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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 1-15274
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 COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 26-0037077
(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 X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
271,532,488 shares of Common Stock of 50 cents par value, as of June 4, 2003.
INDEX
Page
------
Part I Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations 1
Consolidated Balance Sheets 2
Consolidated Statements of Cash Flows 4
Notes to the Unaudited Interim Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 22
Part II Other Information
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature Page 24
Certifications 25
i
PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Financial Statements
J. C. Penney Company, Inc.
Consolidated Statements of Operations
(Unaudited)
($ in millions, except per share data)
13 weeks ended
-----------------------------
April 26, April 27,
2003 2002
-------------- -----------
Retail sales, net $ 7,493 $ 7,728
Costs and expenses
Cost of goods sold 5,167 5,375
Selling, general and administrative expenses 2,125 2,096
Other unallocated (7) 10
Net interest expense 104 102
Acquisition amortization 10 10
-------------- -----------
Total costs and expenses 7,399 7,593
-------------- -----------
Income before income taxes 94 135
Income taxes 33 49
-------------- -----------
Net income $ 61 $ 86
Less: preferred stock dividends 7 7
-------------- -----------
Net income applicable to common
stockholders $ 54 $ 79
============== ===========
Earnings per share:
Basic $0.20 $0.30
Diluted $0.20 $0.29
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
-1-
J. C. Penney Company, Inc.
Consolidated Balance Sheets
(Unaudited)
($ in millions) Apr. 26, Apr. 27, Jan. 25,
2003 2002 2003
-------------- ------------ ---------------
Assets
Current assets
Cash and short-term investments
(including restricted balances of $87,
$134 and $86) $ 2,642 $ 2,274 $ 2,474
Receivables (net of bad debt reserves
of $17, $25 and $14) 718 785 705
Merchandise inventory (net of LIFO
reserves of $410, $393 and $403) 5,086 4,902 4,945
Prepaid expenses 268 229 229
-------------- ------------ ---------------
Total current assets 8,714 8,190 8,353
Property and equipment (net of accumulated
depreciation of $3,366, $3,464 and $3,253) 4,820 4,921 4,901
Goodwill 2,306 2,320 2,304
Intangible assets (net of accumulated
amortization of $338, $273 and $322) 479 516 494
Other assets 1,791 1,521 1,815
-------------- ------------ ---------------
Total Assets $ 18,110 $ 17,468 $ 17,867
============== ============ ===============
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
-2-
J. C. Penney Company, Inc.
Consolidated Balance Sheets
(Unaudited)
($ in millions except per share data) Apr. 26, Apr. 27, Jan. 25,
2003 2002 2003
-------------- ------------ --------------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $3,304 $3,437 $3,791
Short-term debt 23 30 13
Current maturities of long-term debt 291 233 288
Deferred taxes 113 96 80
-------------- ------------ --------------
Total current liabilities 3,731 3,796 4,172
Long-term debt 5,534 5,162 4,927
Deferred taxes 1,390 1,244 1,391
Other liabilities 993 1,021 1,007
-------------- ------------ --------------
Total Liabilities 11,648 11,223 11,497
Stockholders' equity
Capital stock
Preferred stock, no par value and stated value
of $600 per share: authorized, 25 million shares;
issued and outstanding, 0.5, 0.6 and 0.6 million
shares of Series B ESOP convertible preferred 325 353 333
Common stock, par value $0.50 per share:
authorized, 1,250 million shares; issued and
outstanding, 271, 267 and 269 million shares 3,479 3,398 3,423
-------------- ------------ --------------
Total capital stock 3,804 3,751 3,756
-------------- ------------ --------------
Reinvested earnings at beginning of year 2,817 2,573 2,573
Net income 61 86 405
Dividends declared (34) (33) (161)
-------------- ------------ --------------
Reinvested earnings at end of period 2,844 2,626 2,817
Accumulated other comprehensive (loss) (186) (132) (203)
-------------- ------------ --------------
Total Stockholders' Equity 6,462 6,245 6,370
-------------- ------------ --------------
Total Liabilities and Stockholders' Equity $18,110 $ 17,468 $ 17,867
============== ============ ==============
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
-3-
J. C. Penney Company, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
($ in millions) 13 weeks ended
---------------------------------------
Apr. 26, Apr. 27,
2003 2002
----------------- ----------------
Cash flows from operating activities:
Net income $ 61 $ 86
Adjustments to reconcile net income to net cash
from operating activities:
Asset impairments, PVOL and other unit closing costs 2 21
Depreciation and amortization, including intangible assets 180 163
Net gains on sale of assets (21) (10)
Benefit plans expense 26 -
Vesting of restricted stock awards (1) 1
Deferred taxes 32 10
Change in cash from:
Receivables (35) (87)
Sale of drugstore receivables 50 -
Inventory (141) 28
Prepaid expenses and other assets (7) (21)
Accounts payable (48) 275
Current income taxes payable (27) 5
Other liabilities (325) (197)
----------------- ----------------
Net cash from operating activities (254) 274
----------------- ----------------
Cash flows from investing activities:
Capital expenditures (163) (126)
Proceeds from sale of assets 23 12
----------------- ----------------
Net cash from investing activities (140) (114)
----------------- ----------------
Cash flows from financing activities:
Change in short-term debt 10 15
Proceeds from equipment financing 9 -
Net proceeds from issuance of long-term debt 586 -
Payment of long-term debt, including capital leases (8) (706)
Common stock issued, net 7 8
Preferred stock redeemed (8) (10)
Dividends paid (34) (33)
----------------- ----------------
Net cash from financing activities 562 (726)
----------------- ----------------
Net increase/(decrease) in cash and short-term investments 168 (566)
Cash and short-term investments at beginning of year 2,474 2,840
----------------- ----------------
Cash and short-term investments at end of period $2,642 $2,274
================= ================
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
-4-
Notes to the Unaudited Interim Consolidated Financial Statements
1) Summary of Significant Accounting Policies
------------------------------------------
A description of significant accounting policies is included in the Company's
Annual Report on Form 10-K for the fiscal year ended January 25, 2003 (the "2002
10-K"). The accompanying unaudited Interim Consolidated Financial Statements
should be read in conjunction with the Consolidated Financial Statements and
notes thereto in the 2002 10-K.
