-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RVJFexDbzbriaiV0HV1Gvz/6v++R5/kThKPP4xkfz63bY/J/4PzIn8a8NVWWX7IC ZzlKbRgXqrlQd3DqKx6NUQ== 0000063416-97-000008.txt : 19970424 0000063416-97-000008.hdr.sgml : 19970424 ACCESSION NUMBER: 0000063416-97-000008 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970201 FILED AS OF DATE: 19970423 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAY DEPARTMENT STORES CO CENTRAL INDEX KEY: 0000063416 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 431104396 STATE OF INCORPORATION: DE FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-00079 FILM NUMBER: 97585897 BUSINESS ADDRESS: STREET 1: 611 OLIVE ST CITY: ST LOUIS STATE: MO ZIP: 63101 BUSINESS PHONE: 3143426300 10-K405 1 1996 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 1, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-79 THE MAY DEPARTMENT STORES COMPANY (Exact name of registrant as specified in its charter) Delaware 43-1104396 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 611 Olive Street, St. Louis, Missouri 63101 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (314) 342-6300 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, par value $.50 per share New York Stock Exchange Preferred stock purchase rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of registrant's common stock held by non- affiliates as of March 24, 1997: $10,760,871,413 Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 234,648,732 shares of common stock, $.50 par value, as of April 5, 1997. Documents incorporated by reference: 1. Portions of Registrant's 1996 Annual Report to Shareowners are incorporated into Parts I and II. 2. Portions of Registrant's 1997 Proxy Statement, dated April 17, 1997, are incorporated into Part III. PART I Items 1 and 2. Business and Description of Property Registrant, a corporation organized under the laws of the State of Delaware, became the successor to The May Department Stores Company, a New York corporation ("May NY") in a reincorporation from New York to Delaware pursuant to a statutory share exchange. May NY was organized under the laws of the State of New York on June 4, 1910, as the successor to a business founded by David May, who opened his first store in Leadville, Colorado, in 1877. At the shareowners' annual meeting on May 24, 1996, the shareowners approved the change of the state of incorporation from New York to Delaware. The reincorporation in Delaware was accomplished by means of a statutory share exchange, whereby each share of common stock of May NY (and associated preferred stock purchase right), outstanding prior to the filing of a "Certificate of Exchange" by the Department of State of the State of New York, was exchanged for one share of common stock of registrant. As a result of the share exchange, May NY became a wholly owned subsidiary of registrant. Registrant operates eight quality regional department store companies nationwide using ten trade names. At fiscal year-end 1996, registrant operated 365 department stores in 30 states and the District of Columbia. The department store companies and the markets served are shown in the table below. Store Company Markets Served Lord & Taylor 24 markets including New York City, Chicago, Boston, Washington, D.C., Detroit, Dallas/Fort Worth, Atlanta and Miami Hecht's and 17 markets including Washington, D.C., Strawbridge's Philadelphia (Strawbridge's), Baltimore, Norfolk, and Richmond Foley's 15 markets, including Houston, Dallas/Fort Worth, Denver, San Antonio, and Oklahoma City Robinsons-May 10 markets, including Los Angeles, San Diego, Orange County, Phoenix, and Riverside/San Bernardino Kaufmann's 20 markets, including Pittsburgh, Cleveland, Buffalo, Rochester, Akron and Syracuse Filene's 16 markets, including Boston, New Haven, Hartford, Providence, R.I., and Albany Famous Barr and 14 markets, including St. Louis, Indianapolis L.S. Ayres (L.S. Ayres), Fort Wayne and South Bend Meier & Frank Four markets: Portland/Vancouver, Salem, Eugene and Medford 2 On January 17, 1996, registrant announced the spin-off of Payless ShoeSource, Inc., its chain of self-service family shoe stores. The spin-off was completed effective May 4, 1996 as a tax-free distribution to shareowners. On July 18, 1996, registrant purchased 13 former Strawbridge & Clothier department stores in the greater Philadelphia area. Registrant delivered 4.5 million shares of May common stock and assumed $255 million of debt and certain other liabilities in exchange for the Strawbridge & Clothier department store assets. The acquisition was accounted for as a purchase. Registrant employs approximately 53,000 full-time and 58,000 part- time associates in 30 states, the District of Columbia and eight offices overseas. Management's Discussion and Analysis (pages 12-16) of registrant's 1996 Annual Report to Shareowners is incorporated herein by reference. A. Property Ownership The following summarizes the property ownership of department stores at February 1, 1997: % of Gross Number of Building Stores Sq. Footage Entirely or mostly owned* 204 60% Entirely or mostly leased 98 26 Owned on leased land* 63 14 365 100% * Includes a total of 19 department stores subject to financing. B. Credit Sales Sales at registrant's department stores are made for cash or credit, including registrant's 30-day charge accounts and open-end credit plans, which include revolving charge accounts and revolving installment accounts. During the fiscal year ended February 1, 1997, 50.0% of the total revenues of registrant's department stores were made through registrant's credit plans. In 1991, registrant formed May National Bank of Arizona (MBA) and May National Bank of Ohio (MBO), which are indirectly wholly owned and consolidated subsidiaries of registrant. During fiscal 1996, MBA and MBO extended credit to customers of registrant's Lord & Taylor (effective October 1, 1996), Hecht's (effective October 1, 1996), Strawbridge's (effective August 1, 1996), Robinsons-May, Kaufmann's, Famous-Barr (effective October 1, 1996), L.S. Ayres and Meier & Frank department stores companies. Throughout 1996, MBA and MBO sold the resulting accounts receivables at face value, to May NY. In addition, MBA and MBO process remittances for their parent, May Funding, Inc. and its other subsidiaries. MBA and MBO receive processing fee revenue for this service. 3 C. Competition in Retail Merchandising Registrant's retail merchandising business is conducted under highly competitive conditions. During the past several years, the retail industry has seen major changes which have increased competition. Although registrant is one of the nation's largest department store retailers, it has thousands of competitors at the local level which compete with registrant's individual department stores. Competition at the local level is characterized by numerous factors including convenience of facilities, reputation, procurement of merchandise, product mix, advertising, price, quality, service and credit availability. Registrant believes that it is in a strong competitive position with regard to each of these factors. D. Executive Officers of Registrant The names and ages (as of April 17, 1997) of all executive officers of registrant, and the positions and offices held with registrant by each such person are as follows: Name Age Positions and Offices David C. Farrell 63 Chairman and Chief Executive Officer Jerome T. Loeb 56 President Richard L. Battram 62 Executive Vice Chairman Eugene S. Kahn 47 Vice Chairman Anthony J. Torcasio 51 President and Chief Executive Officer, May Merchandising Company John L. Dunham 50 Executive Vice President and Chief Financial Officer Louis J. Garr, Jr. 57 Executive Vice President and General Counsel R. Dean Wolfe 53 Executive Vice President William D. Edkins 44 Senior Vice President Lonny J. Jay 55 Senior Vice President Jan R. Kniffen 48 Senior Vice President Richard A. Brickson 49 Secretary and Senior Counsel Martin M. Doerr 42 Vice President Andrew T. Hall 36 Vice President Each of the above named executive officers shall remain in office until the annual meeting of directors following the next annual meeting of shareowners of registrant, or until their respective successors shall have been elected and shall qualify. Messrs. Farrell, Loeb, Battram, Kahn and Torcasio also serve as directors of registrant. Each of the executive officers has been an officer of registrant for at least the last five years, with the following exceptions: Mr. Kahn served as president of the former G. Fox department store company from 1990 to 1992 and as president and chief executive officer of Filene's from 1992 to March, 1996 when he became vice chairman. Mr. Torcasio served as president and chief executive officer of Famous-Barr from 1991 to 1993 when he became president and chief executive officer of May Merchandising Company and became an executive officer of registrant. Mr. Dunham served as chairman of the former G. Fox department store company from 1989 to 1993 and 4 as chairman of May Merchandising Company from 1993 to May, 1996 when he became an executive officer of registrant. Mr. Doerr was associated with the public accounting firm of Arthur Andersen LLP from 1976 to 1992 and became an executive officer of registrant in 1994. Mr. Hall was associated with the public accounting firm of Arthur Andersen LLP from 1983 to 1993 and became an executive officer of registrant in 1994. Item 3. Legal Proceedings There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which registrant or any of its subsidiaries is a party or of which any of their property is the subject. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the 13 weeks ended February 1, 1997. PART II Item 5. Market for Registrant's Common Equity and Related Shareowner Matters Common Stock Dividends and Market Prices (page 16) of registrant's 1996 Annual Report to Shareowners are incorporated herein by reference. Item 6. Selected Financial Data The Eleven Year Financial Summary (pages 28 and 29) of registrant's 1996 Annual Report to Shareowners is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis (pages 12-16) and Notes to Consolidated Financial Statements (pages 21-27) of registrant's 1996 Annual Report to Shareowners are incorporated herein by reference. Item 8. Financial Statements and Supplementary Data Consolidated Financial Statements (pages 17-20), Notes to Consolidated Financial Statements (pages 21-27) and Report of Independent Public Accountants (page 30) of registrant's 1996 Annual Report to Shareowners are incorporated herein by reference. 5 QUARTERLY RESULTS (Unaudited) Quarterly results are determined in accordance with the annual accounting policies and include certain items based upon estimates for the entire year. Summarized quarterly results for the last two years were as follows: (millions, except per share) 1996 Quarter First Second Third Fourth Year Revenues $ 2,511 $ 2,533 $ 2,855 $ 4,101 $ 12,000 Cost of sales $ 1,755 $ 1,773 $ 2,004 $ 2,694 $ 8,226 Net Earnings: Continuing operations $ 98 $ 110 $ 118 $ 423 $ 749 Discontinued operation 11 - - - 11 Before extraordinary loss 109 110 118 423 760 Extraordinary loss related to early extinguishment of debt - - - (5) (5) Net Earnings 109 110 118 418 755 Primary earnings per share: Continuing operations $ 0.37 $ 0.42 $ 0.45 $ 1.70 $ 2.94 Discontinued operation 0.05 - - - 0.05 Before extraordinary loss 0.42 0.42 0.45 1.70 2.99 Extraordinary loss related to early extinguishment of debt - - - (0.02) (0.02) Primary earnings per share 0.42 0.42 0.45 1.68 2.97 Fully diluted earnings per share: Continuing operations $ 0.36 $ 0.41 $ 0.44 $ 1.61 $ 2.82 Discontinued operation 0.05 - - (0.01) 0.04 Before extraordinary loss 0.41 0.41 0.44 1.60 2.86 Extraordinary loss related to early extinguishment of debt - - - (0.02) (0.02) Fully Diluted Earnings Per Share $ 0.41 $ 0.41 $ 0.44 $ 1.58 $ 2.84 6 (millions, except per share) 1995 Quarter First Second Third Fourth Year Revenues $ 2,218 $ 2,325 $ 2,569 $ 3,840 $ 10,952 Cost of sales $ 1,543 $ 1,625 $ 1,798 $ 2,495 $ 7,461 Net Earnings: Continuing operations $ 87 $ 107 $ 110 $ 396 $ 700 Discontinued operation 27 34 25 (31) 55 Before extraordinary loss 114 141 135 365 755 Extraordinary loss related to early extinguishment of debt - - - (3) (3) Net Earnings 114 141 135 362 752 Primary earnings per share: Continuing operations $ 0.33 $ 0.41 $ 0.42 $ 1.57 $ 2.73 Discontinued operation 0.11 0.13 0.10 (0.12) 0.22 Before extraordinary loss 0.44 0.54 0.52 1.45 2.95 Extraordinary loss related to early extinguishment of debt - - - (0.01) (0.01) Primary earnings per share 0.44 0.54 0.52 1.44 2.94 Fully diluted earnings per share: Continuing operations $ 0.32 $ 0.40 $ 0.41 $ 1.48 $ 2.61 Discontinued operation 0.10 0.13 0.09 (0.11) 0.21 Before extraordinary loss 0.42 0.53 0.50 1.37 2.82 Extraordinary loss related to early extinguishment of debt - - - (0.01) (0.01) Fully Diluted Earnings Per Share $ 0.42 $ 0.53 $ 0.50 $ 1.36 $ 2.81 7 SUMMARIZED FINANCIAL INFORMATION - THE MAY DEPARTMENT STORES COMPANY, NEW YORK. At the shareowners' annual meeting on May 24, 1996, the shareowners approved the change of the state of incorporation of The May Department Stores Company from New York to Delaware. This transaction did not result in any change in the business or the consolidated assets, liabilities or net worth of the reincorporated entity. Summarized financial information for The May Department Stores Company, New York, is set forth below for 1996. Corresponding information for fiscal year 1995 is not included below as amounts reflected in the respective consolidated financial statements reflect information for The May Department Stores Company, New York. February 1, 1997 Balance Sheet Current assets $ 5,415 Noncurrent assets 5,008 Current liabilities 1,912 Noncurrent liabilities 7,673 February 1, 1997 13 Weeks 52 Weeks Ended Ended Statement of Earnings Revenues 4,101 12,000 Cost of sales 2,694 8,225 Net earnings 377 662 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 8 PART III Items 10, 11, 12, 13. Directors and Executive Officers of Registrant, Executive Compensation, Security Ownership of Certain Beneficial Owners and Management, Certain Relationships and Related Transactions Pursuant to paragraph G (Information to be Incorporated by Reference) of the General Instructions to Form 10-K, the information required by Items 10, 11, 12 and 13 (other than information about executive officers of registrant) is incorporated by reference from the definitive proxy statement dated April 17, 1997, and filed pursuant to Regulation 14A. Information about executive officers of registrant is set forth in Part I of this Form 10-K, under the heading "Items 1. and 2. Business and Description of Property." PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents filed as part of this report: (1) Financial Statements. Incorporated by reference to registrant's 1996 Annual Report to Shareowners (Exhibit 13): Page in Annual Report Financial Statements- Consolidated Statement of Earnings for the three fiscal years ended February 1, 1997 17 Consolidated Balance Sheet - February 1, 1997, and February 3, 1996 18 Consolidated Statement of Cash Flows for the three fiscal years ended February 1, 1997 19 Consolidated Statement of Shareowners' Equity for the three fiscal years ended February 1, 1997 20 Notes to Consolidated Financial Statements 21-27 Report of Independent Public Accountants 30 Page in this Report (2) Supplemental Financial Statement Schedule (for the three fiscal years ended February 1, 1997): Report of Independent Public Accountants on Schedule II 13 II Valuation and Qualifying Accounts 14 9 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) (3) Exhibits: Location 3(a) Amended and Restated Certificate Incorporated of Incorporation of Registrant, by Reference dated May 22, 1996 to Exhibit 4(a) of Post Effective Amendment No. 1 to Form S-8, filed May 29, 1996. 