JCPenney 2003 Annual Report Download - page 33

J. C. Penney Company, Inc. 31
Notes to the Consolidated Financial Statements
activity of the VIE as well as their maximum exposure to losses as
a result of involvement with the VIE. FIN 46 was revised in
December 2003 and is effective for financial statements of public
entities that have special-purpose entities, as defined, for periods
ending after December 15, 2003. For public entities without
special-purpose entities, it is effective for financial statements for
periods ending after March 15, 2004. The Company does not
have any special-purpose entities, as defined (other than an enti-
ty within its discontinued operations that was established for the
purpose of selling securitized receivables and is fully described in
the 2002 Annual Report), and is currently evaluating the provi-
sions of this statement. The Company does not expect FIN 46 to
have a material effect on its financial statements.
2DISCONTINUED OPERATIONS
Eckerd Drugstores
During the fourth quarter of fiscal 2003, the Company’s Board of
Directors authorized Company management to sell the Eckerd
Drugstore operation. Management is currently in active negotia-
tions with interested parties. Having met the criteria of SFAS No.
144, Eckerd’s net assets have been classified as "held for sale" and
their results of operations and financial position presented as a dis-
continued operation as of year-end 2003. All prior periods
presented have been reclassified to conform to this accounting
treatment.
For fiscal 2003, the $1,275 million loss from Eckerd discontin-
ued operations, net of tax, includes a non-cash charge of $450
million to reflect the investment in Eckerd at its estimated fair
value less costs to sell and a charge of $875 million to recognize
an estimated deferred tax liability for the excess of estimated fair
value over the tax basis of Eckerd’s net assets. The tax basis of
Eckerd is lower than its book basis because the Company’s drug-
store acquisitions were largely tax-free transactions. See further
discussion of management’s evaluation of potential goodwill
impairment under SFAS No. 142 in Note 1.
The fiscal 2003 loss from discontinued operations excludes
the future operating results and any future gains or losses result-
ing from the pending sale of Eckerd. The final financial impact
of the pending sale of Eckerd is dependent upon the results of
the final negotiations with the ultimate buyer(s).
Mexico Department Stores
Effective November 30, 2003, the Company closed on the sale
of its six Mexico department stores to Grupo Sanborns S.A. de
C.V. of Mexico City. The stock sale transaction, which included
the Mexico holding company and operating companies com-
prising JCPenney’s Mexico department store operation, resulted
in a loss of $14 million, net of a $27 million tax benefit. The loss
was principally related to currency translation losses of $25 mil-
lion accumulated since operations began in 1995 that were pre-
viously reflected as reductions to stockholders’ equity.
Additional components of the loss include potential liability on
certain store leases, inventory shrinkage and transaction costs.
Direct Marketing Services
In 2001, the Company closed on the sale of its J. C. Penney
Direct Marketing Services, Inc. (DMS) assets, including its
J. C. Penney Life Insurance subsidiaries and related businesses, to a
U.S. subsidiary of AEGON, N.V. DMS was reflected as a discon-
tinued operation in the 2000 Annual Report, with an estimated
net loss of $296 million on a planned sale. In 2001, the transaction
closed earlier than anticipated, resulting in an additional loss of
$16 million. In 2002, tax regulation changes enabled the Company
to take additional capital loss deductions, resulting in a $34 mil-
lion gain on the sale of discontinued operations for the year. In
2003, the tax liability was reduced by $4 million because of a tax
audit.
The Company’s financial statements have been presented to
reflect Eckerd, Mexico and DMS as discontinued operations for all
periods presented. Results of the discontinued operations are
summarized below:
Discontinued Operations
($ in millions) 2003 2002 2001
Eckerd
Net sales $15,137 $14,643 $ 13,847
Gross margin 3,487 3,419 3,113
Selling, general and
administrative expenses (3,196) (3,007) (2,905)
Interest expense(1) (163) (161) (153)
Acquisition amortization (40) (42) (120)
Other (7) (5) 1
Fair value adjustment (450) ——
(Loss)/income before
income taxes (369) 204 (64)
Income tax expense 906(2) 75 1
Eckerd (loss)/income
from operations (1,275) 129 (65)
Mexico (loss) from operations,
net of income tax expense/
(benefit) of $1, $8 and $(4)(3) (7) (43) (3)
(Loss) on sale of Mexico, net of
income tax (benefit) of $(27) (14) ——
Gain/(loss) on sale of DMS,
net of income tax (benefit)
of $(4), $(34) and $(6) 434 (16)
Tot al discontinued operations $(1,292) $120 $ (84)
(1) Eckerd interest expense consists primarily of interest on the intercompany loan
between Eckerd and JCPenney. The loan balance was initially based on the alloca-
tion of JCPenney debt to the Eckerd business to reflect a competitive capital structure
within the drugstore industry. Since inception, the loan balance has fluctuated based
on Eckerd cash flow requirements. The loan balance, together with accrued interest
and other intercompany payables, was $1,212 million, $1,151 million and $1,597 mil-
lion at the end of 2003, 2002 and 2001, respectively. The loan bears interest at
JCPenney’s weighted average interest rate on its net debt (long-term debt net of short-
term investments) calculated on a monthly basis. The weighted average interest rate
was 13.76% for 2003, 12.05% for 2002 and 9.05% for 2001.
(2) Includes $875 million of deferred income tax expense for the book/tax basis difference.
(3) Components of Mexico operations are not presented due to immateriality.