The accompanying Interim Consolidated Financial Statements are unaudited but, in
the opinion of management, include all material adjustments necessary for a fair
presentation. Because of the seasonal nature of the retail business, operating
results for interim periods are not necessarily indicative of the results that
may be expected for the full year. The January 25, 2003 financial information
has been derived from the audited Consolidated Financial Statements, with
related footnotes, included in the 2002 10-K.
Certain reclassifications have been made to prior year amounts to conform to the
current period presentation.
Holding Company
- ---------------
Effective January 27, 2002, J. C. Penney Company, Inc. changed its corporate
structure to a holding company format. As part of this structure, J. C. Penney
Company, Inc. changed its name to J. C. Penney Corporation, Inc. (JCP) and
became a wholly owned subsidiary of a newly formed affiliated holding company
(Holding Company). The Holding Company assumed the name J. C. Penney Company,
Inc. The Holding Company has no direct subsidiaries other than JCP, nor does it
have any independent assets or operations. All outstanding shares of common and
preferred stock were automatically converted into the identical number and type
of shares in the Holding Company. Stockholders' ownership interests in the
business did not change as a result of the new structure. Shares of the Company
remain publicly traded under the same symbol (JCP) on the New York Stock
Exchange. The Holding Company is a co-obligor (or guarantor, as appropriate)
regarding the payment of principal and interest on JCP's outstanding debt
securities. The guarantee by the Holding Company of certain of JCP's outstanding
debt is full and unconditional. The Holding Company and its consolidated
subsidiaries, including JCP, are collectively referred to in this quarterly
report as "Company" or "JCPenney," unless indicated otherwise.
Stock-Based Compensation
- ------------------------
The Company has a stock-based compensation plan that provides for grants to
associates of stock awards, stock appreciation rights or options to purchase the
Company's common stock. The Company accounts for the plan under the recognition
and measurement principles of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. No
stock-based employee compensation cost is reflected in the consolidated
statement of operations for stock options, as all options granted under the plan
had an exercise price equal to the market value of the underlying common stock
on the date of grant. Compensation expense for fixed stock awards with pro rata
vesting is recorded on a straight-line basis over the vesting period, which
typically ranges from one to five years.
-5-
The following table illustrates the effect on net income and earnings per share
as if the Company had applied the fair value recognition provisions of Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," to stock options.
$ in millions, except EPS 13 weeks ended
-------------------
Apr. 26, Apr. 27,
2003 2002
--------------- -------------
Net income, as reported $ 61 $ 86
Add: Stock-based employee compensation
expense included in reported net income, net of
related tax effects 1 1
Deduct: Total stock-based employee compensation
expense determined under fair value
method for all stock options, net of related
tax effects (6) (6)
--------------- -------------
Pro forma net income $ 56 $ 81
=============== =============
Earnings per share:
Basic--as reported $0.20 $0.30
Basic--pro forma $0.18 $0.28
Diluted--as reported $0.20 $0.29
Diluted--pro forma $0.18 $0.27
Effect of New Accounting Standards
- ----------------------------------
The Company adopted Emerging Issues Task Force (EITF) Issue No. 02-16,
"Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor," in the first quarter of 2003. This pronouncement
requires that vendor allowances be treated as a reduction of inventory costs
unless specifically identified as a reimbursement of costs to advertise the
vendor's products or payment for other services. In addition, any vendor
allowances received in excess of costs incurred should be treated as a reduction
of inventory costs. The adoption of this pronouncement did not have a material
impact on Eckerd segment results, but did impact a small portion of vendor
allowances for Department Stores and Catalog and resulted in a reduction in the
segment's operating profit of $5 million and net income of approximately $3
million for the first quarter of 2003.
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Guarantees of Indebtedness of Others."
Disclosures related to this interpretation were effective for year-end 2002
reporting, and the accounting requirements are effective for guarantees entered
into or modified after December 31, 2002, and require all guarantees and
indemnifications within its scope to be recorded at fair value as liabilities,
and the maximum possible loss to the Company under these guarantees and
indemnifications to be disclosed. Current period disclosures related to
guarantees are included in Note 10. Adoption of FIN 45 did not have a material
impact on the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation Costs - Transition and Disclosure." This statement amended SFAS No.
123 and provides alternative methods of transition for an entity that
voluntarily changes to the fair value-based method of accounting for stock-based
compensation. It also requires additional disclosures about the effects on
reported net income of an entity's accounting policy with respect to stock-based
employee compensation. As discussed previously, the Company accounts for
stock-based compensation in accordance with APB 25 and adopted the
disclosure-only alternative of SFAS No. 123. The Company adopted the disclosure
provisions of SFAS No. 148 effective for fiscal 2002.
-6-
On January 17, 2003, FIN 46, "Consolidation of Variable Interest Entities, an
interpretation of ARB 51," was issued. The primary objective of FIN 46 is to
provide guidance on the identification and consolidation of variable interest
entities, or VIEs, which are entities for which control is achieved through
means other than through voting rights. The provisions of FIN 46 are required to
be applied to VIEs created or in which the Company obtains an interest after
January 31, 2003. For VIE's in which the Company holds a variable interest that
it acquired before February 1, 2003, the provisions of FIN 46 are effective for
the third quarter of 2003. The Company does not expect the adoption of FIN 46 in
the third quarter of 2003 to have a material impact on its financial position,
results of operations or cash flows.