3(b) By-Laws of Registrant, as amended Incorporated by Reference to Exhibit 3(ii) of Form 10-Q, filed December 10, 1996. 11 Computation of Net Earnings Filed Per Share herewith. 12 Computation of Ratio of Filed Earnings to Fixed Charges herewith. 13 The May Department Stores Filed Company 1996 Annual Report to herewith. Shareowners (only those portions specifically incorporated by reference shall be deemed filed with the Commission) 21 Subsidiaries of Registrant Filed herewith. 23 Consent of Independent Public Page 13 of Accountants this Report. 27 Financial Data Schedule Filed herewith. 99 Form 11-K Annual Report of the Filed Profit Sharing and Savings Plan herewith. of The May Department Stores Company for the fiscal year ended December 31, 1996 (4) Reports on Form 8-K A report dated November 4, 1996 which contained a copy of the Underwriting Agreement dated October 30, 1996, among registrant, The May Department Stores Company, New York, Morgan Stanley & Co. Incorporated, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citicorp Securities, Inc.; and a specimen of 6.875% debentures due November 1, 2005. All other schedules and exhibits of registrant for which provision is made in the applicable regulations of the Securities and Exchange Commission have been omitted, as they are not required or are inapplicable or the information required thereby has been given otherwise. 10 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE MAY DEPARTMENT STORES COMPANY Date: April 23, 1997 By: /s/ John L. Dunham John L. Dunham Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of registrant and in the capacities and on the dates indicated. Date Signature Title Principal Executive Officer: April 23, 1997 /s/ David C. Farrell Director, David C. Farrell Chairman and Chief Executive Officer Principal Financial and Accounting Officer: April 23, 1997 /s/ John L. Dunham Executive John L. Dunham Vice President and Chief Financial Officer Directors: April 23, 1997 /s/ Jerome T. Loeb Director and Jerome T. Loeb President 11 Date Signature Title April 23, 1997 /s/ Richard L. Battram Director and Richard L. Battram Executive Vice Chairman April 23, 1997 /s/ Eugene S. Kahn Director and Vice Eugene S. Kahn Chairman April 23, 1997 /s/ Anthony J. Torcasio Director, Anthony J. Torcasio President and Chief Executive Officer, May Merchandising Company April 23, 1997 /s/ Helene L. Kaplan Director Helene L. Kaplan April 23, 1997 /s/ Edward H. Meyer Director Edward H. Meyer April 23, 1997 /s/ Russell E. Palmer Director Russell E. Palmer April 23, 1997 /s/ Michael R. Quinlan Director Michael R. Quinlan April 23, 1997 /s/ William P. Stiritz Director William P. Stiritz April 23, 1997 /s/ Robert D. Storey Director Robert D. Storey April 23, 1997 /s/ Murray L. Weidenbaum Director Murray L. Weidenbaum 12 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The May Department Stores Company: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in The May Department Stores Company's Annual Report to Shareowners incorporated by reference in this Form 10-K, and have issued our report thereon dated February 12, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. Schedule II included in this Form 10-K is the responsibility of the company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the consolidated financial statements. The Schedule has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP 1010 Market Street St. Louis, Missouri 63101-2089 February 12, 1997 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Annual Report on Form 10-K for the year ended February 1, 1997 into the Company's previously filed Registration Statements on Form S-3 (No. 333-11539 and 333-11539-01) and Form S-8 (No. 33-21415, 33-98045, 33-58985, 333-00957 and 333-02127). ARTHUR ANDERSEN LLP 1010 Market Street St. Louis, Missouri 63101-2089 April 23, 1997 13 SCHEDULE II THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE FISCAL YEARS ENDED February 1, 1997 (Millions) Charges Balance to costs Balance beginning and Deductions end of of period expenses (a) period FISCAL YEAR ENDED FEBRUARY 1, 1997 Allowance for doubtful accounts $ 75 $ 116 $ (87) $ 104 FISCAL YEAR ENDED FEBRUARY 3, 1996 Allowance for doubtful accounts $ 69 $ 88 $ (82) $ 75 FISCAL YEAR ENDED JANUARY 28, 1995: Allowance for doubtful accounts $ 68 $ 77 $ (76) $ 69 (a) Write-off of accounts determined to be uncollectible, net of recoveries of $26 million in 1996, $24 million in 1995 and $23 million in 1994. 14 Exhibit 21 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES SUBSIDIARIES OF REGISTRANT The corporations listed below are subsidiaries of registrant, and all are included in the consolidated financial statements of registrant as subsidiaries (unnamed subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary): Jurisdiction in which Name organized The May Department Stores Company New York May Capital, Inc. Delaware May Funding, Inc. Nevada Leadville Insurance Company Vermont EX-11 2 1996 EXHIBIT 11 TO FORM 10-K
Exhibit 11 THE MAY DEPARTMENT STORES COMPANY COMPUTATION OF NET EARNINGS PER SHARE FOR THE THREE FISCAL YEARS ENDED FEBRUARY 1, 1997 (millions, except per share) 1996 1995 1994 Net earnings from continuing operations $ 749 $ 700 $ 650 ESOP Preferred Dividends, net of tax benefit on unallocated shares (18) (19) (19) Preferred Dividend requirements - - - Net earnings available for common shareowners: Continuing operations 731 681 631 Discontinued operation 11 55 132 Extraordinary loss (5) (3) - Total net earnings available for common shareowners $ 737 $ 733 $ 763 Average common shares outstanding 247.2 248.9 248.4 Net earnings per share: Continuing operations $ 2.95 $ 2.73 $ 2.54 Discontinued operation 0.05 0.22 0.53 Extraordinary loss (0.02) (0.01) - Total net earnings per share $ 2.98 $ 2.94 $ 3.07 Primary Computation: Net earnings available from continuing operations $ 731 $ 681 $ 631 Deferred comp. dividend adjustment 1 1 1 Adjusted net earnings available: Continuing operations 732 682 632 Discontinued operation 11 55 132 Extraordinary loss (5) (3) - Total adjusted net earnings available: $ 738 $ 734 $ 764 Average common shares outstanding 247.2 248.9 248.4 Common share equivalents (CSE's) 1.5 1.0 1.2 Average common stock and CSE's 248.7 249.9 249.6 Primary earnings per share: Continuing operations $ 2.94 $ 2.73 $ 2.53 Discontinued operation 0.05 0.22 0.53 Extraordinary loss (0.02) (0.01) - Total Primary Earnings per share $ 2.97 $ 2.94 $ 3.06
Exhibit 11 THE MAY DEPARTMENT STORES COMPANY COMPUTATION OF NET EARNINGS PER SHARE FOR THE THREE FISCAL YEARS ENDED FEBRUARY 1, 1997 (millions, except per share) 1996 1995 1994 Fully Diluted Computation: Adjusted net earnings available from continuing operations-PRIMARY $ 732 $ 682 $ 632 Earnings impact of assumed conversion of ESOP Preference Shares, net of tax benefit on unallocated common shares 12 11 10 Adjusted net earnings available-FULLY DILUTED: Continuing operations 744 693 642 Discontinued operation 11 55 132 Extraordinary loss (5) (3) - Total adjusted net earnings available-FULLY DILUTED: $ 750 $ 745 $ 774 Average common shares and CSE's 248.7 249.9 249.6 Additional CSE's attributable to treasury stock method - 0.4 - ESOP Preference Shares 15.4 15.0 15.3 Average Common Shares Outstanding on fully diluted basis 264.1 265.3 264.9 Fully Diluted earnings per share: Continuing operations $ 2.82 $ 2.61 $ 2.43 Discontinued operation 0.04 0.21 0.49 Extraordinary loss (0.02) (0.01) - Total Fully Diluted Earnings per share $ 2.84 $ 2.81 $ 2.92
EX-12 3 1996 EXHIBIT 12 TO FORM 10-K
Exhibit 12 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES FOR THE FIVE FISCAL YEARS ENDED FEBRUARY 1, 1997 Fiscal Year Ended Feb. 1, Feb. 3, Jan. 28, Jan. 29, Jan. 30, 1997 1996 1995 1994 1993 Earnings Available for Fixed Charges: Pretax earnings from continuing operations $ 1,232 $ 1,160 $ 1,079 $ 957 $ 579 Fixed charges (excluding interest capitalized and pretax preferred stock dividend requirements) 346 317 293 305 361 Dividends on ESOP Preference Shares (26) (28) (28) (28) (29) Capitalized interest amortization 6 5 4 4 3 1,558 1,454 1,348 1,238 914 Fixed Charges: Gross interest expense (a) $ 341 $ 316 $ 289 $ 295 $ 338 Interest factor attributable to rent expense 22 20 19 20 24 Other (b) - - - - 5 363 336 308 315 367 Ratio of Earnings to Fixed Charges 4.3 4.3 4.4 3.9 2.5 (a) Represents interest expense on long-term and short-term debt, ESOP debt and amortization of debt discount and debt issue expense. (b) Represents the company's proportionate share of interest of unconsolidated 50% owned persons and pretax preferred stock dividend requirements.
EX-13 4 1996 EXHIBIT 13 TO FORM 10-K (ANNUAL REPORT) EXHIBIT 13 [The following "Management's Dicussion and Analysis" section is a reproduction of the same named section included in the paper format Annual Report on pages 12 - 16.] Management's Discussion and Analysis May achieved its 22nd consecutive year of record sales and earnings per share from continuing operations. Our five-year compound growth rate for earnings per share from continuing operations was 13.2% - among the best in the retail industry. Sales in 1996 were $11.6 billion, an increase of 11.1% over 1995 sales of $10.5 billion. The increase reflects the benefit of new-store openings and an increase in store-for-store sales of 4.3%. Store-for-store sales increases for the first through fourth quarters in 1996 were 6.7%, 2.3%, 3.9%, and 4.4%, respectively. Our 1996 earnings per share from continuing operations increased 8.0% to $2.82 from last year's $2.61. Net earnings from continuing operations totaled $749 million, compared with $700 million last year. Returns on revenues, equity, and continuing operations' net assets were 6.2%, 19.4%, and 18.8%, respectively. Return on equity is computed as net earnings from continuing operations divided by beginning shareowners' equity adjusted for the Payless spin-off. We opened 28 department stores during 1996, adding 5.2 million square feet of retail space. Four of these stores were Lord & Taylor locations, in Paramus, N.J.; Gaithersburg, Md.; Fairfax, Va.; and Woodbridge, N.J. Hecht's opened 14 locations, 13 of which were acquired Strawbridge & Clothier stores. These include eight Pennsylvania locations, in Philadelphia, Willow Grove, Exton, Bensalem, Plymouth Meeting, Springfield, Ardmore, and King of Prussia; three New Jersey locations, in Cherry Hill, Voorhees, and Burlington; two Delaware locations, in Newark and Wilmington; and one Virginia location, in Manassas. Foley's opened two Texas stores, in Sugarland and Laredo; one location in Albuquerque, N.M.; and one location in Tulsa, Okla. Robinsons-May opened one location in Henderson, Nev. Kaufmann's opened one store in Strongsville, Ohio. Filene's opened two locations, in Marlborough, Mass.; and Manchester, N.H. Famous-Barr opened two locations, a Famous-Barr store in Evansville, Ind., and an L.S. Ayres store in Muncie, Ind. In addition, we remodeled 22 department stores in 1996, totaling 1.8 million retail square feet, which included the expansion of 12 stores by 405,000 square feet. At fiscal year-end, May operated 365 department stores in 30 states and the District of Columbia. Nine department stores were closed during the year, resulting in a net increase of 19 department stores and 4.0 million square feet of retail space. This is the third consecutive year of significant store openings following several years in which the department store count decreased as new department store openings were more than offset by the closings of low-productivity stores. During 1996, the company purchased 13 former Strawbridge & Clothier department stores in the greater Philadelphia area. These stores were added to the existing Hecht's stores in Philadelphia. All operate under the name Strawbridge's. The Strawbridge's operation enjoys a strong leadership position in Philadelphia. The company delivered 4.5 million shares of May common stock and assumed $255 million of debt and certain other liabilities in exchange for the Strawbridge & Clothier department store assets. Subsequent to the transaction, the company repurchased 4.5 million shares in the open market. In addition to the repurchase of 4.5 million shares, the company used its financial strength to purchase 12.7 million shares for $600 million. These stock purchases and corresponding borrowings result in a capital structure that is better balanced for shareowners and debtholders. In February 1997, the company announced plans to repurchase up to $300 million of May common stock. In May 1996, May completed the spin-off of Payless ShoeSource, Inc. ("Payless"), a self-service family shoe store subsidiary, as a tax-free distribution to shareowners. Payless is reported as a discontinued operation. Our expansion program for 1997 includes 13 new department stores, totaling 2.0 million square feet of retail space. In addition, the company plans to remodel 29 department stores totaling 2.4 million square feet of retail space, which includes the expansion of 13 stores by a total of 430,000 square feet. The 1997-2001 new-store plan would add 100 new department stores totaling 15 million retail square feet, a 4% net annualized increase in department store square footage. During this five-year period, May plans to invest $1.7 billion for new stores, $650 million to expand and remodel existing stores, and $560 million related to systems and operations. These are the major components of a $3.4 billion capital plan.
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Earnings per share from continuing operations $0.83 $1.03 $1.23 $1.50 $1.51 $1.52 $1.76 $2.15 $2.43 $2.61 $2.82
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Net retail sales from continuing operations (in billions) $4.3 $4.7 $6.2 $7.0 $7.5 $7.9 $8.4 $9.0 $9.7 $10.5 $11.6
REVIEW OF OPERATIONS Net earnings from continuing operations totaled $749 million in 1996, compared with $700 million in 1995 and $650 million in 1994. Return on revenues was 6.2% in 1996, compared with 6.4% in 1995 and 1994. Fully diluted earnings per share from continuing operations reached $2.82 in 1996, compared with $2.61 in 1995 and $2.43 in 1994.
