 1,389 $ 495 $1,884 % of retail sales, net 7.2% 4.0% 5.9% ----------------------------------------- 1998 Retail sales, net $19,436 $10,325 $29,761 Segment operating profit 920 254 1,174 Non-comparable items -- 114 114 Depreciation and amortization 380 139 519 Credit operating results 224 -- 224 ----------------------------------------- EBITDA $ 1,524 $ 507 $ 2,031 % of retail sales, net 7.8% 4.9% 6.8% ================================================================================================================
33 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. Debt to capital ($ in millions) 2000 1999 1998 - -------------------------------------------------------------------------- Short-term debt, net of cash investments $ (935) $(1,092)/(1)/ $ 1,671 Long-term debt, including current maturities 5,698 6,469 7,581 ------------------------------------ 4,763 5,377 9,252 Off-balance-sheet debt: Present value of operating leases 3,469 3,293 2,715 Securitizations of receivables, net -- -- 146 ------------------------------------ Total debt 8,232 8,670 12,113 Consolidated equity 6,259 7,228 7,102 ------------------------------------ Total capital $14,491 $15,898 $19,215 ------------------------------------ Percent of total debt to capital 56.8% 54.5% 63.0%/(2)/ ======= ======= ======= (1) Includes asset-backed certificates of $267 million. (2) Upon completion of the Genovese acquisition, the Company's debt to capital ratio decreased to 62.3%. The Company's debt to capital percentage increased in 2000 due to the decline in consolidated equity as a result of the net loss recorded for the year. The Company's debt to capital percentage improved in 1999 primarily as a result of the sale of the Company's private label credit card accounts receivable. The Company expects the percentage to improve over the next several years. Credit ratings. As of March 22, 2001, ratings were as follows: Long-term Commercial Debt Paper ======================================================================== Moody's Investors Service Ba2 Not-Prime Standard & Poor's Corporation BBB- A3 Fitch Investors Service, Inc.(1) BBB- F3 ======================================================================== (1) Under review. 34 EX-21 9 dex21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT ------------------------------ Set forth below is a list of certain subsidiaries of the Company at April 1, 2001. 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) 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 dex23.txt INDEPENDENT AUDITOR'S CONSENT 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, 333-45536) and Form S-3 (No. 333-57019) of J. C. Penney Company, Inc. of our reports dated February 22, 2001, relating to the consolidated balance sheets of J. C. Penney Company, Inc. and subsidiaries as of January 27, 2001 and January 29, 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows and the financial statement schedule for each of the years in the three-year period ended January 27, 2001, 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 27, 2001. /s/ KPMG LLP Dallas, Texas April 24, 2001 EX-24 11 dex24.txt POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS THAT 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"), (i) under the provisions of the Securities Act of 1933, as amended, a Registration Statement on Form S-8 for the registration of shares of Common Stock of 50c par value of the Company, including the associated rights to purchase shares of Series A Junior Participating Preferred Stock, without par value of the Company for issuance pursuant to the J. C. Penney Company, Inc. 2001 Equity Compensation Plan, subject to stockholder approval of such plan at the Company's 2001 Annual Meeting; and (ii) 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 27, 2001 ("Annual Report"), hereby constitutes and appoints W. J. Alcorn, C. R. Lotter, and R. B. Cavanaugh, 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 (x) said Registration Statement, which is about to be filed, and any and all subsequent amendments to said Registration Statement (including, without limitation, any and all post- effective amendments thereto), and (y) said Annual Report, which is about to be filed, and any and all subsequent amendments to said Annual Report, and to file said Registration Statement and Annual Report so signed, and any and all subsequent amendments thereto (including, without limitation, any and all post- effective amendments thereto) so signed, with all exhibits thereto, and any and all documents in connection therewith, and to appear before the Commission in connection with any matter relating to said Registration Statement and 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 23rd day of March, 2001. /s/ A. I. Questrom /s/ R. B. Cavanaugh - ----------------------------- ----------------------------- A. I. Questrom R. B. Cavanaugh 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 /s/ M. A. Burns - ----------------------------- ----------------------------- W. J. Alcorn M. A. Burns Vice President and Controller Director (principal accounting officer) /s/ T. J. Engibous /s/ K. B. Foster - ----------------------------- ----------------------------- T. J. Engibous K. B. Foster Director Director /s/ V. E. Jordan, Jr. /s/ J. C. Pfeiffer - ----------------------------- ----------------------------- V. E. Jordan, Jr. J. C. Pfeiffer Director Director /s/ A. W. Richards /s/ Francisco Sanchez-Loaeza - ----------------------------- ----------------------------- A. W. Richards Francisco Sanchez-Loaeza Director Director /s/ C. S. Sanford, Jr. /s/ R. G. Turner - ----------------------------- ----------------------------- C. S. Sanford, Jr. R. G. Turner Director Director EX-99.B 12 dex99b.txt EXCERPT FROM JC PENNEY FUNDING ANNUAL REPORT EXHIBIT 99(b)