2) Earnings per Share
-------------------
Basic earnings per share (EPS) is computed by dividing income applicable to
common stockholders by the average number of common shares outstanding for the
period. Except when the effect would be anti-dilutive, the diluted EPS
calculation includes the impact of restricted stock awards and shares that could
be issued under outstanding stock options as well as common shares that would
result from the conversion of convertible debentures and convertible preferred
stock. In addition, the related interest on convertible debentures (net of tax)
and preferred stock dividends (net of tax) are added back to income, since these
would not be paid if the debentures or preferred stock were converted to common
stock.
The computation of basic and diluted earnings per share follows:
(In millions, except per share data) 13 weeks ended
------------------------------
Apr. 26, Apr. 27,
2003 2002
-------------- -------------
Earnings:
- ---------
Net income $ 61 $ 86
Less: preferred dividends, net of tax 7 7
-------------- --------------
Income applicable to
common stockholders 54 79
Effect of dilutive securities:
Interest on 5% convertible debt, net of tax - 6
-------------- -------------
Income used for diluted EPS $ 54 $ 85
============== =============
Shares:
- -------
Average shares outstanding (basic shares) 270 266
Effect of dilutive securities:
Stock options and restricted stock units
3 3
Assumed conversion of 5% debentures - 23
-------------- --------------
Average shares used for diluted EPS 273 292
============== =============
Earnings per share:
- -------------------
Basic $0.20 $0.30
Diluted $0.20 $0.29
The following potential shares of common stock and their effects on income were
excluded from the diluted EPS calculations because their effect would be
anti-dilutive:
o Options to purchase 16.4 million and 9.0 million shares of common stock at
exercise prices ranging from $19 to $71 and $22 to $71 were excluded for
the first quarters of 2003 and 2002, respectively, because their exercise
prices were greater than the average market prices.
o The $650 million aggregate principal amount of notes convertible into 22.8
million common shares were excluded for first quarter 2003.
-7-
o Preferred stock convertible into 10.8 million and 11.8 million common
shares was issued and outstanding at April 26, 2003 and April 27, 2002,
respectively, and was excluded from both periods shown.
3) Cash and Restricted Short-Term Investment Balances
---------------------------------------------------
Restricted short-term investment balances of $87 million, $134 million and $86
million as of April 26, 2003, April 27, 2002 and January 25, 2003, respectively,
were included in the total cash and short-term investment balances of $2,642
million, $2,274 million and $2,474 million for the same periods. Restricted
balances are pledged as collateral for import letters of credit not included in
the bank credit facility and for a portion of casualty insurance program
liabilities. Cash and short-term investments on the consolidated balance sheet
include $34 million, $7 million and $6 million of cash as of April 26, 2003,
April 27, 2002 and January 25, 2003, respectively.
4) Supplemental Cash Flow Information
----------------------------------
($ in millions) 13 weeks ended
----------------------------
Apr. 26, Apr. 27,
2003 2002
------------- ------------
Interest paid $150 $ 166
Interest received
7 12
Income taxes paid 33 33
Non-cash transactions:
- ---------------------
o The Company issued 2.4 million shares of common stock in February 2003 and
2.9 million shares of common stock in March 2002 to fund savings plan
contributions of $47 million for 2002 and $58 million for 2001.
o The Company acquired $6 million of drugstore equipment utilizing capital
leases in the first quarter of 2003.
5) Eckerd Managed Care Receivables Securitization
-----------------------------------------------
As disclosed in the 2002 10-K, JCP, through Eckerd, has received a total of
approximately $250 million from the securitization of certain Eckerd managed
care receivables. Of the total proceeds, $200 million was received in 2001, when
a three-year revolving receivables purchase facility agreement was entered into
with an unrelated entity. In February 2003, the agreement was amended to add two
additional third party purchasers and additional Eckerd managed care receivables
were securitized with approximately $50 million of cash proceeds received. Under
the agreement Eckerd sells, on a continuous basis, substantially all of its
managed care receivables to ECR Receivables, Inc. (ECR), a subsidiary of Eckerd.
ECR then sells to the third party purchasers an undivided interest in all
eligible receivables while retaining a subordinated interest in a portion of the
receivables.
As of April 26, 2003, securitized managed care receivables totaled $306 million,
of which the subordinated retained interest was $56 million. Losses and expenses
related to receivables sold under this agreement for the first quarter of 2003
and 2002 were $2 million and $1 million, respectively, and are included in other
unallocated in the accompanying consolidated statements of operations.
-8-
6) Goodwill and Other Intangible Assets
------------------------------------
Effective January 27, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." Upon adoption, the Company ceased amortization of
goodwill and other indefinite-lived intangible assets, primarily the Eckerd
trade name. These assets are now subject to an impairment test on an annual
basis, or when there is reason to believe that their values have been diminished
or impaired. Additionally, a transitional impairment test was required as of the
adoption date. These tests are performed on each business of the Company where
goodwill is recorded. The Company completed the annual impairment test on the
Eckerd trade name and the goodwill impairment test in the fourth quarter of 2002
and there was no evidence of impairment.
The carrying amounts of goodwill were $2,306 million, $2,320 million and $2,304
million as of April 26, 2003, April 26, 2002 and January 25, 2003, respectively.
The changes in carrying value are related to foreign currency translation
adjustments. At April 26, 2003, the total carrying amount of goodwill consisted
of $37 million for the Department Store and Catalog segment and $2,269 million
for the Eckerd Drugstore segment. There were no impairment losses related to
goodwill and intangible assets recorded during the first quarter of 2003 or
2002.
Intangible assets, all of which are included in the Eckerd Drugstores segment,
consisted of the following:
($ in millions) April 26, April 27, Jan. 25,
2003 2002 2003
-------------- --------------- ------------
Amortizing intangible assets:
Prescription files $ 290 $ 263 $ 289
Less accumulated amortization 166 130 157
-------------- --------------- ------------
Prescription files, net 124 133 132
-------------- --------------- ------------
Favorable lease rights 205 204 205
Less accumulated amortization 172 143 165
-------------- --------------- ------------
Favorable lease rights, net 33 61 40
-------------- --------------- ------------
Carrying amount of amortizing
intangible assets 157 194 172
Non-amortizing intangible assets
Eckerd trade name 322 322 322
-------------- --------------- ------------
Total intangible assets $ 479 $ 516 $ 494
============== =============== ============
The net carrying amount of intangible assets decreased $15 million due to $16
million of amortization of intangible assets offset by $1 million of
prescription files acquired during the first quarter of 2003.