Results of continuing operations for the past three years were as follows: 1996 1995 1994 (DOLLARS IN MILLIONS, EXCEPT PERCENT OF PERCENT OF PERCENT OF PER SHARE) $ REVENUES $ REVENUES $ REVENUES NET RETAIL SALES $ 11,650 $ 10,484 $ 9,748 Revenues $ 12,000 100.0% $ 10,952 100.0% $ 10,107 100.0% Cost of sales 8,226 68.5 7,461 68.1 6,879 68.1 Selling, general and administra- tive expenses 2,265 18.9 2,081 19.0 1,916 18.9 Interest expense, net 277 2.3 250 2.3 233 2.3 Earnings before income taxes 1,232 10.3 1,160 10.6 1,079 10.7 Provision for income taxes* 483 39.3 460 39.7 429 39.7 NET EARNINGS $ 749 6.2% $ 700 6.4% $ 650 6.4% FULLY DILUTED EARNINGS PER SHARE $ 2.82 $ 2.61 $ 2.43 * Percent of Revenues column represents effective income tax rate.
Fiscal 1995 included 53 weeks; however, the additional week did not materially affect 1995 earnings. All net retail sales information in this Review of Operations is presented on a 52-week basis for comparability. Earnings before interest and taxes (EBIT) for the past three years were as follows: INCREASE (DOLLARS IN MILLIONS) 1996 1995 1994 1996 1995 Operating earnings $ 1,509 $ 1,410 $ 1,312 7.0% 7.5% Percent of revenues 12.6% 12.9% 13.0% EBIT presented above includes a LIFO (last-in, first out) credit of $20 million, $53 million, and $46 million in 1996, 1995, and 1994, respectively. EBIT, excluding LIFO, is presented below on a supplementary basis for comparative purposes: INCREASE (DOLLARS IN MILLIONS) 1996 1995 1994 1996 1995 Operating earnings $ 1,489 $ 1,357 $ 1,266 9.6% 7.2% Percent of revenues 12.4% 12.4% 12.5% May's 365 quality department stores are operated by eight regional department store companies across the United States, operating under 10 long-standing and widely recognized names. Each store company holds a leading market position in its region. The table below summarizes net retail sales, sales per square foot, building area square footage, and number of stores for each store company:
NET RETAIL BUILDING AREA SALES IN MILLIONS SALES PER SQUARE FOOTAGE OF DOLLARS SQUARE FOOT IN THOUSANDS NUMBER OF STORES STORE COMPANY AND HEADQUARTERS 1996 1995 1996 1995 1996 1995 1996 NEW CLOSED 1995 Lord & Taylor, New York City $1,718 $1,574 $241 $233 7,473 7,131 59 4 2 57 Hecht's, Washington, D.C. (Strawbridge's in Philadelphia) 2,159 1,650 193 207 12,787 10,455 71 14 5 62 Foley's, Houston 1,801 1,693 180 180 10,603 9,896 55 4 - 51 Robinsons-May, Los Angeles 1,751 1,562 185 170 9,808 9,568 54 1 - 53 Kaufmann's, Pittsburgh 1,447 1,394 191 201 7,968 7,747 47 1 - 46 Filene's, Boston 1,364 1,261 232 236 6,255 5,884 40 2 1 39 Famous-Barr, St. Louis (L.S. Ayres in Indianapolis) 1,022 983 201 201 5,454 5,189 31 2 1 30 Meier & Frank, Portland, Ore. 388 367 225 213 1,768 1,770 8 - - 8 The May Department Stores Company $11,650 $10,484 $201 $201 62,116 57,640 365 28 9 346 Net retail sales represent sales of stores open at the end of 1996. Sales per square foot are calculated from revenues and average gross retail square footage. Building area represents gross retail square footage of stores open at the end of the period presented.
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Year-end dividend rate per common share $0.52 $0.57 $0.64 $0.71 $0.79 $0.81 $0.83 $0.92 $1.04 $1.14 $1.16
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Sales per square foot $138 $143 $158 $168 $172 $171 $179 $191 $200 $201 $201
NET RETAIL SALES. Net retail sales (see page 21 for definition) increases for 1996 and 1995 were as follows: 1996 VS. 1995 1995 VS. 1994 FIVE-YEAR STORE-FOR- STORE-FOR- COMPOUND TOTAL STORE TOTAL STORE GROWTH RATE 11.1% 4.3% 7.5% 2.5% 8.2% The total sales increase for 1996 reflects the opening of 28 new department stores and a 4.3% store-for-store increase. The total sales increase for 1995 includes the results of 37 new department stores and a 2.5% store-for-store increase. Sales include leased and licensed department sales of $342 million, $311 million, and $290 million in 1996, 1995, and 1994, respectively. Revenues include finance charge revenues of $338 million, $340 million, and $334 million in 1996, 1995, and 1994, respectively. Finance charge revenues have remained relatively constant due to increased use of third-party credit cards. COST OF SALES. Cost of sales includes cost of merchandise sold and buying and occupancy costs. Cost of sales was $8.23 billion in 1996, compared with $7.46 billion in 1995, a 10.2% increase. The overall increase resulted from a 9.9% increase in sales (52 weeks in 1996 versus 53 weeks in 1995) and a decrease in the LIFO credit. As a percent of revenues, cost of sales increased 0.4% from 68.1% in 1995 to 68.5% in 1996. This increase was caused primarily by the decrease in the LIFO credit. Cost of sales was $7.46 billion in 1995, compared with $6.88 billion in 1994, an 8.5% increase. The overall increase resulted from an 8.6% increase in sales. As a percent of revenues, cost of sales remained constant between 1995 and 1994 at 68.1%. The impact of LIFO on cost of sales, as a percent of revenues, is shown below: 1996 1995 1994 Cost of sales 68.5% 68.1% 68.1% LIFO credit (0.2) (0.5) (0.4) Cost of sales before LIFO 68.7% 68.6% 68.5% SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and administrative expenses were $2.27 billion in 1996, compared with $2.08 billion in 1995, an 8.9% increase. The overall increase was due to a 9.6% increase in revenues. As a percent of revenues, selling, general, and administrative expenses decreased 0.1% to 18.9% in 1996, compared with 19.0% in 1995, as an increase in bad-debt expense was offset by efficiencies across the other selling, general, and administrative expense components. Selling, general, and administrative expenses were $2.08 billion in 1995, compared with $1.92 billion in 1994, an 8.6% increase. The overall increase was due to an 8.4% increase in revenues. As a percent of revenues, selling, general, and administrative expenses increased 0.1% to 19.0% in 1995, compared with 18.9% in 1994, as payroll costs increased at a slightly higher rate than revenues. Selling, general, and administrative expenses include advertising and sales promotion costs of $439 million, $404 million, and $370 million in 1996, 1995, and 1994, respectively. INTEREST EXPENSE. Interest expense components were: (DOLLARS IN MILLIONS) 1996 1995 1994 Interest expense $310 $283 $256 Interest income (16) (14) (8) Capitalized interest (17) (19) (15) Interest expense, net $277 $250 $233 Percent of revenues 2.3% 2.3% 2.3% The increase in 1996 net interest expense from 1995 was due to increased average borrowings related to store growth, including the acquisition of certain assets of Strawbridge & Clothier, and financing the company's common stock repurchases. The increase in 1995 net interest expense from 1994 was due to increased average borrowings related to store growth, including the acquisition of certain assets of John Wanamaker and Woodward & Lothrop. INCOME TAXES. The effective income tax rates were 39.3%, 39.7%, and 39.7% in 1996, 1995, and 1994, respectively. The 1996 effective income tax rate of 39.3% decreased compared with 1995 as the company realized a partial-year benefit from our reincorporation in the state of Delaware and an overall decrease in our effective federal tax rate.
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Common stock price range: Low price $15.94 $11.13 $14.38 $17.31 $18.69 $22.63 $26.00 $33.44 $32.25 $33.50 $40.50 High price $22.06 $25.44 $20.00 $26.31 $29.56 $30.19 $37.25 $46.50 $45.13 $46.25 $52.25 Closing price $21.31 $16.81 $18.75 $22.88 $22.75 $27.44 $35.19 $39.75 $35.13 $43.88 $44.50
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Book value per common share (1996 reflects the spin-off of Payless) $ 8.50 $ 9.13 $10.75 $ 9.32 $10.04 $11.26 $12.82 $14.65 $16.65 $18.42 $15.41
IMPACT OF INFLATION. Inflation has not had a material impact on the company's 1996 sales growth and earnings. The company values its inventory on a LIFO basis, and as a result, the current cost of merchandise is reflected in current operating results. DISCONTINUED OPERATION. In January 1996, the company announced its intention to spin off Payless, its chain of self-service family shoe stores. The spin-off was completed effective May 4, 1996, as a tax-free distribution to shareowners. REVIEW OF FINANCIAL CONDITION We continue to meet our objective of generating superior shareowner returns while maintaining access to capital at reasonable costs. RETURN ON EQUITY. Return on equity is our principal measure in evaluating our performance for shareowners and our ability to invest shareowners' funds profitably. Our objective is performance that places our return on equity in the top quartile of the retail industry. Return on beginning equity was 19.4% in 1996, compared with 20.8% in 1995, and 21.3% in 1994. The 1996 decrease results in part from our share repurchase. The cost of the share repurchase is included in interest expense with no corresponding reduction in beginning equity. RETURN ON NET ASSETS. Return on continuing operations' net assets measures performance independent of capital structure. Return on continuing operations' net assets represents pretax earnings before net interest expense and the interest component of operating leases, divided by beginning of year continuing operations' net assets (including present value of operating leases). Return on continuing operations' net assets was 18.8% in 1996, compared with 20.1% in 1995 and 1994. CASH FLOW. Cash flow from continuing operations (earnings plus depreciation/amortization) was $1.1 billion. This was 9.3% of revenues in 1996, compared with 9.4% in 1995 and 1994. The company's cash flow as a percent of revenues continues to be one of the highest in the retail industry, and it provides the company significant resources to invest in its business. Sources and (uses) of cash flows are summarized below: (MILLIONS) 1996 1995 1994 Earnings and depreciation/amortization $1,122 $1,033 $947 Working capital (increases) decreases 142 (330) (165) Discontinued operation (13) 97 (1) Other operating activities 8 48 (17) Investing activities (603) (871) (580) Net long-term debt issuances 412 444 118 Net purchases of common stock (820) (14) (23) Dividend payments (305) (296) (270) Increase (decrease) in cash and cash equivalents $ (57) $ 111 $ 9 FINANCING ACTIVITIES. Debt issuances for the second through fourth quarters of 1996 were $200 million, $475 million, and $125 million, respectively. Maturities range from 2005 to 2036, with interest rates ranging from 6.875% to 8.30%. The proceeds from the issuances were added to the company's general funds. They were available for stock repurchases, capital expenditures, working capital needs, the purchase of certain of the company's other indebtedness, and other general corporate purposes, including investments and acquisitions. During the fourth quarter of 1996, the company recorded an extraordinary aftertax loss of $5 million ($8 million pretax) as it retired $150 million of 9.125% debentures due to mature December 1, 2016. During the fourth quarter of 1995, the company recorded an extraordinary aftertax loss of $3 million ($5 million pretax) as it executed a binding contract to call $112 million of 9.25% debentures due to mature March1, 2016. The debentures were called, effective March 1, 1996. FINANCIAL CONDITION RATIOS. Our debt-to-capitalization and fixed charge coverage ratios are consistent with our capital structure objective. They provide us with substantial financial flexibility.
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Return on equity 15.7% 17.0% 18.6% 18.0% 21.8% 20.7% 21.5% 22.1% 21.3% 20.8% 19.4%
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Return on net assets from continuing operations 15.4% 15.7% 16.2% 16.9% 15.8% 14.5% 15.4% 19.0% 20.1% 20.1% 18.8%
The debt-to-capitalization ratios were 48%, 42%, and 41% for 1996, 1995, and 1994, respectively. For purposes of the debt-to-capitalization ratio, total debt is defined as short-term and long-term debt (including the ESOP debt reduced by unearned compensation), redeemable preferred stock, and the capitalized value of all leases, including operating leases. Capitalization is defined as total debt, noncurrent deferred taxes, ESOP Preference Shares, and shareowners' equity. The 1996 debt-to-capitalization ratio increased because of the common stock repurchases previously discussed and debt assumed in the Strawbridge & Clothier transaction. See Profit Sharing on page 22 for discussion of the ESOP. The fixed-charge coverage ratios were 4.1x in 1996, and 4.2x for 1995 and 1994. Fixed charges are defined as gross interest expense, interest expense on the ESOP debt, total rent expense, and the pretax equivalent of dividends on redeemable preferred stock. Our bonds continue to be rated A2 by Moody's Investors Service, Inc. and A by Standard & Poor's Corporation. Our commercial paper is rated P1 by Moody's and A1 by Standard & Poor's. CAPITAL EXPENDITURES. Our strong financial condition enables us to make capital expenditures to enhance shareowners' returns. Return on net assets, internal rate of return, and sales per square foot are emphasized as the principal operating measures as we invest in new stores and remodelings, and as we eliminate unproductive space. Capital expenditures in 1997 will approximate $635 million. Capital expenditures for the 1997 - 2001 period are planned at $3.4 billion. We intend to use internal cash flow to finance substantially all of these expenditures. AVAILABLE CREDIT. The company has $750 million of available borrowing under its multiyear credit agreement. In addition, the company has filed with the Securities and Exchange Commission a shelf registration statement that would enable it to issue up to $500 million of additional debt securities. COMMON STOCK DIVIDENDS AND MARKET PRICES. Our dividend policy is based on historical and expected earnings growth rates and capital investment requirements. Our objective is to increase dividends on common stock consistent with our long-term earnings growth. The 1997 annual dividend rate was increased by 3.4%, or $.04 per share, to $1.20 per share. This is the 22nd consecutive annual dividend increase. The new annual dividend rate of $1.20 per share was effective with the March 1997 dividend payment. Dividends paid have increased at a compound rate of 7.4% during the past five years. This rate is lower than the five-year compound earnings growth rate of 13.2% as, over time, we are adjusting our dividend payout ratio to reflect the spin-off of Payless. The company has paid consecutive quarterly dividends since December 1, 1911. The quarterly price ranges of the common stock and dividends per share in 1996 and 1995 were: 1996 1995 MARKET PRICE DIVIDENDS MARKET PRICE DIVIDENDS QUARTER HIGH LOW PER SHARE HIGH LOW PER SHARE First $51-7/8 $43-3/8 $ .28-1/2 $38 $33-1/2 $ .26 Second 52-1/4 40-1/2 .29 44-1/4 35-1/4 .28-1/2 Third 49-1/2 44-1/8 .29 45-3/8 37 .28-1/2 Fourth 49-5/8 43-5/8 .29 46-1/4 38-3/8 .28-1/2 Year $52-1/4 $40-1/2 $1.15-1/2 $46-1/4 $33-1/2 $1.11-1/2 The approximate number of common shareowners as of March 1, 1997, was 43,100. Effective May 4, 1996, the company distributed the common shares of Payless pro rata to May common shareowners of record on April 25, 1996. The May common stock price on May 8, 1996, was adjusted by the New York Stock Exchange from $50.00 per share to $45.25 per share, reflecting the impact of the distribution of the Payless common stock to May common shareowners.
