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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 26, 2003 Commission file number 1-4947-1
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transitional period from ______________ to ________________
Commission File No. ______________
J. C. PENNEY FUNDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0101524
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6501 Legacy Drive, Plano, Texas 75024 - 3698
(Address of principal executive offices)
(Zip Code)
(972) 431-1000
(Registrant's telephone number, including area code)
---------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
500,000 shares of Common Stock of $100 par value, as of June 4, 2003.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1) (a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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PART I - FINANCIAL INFORMATION
ITEM 1. Unaudited Financial Statements
The following interim financial information of J. C. Penney Funding Corporation
("Funding"), a wholly owned subsidiary of J. C. Penney Corporation, Inc.
("JCPenney"), is unaudited; however, in the opinion of Funding, it includes all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation. The financial information should be read in conjunction with the
audited financial statements included in Funding's Annual Report on Form 10-K
for the 52 weeks ended January 25, 2003.
Statements of Income and Reinvested Earnings
(Dollars in millions) (Unaudited)
13 weeks ended
Apr. 26, Apr. 27,
2003 2002
------- -------
Interest earned from
JCPenney and affiliates $ - $ -
Interest expense - -
--- ---
Income before income taxes - -
Income taxes - -
--- ---
Net income - -
Reinvested earnings at 1,093 1,093
beginning of period ----- -----
Reinvested earnings at
end of period $1,093 $1,093
====== ======
2
Balance Sheets
(Dollars in millions) (Unaudited)
Apr. 26, Apr. 27, Jan.25,
2003 2002 2003
------- ------- -------
ASSETS
Loans to JCPenney and affiliates $1,238 $1,238 $1,238
LIABILITIES AND EQUITY HELD BY JCPENNEY
Liabilities $ - $ - $ -
Equity held by JCPenney:
Common stock (including contributed capital), par value
$100 per share:
Authorized, 750,000 shares
Issued and outstanding, 500,000 shares
$145 $145 $145
Reinvested earnings $1,093 $1,093 $1,093
------ ------ ------
Total equity held by JCPenney $1,238 $1,238 $1,238
------ ------ ------
Total liabilities and equity held by JCPenney $1,238 $1,238 $1,238
====== ====== ======
3
Consolidated Statements of Cash Flows
(Dollars in millions) (Unaudited)
13 weeks ended
Apr. 26, Apr. 27,
2003 2002
------- -------
Operating Activities $ - $ -
Financing Activities - -
---- ----
Increase in cash - -
Cash at beginning of year - -
---- ----
Cash at end of first quarter $ - $ -
==== ====
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Notes to the Unaudited Interim Financial Statements
1) Background
----------
Historically, Funding has provided short-term financing for JCPenney.
Principally, Funding issued commercial paper to finance JCPenney's working
capital needs. In 2001, JCPenney sold the assets of J. C. Penney Direct
Marketing Services, Inc. to an unrelated third party. The result of this
transaction coupled with JCPenney's other sources of liquidity eliminated the
need for Funding to issue commercial paper for short-term borrowing
requirements. Therefore, Funding has not produced any revenue or income. In
addition, with Funding's current credit ratings, it is assumed that Funding
would have little or no current access to commercial paper borrowing.
2) Subsequent Event
----------------
On May 29, 2003, Standard & Poor's downgraded JCPenney's corporate credit,
senior unsecured and secured bank loan ratings to BB+ from BBB-. This new rating
is more in line with the Moody's and Fitch ratings.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Funding derives earnings on loans to JCPenney under the terms of the Loan
Agreement, which provides for unsecured loans to be made by Funding to JCPenney.
Additionally, in order to maintain Funding's income at defined coverage ratios,
Funding's income is supplemented by charges to JCPenney. The income of Funding
is designed to cover Funding's fixed charges (interest expense) at a coverage
ratio mutually agreed upon by Funding and JCPenney. The earnings to fixed
charges coverage ratio has historically been at least one and one-half times.