-9-
The following table provides amortization expense for the periods presented.
Amortization expense related to major business acquisitions is reported as
acquisition amortization on the consolidated statements of operations. The
remaining amount of amortization expense is included in selling, general and
administrative (SG&A) expenses.
($ in millions) 13 weeks ended
---------------------------
April 26, April 27,
2003 2002
------------- -------------
Major business acquisitions(1) $ 10 $ 10
Other acquisitions 6 6
------------- -------------
Total for amortizing intangible assets $ 16 $ 16
============= =============
(1)Major business acquisitions include Eckerd Corporation acquired in early
1997, Lojas Renner S.A. acquired in January 1999 and Genovese Drug Stores, Inc.
acquired in March 1999.
Amortization expense for the intangible assets reflected above is expected to be
approximately (in millions) $66, $34, $26, $16 and $10 for fiscal years 2003,
2004, 2005, 2006 and 2007, respectively. Of these amounts, amortization related
to major business acquisitions is expected to be approximately (in millions)
$40, $9, $6 and $1 for fiscal years 2003, 2004, 2005 and 2006, respectively.
7) Restructuring Reserves
----------------------
At April 26, 2003, the consolidated balance sheet included $104 million of
remaining reserves that were established in connection with the Company's
restructuring initiatives compared to $165 million at April 27, 2002 and $113
million at January 25, 2003. The remaining reserves are related primarily to
future lease obligations for both department stores and drugstores that have
closed.
Costs are being charged against the reserves as incurred. Reserves are
periodically reviewed for adequacy and are adjusted as appropriate. Imputed
interest expense and any other adjustments to the reserves are included in other
unallocated. During the first quarter of 2003, cash payments related to the
reserves were $10 million. The reserves were increased by approximately $1
million for imputed interest during the first quarter of 2003. Cash payments
related to these reserves are expected to approximate $27 million for the
balance of 2003, with most of the remainder to be paid out by the end of 2005.
8) Issuance of $600 Million Debt
-----------------------------
On February 28, 2003, JCP issued $600 million principal amount of 8.0% Notes Due
2010 ("Notes") priced at 99.342% of their principal amount to yield 8.125%.
J. C. Penney Company, Inc. is a co-obligor on the Notes. The Notes pay interest
on March 1 and September 1 each year. The Notes are redeemable in whole or in
part, at the Company's option at any time, at a redemption price equal to the
greater of (i) 100% of the principal amount of such Notes or (ii) the sum of the
present values of the remaining scheduled payments, discounted to the redemption
date on a semi-annual basis at the "treasury yield" plus 50 basis points,
together in either case with accrued interest to the date of redemption.
-10-
9) Comprehensive Income and Accumulated Other Comprehensive (Loss)
---------------------------------------------------------------
Comprehensive Income /(Loss)
($ in millions) 13 weeks ended
-----------------------------
Apr. 26, Apr. 27,
2003 2002
--------- ---------
Net income $ 61 $ 86
Other comprehensive income/(loss):
Foreign currency translation adjustments 8 (2)
Net unrealized gains in real estate investment trusts 9 7
--------- ---------
17 5
--------- ---------
Total comprehensive income $ 78 $ 91
========= =========
Accumulated Other Comprehensive (Loss)/Income
($ in millions) Apr. 26, Apr. 27, Jan. 25,
2003 2002 2003
---------- ---------- ----------
Foreign currency translation adjustments $ (156) $(102) $(164)
Non-qualified plan minimum liability adjustment (58) (51) (58)
Net unrealized gains in real estate investment trusts 28 21 19
---------- ---------- ----------
Accumulated other comprehensive (loss) $ (186) $(132) $(203)
========== ========== ==========
Net unrealized gains in real estate investment trusts are shown net of deferred
taxes of $16 million, $12 million and $10 million as of April 26, 2003, April
27, 2002 and January 25, 2003, respectively. The non-qualified plan minimum
liability is shown net of deferred tax asset of $39 million, $33 million and $39
million as of April 26, 2003, April 27, 2002 and January 25, 2003, respectively.
A deferred tax asset has not been established for foreign currency translation
adjustments due to the historical reinvestment of earnings in the foreign
subsidiaries.
10) Guarantees
----------
JCP had total guarantees of approximately $270 million at April 26, 2003, which
are described in detail in the 2002 10-K. These guarantees include: $178 million
potential remaining obligation for building and equipment leases entered into by
third party operators of certain of the Company's store support centers (SSCs)
upon termination of services for any reason; $43 million related to investments
in one real estate investment trust; $20 million maximum exposure on insurance
reserves established by a former subsidiary included in the sale of the
Company's Direct Marketing Services business; and $29 million of lease
guarantees on certain sold drugstores, $22 million of which is recorded in other
liabilities.
-11-
11) Other Unallocated
-----------------
Other unallocated contains items that are related to corporate initiatives or
activities, which are not allocated to an operating segment and consisted of the
following:
($ in millions) 13 weeks ended
------------------------
April 26, April 27,
2003 2002
------------------------
Asset impairments, PVOL and other unit closing costs $ 15 $ 22
Gains from sale of real estate
(21) (10)
Real estate operations
(4) (6)
Eckerd receivables financing
2 1
Third party fulfillment losses
- 3
Other
1 -
-------- -------
Total $ (7) $ 10
======== =======
The Company recorded charges of $15 million for the first quarter of 2003 for
asset impairments, the present value of lease obligations (PVOL) and other unit
closing costs. This charge was comprised of $12 million of accelerated
depreciation for catalog facilities scheduled to close by the end of the second
quarter of 2003 and $3 million related to the PVOL for closed stores. For the
first quarter of 2002 these costs included $8 million of assets impairments on
certain underperforming department stores, $10 million recorded for PVOL of
stores scheduled to close and $4 million related to unit closings.