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 (in millions) Cash flow from continuing operations $ 454 $ 505 $ 599 $ 659 $ 657 $ 677 $ 755 $ 859 $ 947 $1,033 $1,122 Depreciation and amortization $ 189 $ 187 $ 236 $ 234 $ 253 $ 273 $ 283 $ 281 $ 297 $ 333 $ 373 Net earnings $ 264 $ 318 $ 362 $ 425 $ 404 $ 404 $ 472 $ 578 $ 650 $ 700 $ 749
[The following "Consolidated Financial Statements" section is a reproduction of the same named section included in the Annual Report on pages 17 - 20.]
Consolidated Statement of Earnings (DOLLARS IN MILLIONS, EXCEPT PER SHARE) 1996 1995 1994 Net Retail Ssles $11,650 $10,484 $ 9,748 Revenues $12,000 $10,952 $10,107 Cost of sales 8,226 7,461 6,879 Selling, general, and administrative expenses 2,265 2,081 1,916 Interest expense, net 277 250 233 Total cost of sales and expenses 10,768 9,792 9,028 Earnings from continuing operations before income taxes 1,232 1,160 1,079 Provision for income taxes 483 460 429 NET EARNINGS FROM CONTINUING OPERATIONS 749 700 650 Net earnings from discontinued operation 11 55 132 Net earnings before extraordinary loss 760 755 782 Extraordinary loss related to early extinguishment of debt, net of income taxes (5) (3) - Net earnings $ 755 $ 752 $ 782 Primary Earnings per Share: Continuing operations $ 2.94 $ 2.73 $ 2.53 Discontinued operation 0.05 0.22 0.53 Net earnings before extraordinary loss 2.99 2.95 3.06 Extraordinary loss (0.02) (0.01) - Primary Earnings per Share $ 2.97 $ 2.94 $ 3.06 FULLY DILUTED EARNINGS PER SHARE: CONTINUING OPERATIONS $ 2.82 $ 2.61 $ 2.43 Discontinued operation 0.04 0.21 0.49 Net earnings before extraordinary loss 2.86 2.82 2.92 Extraordinary loss (0.02) (0.01) - Fully Diluted Earnings per Share $ 2.84 $ 2.81 $ 2.92 Fiscal 1995 was a 53-week year. Net retail sales for fiscal 1995 are shown on a 52-week basis for comparability. Net retail sales for the 53 weeks ended February 3, 1996, were $10,588. See Notes to Consolidated Financial Statements.
Consolidated Balance Sheet FEBRUARY 1, FEBRUARY 3, (DOLLARS IN MILLIONS, EXCEPT PER SHARE) 1997 1996 ASSETS Current Assets: Cash $ 12 $ 12 Cash equivalents 90 147 Accounts receivable, net 2,425 2,403 Merchandise inventories 2,380 2,134 Other current assets 128 169 Net current assets of discontinued operation - 232 Total Current Assets 5,035 5,097 Property and Equipment: Land 287 238 Buildings and improvements 3,252 2,908 Furniture, fixtures, and equipment 2,765 2,416 Property under capital leases 68 75 Total property and equipment 6,372 5,637 Accumulated depreciation (2,213) (1,893) Property and equipment, net 4,159 3,744 Goodwill 776 671 Other Assets 89 89 Net Noncurrent Assets of Discontinued Operation - 521 Total Assets $10,059 $10,122 LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities: Current maturities of long-term debt $ 256 $ 132 Accounts payable 872 692 Accrued expenses 658 650 Income taxes payable 137 128 Total Current Liabilities 1,923 1,602 Long-term Debt 3,849 3,333 Deferred Income Taxes 401 378 Other Liabilities 223 204 ESOP Preference Shares 347 366 Unearned Compensation (334) (346) Shareowners' Equity: Common stock 118 124 Additional paid-in capital - - Retained earnings 3,532 4,461 Total Shareowners' Equity 3,650 4,585 Total Liabilities and Shareowners' Equity $10,059 $10,122 Common stock has a par value of $.50 per share; 700 million shares are authorized and 313.6 million shares were issued. At February 1, 1997, 236.9 million shares were outstanding, and 76.7 million shares were held in treasury. At February 3, 1996, 248.9 million shares were outstanding, and 64.7 million shares were held in treasury. ESOP Preference Shares have a par value of $.50 per share, a stated value of $507 per share, and 800,000 shares are authorized. At February 1, 1997, 685,050 shares (convertible into 15.4 million shares of common stock) were issued and outstanding. At February 3, 1996, 722,111 shares (convertible into 14.8 million shares of common stock) were issued and outstanding. See Preferred and Preference Stock in Notes to Consolidated Financial Statements for discussion of other preferred stock. See Notes to Consolidated Financial Statements. Consolidated Statement of Cash Flows (DOLLARS IN MILLIONS) 1996 1995 1994 OPERATING ACTIVITIES: Net earnings from continuing operations $ 749 $ 700 $ 650 Net earnings from discontinued operation 11 55 132 Extraordinary loss related to early extinguishment of debt, net of income taxes (5) (3) - Net earnings 755 752 782 Adjustments for noncash items included in earnings: Depreciation and amortization 373 333 297 Deferred income taxes (noncurrent) 62 42 15 Deferred and unearned compensation 10 15 16 Working capital changes* 142 (330) (165) Other assets and liabilities, net (59) (6) (48) Total Operating Activities 1,283 806 897 INVESTING ACTIVITIES: Capital expenditures (632) (801) (682) Dispositions of property and equipment 53 20 106 Goodwill (24) (89) - Other - (1) (4) Cash provided by (used in) discontinued operation (24) 42 (133) Total Investing Activities (627) (829) (713) FINANCING ACTIVITIES: Issuances of long-term debt 800 600 200 Repayments of long-term debt (388) (156) (82) Purchases of common stock (869) (71) (56) Issuances of common stock 49 57 33 Dividend payments (305) (296) (270) Total Financing Activities (713) 134 (175) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (57) 111 9 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 159 48 39 CASH AND CASH EQUIVALENTS, END OF YEAR $ 102 $ 159 $ 48 *Working capital changes comprise: Accounts receivable, net $ 137 $ 29 $ (43) Merchandise inventories (211) (321) (166) Other current assets 45 13 14 Accounts payable 180 (43) (44) Accrued expenses (18) (8) (6) Income taxes payable 9 - 80 Net decrease (increase) in working capital $ 142 $(330) $(165) Cash paid during the year: Interest $ 288 $ 268 $ 240 Income taxes 380 448 418 Noncash investing and financing activities include conversions of ESOP Preference Shares into common stock of $19 million, $8 million, and $7 million in 1996, 1995, and 1994, respectively. See Notes to Consolidated Financial Statements.
Consolidated Statement of Shareowners' Equity OUTSTANDING COMMON STOCK ADDITIONAL TOTAL (DOLLARS IN MILLIONS, PAID-IN RETAINED SHAREOWNERS' SHARES IN THOUSANDS) SHARES DOLLARS CAPITAL EARNINGS EQUITY BALANCE AT JANUARY 29, 1994 248,342 $ 124 $ 21 $3,494 $3,639 Net earnings - - - 782 782 Dividends paid: Common stock ($1.01 per share) - - - (251) (251) ESOP Preference Shares, net of tax benefit - - - (19) (19) Preferred stock - - - - - Common stock issued 1,429 1 39 - 40 Purchase of common stock (1,388) (1) (55) - (56) BALANCE AT JANUARY 28, 1995 248,383 124 5 4,006 4,135 Net earnings - - - 752 752 Dividends paid: Common stock ($1.11-1/2 per share) - - - (277) (277) ESOP Preference Shares, net of tax benefit - - - (19) (19) Preferred stock - - - - - Common stock issued 2,198 1 64 - 65 Purchase of common stock (1,710) (1) (69) (1) (71) BALANCE AT FEBRUARY 3, 1996 248,871 124 - 4,461 4,585 Net earnings - - - 755 755 Dividends paid: Common stock ($1.15-1/2 per share) - - - (287) (287) ESOP Preference Shares, net of tax benefit - - - (18) (18) Preferred stock - - - - - Common stock issued 6,646 3 258 - 261 Purchase of common stock (18,591) (9) (258) (602) (869) Distribution of equity in Payless ShoeSource, Inc. - - - (777) (777) BALANCE AT FEBRUARY 1, 1997 236,926 $ 118 $ - $3,532 $3,650
Outstanding common stock excludes shares held in treasury. Treasury share activity for the last three years is summarized below: 1996 1995 1994 BALANCE, BEGINNING OF YEAR 64,766 65,254 65,295 Common stock issued: Exercise of stock options (997) (1,419) (677) Deferred compensation plan (150) (158) (181) Restricted stock grants, net of forfeitures (246) (236) (157) Contribution to Profit Sharing Plan - (89) (145) Conversion of ESOP Preference Shares (796) (296) (269) Strawbridge & Clothier acquisition (4,457) - - (6,646) (2,198) (1,429) Purchase of common stock 18,591 1,710 1,388 BALANCE, END OF YEAR 76,711 64,766 65,254 See Notes to Consolidated Financial Statements. [The following "Notes to Consolidated Financial Statements" section is a reproduction of the same named section included in the paper format Annual Report on pages 21 - 27.] Notes to Consolidated Financial Statements SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR. The company's fiscal year ends on the Saturday closest to January 31. Fiscal years 1996, 1995, and 1994 ended on February 1, 1997, February 3, 1996, and January 28, 1995, respectively. Fiscal 1995 included 53 weeks. References to years in this annual report relate to fiscal years rather than calendar years. BASIS OF REPORTING. The consolidated financial statements include the accounts of the company and all wholly owned subsidiaries (the company), reflecting the operation of 365 quality department stores. The consolidated financial statements reflect Payless ShoeSource, Inc. ("Payless"), as a discontinued operation through May 4, 1996. All the following notes, except Discontinued Operation on page 27, reflect data on a continuing operations basis. USE OF ESTIMATES. Management makes estimates and assumptions that affect the amounts reported in the consolidated statements of earnings, shareowners' equity and cash flows, the consolidated balance sheet, and notes to consolidated financial statements. Actual results could differ from these estimates. NET RETAIL SALES AND REVENUES. Net retail sales (sales) represent sales of stores operating at the end of the latest period, and exclude finance charge revenues and the sales of stores that have been closed and not replaced. Sales include sales of merchandise and services, and sales from leased and licensed departments. Sales are net of returns and exclude sales tax. Store-for-store sales represent sales of those stores open during both years. Revenues include finance charge revenues and all sales from all stores operating during the period. COST OF SALES. Cost of sales includes the cost of merchandise sold and buying and occupancy costs. ADVERTISING COSTS. Advertising and sales promotion costs are expensed at the time the advertising takes place. PREOPENING EXPENSES. Costs associated with the opening of new stores are expensed during the year incurred. INCOME TAXES. Income taxes are accounted for using a balance sheet approach known as the liability method. The liability method accounts for deferred income taxes by applying statutory tax rates in effect at the date of the balance sheet to differences between the book basis and the tax basis of assets and liabilities. Adjustments to deferred taxes resulting from statutory rate changes flow through the tax provision in the year of the change. EARNINGS PER SHARE. Primary earnings per share are computed by dividing net earnings less dividend requirements on redeemable preferred stock and ESOP Preference Shares (net of related income tax benefits on unallocated shares) by the average number of shares of common stock outstanding and common share equivalents during the period. Fully diluted earnings per share assume conversion of the ESOP Preference Shares into common stock, and adjust net earnings for the additional expense required to fund the ESOP debt service resulting from the assumed replacement of the ESOP Preference Shares dividends with common stock dividends. The average number of shares of common stock outstanding and common share equivalents used to calculate fully diluted earnings per share were 264.1 million, 265.3 million, and 264.9 million in 1996, 1995, and 1994, respectively. References to earnings per share in this annual report relate to fully diluted earnings per share. STOCK-BASED COMPENSATION. In 1996, the company adopted the alternative under Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," which allows for continued application of APB Opinion No. 25 in accounting for stock-based compensation. CASH EQUIVALENTS. Cash equivalents consist primarily of commercial paper with maturities of less than three months. Cash equivalents are stated at cost, which approximates fair value. ACCOUNTS RECEIVABLE. In accordance with industry practice, installments on deferred payment accounts receivable maturing in more than one year have been included in current assets. MERCHANDISE INVENTORIES. Merchandise inventories are valued by the retail method and are stated on the LIFO (last-in, first-out) cost basis, which is lower than market. The accumulated LIFO provision was $98 million and $118 million in 1996 and 1995, respectively. PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost. Property and equipment are depreciated on a straight-line basis over their estimated useful lives. Investments in properties under capital leases and leasehold improvements are amortized over the shorter of their useful lives or their related lease terms. GOODWILL. Goodwill represents the excess of cost over the fair value of net tangible assets acquired, at the dates of acquisition. Substantially all amounts are amortized using the straight-line method over a 40-year period. Goodwill is presented in the consolidated balance sheet net of accumulated amortization of $151 million and $129 million in 1996 and 1995, respectively. LONG-LIVED ASSETS. Beginning in 1995, long-lived assets and certain identifiable intangibles to be held and used or disposed of were reviewed to determine whether the carrying amount of the asset was recoverable. No impairment losses needed to be recognized for applicable assets of continuing operations. DERIVATIVES POLICY. The company's policy is to use financial derivatives only to reduce risk in conjunction with specific business transactions. Gains and losses on hedges of existing assets or liabilities are included in the respective balance sheet amounts. Gains and losses related to hedges of firm commitments or anticipated transactions are deferred and recognized in operating results or included in balance sheet amounts when the transaction occurs. RECLASSIFICATIONS. Certain prior-period amounts have been reclassified to conform with the current-year presentation. QUARTERLY RESULTS (UNAUDITED) Quarterly results of continuing operations are determined in accordance with the annual accounting policies. They include certain items based upon estimates for the entire year. Summarized quarterly results for the last two years were as follows: (MILLIONS, EXCEPT PER SHARE) 1996 QUARTER FIRST SECOND THIRD FOURTH YEAR Revenues $2,511 $2,533 $2,855 $4,101 $12,000 Cost of sales $1,755 $1,773 $2,004 $2,694 $ 8,226 NET EARNINGS FROM CONTINUING OPERATIONS $ 98 $ 110 $ 118 $ 423 $ 749 Primary earnings per share