When applicable, 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. No commercial paper has been
issued or outstanding during the first quarter of 2003. The commercial paper
program is rated "Not Prime" by Moody's Investors Service, Inc. and "B" by Fitch
Ratings. Standard & Poor's Rating Services does not rate the program.
Funding had no short-term debt outstanding as of April 26, 2003 nor as of April
27, 2002.
JCPenney's financial condition remains strong with approximately $2.6 billion in
cash and short-term investments as of April 26, 2003, which represents
approximately 43% of the total of the $5.8 billion of outstanding long-term debt
plus the proceeds of $250 million from the securitization of Eckerd managed care
receivables. Included in the total cash and short-term investment balance were
restricted short-term investment balances of $87 million as of April 26, 2003,
which are pledged as collateral for import letters of credit not included in the
bank credit facility and for a portion of casualty program liabilities.
JCPenney's liquidity position was further strengthened in February 2003 with the
completion of two financing transactions. First, on February 3, 2003, JCPenney
raised approximately $50 million by securitizing additional Eckerd managed care
receivables. Second, on February 28, 2003, JCPenney issued $600 million
principal amount of unsecured 8% Notes Due 2010 ("Notes") at an effective rate
of 8.125%. J. C. Penney Company, Inc. is a co-obligor on the Notes. Additional
liquidity strengths include the available $1.5 billion credit facility discussed
in J. C. Penney Company, Inc.'s 2002 Annual Report on Form 10-K and significant
unencumbered assets, primarily Eckerd inventory, which totaled $2,307 million at
April 26, 2003, that could be used to secure additional short-term funding, if
needed. No borrowings, other than the issuance of trade and stand-by letters of
credit, which totaled $200 million as of the end of the first quarter of 2003,
have been made under this credit facility.
For the remainder of 2003, JCPenney's management believes that cash flow
generated from operations, combined with the short-term investment position,
will be adequate to fund cash requirements for capital expenditures, working
capital and dividend payments and, therefore, no external funding will be
required. On May 29, 2003, Standard & Poor's (S&P) downgraded JCPenney's
corporate credit, senior unsecured and secured bank loan ratings to BB+ from
BBB-. This change brings the S&P rating more in line with the Moody's and Fitch
ratings. This change is not expected to impact JCPenney's liquidity or financial
position as the lower credit rating had already been incorporated into the
long-term financing strategy. JCPenney's management believes that JCPenney's
financial position will continue to provide the financial flexibility to support
its turnaround initiatives.
6
ITEM 4. Controls and Procedures
(a) Based on their evaluation of Funding's disclosure controls and
procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange
Act of 1934 (the "Exchange Act")) as of a date within 90 days of the filing date
of this Quarterly Report on Form 10-Q, Funding's principal executive officer and
principal financial officer have concluded that Funding's disclosure controls
and procedures are effective for the purpose of ensuring that material
information required to be in this Quarterly Report on Form 10-Q is made known
to them by others on a timely basis.
(b) There were no significant changes in Funding's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their most recent evaluation.
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
--------
99(i)Certificate of Michael P. Dastugue Pursuant to Section 906
of the Sarbanes-Oxley Act
99(ii) Certificate of William J. Alcorn Pursuant to Section 906
of the Sarbanes-Oxley Act
(b) Reports on Form 8-K
--------------------
None.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
J. C. PENNEY FUNDING CORPORATION
By: /S/ W. J. Alcorn
-------------------------------
W. J. Alcorn
Vice President and Controller
(Principal Accounting Officer)
Date: June 10, 2003
8
CERTIFICATIONS
--------------
I, Michael P. Dastugue, Chairman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of J. C. Penney Funding
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: June 10, 2003.
/s/ Michael P. Dastugue
---------------------------
Michael P. Dastugue
Chairman of the Board
J. C. Penney Funding Corporation
9
CERTIFICATIONS
--------------
I, William J. Alcorn, Vice President and Controller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of J. C. Penney Funding
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 10, 2003.
/s/ William J. Alcorn
--------------------------
William J. Alcorn
Vice President and Controller
J. C. Penney Funding Corporation
10