Real estate gains were recorded from the sale of facilities that are no longer
used in Company operations.
Real estate operations consist primarily of operating income of the Company's
real estate subsidiary.
Losses and expenses related to receivables sold as part of the Eckerd managed
care receivables securitization are recorded in other unallocated. See Note 5
for more information about the securitization of Eckerd managed care
receivables.
The Company incurred operating losses related to third party fulfillment
operations that were discontinued in 2002.
-12-
12) Segment Reporting
------------------
Reportable segments are determined based on similar economic characteristics,
the nature of products and services and the method of distribution. Performance
of the segments is evaluated based on segment operating profit. Segment
operating profit is LIFO gross margin less SG&A expenses. Segment assets include
goodwill and other intangibles; however, segment operating profit does not
include the amortization related to these assets. The Company operates in two
business segments: Department Stores and Catalog (including Internet), and
Eckerd Drugstores. Other unallocated is provided for purposes of reconciling to
total Company amounts.
Business Segment Information
($ in millions)
Dept.
Stores & Eckerd Other Total
Catalog Drugstores Unallocated Company
- -------------------------------------------------------------------------------------------------------------------------------
1st Quarter - 2003
Retail sales, net $ 3,723 $ 3,770 $ - $ 7,493
-----------------------------------------------------------------------
Segment operating profit 83 118 - 201
Net interest expense (104) (104)
Other unallocated 7 7
Acquisition amortization (10) (10)
--------------
Income before income taxes 94
--------------
Depreciation and amortization expense 89 69 22 180
Total assets $11,282 $ 6,678 $ 150 $ 18,110
- -----------------------------------------------------------------------------------------------------------------------------
1st Quarter - 2002
Retail sales, net $ 4,006 $ 3,722 $ - $7,728
---------------------------------------------------------------------
Segment operating profit 157 100 - 257
Net interest expense (102) (102)
Other unallocated (10) (10)
Acquisition amortization (10) (10)
--------------
Income before income taxes 135
--------------
Depreciation and amortization expense 92 61 10 163
Total assets $ 10,572 $ 6,712 $ 184 $ 17,468
- -------------------------------------------------------------------------------------------------------------------------------
13) Subsequent Event
----------------
On May 29, 2003, Standard & Poor's downgraded the Company'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.
-13-
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Holding Company
- ----------------
Effective January 27, 2002, J. C. Penney Company, Inc. changed its corporate
structure to a holding company format. As part of this structure, J. C. Penney
Company, Inc. changed its name to J. C. Penney Corporation, Inc. (JCP) and
became a wholly owned subsidiary of a newly formed affiliated holding company
(Holding Company). The holding company assumed the name J. C. Penney Company,
Inc. The Holding Company has no direct subsidiaries other than JCP, nor does it
have any independent assets or operations. All outstanding shares of common and
preferred stock were automatically converted into the identical number and type
of shares in the Holding Company. Stockholders' ownership interests in the
business did not change as a result of the new structure. Shares of the Company
remain publicly traded under the same symbol (JCP) on the New York Stock
Exchange. The Holding Company is a co-obligor (or guarantor, as appropriate)
regarding the payment of principal and interest on JCP's outstanding debt
securities. The guarantee by the Holding Company of certain of JCP's outstanding
debt is full and unconditional. The Holding Company and its consolidated
subsidiaries, including JCP, are collectively referred to in this report as
"Company" or "JCPenney," unless indicated otherwise.
Critical Accounting Policies
- ----------------------------
Management's discussion and analysis of its financial condition and results of
operations is based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect reported
amounts of assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. Management bases its estimates on
historical experience and on other assumptions that are believed to be
reasonable under the circumstances. On an ongoing basis, management evaluates
estimates used, including those related to inventory valuation under the retail
method; revenue recognition; valuation of long-lived and intangible assets,
including goodwill; estimation of reserves and valuation allowances specifically
related to closed stores, insurance, income taxes, litigation and environmental
contingencies; and pension accounting. Actual results may differ from these
estimates under different assumptions or conditions. Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations, in the
2002 10-K includes detailed descriptions of certain judgments that management
makes in applying its accounting policies in these areas.
-14-
Consolidated Results of Operations
($ in millions except EPS) 13 weeks ended
-------------------------
Apr. 26, Apr. 27,
2003 2002
--------- ---------
Segment operating profit
Department Stores and Catalog $ 83 $ 157
Eckerd Drugstores 118 100
--------- ---------
Total segments 201 257
Other unallocated 7 (10)
Net interest expense (104) (102)
Acquisition amortization (10) (10)
--------- ---------
Income before income taxes 94 135
Income taxes (33) (49)
--------- ---------
Net income $ 61 $ 86
========= =========
Earnings per share, diluted $ 0.20 $ 0.29
========= =========
For the first quarter of 2003, the Company reported net income of $61 million,
or $0.20 per share, compared to $86 million, or $0.29 per share for the
comparable 2002 period. The decline in earnings is primarily the result of lower
sales and higher SG&A expenses in Department Stores and Catalog, partially
offset by gross margin improvement in both operating segments. Results in this
year's first quarter were impacted by a challenging retail environment and world
events. EPS for the first quarter of 2003 was reduced by $0.06 as a result of
higher non-cash pension expense, as previously disclosed in the 2002 10-K.