from continuing operations $ 0.37 $ 0.42 $ 0.45 $ 1.70 $ 2.94 FULLY DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS $ 0.36 $ 0.41 $ 0.44 $ 1.61 $ 2.82 (MILLIONS, EXCEPT PER SHARE) 1995 QUARTER FIRST SECOND THIRD FOURTH YEAR Revenues $2,218 $2,325 $2,569 $3,840 $10,952 Cost of sales $1,543 $1,625 $1,798 $2,495 $ 7,461 NET EARNINGS FROM CONTINUING OPERATIONS $ 87 $ 107 $ 110 $ 396 $ 700 Primary earnings per share from continuing operations $ 0.33 $ 0.41 $ 0.42 $ 1.57 $ 2.73 FULLY DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS $ 0.32 $ 0.40 $ 0.41 $ 1.48 $ 2.61 There are variables and uncertainties in the factors used to estimate the annual LIFO provision (credit) on an interim basis. The following unaudited supplementary information shows the pro forma per share impact of LIFO had the final variables and factors been known at the beginning of each year. 1996 1995 PRO AS PRO AS QUARTER FORMA REPORTED FORMA REPORTED First $(0.01) $ 0.02 $(0.02) $ 0.02 Second (0.01) 0.02 (0.03) 0.02 Third (0.01) 0.00 (0.03) 0.00 Fourth (0.02) (0.09) (0.04) (0.16) Year $(0.05) $(0.05) $(0.12) $(0.12) ACQUISITIONS On July 18, 1996, the company purchased 13 former Strawbridge & Clothier department stores in the greater Philadelphia area. The company delivered 4.5 million shares of May common stock and assumed $255 million of debt and certain other liabilities in exchange for the Strawbridge & Clothier department store assets. In August 1995, the company purchased 14 John Wanamaker stores in the Philadelphia area and three Woodward & Lothrop stores in the Washington, D.C., area, for approximately $412 million. This acquisition was funded principally with long-term debt. These asset acquisitions have been accounted for as purchases, and accordingly, the operating results of the acquired stores have been included in the company's consolidated results since the acquisition dates. The acquisitions did not have a material effect on the results of operations or financial position of the company in 1996 or 1995. PROFIT SHARING The company has a qualified profit-sharing plan that covers substantially all associates who work 1,000 hours or more in a year and have attained age 21. The plan is a defined contribution program that provides for discretionary matching allocations at a variable matching rate generally based upon changes in the company's annual earnings per share, as defined in the plan. The plan's matching allocation value totaled $43 million in 1996, representing a record effective match rate of 103%. The matching allocation value was $33 million and $29 million in 1995 and 1994, respectively. The company's Profit Sharing Plan includes an Employee Stock Ownership Plan (ESOP) under which the Profit Sharing Plan borrowed $400 million in 1989, guaranteed by the company, at an average rate of 8.5% with an average maturity of 12 years. The proceeds were used to purchase $400 million, or 788,955 shares, of a new class of convertible preference stock of the company (ESOP Preference Shares). Each share is currently convertible into 22.525 shares of common stock and has a stated value of $22.51 per common share equivalent. The annual dividend rate on the ESOP Preference Shares is 7.5%, and the shares are redeemable by the holder or the company in certain situations. The $363 million outstanding portion of the guaranteed ESOP debt is reflected on the consolidated balance sheet as long-term debt because the company will ultimately fund the required debt service. The company's contributions to the ESOP, along with the dividends on the ESOP Preference Shares, are used to repay the loan principal and interest. Interest expense associated with the ESOP debt was $31 million in 1996, $32 million in 1995, and $33 million in 1994. ESOP Preference Shares dividends were $26 million in 1996, and $28 million in 1995 and 1994. ESOP debt principal payments began in 1993. The release of ESOP Preference Shares is based upon debt-service payments, and the shares are allocated to participating associates' accounts. Unearned compensation, initially an equal, offsetting amount to the $400 million guaranteed ESOP debt, has been adjusted for the difference between the expense related to the ESOP and cash payments to the ESOP, and it is amortized as principal is repaid. The company's expense related to the Profit Sharing Plan was $22 million, $17 million, and $19 million in 1996, 1995, and 1994, respectively. At February 1, 1997, the Profit Sharing Plan beneficially owned 11.5 million shares of the company's common stock and 100% of the company's ESOP Preference Shares. The Preference Shares are convertible into 15.4 million shares of the company's common stock, which represents 10.7% of the company's common stock on a fully converted basis. PENSION The company has a qualified retirement plan that covers substantially all associates who work 1,000 hours or more in a year and have attained age 21. The plan is noncontributory. It provides benefits based upon years of service and pay during employment. In addition, during 1996 the company assumed a fully funded qualified pension plan in connection with the acquisition of the Strawbridge & Clothier department store assets. This plan operates under provisions similar to those of the company's qualified plan. The acquired plan has an accumulated benefit obligation of $98 million and a pro-projected benefit obligation of $98 million. At February 1, 1997, the qualified plans' assets exceed the accumulated benefit obligation by $62 million. The company also maintains a nonqualified supplementary retirement plan for certain associates. Further, the company assumed a similar nonqualified supplementary retirement plan from Strawbridge & Clothier with an accumulated benefit obligation of $13 million and a projected benefit obligation of $13 million. Pension expense is based on information provided by an outside actuarial firm, which uses assumptions to estimate the total benefits ultimately payable to associates and then allocates this cost to service periods. The actuarial assumptions used to calculate pension costs are reviewed annually. The following tables summarize the funded status of the plans, components of pension expense, actuarial assumptions, and definitions of terms for both the qualified and nonqualified plans. QUALIFIED PLANS (FUNDED) (MILLIONS) 1996 1995 Actuarial Present Value of Benefit Obligations: Vested benefit obligation $ 323 $ 213 Nonvested benefit obligation 24 16 Accumulated benefit obligation (ABO) 347 229 Estimated effect of future salary increases 33 35 Projected benefit obligation (PBO) 380 264 Plan assets at fair value (primarily equity and fixed income securities) 409 290 Plan assets in excess of PBO 29 26 Unrecognized obligation 1 1 Unrecognized gain (32) (30) Unrecognized prior service cost 2 3 Accrued pension cost $ 0 $ 0 Plan assets in excess of ABO $ 62 $ 61 NONQUALIFIED PLANS (UNFUNDED) (MILLIONS) 1996 1995 Actuarial Present Value of Benefit Obligations: Vested benefit obligation $ 59 $ 47 Nonvested benefit obligation 13 13 Accumulated benefit obligation (ABO) 72 60 Estimated effect of future salary increases 18 14 Projected benefit obligation (PBO) 90 74 Plan assets at fair value 0 0 Plan assets less than PBO (90) (74) Unrecognized obligation 2 2 Unrecognized loss 3 3 Unrecognized prior service cost 13 18 Accrued pension cost $ (72) $ (51) Plan assets less than ABO $ (72) $ (60) The accrued pension cost is included in other liabilities on the accompanying balance sheet. Accrued pension cost principally represents amounts expensed but not yet contributed to the nonqualified supplementary retirement plans. COMPONENTS OF PENSION EXPENSE (ALL PLANS) (MILLIONS) 1996 1995 1994 Service cost $27 $21 $22 Interest on PBO 24 22 19 Actual return on assets (30) (61) 6 Net amortization and deferral 10 46 (19) Total $31 $28 $28 ACTUARIAL ASSUMPTIONS JANUARY 1, 1997 1996 1995 Discount rate 7.5 % 7.0 % 8.0 % Expected return on plan assets 7.75 7.25 8.25 Salary increase 4.5 4.0 5.0 At the end of 1996, the discount rate was increased as a result of a general increase in interest rates during the year. DEFINITIONS OF TERMS: ABO is the actuarial present value of benefits (both vested and nonvested) attributed by the pension benefit formula to prior associate service; it is based on current and past compensation levels. PBO is the actuarial present value of benefits attributed by the pension benefit formula to prior associate service; it takes into consideration future salary increases. Accrued pension cost is the balance sheet accrued expense not yet paid to a plan. Net amortization and deferral represents the net effect during the period of the delayed recognition provisions of SFAS No. 87. Another important element in the retirement programs for associates is the federal Social Security system, into which the company paid $135 million in 1996 as its matching contribution to the $135 million paid in by associates. The company maintains a postretirement benefit plan for certain associates. Benefits vary by the group of associates covered. They include fixed or variable benefits for life and/or health insurance. At the end of 1996, the company increased the discount rate assumption from 7.0% to 7.5%, which resulted in a $2 million decrease in the present value of future obligations. As of February 1, 1997, the company's estimated present value of future obligations for postretirement benefits of $41 million is fully accrued in accordance with SFAS No. 106, "Employers' Accounting for Post-retirement Benefits Other Than Pensions." The estimated future obligations are based upon assumed annual health care cost increases of 11% for 1997, decreasing by 1% annually to 7% for 2001 and future years. A one-percentage-point increase/ decrease in the assumed annual health care cost increases would increase/decrease the present value of estimated future obligations for postretirement benefits by $1 million. The postretirement plan is unfunded. The postretirement expense was $3 million, $2 million, and $3 million in 1996, 1995, and 1994, respectively. TAXES The provision for income taxes and related percent of pretax earnings for the last three years were as follows: 1996 1995 1994 (DOLLARS IN MILLIONS) $ % $ % $ % Federal $344 $343 $331 State and local 69 70 72 Taxes currently payable 413 33.6% 413 35.7% 403 37.3% Federal 58 40 22 State and local 12 7 4 Deferred taxes 70 5.7 47 4.0 26 2.4 Total $483 39.3% $460 39.7% $429 39.7% The reconciliation between the statutory federal income tax rate and the effective income tax rate for the last three years follows: 1996 1995 1994 Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes 6.6 6.7 7.2 Federal tax benefit of state and local income taxes (2.3) (2.3) (2.5) Other, net - 0.3 - Effective income tax rate 39.3% 39.7% 39.7% Major components of deferred tax assets and (liabilities) were as follows: FEBRUARY 1, FEBRUARY 3, (MILLIONS) 1997 1996 Accrued expenses and reserves $ 130 $ 132 Deferred and other compensation 103 104 Depreciation/amortization and basis differences (407) (323) Other deferred income tax liabilities, net (155) (173) Net deferred income taxes (329) (260) Less: Net current deferred income tax assets 72 118 Noncurrent deferred income taxes $(401) $(378) Net current deferred income tax assets are included in other current assets in the accompanying balance sheet. ACCOUNTS RECEIVABLE During 1996, credit sales under department store credit programs were $6.0 billion, or 50.0% of 1996 department store revenues; this compares with 54.5% in 1995 and 57.3% in 1994. An estimated 30 million customers hold credit cards under the company's various credit programs. Sales made through third-party credit cards totaled $3.0 billion in 1996, compared with $2.4 billion in 1995 and $1.8 billion in 1994. Net accounts receivable consisted of: FEBRUARY 1, FEBRUARY 3, (MILLIONS) 1997 1996 Customer accounts receivable $2,410 $2,377 Other accounts receivable 119 101 Total accounts receivable 2,529 2,478 Allowance for uncollectible accounts (104) (75) Accounts receivable, net $2,425 $2,403 OTHER CURRENT ASSETS In addition to net current deferred income tax assets, other current assets consisted of prepaid expenses and supply inventories of $56 million and $51 million in 1996 and 1995, respectively. OTHER ASSETS Major components of other assets included: FEBRUARY 1, FEBRUARY 3, (MILLIONS) 1997 1996 Notes receivable $32 $37 Deferred debt expense 31 26 ACCRUED EXPENSES Major components of accrued expenses included: FEBRUARY 1, FEBRUARY 3, (MILLIONS) 1997 1996 Insurance costs $197 $185 Salaries, wages, and employee benefits 105 89 Interest and rent expense 94 79 Sales and use and other taxes 91 96 Store closings and real estate-related 51 71 Advertising and other operating expenses 51 53 Construction costs 44 43 SHORT-TERM DEBT AND LINES OF CREDIT Short-term borrowings for the last three years were: (DOLLARS IN MILLIONS) 1996 1995 1994 Balance outstanding at year-end - - - Average balance outstanding $ 35 $ 75 $ 83 Average interest rate on average balance 5.7% 6.2% 5.0% Maximum balance outstanding $178 $246 $317 The average balance of short-term borrowings outstanding, primarily commercial paper, and the respective weighted average interest rates are based on the number of days such short-term borrowings were outstanding during the year. The company has $750 million available under a credit agreement. At February 1, 1997, there were no amounts outstanding under this agreement. LONG-TERM DEBT Long-term debt and capital lease obligations were: FEBRUARY 1, FEBRUARY 3, (DOLLARS IN MILLIONS) 1997 1996 5.7% to 10.75% unsecured notes and sinking-fund debentures due 1997 - 2036 $3,981 $3,341 3.0% to 10.0% mortgage notes and bonds due 1997 - 2012 66 65 Debt 4,047 3,406 Capital lease obligations 58 59 Total debt and capital lease obligations 4,105 3,465 Less current maturities 256 132 Total long-term $3,849 $3,333 In the second quarter of 1996, the company issued $200 million of 8.30% debentures due in 2026. During the 1996 third quarter, the company issued a total of $475 million in debt securities which comprised $200 million of 7.875% debentures due in 2036, $150 million of 7.45% debentures due in 2011, and $125 million of 7.45% debentures due in 2016. During the 1996 fourth quarter, the company issued $125 million of 6.875% debentures due in 2005. The proceeds from these issuances were added to the company's general funds. They were available for capital expenditures, working-capital needs, stock repurchases, the purchase of certain of the company's other indebtedness, and