===================================================================================================== J. C. PENNEY FUNDING CORPORATION 2000 ANNUAL REPORT Financial Highlights ($ in millions) For the Year 2000 1999 1998 ------------------------ Net income............................................................... $ 5 $ 46 $ 35 Fixed charges - times earned............................................. 1.52 1.52 1.52 Commercial paper and Line of Credit Debt Volume................................................................ $1,801 $17,165 $11,610 Peak outstanding...................................................... $ 842 $ 3,582 $ 3,117 Average outstanding................................................... $ 193 $ 2,475 $ 1,938 At Year End Loans to JCPenney........................................................ $1,240 $ 1,588 $ 3,129 Short Term Debt.......................................................... $ 0 $ 330 $ 1,924 Equity of JCPenney....................................................... $1,238 $ 1,233 $ 1,187
Table of Contents Financial Highlights............................................................................. 2 Management's Discussion and Analysis of Financial Condition and Results of Operations............ 3 Statements of Income............................................................................. 4 Statements of Reinvested Earnings................................................................ 4 Balance Sheets................................................................................... 5 Statements of Cash Flows......................................................................... 6 Independent Auditors' Report..................................................................... 7 Notes to Financial Statements.................................................................... 7 Five Year Financial Summary...................................................................... 8 Quarterly Data................................................................................... 9 Commercial Paper Sales Policies.................................................................. 10 Directors and Officers........................................................................... 11
2 Management's Discussion and Analysis of 2000 Annual Report Financial Condition and Results of Operations J. C. Penney Funding Corporation ("Funding") is a wholly-owned 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. To assist in financing the operations of JCPenney, Funding from time to time 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 "A3" by Standard & Poor's Corporation, "Not-Prime" by Moody's Investors Service, and "F3" by Fitch Investors Service, Inc. as of March 22, 2001. 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 $5 million in 2000 as compared with $46 million in 1999 and $35 million in 1998. The decrease in 2000 is attributed to lower borrowing levels, and the increase in 1999 is attributed to higher borrowing levels. Interest expense was $13 million in 2000 compared with $137 million in 1999 and $106 million in 1998. Interest earned from JCPenney was $20 million in 2000 compared to $208 million in 1999 and $160 million in 1998. Commercial paper borrowings averaged $193 million in 2000 compared to $2,475 million in 1999 and $1,938 million in 1998. The average interest rate on commercial paper was 6.7 per cent for fiscal 2000 and 5.5% for both 1999 and 1998. Funding did not have any short-term debt outstanding as of January 27, 2001, a decrease of $330 million from the prior year end. At year end 2000, the balance of the Loan to JCPenney was $1,240 million as compared with $1,588 million at the end of the prior year. On December 6, 1999 JCPenney sold 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. On March 7, 2001, JCPenney signed a definitive agreement with a U.S. subsidiary of AEGON N.V. (AEGON) to sell the assets of its J.C. Penney Direct Marketing Services, Inc. (DMS) business, consisting of the stock of its insurance subsidiaries and related businesses. JCPenney will receive cash proceeds at closing of approximately $1.3 billion. The parties also established a 15-year strategic marketing alliance which is expected to generate up to $300 million to JCPenney on a present value basis. The sale of DMS and the credit card operation has created significant liquidity for JCPenney. Accordingly, the need for commercial paper financing in the future will be greatly reduced. Available to Funding and JCPenney is a committed bank credit line in the form of a $1.5 billion, five-year revolving credit facility, which expires November 21, 2002. No borrowings have been made under this facility. 3 Statements of Income J. C. Penney Funding Corporation ($ in millions) For the Year 2000 1999 1998 -------------------------- Interest income from JCPenney........... $ 20 $ 208 $ 160 Interest expense........................ 13 137 106 ------ ------ ------ Income before income taxes.............. 7 71 54 Income taxes......................... 2 25 19 ------ ------ ------ Net income.............................. $ 5 $ 46 $ 35 ====== ====== ====== Statements of Reinvested Earnings ($ in millions) 2000 1999 1998 ------ ------ ------ Balance at beginning of year............ $1,088 $1,042 $1,007 Net income.............................. 5 46 35 ------ ------ ------ Balance at end of year.................. $1,093 $1,088 $1,042 ====== ====== ====== See Notes to financial Statements on page 7 4 Balance Sheets J. C. Penney Funding Corporation (In millions except share data) 2000 1999 -------------- Assets Loans to JCPenney................................ $1,240 $1,588 ====== ====== Liabilities and Equity of JCPenney Current Liabilities Short term debt.................................. $ 0 $ 330 Due to JCPenney.................................. 2 25 ------ ------ Total Current Liabilities................... 