Results of operations for the first quarter of 2003 included $21 million of
pre-tax gains on the sale of several closed units, $12 million of accelerated
depreciation for catalog facilities scheduled to close by the end of the second
quarter of 2003 and $3 million of expenses related to the present value of lease
obligations (PVOL) for closed stores. For the first quarter of 2002, results of
operations included a $10 million pre-tax gain on the sale of a closed store and
$22 million of asset impairments, PVOL and other unit closing costs in Other
Unallocated. These charges and credits are not reflective of normal ongoing,
operating performance. Management believes discussion of these items is
important in assessing the quality of earnings and the level of sustainability
and trends going forward. Items are discussed in Note 11 and in Other
Unallocated on page 19.
-15-
Segment Operating Results
Department Stores and Catalog
($ in millions) 13 weeks ended
-------------------------
Apr. 26, Apr. 27,
2003 2002
--------- ---------
Retail sales, net $ 3,723 $ 4,006
--------- ---------
FIFO/LIFO gross margin 1,460 1,514
SG&A expenses (1,377) (1,357)
--------- ---------
Segment operating profit $ 83 $ 157
========= =========
Sales percent (decrease)/increase:
Comparable stores(1) (4.9)% 7.9%
Total department stores (6.3)% 5.1%
Catalog (11.1)% (24.8)%
Ratios as a percent of sales:
FIFO/LIFO gross margin 39.2% 37.8%
SG&A expenses 37.0% 33.9%
Segment operating profit 2.2% 3.9%
(1) Comparable store sales include sales from stores which have been open for
12 consecutive months. A store's sales become comparable on the first day
of the 13th fiscal month.
Segment operating profit of $83 million for Department Stores and Catalog
decreased 170 basis points to 2.2% of sales in this year's first quarter, from
$157 million, or 3.9% of sales in the same period last year. Contributing to the
decrease was a challenging retail environment compounded by comparing this
year's results against a particularly strong first quarter last year which
included the Company's very successful 100th Anniversary event. Gross margins
continued to improve and SG&A expenses were well controlled although not
leveraged against soft sales for the quarter.
Comparable department store sales decreased 4.9% compared to a strong 7.9%
increase in last year's first quarter. Total department store sales for the
quarter decreased 6.3%. Many seasonal apparel categories were soft and customer
response to storewide events was weaker than last year's 100th Anniversary
promotion. Divisions that experienced sales gains were Children's and Fine
Jewelry. Other specific categories that performed well were fashion jewelry,
window coverings and the expanded housewares department. Two new apparel lines,
Bisou Bisou, the womens' contemporary sportswear, and Havanera, a
Hispanic-influenced menswear brand, were launched in the first quarter and
exceeded planned sales for the quarter.
Catalog sales decreased 11.1% compared to last year primarily as a result of
softer customer demand and planned lower page counts and lower circulation.
Total internet sales are reported as a component of catalog sales and are an
integral part of the Company's three-channel retailing strategy. Including
shipping and handling fees, internet sales increased approximately 30% to $115
million from $89 million last year.
As discussed in Note 1, the Company adopted EITF Issue 02-16, "Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor," in the first quarter of 2003. The impact on the first quarter results
was a decrease in segment operating profit of approximately $5 million.
Gross margin continued to improve, increasing 140 basis points to 39.2% of
sales. This compares with a 180 basis point improvement in last year's first
quarter. Improvement continues to be the result of better merchandise offerings
and benefits from the centralized merchandising model. Benefits include larger
order quantities, which contribute to lower costs, more timely selection of
merchandise, better supplier involvement from planning stages
-16-
through sale of the merchandise and more efficient delivery of merchandise to
stores. Also contributing to the improvement in margins were substantially lower
levels of catalog liquidation merchandise.
SG&A expenses increased 1.5% from last year's first quarter due primarily to
higher planned advertising, transition costs for the new store support center
(SSC) distribution network and higher non-cash pension expense. Partially
offsetting these expense increases were savings in store labor costs as a result
of the transition to centralized checkouts in department stores (also referred
to as customer service centers), progress toward the elimination of in-store
receiving, catalog expense management and benefits from centralized management
of store expenses. The new SSC network for department stores is an integral part
of the Company's centralization efforts. By the end of the first quarter, 12 of
the 13 planned SSCs were in operation, with the remaining SSC scheduled to be
operational by the end of the second quarter of 2003. Once this new distribution
network matures, the Company expects to see additional benefits from operational
efficiencies and a consistently better flow of merchandise to individual stores.
As the Company continues executing its turnaround program for Department Stores
and Catalog, steps have been taken to continue to improve the merchandise
offerings and enhance systems to provide better inventory data and more
visibility into merchandise selling patterns, centralize the buying and
distribution process, present a more integrated and powerful marketing message
and right-size the catalog operation. The successful execution of the turnaround
and progress toward improving the profitability of Department Stores and Catalog
is impacted by the customers' response to the merchandise offerings as well as
competitive conditions, the effects of the current economic climate and consumer
confidence.
-17-
Eckerd Drugstores
($ in millions) 13 weeks ended
--------------------------------
Apr. 26, Apr. 27,
2003 2002
--------------------------------
Retail sales, net $ 3,770 $ 3,722
--------------- --------------
FIFO gross margin 873 854
LIFO charge (7) (15)
--------------- --------------
LIFO gross margin 866 839
SG&A expenses (748) (739)
--------------- --------------
Segment operating profit $ 118 $ 100
=============== ==============
Sales percent (decrease)/increase:
Comparable stores(1) (1.1)% 7.6%
Total sales 1.3% 7.6%
Ratios as a percent of sales:
FIFO gross margin 23.1% 23.0%
LIFO gross margin 22.9% 22.5%
SG&A expenses 19.8% 19.8%
Segment operating profit 3.1% 2.7%
(1) Comparable store sales include the sales from stores which have been open
for at least one full year. Comparable store sales include the sales for
relocated stores.
Eckerd's segment operating profit, while below expectations, increased 18% to
$118 million in this year's first quarter from $100 million in the same period
last year. As a percent of sales, operating profit increased 40 basis points
from 2.7% to 3.1%. The increase is primarily from gross margin improvement.