other general corporate purposes, including investments and acquisitions. During the 1996 fourth quarter, the company called $150 million of 9.125% debentures due to mature December 1, 2016, and recorded an extraordinary aftertax loss of $5 million ($8 million pretax). During the 1995 fourth quarter, the company recorded an extraordinary aftertax loss of $3 million ($5 million pretax), as it executed a binding contract to call $112 million of 9.25% debentures due to mature March 1, 2016. The debentures were called on March 1, 1996. The annual maturities of long-term debt, including sinking fund requirements, are $255 million, $237 million, $97 million, $250 million, and $83 million for 1997 through 2001, respectively. The net book value of property and equipment encumbered under long-term debt agreements was $107 million at February 1, 1997. LEASE OBLIGATIONS The company owns approximately 74% of its stores. Rental expense for the company's operating leases consisted of: (MILLIONS) 1996 1995 1994 Minimum rentals $45 $38 $38 Contingent rentals based on sales 17 15 14 Real property rentals 62 53 52 Equipment rentals 4 4 5 Total $66 $57 $57 Future minimum lease payments at February 1, 1997, were as follows: CAPITAL OPERATING (MILLIONS) LEASES LEASES TOTAL 1997 $ 8 $ 44 $ 52 1998 8 40 48 1999 7 35 42 2000 7 32 39 2001 7 29 36 After 2001 115 297 412 Minimum lease payments 152 $477 $629 Less imputed interest component 94 Present value of net minimum lease payments, of which $1 million is included in current liabilities $ 58 The present value of operating leases was $242 million at February 1, 1997. Property under capital leases is summarized as follows: FEBRUARY 1, FEBRUARY 3, (MILLIONS) 1997 1996 Cost $ 68 $ 75 Accumulated amortization (34) (39) Total $ 34 $ 36 OTHER LIABILITIES In addition to accrued pension cost, other liabilities principally consisted of deferred compensation liabilities of $151 million at February 1, 1997, and at February 3, 1996. Under the company's deferred compensation plan, eligible associates may elect to defer a portion of their compensation each year into cash and/or stock unit alternatives. The company makes payments in shares to settle obligations with most participants who defer in stock units, and maintains shares in treasury sufficient to settle all outstanding stock unit obligations. PREFERRED AND PREFERENCE STOCK The company is authorized to issue 25,134,474 shares of preferred and preference stock. The following table summarizes the authorized, issued, and outstanding shares by type: ISSUED AND OUTSTANDING FEBRUARY 1, FEBRUARY 3, 1997 1996 (DOLLARS IN MILLIONS, SHARES EXCEPT PER SHARE) AUTHORIZED $ SHARES $ SHARES Preferred Stock, no par value 51,323 $ - - $ 1 11,974 $1.80 Preference Stock, no par value 73,273 - - 1 26,653 3-3/4 % Cumulative Preference Stock, $100 par value per share 9,878 - - - - Preference Stock, $.50 par value per share, in the aggregate, including ESOP shares 25,000,000 $347 685,050 $366 722,111 The Preferred Stock and the $1.80 Preference Stock were included in other liabilities in 1995. The ESOP Preference Shares are shown separately in the consolidated balance sheet outside of shareowners' equity as the shares are redeemable by the holder or the company in certain situations. COMMON STOCK REPURCHASE PROGRAM During 1996, the company repurchased $600 million of its common stock (12.7 million shares) in the open market from time to time as market conditions allowed. In addition, on February 12, 1997, the company announced plans to repurchase up to $300 million of May common stock. Such purchases, which will be made in the open market from time to time as market conditions allow, are subject to Securities and Exchange Commission rules and regulations. STOCK OPTION AND STOCK-RELATED PLANS Under the company's common stock option plans, options are granted at the market price on the date of grant. Options to purchase may extend for a period of up to 10 years, may be exercised in installments only after stated intervals of time, and are conditional upon continued active employment with the company. The options may be exercised during certain periods following retirement, disability or death. During 1996, the number of stock options and option prices were adjusted proportionally to reflect the distribution of Payless common shares to May common shareowners. For comparability with 1996, option information for 1995 is presented on an adjusted basis. A summary of the status of the various stock option plans at the end of 1996 and 1995, and the changes within years is presented below: 1996 1995 RANGE OF AVERAGE RANGE OF AVERAGE (SHARES IN EXERCISE EXERCISE EXERCISE EXERCISE THOUSANDS) SHARES PRICES PRICE SHARES PRICES PRICE Outstanding at beginning of year 5,687 $11-40 $32 5,874 $11-40 $29 Granted 2,583 43-49 45 1,704 33-40 34 Exercised (1,042) 11-40 28 (1,567) 12-38 24 Forfeited or expired (507) 25-45 36 (324) 19-40 33 Outstanding at end of year 6,721 $11-49 $37 5,687 $11-40 $32 Exercisable at end of year 2,186 $11-40 $31 1,929 $11-40 $29 Shares available for additional grants 9,349 11,535 Fair value of options granted $17 $12 The following table summarizes information about stock options outstanding at February 1, 1997: OPTIONS OUTSTANDING OPTIONS EXERCISABLE AVERAGE RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE PRICES AT FEB. 1 LIFE PRICES AT FEB. 1 LIFE $ 11 4 4 $11 4 4 19-27 833 5 25 723 5 28-40 3,378 7 34 1,411 7 43-49 2,506 9 46 48 9 6,721 8 $31 2,186 6 Under the 1994 Stock Incentive Plan, the company is authorized to grant a maximum of 1.75 million shares of restricted stock to management associates. No monetary consideration is paid by associates who receive restricted stock. Restricted stock can be granted with or without performance restrictions. Restrictions, including performance restrictions, lapse over periods of up to 10years, as determined at the date of the grant. In 1996 and 1995, the company granted 257,790 and 274,750 shares of restricted stock, respectively, under the 1994 Stock Incentive Plan. The company's plans are accounted for by applying APB Opinion No. 25. For stock options, no compensation cost has been recognized because the option exercise price is fixed at the market price on the date of grant. For restricted stock grants, compensation expense is based upon the grant date market price and is recorded over the lapsing period. For performance-based restricted stock, compensation expense is recorded over the performance period based on estimates of performance levels and the issuance-date market price. In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation," was issued. SFAS No. 123 provides an alternative method of accounting for stock-based compensation. Had compensation cost for these plans been determined in accordance with SFAS No. 123, the company's net earnings and net earnings per share would have been as follows: 1996 1995 Net earnings from continuing operations: As reported $ 749 $ 700 Pro forma 740 697 Primary EPS from continuing operations: As reported $2.94 $2.73 Pro forma 2.91 2.72 Fully diluted EPS from continuing operations: As reported $2.82 $2.61 Pro forma 2.79 2.60 The option expense is estimated on the date of grant (for 1995 or later grants) using the Black-Scholes option pricing model. The option expense is recognized (on a pro forma basis) as the options vest. As the option expense only measures 1995 or later grants, the pro forma impact above may not be representative of future years. The respective 1996 and 1995 Black-Scholes assumptions include 6.8% and 6.4% risk-free interest rates, $1.16 and $1.14 expected dividend yields, 10-year lives, and 25.1% and 23.0% expected volatility. SHAREOWNER RIGHTS PLAN The company has a Shareowner Rights Plan (Preferred Stock Purchase Rights) under which a right is attached to each share of the company's common stock. The rights become exercisable only under certain circumstances involving actual or potential acquisitions of the company's common stock by a person or by affiliated persons. Depending upon the circumstances, if the rights become exercisable, the holder may be entitled to purchase units of the company's preference stock, shares of the company's common stock, or shares of common stock of the acquiring person. The rights will remain in existence until August 31, 2004, unless they are terminated, extended, exercised or redeemed. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and fair values of the company's financial instruments at February 1, 1997, and February 3, 1996. SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. 1996 1995 CARRYING FAIR CARRYING FAIR (MILLIONS) AMOUNT VALUE AMOUNT VALUE Accounts receivable $2,425 $2,425 $2,403 $2,403 Long-term debt 4,047 4,381 3,406 3,977 The carrying amounts shown in the table are included in the consolidated balance sheet under the indicated captions. The decrease in the spread between the fair value and carrying amount of long-term debt in 1996 compared with 1995 was due to higher interest rates at the end of 1996. The fair value was determined with the use of borrowing rates currently available for debt instruments with similar remaining terms and maturities. DISCONTINUED OPERATION On January 17, 1996, the company announced its intention to spin off Payless, its chain of self-service family shoe stores. The spin-off was completed effective May 4, 1996, as a tax-free distribution to shareowners. The company's financial statements presented herein have been restated to reflect Payless as a discontinued operation. Payless revenues were $601 million, $2,330 million, and $2,116 million for 1996, 1995, and 1994, respectively. The reported net earnings from the discontinued operation are net of $16 million, $36 million, and $86 million in income tax expense for 1996, 1995, and 1994, respectively. In 1995, Payless recorded a pretax special and nonrecurring charge of $72 million, related primarily to store closings. Payless's 1995 net earnings before special and nonrecurring items would have been $99 million, or $.37 per fully diluted share. [The following "Eleven Year Financial Summary" section is a reproduction of the same named section included in the paper format Annual Report on pages 28 - 29.]
Eleven-Year Financial Summary (DOLLARS IN MILLIONS, EXCEPT PER SHARE) 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 Net Retail Sales $11,650 $10,484 $ 9,748 $9,010 $8,405 $7,862 $7,491 $7,026 $6,175 $4,744 $4,343 OPERATIONS Revenues $12,000 $10,952 $10,107 $9,562 $9,362 $9,068 $8,700 $8,356 $7,742 $6,415 $6,503 Cost of sales 8,226 7,461 6,879 6,537 6,459 6,275 6,047 5,734 5,348 4,492 4,625 Selling, general, and administrative expenses 2,265 2,081 1,916 1,824 1,859 1,861 1,772 1,735 1,645 1,325 1,353 Interest expense, net 277 250 233 244 279 315 278 231 196 77 90 Earnings from continuing operations before income taxes 1,232 1,160 1,079 957 579* 617 603 656 553 521 435 Provision for income taxes 483 460 429 379 107* 213 199 231 191 203 171 NET EARNINGS FROM CONTINUING OPERATIONS 749 700 650 578 472 404 404 425 362 318 264 LIFO charge (credit) (20) (53) (46) 7 10 26 39 (22) (3) 8 4 Net earnings 755 752 782 711 603 515 500 498 534 444 381 Depreciation and amortization 373 333 297 281 283 273 253 234 236 187 189 Cash flow from operations 1 1,122 1,033 947 859 755 677 657 659 599 505 454 Net issuances (repayments) of long-term debt 2 412 444 118 (190) (248) 313 590 169 891 (61) 159 Capital expenditures 632 801 682 560 284 366 466 470 292 353 374 Dividends on common stock 287 278 251 223 204 198 191 186 184 170 131 PER SHARE NET EARNINGS FROM CONTINUING OPERATIONS 3 $ 2.82 $ 2.61 $ 2.43 $ 2.15 $ 1.76 $ 1.52 $ 1.51 $ 1.50 $ 1.23 $ 1.03 $ .83 Net earnings 3,4 2.84 2.81 2.92 2.65 2.26 1.93 1.87 1.76 1.81 1.44 1.20 Dividends paid 1.16 1.12 1.01 .90 .83 .81 .77 .69 .62 .56 .51 Annual dividend rate at year-end 1.16 1.14 1.04 .92 .83 .81 .79 .71 .64 .57 .52 Book value 15.41 18.42 16.65 14.65 12.82 11.26 10.04 9.32 10.75 9.13 8.50 Market price - high 52.25 46.25 45.13 46.50 37.25 30.19 29.56 26.31 20.00 25.44 22.06 Market price - low 40.50 33.50 32.25 33.44 26.00 22.63 18.69 17.31 14.38 11.13 15.94 Market price - average of high and low 46.38 39.88 38.69 39.97 31.63 26.41 24.13 21.81 17.19 18.28 19.00 FINANCIAL POSITION Customer accounts receivable $ 2,410 $ 2,377 $ 2,418 $2,367 $2,373 $2,377 $2,456 $2,223 $2,099 $1,590 $1,516 Merchandise inventories 2,380 2,134 1,813 1,647 1,476 1,436 1,375 1,278 1,141 880 848 Working capital 3,112 3,495 3,029 2,921 2,691 3,051 2,635 2,059 2,093 1,821 1,921 Property and equipment, net 4,159 3,744 3,275 2,977 2,774 2,808 2,728 2,446 2,285 1,830 1,745 Long-term debt, preferred, and preference stock 4,196 3,701 3,240 3,192 3,256 4,299 3,948 3,387 2,384 1,048 1,131 Shareowners' equity 3,650 4,585 4,135 3,639 3,181 2,781 2,467 2,319 3,050 2,723 2,595 Total assets 10,059 10,122 9,237 8,614 8,376 8,566 8,083 7,570 7,374 5,464 5,629 STATISTICS Percent of revenues: Net earnings from continuing operations 6.2% 6.4% 6.4% 6.0% 5.0% 4.5% 4.6% 5.1% 4.7% 5.0% 4.1% Cash flow from operations 1 9.3 9.4 9.4 9.0 8.1 7.5 7.6 7.9 7.7 7.9 7.0 Return on equity 19.4 20.8 21.3 22.1 21.5 20.7 21.8 18.0 18.6 17.0 15.7 Return on net assets 18.8 20.1 20.1 19.0 15.4** 14.5 15.8 16.9 16.2 15.7 15.4 STORES OPEN AT YEAR-END 365 346 314 301 303 318 324 288 297 258 286 AVERAGE SHARES OUTSTANDING AND EQUIVALENTS Primary 248.7 249.9 249.6 249.9 248.8 248.0 249.0 267.2 294.8 306.3 313.1 Fully diluted 264.1 265.3 264.9 265.5 265.3 264.2 264.8 280.0 295.4 306.3 314.9 All years included 52 weeks, except 1995 and 1989, which included 53 weeks. Net retail sales for 1995 and 1989 are shown on a 52-week basis for comparability. 1 Cash flow from operations represents net earnings and depreciation/amortization from continuing operations. It is different from cash flow from operating activities as shown on the statement of cash flows. 2 Net issuances (repayments) of long-term debt exclude the elimination of $618 million of MCAC loans in 1992 and $400 million of guaranteed ESOP debt in 1989. 3 Represents earnings per share on a fully diluted basis. 4 Primary earnings per share were $.13 higher in 1996, $.13 higher in 1995, $.14 higher in 1994, $.12 higher in 1993, $.09 higher in 1992, $.08 higher in 1991, $.07 higher in 1990, $.05 higher in 1989, and $.01 higher in each of 1988 and 1986. * Pretax earnings include a net charge of $187 million from special and nonrecurring items, and income taxes include a tax benefit of $187 million from special and nonrecurring items. ** Based on pretax earnings before special and nonrecurring items.
