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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 26, 2003 Commission file number 1-4947
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 September 3, 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 26 weeks ended
______________ _______________
Jul. 26, Jul. 27, Jul. 26, Jul. 27,
2003 2002 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 1,093 1,093
beginning of period _____ _____ _____ _____
Reinvested earnings at
end of period $1,093 $1,093 $1,093 $1,093
====== ====== ====== ======
2
Balance Sheets
(Dollars in millions) (Unaudited)
Jul. 26, Jul. 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)
26 weeks ended
_______________
Jul. 26, Jul. 27,
2003 2002
Operating Activities $ - $ -
Financing Activities - -
___ ___
Increase in cash - -
Cash at beginning of year - -
___ ___
Cash at end of second 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 Events
_________________
On August 15, 2003, JCPenney's bondholders exercised their option to redeem
approximately $117 million of $119 million 6.9% Debentures Due 2026. On the same
date, JCPenney retired $37.5 million of its 8.25% Debentures Due 2022 at par,
through the mandatory sinking fund payment of $12.5 million and available
optional sinking fund payments totaling $25 million. Also in August 2003,
JCPenney purchased approximately $12.8 million of the 8.25% Sinking Fund
Debentures Due 2022. These purchases, together with the $4.1 million purchases
in the second quarter of 2003, will be applied to unspecified future mandatory
sinking fund payments.
5
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 half 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 July 26, 2003, nor as of July
27, 2002.
JCPenney's financial condition remains strong with approximately $2.6 billion in
cash and short-term investments as of July 26, 2003, which represented
approximately 43% of the $5.8 billion of outstanding long-term debt, including
current maturities, and proceeds of approximately $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 July 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.
On June 16, 2003, JCPenney retired $25 million of its 9.75% Debentures Due 2021
at par through a mandatory sinking fund payment and an optional sinking fund
payment. During the quarter, JCPenney also purchased $4.1 million principal
amount of its 8.25% Sinking Fund Debentures Due 2022 for application to a future
mandatory sinking fund payment.
On August 15, 2003, JCPenney's bondholders exercised their option to redeem
approximately $117 million of $119 million 6.9% Debentures Due 2026. On the same
date, JCPenney retired $37.5 million of its 8.25% Sinking Fund Debentures Due
2022 at par, through a mandatory sinking fund payment of $12.5 million and
available optional sinking fund payments totaling $25 million. Also in August
2003, JCPenney purchased approximately $12.8 million of the 8.25% Sinking Fund
Debentures Due 2022. These purchases, together with the $4.1 million purchases
in the second quarter of 2003, will be applied to unspecified future mandatory
sinking fund payments.
During the first quarter, JCPenney completed two transactions that strengthened
its overall liquidity position. 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 at an effective rate of 8.125%
with J. C. Penney Company, Inc., JCPenney's parent corporation, as co-obligor.
Additional liquidity strength includes the available $1.5 billion credit
facility discussed in JCPenney Company, Inc.'s 2002 10-K and significant
unencumbered assets, primarily Eckerd Corporation's FIFO inventory, which
totaled $2,430 million at July 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 $227 million as of the end of the
second quarter of 2003, have been made under this credit facility. 6
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 J. C. Penney
Company and its subsidiaries' corporate credit, senior unsecured and secured
bank loan ratings to BB+ from BBB-. This change brought the S&P rating more in
line with the Moody's and Fitch ratings. This change has not impacted 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.
ITEM 4. Controls and Procedures
Based on their evaluation of Funding's disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934) as of the end of the period covered by this Quarterly Report on Form 10-Q,
Funding's principal executive officer and principal financial officer have
concluded that the design and operation of Funding's disclosure controls and
procedures are effective for the purpose of ensuring that material information
required to be in this Quarterly Report is made known to them by others on a
timely basis. There have not been any changes in Funding's internal control over
financial reporting that occurred during Funding's last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, Funding's
internal control over financial reporting.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
________
31.1 Certification of Michael P. Dastugue Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of William J. Alcorn Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Michael P. Dastugue Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of William J. Alcorn Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
___________________
None.
7
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: September ____, 2003
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Exhibit 31.1
CERTIFICATION
_____________
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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) [Intentionally omitted]
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: September ____, 2003.
/s/ Michael P. Dastugue
___________________________
Michael P. Dastugue
Chairman of the Board
J. C. Penney Funding Corporation
9
Exhibit 31.2
CERTIFICATION
_______________
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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) [Intentionally omitted]
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: September ____, 2003.
/s/ William J. Alcorn
___________________________
William J. Alcorn
Vice President and Controller
J. C. Penney Funding Corporation
10
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of J. C. Penney Funding Corporation (the
"Company") on Form 10-Q for the period ending July 26, 2003 (the "Report"), I,
Michael P. Dastugue, Chairman of the Board of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) the Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
DATED this _____ day of September 2003.
/s/ Michael P. Dastugue
___________________________
Michael P. Dastugue
Chairman of the Board
J. C. Penney Funding Corporation
11
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of J. C. Penney Funding Corporation (the
"Company") on Form 10-Q for the period ending July 26, 2003 (the "Report"), I,
William J. Alcorn, Vice President and Controller of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
DATED this _____ day of September 2003.
/s/ William J. Alcorn
____________________________
William J. Alcorn
Vice President and Controller
J. C. Penney Funding Corporation
12