Comparable store sales decreased 1.1% for the quarter, with pharmacy sales
increasing 1.6% and general merchandise (front-end) sales decreasing 6.5% from
last year. As a percent of total drugstore sales, pharmacy sales were 69.3% for
the quarter versus 67.7% for the same period last year, an increase of 160 basis
points. Sales to customers covered by third party programs such as managed care
organizations, as well as government and private insurance, have continued to
increase as a percent of total pharmacy sales. Third party pharmacy sales for
the first quarter of 2003 increased 80 basis points to 93.0% of total pharmacy
sales. Continued pharmacy sales growth is dependent on Eckerd's ability to
attract and retain managed care customers. Total pharmacy sales were negatively
impacted by approximately 450 basis points from a shift from branded drugs to
lower priced generic drugs and other changes in branded drugs, such as Claritin
being made available over the counter. Although the shift to more generic drugs
negatively affects pharmacy sales, it typically improves margins. A challenging
retail environment as well as competitor store openings and a soft tourist
market impacted front-end sales. The strongest general merchandise categories
were over-the-counter products, beverages and seasonal items.
LIFO gross margin for the quarter increased 40 basis points as a percent of
sales compared to last year. Gross margin benefited primarily from a lower LIFO
charge resulting from lower inflation for prescription drugs and
over-the-counter products. Gross margin also benefited from the continued shift
from branded prescriptions to generics and lower shrinkage.
As a percent of sales, SG&A expenses for the quarter increased 1.2% and were
flat with last year as a percent of sales. Payroll savings were offset by
increases in rent expense associated with new and relocated stores, as well as
advertising and insurance expense. During the quarter, eight stores were
relocated, 12 new stores opened and 115 stores were remodeled. By the end of the
first quarter of 2003, about 60% of the stores were operating in the new store
format. The new format stores are more efficient to operate and contribute to
improved operating results.
-18-
Eckerd has entered the last year of its stated three-year turnaround program.
Operating results in the first quarter were below original expectations and the
weak sales environment is expected to impact the second quarter as well. As a
result, management has pushed back its FIFO segment operating profit target of
4% to 4.5% of sales to 2004. Changes continue to be made to the Eckerd business
model to improve the fundamentals of the business and the long-term competitive
position in the industry. The Company is taking a number of steps to improve
Eckerd's sales trends, including planning to open or relocate 250 stores in 2003
and in each of the next several years. In addition, Eckerd is making adjustments
to its merchandise and marketing programs. The successful continuation of the
Eckerd turnaround is dependent on Eckerd's ability to attract and retain
customers through various marketing and merchandising programs, to secure
suitable new drugstore locations at favorable lease terms, to continue the
remodeling program for drugstores, to attract and retain qualified pharmacists,
and to maintain favorable reimbursement rates from managed care organizations,
governmental and other third-party payors.
Other Unallocated
- -------------------
Other unallocated consists of real estate activities, investment transactions,
and other items that are related to corporate initiatives or activities, which
are not allocated to an operating segment but are included in total Company
operating income. Other unallocated for the first quarter of 2003 was a net
credit of $7 million, which consisted of $21 million of gains on the sale of
closed units, $12 million of accelerated depreciation of catalog facilities
scheduled to close, $3 million of expenses related to future rent for closed
units, a $4 million credit for real estate operations, $2 million of expenses
related to the Eckerd receivables financing, and $1 million of other expenses.
First quarter 2002 results included $22 million of asset impairments on certain
underperforming department stores, PVOL for stores scheduled to close and other
unit closing activities, a $10 million gain on the sale of a closed store, $6
million of real estate operating activities, $1 million of expenses related to
the Eckerd receivables financing and a $3 million loss from third party
fulfillment activities.
Net Interest Expense
- ---------------------
Net interest expense for the first quarter was $2 million higher than the same
period last year. The increase is related to lower returns on short-term
investments, partially offset by lower interest expense from reduced average
borrowing levels.
Acquisition Amortization
- ------------------------
The amortization of intangible assets with estimable useful lives related to
major business acquisitions was $10 million for first quarter of both 2003 and
2002. Acquisition amortization is expected to be approximately $40 million for
full year 2003.
Income Taxes
- ------------
The Company's effective income tax rate was 35.4% for the first quarter of 2003
compared with 36.5% for the same period last year. The improved rate is
primarily due to increased utilization of state tax benefits.
-19-
Merchandise Inventories
- ------------------------
On April 26, 2003, consolidated merchandise inventories on the first-in,
first-out (FIFO) basis were $5,496 million compared to $5,295 million at April
27, 2002 and $5,348 million at January 25, 2003. The 3.8% increase compared to
last year's first quarter reflects higher inventories in Department Stores and
Catalog.
Inventories on a FIFO basis for the Department Stores and Catalog segment
totaled $3,189 million and $2,983 million at April 26, 2003 and April 27, 2002,
respectively. Inventory levels were planned to be higher at the end of this
year's first quarter because last year department stores had low levels of key
basic and fashion merchandise. Because of sales shortfalls in this year's first
quarter, inventories are slightly higher than planned.
Eckerd Drugstore inventories on a FIFO basis, at $2,307 million, were flat with
the end of last year's first quarter. Eckerd continues to eliminate slow-moving
merchandise, concentrating on being in stock on high-velocity items.
The current cost of consolidated inventories exceeded the LIFO basis amount
carried on the balance sheet by approximately $410 million at April 26, 2003,
$393 million at April 27, 2002 and $403 million at January 25, 2003. The
drugstore segment comprises the majority of the LIFO reserve and is
predominantly the result of inflation on prescription inventories.
Liquidity and Capital Resources
- -------------------------------
The Company'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. Cash
flow used in operating activities for the first quarter of 2003 was $254 million
compared to cash flow generated from operating activities of $274 million in the
comparable period of 2002. The decrease was due primarily to cash used to fund
investments in inventory and pay operating liabilities.