Management's Responsibility and Report of Independent Public Accountants REPORT OF MANAGEMENT. Management is responsible for the preparation, integrity, and objectivity of the financial information included in this annual report. The financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts. Although the financial statements reflect all available information and management's judgment and estimates of current conditions and circumstances, prepared with the assistance of specialists within and outside the company, actual results could differ from those estimates. Management has established and maintains an internal control structure to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, that the accounting records provide a reliable basis for the preparation of financial statements, and that such financial statements are not misstated due to material fraud or error. Internal controls include the careful selection of associates, the proper segregation of duties, and the communication and application of formal policies and procedures that are consistent with high standards of accounting and administrative practices. An important element of this structure is a comprehensive internal audit program. Management continually reviews, modifies, and improves its systems of accounting and controls in response to changes in business conditions and operations, and in response to recommendations in the reports prepared by the independent public accountants and internal auditors. Management believes that it is essential for the company to conduct its business affairs in accordance with the highest ethical standards and in conformity with the law. This standard is described in the company's policies on business conduct, which are publicized throughout the company. AUDIT COMMITTEE OF THE BOARD OF DIRECTORS. The Board of Directors, through the activities of its Audit Committee, participates in the reporting of financial information by the company. The committee meets regularly with management, the internal auditors, and the independent public accountants. The committee met four times during 1996. It reviewed the scope, timing, and fees for the annual audit and the results of audit examinations completed by the internal auditors and independent public accountants. The audit results included recommendations to improve certain internal controls and the follow-up reports prepared by management. The independent public accountants and internal auditors have free access to the committee and the Board of Directors. They attend each meeting of the committee. The members of the Audit Committee are Russell E. Palmer (chairman), Helene L. Kaplan, Edward H. Meyer, Michael R. Quinlan, William P. Stiritz, Robert D. Storey, and Murray L. Weidenbaum. The Audit Committee reports the results of its activities to the full Board of Directors. [The following "Report of Independent Public Accountants" section is a reproduction of the same named section of the paper format Annual Report on page 30.] REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS. To the Board of Directors and Shareowners of The May Department Stores Company: We have audited the accompanying consolidated balance sheet of The May Department Stores Company (a Delaware corporation) and subsidiaries as of February 1, 1997, and February 3, 1996, and the related consolidated statements of earnings, shareowners' equity and cash flows for each of the three fiscal years in the period ended February 1, 1997. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The May Department Stores Company and subsidiaries as of February 1, 1997, and February 3, 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 1, 1997, in conformity with generally accepted accounting principles. Arthur Andersen LLP 1010 Market Street St. Louis, Missouri 63101-2089 February 12, 1997 EX-27 5 1996 EXHIBIT 27 TO FORM 10-K (FINANCIAL DATA SCH)
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF EARNINGS ON PAGES 17 AND 18 OF THE MAY DEPARTMENT STORES COMPANY 1996 ANNUAL REPORT TO SHAREOWNERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR FEB-01-1997 FEB-01-1997 12 90 2,529 104 2,380 5,035 6,372 2,213 10,059 1,923 4,105 0 0 118 3,532 10,059 11,650 12,000 8,226 8,226 0 0 277 1,232 483 749 11 (5) 0 755 2.97 2.84
EX-99 6 1996 EXHIBIT 99 TO FROM 10-K (1996 FORM 11-K) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Year Ended December 31, 1996 A. Full title of the plan if different from that of the issuer named below: THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN B. Name of issuer of securities held pursuant to the plan and the address of its principal executive office: THE MAY DEPARTMENT STORES COMPANY 611 Olive Street St. Louis, MO 63101 Commission File Number 1-79 THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN FINANCIAL STATEMENTS AND EXHIBIT Listed below are all financial statements and exhibit filed as part of this annual report on Form 11-K: Page of this Financial Statements Form 11-K Report of Independent Public Accountants 3 Financial Statements of the Plan: Statement of Net Assets Available for Benefits - December 31, 1996 4 Statement of Net Assets Available for Benefits - December 31, 1995 7 Statement of Changes in Net Assets Available for Benefits for the Year Ended December 31, 1996 10 Notes to Financial Statements - December 31, 1996 and 1995 12 Schedule I - Item 27(a): Schedule of Assets Held for Investment Purposes - December 31, 1996 18 Schedule II - Item 27(d): Schedule of Reportable Transactions for the Year Ended December 31, 1996 22 Exhibit Consent of Independent Public Accountants 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Plan Administrator has duly caused this annual report to be signed by the undersigned, thereunto duly authorized. THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN By: The May Department Stores Company Date: April 23, 1997 By: /s/ John L. Dunham John L. Dunham Executive Vice President and Chief Financial Officer REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The May Department Stores Company Profit Sharing Plan: We have audited the accompanying statements of net assets available for benefits, including the schedules referred to below, of The May Department Stores Company Profit Sharing Plan as of December 31, 1996 and 1995, and the related statement of changes in net assets available for benefits for the year ended December 31, 1996. These financial statements and schedules referred to below are the responsibility of the Plan Administrator. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Plan as of December 31, 1996 and 1995, and the changes in net assets available for benefits for the year ended December 31, 1996, in conformity with generally accepted accounting principles. Our audits were performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules of assets held for investment purposes and reportable transactions are presented for the purpose of additional analysis and are not a required part of the basic financial statements but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The Fund Information in the statements of net assets available for benefits and the statement of changes in net assets available for benefits is presented for purposes of additional analysis rather than to present the net assets available for benefits and changes in net assets available for benefits of each fund. The supplemental schedules and Fund Information have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP St. Louis, Missouri, April 23, 1997 THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1996 (Thousands, except per unit information) Nonparticipant Directed Investment Funds -------------------------------- ESOP Preference ---------------------- May Member Common ASSETS Unallocated Allocated Stock INVESTMENTS, at fair value: The May Department Stores Company- Convertible preferred stock $544,377 $178,483 $ - Common stock - - 158,322 Short-term investments - - 737 Commingled equity index fund - - - U.S. government securities - - - Fixed income investments - - - -------- -------- -------- Total investments 544,377 178,483 159,059 OTHER ASSETS: Receivable (payable) for allocation to member accounts (40,127) 40,127 - Dividends and interest receivable - - 4 Receivable - withholdings of member contributions - - - Interfund receivable (payable) - (137) 405 -------- -------- -------- Total assets 504,250 218,473 159,468 -------- -------- -------- LIABILITIES LIABILITIES: Notes payable 362,557 - - Accrued interest payable 5,085 - - Net amount payable (receivable) for investment security transactions and other - - 213 Amounts payable for administrative expenses - - 128 -------- -------- -------- Total liabilities 367,642 - 341 -------- -------- -------- NET ASSETS AVAILABLE FOR BENEFITS $136,608 $218,473 $159,127 ======== ======== ======== NUMBER OF UNITS AT DECEMBER 31, 1996 3,420 ======== VALUE PER UNIT AT DECEMBER 31, 1996 $ 46.53 ======== (Continued on following page) THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1996 (Thousands, except per unit information) Participant Directed Investment Funds ----------------------------------- May Common Fixed Common Money Stock Income ASSETS Stock Market Index Index INVESTMENTS, at fair value: The May Department Stores Company- Convertible preferred stock $ - $ - $ - $ - Common stock 380,739 - - - Short-term investments 1,771 50,701 461 1,570 Commingled equity index fund - - 81,872 - U.S. government securities - - - 26,715 Fixed income investments - - - 5,802 -------- ------- ------- ------- Total investments 382,510 50,701 82,333 34,087 OTHER ASSETS: Receivable (payable) for allocation to member accounts - - - - Dividends and interest receivable 9 234 271 418 Receivable - withholdings of member contributions 350 70 139 47 Interfund receivable (payable) 975 (1,034) (170) (39) -------- ------- ------- ------- Total assets 383,844 49,971 82,573 34,513 -------- ------- ------- ------- LIABILITIES LIABILITIES: Notes payable - - - - Accrued interest payable - - - - Net amount payable (receivable) for investment security transactions and other 511 - - 896 Amounts payable for administrative expenses 307 130 158 107 -------- ------- ------- ------- Total liabilities 818 130 158 1,003 -------- ------- ------- ------- NET ASSETS AVAILABLE FOR BENEFITS $383,026 $49,841 $82,415 $33,510 ======== ======= ======= ======= NUMBER OF UNITS AT DECEMBER 31, 1996 8,232 32,234 26,571 18,858 ======== ======= ======= ======= VALUE PER UNIT AT DECEMBER 31, 1996 $46.53 $1.55 $3.10 $1.78 ====== ===== ===== ===== (Continued on following page) THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1996 (Thousands, except per unit information) Distribution ASSETS Account Total INVESTMENTS, at fair value: The May Department Stores Company- Convertible preferred stock $ - $ 722,860 Common stock - 539,061 Short-term investments 2,602 57,842 Commingled equity index fund - 81,872 U.S. government securities - 26,715 Fixed income investments - 5,802 ------ ---------- Total investments 2,602 1,434,152 OTHER ASSETS: Receivable (payable) for allocation to member accounts - - Dividends and interest receivable - 936 Receivable - withholdings of member contributions - 606 Interfund receivable (payable) - - ------ ---------- Total assets 2,602 1,435,694 ------ ---------- LIABILITIES LIABILITIES: Notes payable - 362,557 Accrued interest payable - 5,085 Net amount payable (receivable) for investment security transactions and other 2,602 4,222 Amounts payable for administrative expenses - 830 ------ ---------- Total liabilities 2,602 372,694 ------ ---------- NET ASSETS AVAILABLE FOR BENEFITS $ - $1,063,000 ====== ========== The accompanying notes are an integral part of this statement. THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1995 (Thousands, except per unit information) Nonparticipant Directed Investment Funds -------------------------------- ESOP Preference ---------------------- May Member Common ASSETS Unallocated Allocated Stock INVESTMENTS, at fair value: The May Department Stores Company- Convertible preferred stock $485,970 $138,402 $ - Common stock - - 145,141 Short-term investments - - 1,053 Commingled equity index fund - - - U.S. government securities - - - Fixed income investments - - - -------- -------- -------- Total investments 485,970 138,402 146,194 OTHER ASSETS: Receivable (payable) for allocation to member accounts (29,770) 29,770 - Dividends and interest receivable - - 5 Receivable - withholdings of member contributions - - - Interfund receivable (payable) - (144) (1,062) -------- -------- -------- Total assets 456,200 168,028 145,137 -------- -------- -------- LIABILITIES LIABILITIES: Notes payable 378,031 - - Accrued interest payable 5,300 - - Net amount payable (receivable) for investment securities transactions and other - - - Amounts payable for administrative expenses - - 135 -------- -------- -------- Total liabilities 383,331 - 135 -------- -------- -------- NET ASSETS AVAILABLE FOR BENEFITS $ 72,869 $168,028 $145,002 ======== ======== ======== NUMBER OF UNITS AT DECEMBER 31, 1995 3,847 ======== VALUE PER UNIT AT DECEMBER 31, 1995 $ 37.69 ======== (Continued on following page) THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1995 (Thousands, except per unit information) Participant Directed Investment Funds ----------------------------------- May Common Fixed Common Money Stock Income ASSETS Stock Market Index Index INVESTMENTS, at fair value: The May Department Stores Company- Convertible preferred stock $ - $ - $ - $ - Common stock 339,470 - - - Short-term investments 2,462 56,132 515 771 Commingled equity index fund - - 71,097 - U.S. government securities - - - 32,711 Fixed income investments - - - 5,746 -------- ------- ------- ------- Total investments 341,932 56,132 71,612 39,228 OTHER ASSETS: Receivable (payable) for allocation to member accounts - - - - Dividends and interest receivable 11 280 130 568 Receivable - withholdings of member contributions 83 59 11 20 Interfund receivable (payable) (2,486) 1,068 1,939 685 -------- ------- ------- ------- Total assets 339,540 57,539 73,692 40,501 -------- ------- ------- ------- LIABILITIES LIABILITIES: Notes payable - - - - Accrued interest payable - - - - Net amount payable (receivable) for investment securities transactions and other - - - (194) Amounts payable for administrative expenses 316 168 179 137 -------- ------- ------- ------- Total liabilities 316 168 179 (57) -------- ------- ------- ------- NET ASSETS AVAILABLE FOR BENEFITS $339,224 $57,371 $73,513 $40,558 ======== ======= ======= ======= NUMBER OF UNITS AT DECEMBER 31, 1995 9,001 38,813 28,985 23,362 ======== ======= ======= ======= VALUE PER UNIT AT DECEMBER 31, 1995 $37.69 $1.48 $2.54 $1.74 ====== ===== ===== ===== (Continued on following page) THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1995 (Thousands, except per unit information) Distribution ASSETS Account Total INVESTMENTS, at fair value: The May Department Stores Company- Convertible preferred stock $ - $ 624,372 Common stock - 484,611 Short-term investments 1,660 62,593 Commingled equity index fund - 71,097 U.S. government securities - 32,711 Fixed income investments - 5,746 ------ ---------- Total investments 1,660 1,281,130 OTHER ASSETS: Receivable (payable) for allocation to member accounts - - Dividends and interest receivable - 994 Receivable - withholdings of member contributions - 173 Interfund receivable (payable) - - ------ ---------- Total assets 1,660 1,282,297 ------ ---------- LIABILITIES LIABILITIES: Notes payable - 378,031 Accrued interest payable - 5,300 Net amount payable (receivable) for investment securities transactions and other 1,660 1,466 Amounts payable for administrative expenses - 935 ------ ---------- Total liabilities 1,660 385,732 ------ ---------- NET ASSETS AVAILABLE FOR BENEFITS $ - $ 896,565 ====== ========== The accompanying notes are an integral part of this