2 355 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.............................. 1,093 1,088 ------ ------ Total Equity of JCPenney.................... 1,238 1,233 ------ ------ Total Liabilities and Equity of JCPenney.... $1,240 $1,588 ====== ====== See Notes to Financial Statements on page 7 5 Statements of Cash Flows J. C. Penney Funding Corporation ($ in millions) For the Year 2000 1999 1998 ------------------------- Operating Activities Net income....................................... $ 5 $ 46 $ 35 Decrease (Increase) in loans to JCPenney......... 348 1,541 (538) (Decrease) Increase in amount due to JCPenney.... (23) 7 (5) ----- ------- ----- $ 330 $ 1,594 $(508) Financing Activities (Decrease) Increase in short term debt........... $(330) $(1,594) $ 508 Supplemental Cash Flow Information Interest paid.................................... $ 13 $ 137 $ 106 Income taxes paid................................ $ 25 $ 19 $ 23 ___________ 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 27, 2001 and January 29, 2000, and the related statements of income, reinvested earnings, and cash flows for each of the years in the three-year period ended January 27, 2001. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of J. C. Penney Funding Corporation as of January 27, 2001 and January 29, 2000, and the results of its operations and its cash flows for each of the years in the three-year period ended January 27, 2001 in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Dallas, Texas February 22, 2001 ================================================================================ Notes to Financial Statements Nature of Operations - -------------------- J. C. Penney Funding Corporation ("Funding") is a wholly-owned 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 2000 ended January 27, 2001, fiscal 1999 ended January 29, 2000, and fiscal 1998 ended January 30, 1999. All three years contained 52 weeks. Commercial Paper Placement Funding places commercial paper solely through dealers. The average interest rate on commercial paper was 6.7% for fiscal 2000 and 5.5% for both 1999 and 1998. 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 statements 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 Facility - ------------------------------ Available to Funding and JCPenney is a committed bank credit line in the form of a $1.5 billion, five-year revolving credit facility, which expires November 21, 2002. No borrowings have been made under this facility. Fair Value of Financial Instruments - ----------------------------------- The fair value of short term debt (commercial paper) at January 27, 2001 and January 29, 2000 approximates the amount reflected on the balance sheets due to its short average maturity. The fair value of loans to JCPenney at January 27, 2001, and January 29, 2000 also approximates the amount reflected on the balance sheets because the loan is payable on demand and the interest charged on the loan balance is adjusted to reflect current market interest rates. 7
Five Year Financial Summary J. C. Penney Funding Corporation ($ in millions) At Year End 2000 1999 1998 1997 1996 ------------------------------------------- Capitalization Short term debt Commercial paper................... $ 0 $ 330 $ 1,924 $ 1,416 $ 2,049 Credit line advance................ 0 0 0 0 1,903 ------- ------- ------- ------- ------- Total short term debt............ 0 330 1,924 1,416 3,952 Equity of JCPenney.................... 1,238 1,233 1,187 1,152 1,109 ------- ------- ------- ------- ------- Total capitalization..................... $ 1,238 $ 1,563 $ 3,111 $ 2,568 $ 5,061 ======= ======= ======= ======= ======= Committed bank credit facilities......... $ 1,500 $ 3,000 $ 3,000 $ 3,000 $ 6,000 For the Year Income................................... $ 20 $ 208 $ 160 $ 193 $ 169 Expenses................................. $ 13 $ 137 $ 106 $ 127 $ 111 Net income............................... $ 5 $ 46 $ 35 $ 43 $ 38 Fixed charges - times earned............. 1.52 1.52 1.52 1.52 1.52 Peak short term debt..................... $ 842 $ 3,582 $ 3,117 $ 4,295 $ 4,010 Average debt............................. $ 193 $ 2,475 $ 1,938 $ 2,247 $ 2,041 Average interest rates................... 6.7% 5.5% 5.5% 5.6% 5.5%
____________ 8 Quarterly Data J. C. Penney Funding Corporation ($ in millions) (Unaudited)
First Second Third Fourth ---------------- ------------------ ------------------- ------------------ 2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Income....................... $ 5 47 34 - 47 33 11 63 46 4 51 47 Expenses..................... $ 3 31 22 - 31 22 7 41 30 3 34 32 Income before taxes.......... $ 2 16 12 - 16 11 4 22 16 1 17 15 Net income................... $ 1 10 8 - 10 7 3 15 10 1 11 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
_______________ 9 Commercial Paper Sales Policies J. C. Penney Funding Corporation JCPenney Funding issues commercial paper through dealer-placed commercial paper programs. JCPenney`s commercial paper sales policies are the same as those used by each respective dealer. For more information on those policies, contact Ms. Stephanie Gentile at Credit Suisse First Boston Corporation, 212-325-3358, Mr. Todd Nordstrom at J.P. Morgan Securities Inc., 212-834-5471, Mr. K. Carter Harris at Merrill Lynch Money Markets Inc., 212-449-0348, or Mr. Robert M. Bonafide at Morgan Stanley Dean Witter, 212-761-1872. RATINGS Ratings as of March 22, 2001 were as follows: Standard & Poor's Corporation A3 Moody's Investors Service Not-Prime Fitch Investors Service, Inc. (1) F3 (1) Rating under review. RATES Rates and information are available nationally through Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc., Merrill Lynch Money Markets Inc., or Morgan Stanley Dean Witter. ____________ 10 -----END PRIVACY-ENHANCED MESSAGE-----