The Company's liquidity position was further strengthened in February 2003 with
the completion of two financing transactions. First, on February 3, 2003, the
Company raised approximately $50 million by securitizing additional Eckerd
managed care receivables (See Note 5). Second, on February 28, 2003, JCP issued
$600 million principal amount of unsecured 8% Notes Due 2010 ("Notes") at an
effective rate of 8.125% with the Holding Company as co-obligor (See Note 8).
Additional liquidity strengths include the available $1.5 billion credit
facility discussed in the 2002 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. The Company was in compliance with all financial covenants
of the credit facility at April 26, 2003.
For the remainder of 2003, 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. The payment of
dividends is subject to approval by the Company's Board of Directors on a
quarterly basis. At the present time, management does not expect to access the
capital markets for any external financing for the remainder of 2003. However,
the Company manages its financial position on a multi-year basis and may access
the capital markets on an opportunistic basis. On May 29, 2003, Standard &
Poor's (S&P) downgraded the Company'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 the Company's liquidity or financial position as the lower credit rating
had already been incorporated into the long-term financing strategy.
-20-
Management believes that the Company's financial position will continue to
provide the financial flexibility to support its turnaround initiatives.
Operating cash flows may be impacted by many factors, including the competitive
conditions in the retail industry, and the effects of the current economic
conditions and consumer confidence. Based on the nature of the Company's
businesses, management considers the above factors to be normal business risks.
Capital expenditures were $163 million the first quarter of 2003 compared with
$126 million for the comparable 2002 period. This year's investments were
primarily for new and relocated Eckerd drugstores and the continued remodeling
of existing Eckerd drugstores, as well as investments to support the
implementation of the SSC distribution network for department stores, department
store modernizations and renewals and technology improvements. Management
continues to expect total capital expenditures for the full year to be in the
range of $900 million to $1.1 billion, about evenly split between department
stores and Eckerd.
A quarterly dividend of $0.125 per share on the Company's outstanding common
stock was paid on February 1, 2003 to stockholders of record on January 10,
2003.
Stock Option Accounting
- -----------------------
As discussed in the 2002 10-K, the Company follows Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," which does not
require expense recognition for stock options when the exercise price of an
option equals, or exceeds, the fair market value of the common stock on the date
of grant. Among other reasons, the Company follows APB 25 accounting because
management believes that the impact of options is already factored into the
earnings calculation through the dilutive effect of option shares.
The Financial Accounting Standards Board (FASB) is currently reviewing the rules
governing stock option accounting and has made a tentative decision to require
expense recognition of stock options in the statement of operations. The FASB
intends to develop revised rules that would be effective for 2004. The Company
will adopt any new rules required by the FASB when they are effective. As
disclosed in the 2002 10-K, the annual impact of expensing stock options for the
Company using current valuation models would be approximately five to seven
cents per share. See Note 1 for the pro forma impact on the first quarters of
2003 and 2002.
Recently Issued Accounting Pronouncements
- -----------------------------------------
Recently issued accounting pronouncements are discussed in Note 1 to the
unaudited Interim Consolidated Financial Statements.
Pre-Approval of Auditor Services
- ---------------------------------
During the first quarter of 2003, the Audit Committee of the Company's Board of
Directors approved estimated fees for the remainder of 2003 related to the
performance of both audit and allowable non-audit services by the Company's
external auditors, KPMG LLP.
Seasonality
- -------------
The Company's business depends to a great extent on the last quarter of the
year. Historically, sales for that period have averaged approximately one-third
of annual sales and comprise about 45% of the Company's annual profits.
Accordingly, the results of operations for the 13 weeks ended April 26, 2003 are
not necessarily indicative of the results for the entire year.
-21-
Item 3 - Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to market risks in the normal course of business due to
changes in interest rates and currency exchange rates. The Company's market
risks related to interest rates at April 26, 2003 are similar to those disclosed
in the Company's 2002 10-K. For the 13 weeks ended April 26, 2003 the other
comprehensive income on foreign currency translation was $8 million. Due to the
relatively small size of foreign operations, management believes that its
exposure to market risk associated with foreign currencies would not have a
material impact on its financial condition or results of operations.
Item 4 - Controls and Procedures
Based on their evaluation of the Company'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 a date within 90 days of the filing date of this Quarterly Report
on Form 10-Q, the Company's principal executive officer and principal financial
officer have concluded that the Company'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 were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their most recent evaluation.
This report 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.
-22-
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company has no material legal proceedings pending against it.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
The following documents are filed as exhibits to this report:
o 99(i) Certificate of Allen Questrom Pursuant to Section 906 of
the Sarbanes-Oxley Act
o 99(ii) Certificate of Robert B. Cavanaugh Pursuant to Section 906
of the Sarbanes-Oxley Act
(b) Reports on Form 8-K
The Company filed the following report on Form 8-K during the period
covered in this report:
o Current Report on Form 8-K dated March 3, 2003 (Item 5 - Other
Events and Regulation FD Disclosure; Item 7 - Financial
Statements and Exhibits)
-23-
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 COMPANY, INC.
By /s/ W. J. Alcorn
-------------------
W. J. Alcorn
Senior Vice President and Controller
(Principal Accounting Officer)
Date: June 10, 2003
-24-
CERTIFICATIONS
I, Allen Questrom, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of J. C. Penney Company,
Inc.;
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 we 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 or not 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/ Allen Questrom
--------------------------
Allen Questrom
Chairman and Chief Executive Officer
J. C. Penney Company, Inc.
-25-
CERTIFICATIONS
I, Robert B. Cavanaugh, Executive Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of J. C. Penney Company,
Inc.;
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 we 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 or not 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/ Robert B. Cavanaugh
----------------------------
Robert B. Cavanaugh
Executive Vice President and
Chief Financial Officer
J. C. Penney Company, Inc.
-26-