statement. THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED DECEMBER 31, 1996 (Thousands) Nonparticipant Directed Investment Funds -------------------------------- ESOP Preference ---------------------- May Member Common Unallocated Allocated Stock NET APPRECIATION (DEPRECIATION) IN FAIR VALUE OF INVESTMENTS $ 94,043 $ 41,736 $ 29,085 -------- -------- -------- INVESTMENT INCOME: Dividends 20,731 5,742 3,899 Interest - - 53 -------- -------- -------- 20,731 5,742 3,952 -------- -------- -------- CONTRIBUTIONS: Member - - - Employer allocation (40,251) 40,251 - Employer ESOP contribution 20,156 - - Member interfund transfers - (1,005) (741) Forfeiture reallocation - - (10) -------- -------- -------- (20,095) 39,246 (751) -------- -------- -------- DEDUCTIONS: Member terminations and withdrawals - 15,998 17,607 Interest expense 30,940 - - Transfer to plan of divested subsidiary - 20,281 - Administrative expenses - - 554 -------- -------- -------- 30,940 36,279 18,161 -------- -------- -------- INCREASE (DECREASE) IN NET ASSETS AVAILABLE FOR BENEFITS 63,739 50,445 14,125 NET ASSETS AVAILABLE FOR BENEFITS AT DECEMBER 31, 1995 72,869 168,028 145,002 -------- -------- -------- NET ASSETS AVAILABLE FOR BENEFITS AT DECEMBER 31, 1996 $136,608 $218,473 $159,127 ======== ======== ======== (Continued on following page) THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED DECEMBER 31, 1996 (Thousands) Participant Directed Investment Funds ----------------------------------- May Common Fixed Common Money Stock Income Stock Market Index Index Total NET APPRECIATION (DEPRECIATION) IN FAIR VALUE OF INVESTMENTS $ 69,943 $ - $13,712 $(1,013) $ 247,506 -------- ------- ------- ------- ---------- INVESTMENT INCOME: Dividends 9,375 - 1,649 - 41,396 Interest 128 2,752 51 2,097 5,081 -------- ------- ------- ------- ---------- 9,503 2,752 1,700 2,097 46,477 -------- ------- ------- ------- ---------- CONTRIBUTIONS: Member 41,439 7,359 13,005 5,816 67,619 Employer allocation - - - - - Employer ESOP contribution - - - - 20,156 Member interfund transfers (11,306) 6,854 5,513 685 - Forfeiture reallocation (23) 29 1 3 - -------- ------- ------- ------- ---------- 30,110 14,242 18,519 6,504 87,775 -------- ------- ------- ------- ---------- DEDUCTIONS: Member terminations and withdrawals 42,343 13,421 10,538 6,230 106,137 Interest expense - - - - 30,940 Transfer to plan of divested subsidiary 22,079 10,544 13,855 7,969 74,728 Administrative expenses 1,332 559 636 437 3,518 -------- ------- ------- ------- ---------- 65,754 24,524 25,029 14,636 215,323 -------- ------- ------- ------- ---------- INCREASE (DECREASE) IN NET ASSETS AVAILABLE FOR BENEFITS 43,802 (7,530) 8,902 (7,048) 166,435 NET ASSETS AVAILABLE FOR BENEFITS AT DECEMBER 31, 1995 339,224 57,371 73,513 40,558 896,565 -------- ------- ------- ------- ---------- NET ASSETS AVAILABLE FOR BENEFITS AT DECEMBER 31, 1996 $383,026 $49,841 $82,415 $33,510 $1,063,000 ======== ======= ======= ======= ========== The accompanying notes are an integral part of this statement. THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 1. DESCRIPTION OF THE PLAN: The following description of The May Department Stores Company Profit Sharing Plan (the "Plan") is provided for financial statement purposes only. Members should refer to the Plan document and the Summary Plan Description dated May 1996, with updates, for more complete information. General The Plan is a defined contribution profit sharing plan. The Plan covers eligible associates of The May Department Stores Company, a Delaware corporation ("May"), and its subsidiaries and affiliates who are members of The May Department Stores Company Retirement Plan. Participation is voluntary. Contributions Plan members may contribute 1% to 15% of their annual pay. Contributions may be made prior to federal and certain other income taxes pursuant to Section 401(k) of the Internal Revenue Code. The employer allocation is variable and discretionary. Generally, the employer allocation for each Plan year is determined by multiplying a base matching rate times members' basic contributions (generally, contributions up to 5% of pay each paycheck), reduced by forfeitures, one-third of annual dividends with respect to the Employee Stock Ownership Plan ("ESOP") Preference Shares, as defined, administrative expenses and excess ESOP allocations from prior Plan years (to the extent such amounts have not been previously used to reduce employer allocations for earlier Plan years). The base matching rate is determined as follows: In the event May has earnings per share ("EPS") of its common stock for its most recent fiscal year ("current year") resulting in a 6.0% increase over the EPS for the fiscal year immediately preceding the current year, the base matching rate will be 50%. For each percentage point increase over 6.0% or decrease below 6.0%, there is a 1.25 percentage point increase in or decrease from the 50% base matching rate. ESOP Preference Shares allocated to associates' accounts through application of the base matching rate formula are allocated at their original cost to the Plan of $22.51 per common share equivalent ($24.74 per common share equivalent before the Payless ShoeSource, Inc. "spin-off" in May 1996). Because the ESOP Preference Shares are convertible into May common stock, the ESOP Preference Shares are worth more than original cost when the market value of May common stock is higher than the original cost. This market value of the employer allocation (including supplemental contributions, if any), divided by associates' matchable contributions, is the effective matching rate. If the effective matching rate for a Plan year exceeds 100%, only ESOP Preference Shares will be used for the employer allocation and no May common shares will be contributed as a supplemental contribution. The effective matching rate will also be limited to 2.5 times the base matching rate. The base matching rate formula may be adjusted at any time for unusual events including discontinued operations, accounting changes, or items of extraordinary gain or loss. Investments Members' contributions may be invested in any of four investment funds: May Common Stock Fund - For investment of contributions in May common stock. Money Market Fund - For investment of contributions in short-term (less than one year) obligations of high-quality issuers including banks, corporations, municipalities, the U.S. Treasury and other federal agencies. Common Stock Index Fund - For investment of contributions in a fund comprised proportionately of all the common stock of corporations that make up the Standard & Poor's 500 Composite Stock Price Index. Investment mix is determined based on the relative market size of the 500 corporations, with larger corporations making up a higher proportion of the fund than smaller corporations. This index represents the composite performance of the 500 major stocks in the United States. Fixed Income Index Fund - For investment of contributions in corporate, U.S. Government, federal agency and certain foreign government securities that make up the Lehman Intermediate Government/Corporate Bond Index. The securities that comprise this index have maturities ranging from one to 10 years, with an average of four years. (The Lehman Intermediate Government/Corporate Bond Index represents the composite performance of intermediate-term, fixed income securities.) At December 31, 1996, the nonparticipant directed May Common Stock and ESOP Member Allocated Funds include approximately $59,673,000 and $47,190,000, respectively, attributable to participants over the age of 55. These amounts can be transferred to other funds at the discretion of the participants. Employer allocations and supplemental contributions are invested in the ESOP Preference Fund and the May Common Stock Fund, respectively. The employer allocation to the Plan for the year ended December 31, 1996, will be made in May 1997 and will be in the form of 38,106 ESOP Preference Shares. ESOP Feature In 1989, the Plan was amended and restated to add an ESOP feature and acquired 788,955 shares of convertible preferred stock of May (the "ESOP Preference Shares"). Each ESOP Preference Share costs $507, has a guaranteed minimum value of $507 and was previously convertible into 20.49031 shares of May common stock. Effective May 4, 1996, in connection with May's spin-off of Payless ShoeSource, Inc., the conversion rate was adjusted to 22.52498 shares of May common stock. The acquisition of the ESOP Preference Shares was financed with the proceeds of a private placement to a group of institutional investors of an aggregate $400 million principal amount (the "ESOP Loans") (see Note 4). The ESOP Loans are guaranteed by The May Department Stores Company, a New York corporation. The excess of the value of the unallocated ESOP Preference Shares over the principal amount of guaranteed ESOP Loans and accrued interest payable is reflected as Net Assets Available for Benefits in the Statement of Net Assets Available for Benefits as of December 31, 1996 and 1995. The ESOP Loans are repaid by the Plan from the following sources in the following order: (a) dividends from May on ESOP Preference Shares previously allocated to members; (b) dividends from May on unallocated ESOP Preference Shares; and (c) contributions by May. During the term of the ESOP Loans, the ESOP Preference Shares which have not been allocated to members' company accounts serve as collateral for the ESOP Loans. ESOP Preference Shares are initially held by the Plan in an Unallocated account. As ESOP Loans are repaid, ESOP Preference Shares are released to a suspense account pending release to the members' company accounts in satisfaction of the employer allocation. If the guaranteed minimum value of the ESOP Preference Shares allocated to members' company accounts as a result of the ESOP Loan payments (principal and interest) for a year is less than the employer allocation, then May may make "supplemental" contributions to the Plan to make up the difference, subject to the 100% effective matching rate limitations described in Note 1. Supplemental contributions can be made in either shares of May common stock or cash. If the guaranteed minimum value of the ESOP Preference Shares released for allocation to members' company accounts as a result of the ESOP Loan payments is greater than the required employer allocation, any "excess" would be applied to satisfy required employer allocations in future Plan years. Vesting The method of calculating vesting service is the elapsed time approach. Elapsed time is measured by calculating the time which has elapsed between the member's hire date and retirement date/termination date (excluding certain break-in-service periods). Generally, Plan members are vested in company accounts in accordance with the following schedule: Years of Vesting Vesting Service Percentage Less than 3 years 0% 3 years 20% 4 years 40% 5 years 60% 6 years 80% 7 years or more 100% Plan members are always fully vested in the value of their member accounts. Payment of Benefits Amounts in a member's account and the vested portion of a member's company account may be distributed upon retirement, death, disability or termination of employment. Distributions from the May Common Stock Fund and ESOP Preference Fund are made in shares of May common stock if the combined distribution exceeds 100 shares. All other distributions are generally made in cash. Transfers are made from the investment funds to the Distribution account to fund the Plan's cash distributions. Administration of Plan The Plan is administered by a Committee consisting of at least five persons appointed by May. An Administrative Subcommittee has the general responsibility for administration of the Plan and an Investment Subcommittee establishes and monitors investment policies and activities. The assets of the Plan are held in a trust for which The Bank of New York is the Trustee. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Investments Except for the ESOP Preference Fund, the Plan's investments are stated at fair value, as determined by the Trustee, based on publicly stated price information. Each ESOP Preference Share is valued at the greater of (a) the guaranteed minimum value (original cost) of $507 per share or (b) a conversion value equal to the market price of May common stock multiplied by the conversion rate for each ESOP Preference Share. As of December 31, 1996 and 1995, the ESOP Preference Shares were valued at their conversion values of $1,053.04 and $863.15, respectively. Federal Income Taxes The Trust established under the Plan to hold the Plan's assets is qualified pursuant to Section 401(a), 401(k) and 4975(e)(7) of the Internal Revenue Code and accordingly, the Trust's net investment income is exempt from income taxes. The Plan has received a favorable tax determination letter in prior years, and the Company believes that the Plan continues to qualify and operate in accordance with the Internal Revenue Code. Employer allocations and contributions, member before-tax contributions and the income of the Plan are not taxable to the members until distributions or withdrawals are made. Administrative Expenses All administrative expenses (including the allocable portion of expenses for data processing services, and salaries and benefits of employees providing services to the Plan) are paid by the Plan. Prior to 1996, May provided the salaries and related benefits of associates who administer the Plan. Monthly Valuation of the Trust The unit value of each investment fund is determined by dividing the month-end market value of the particular investment fund by the total number of units outstanding at month-end in all member accounts in such investment fund. As of each succeeding monthly valuation date, the unit value of each fund is redetermined and account balances in each fund are adjusted as follows: (a) All payments made from an account (except for the ESOP Preference Fund) are valued based on the unit value at the month-end valuation date. Payments from the ESOP Preference Fund are valued at the greater of the guaranteed minimum value (plus accrued dividends) or conversion value, as of the distribution date. (b) With respect to any dollar amount contributed during the month (except for the ESOP Preference Fund), an equivalent number of additional units are credited to the appropriate accounts in such investment fund based on the unit value at the month-end valuation date. Allocations of ESOP Preference Shares are valued at the greater of the guaranteed minimum value (plus accrued dividends) or conversion value, as of the distribution date. (c) In the event that a member's employment is terminated and a portion of such member's company account has been forfeited, the forfeited units or ESOP Preference Shares shall be canceled as of the last day of the Plan year. The dollar amount of such forfeited units or ESOP Preference Shares is reallocated among the remaining members of the Plan as of the last day of the Plan year in the same manner as the employer allocation for such year. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of net assets available for benefits and the reported amounts of additions to and deductions from net assets available for benefits during the year. Actual results could differ from those estimates. 3. INVESTMENTS: The fair market value of the Plan's investments that represent 5% or more of the Plan's Net Assets Available for Benefits as of December 31, 1996 and 1995, are as follows (dollars in thousands): December 31, 1996 December 31, 1995 ---------------------- ---------------------- Number of Number of Shares or Shares or Principal Fair Principal Fair Amount Value Amount Value The May Department Stores Company 7.5% ESOP Preference Stock: Unallocated 516,956 $ 544,377 563,016 $ 485,970 Member allocated 169,492 178,483 160,344 138,402 ---------- ---------- ---------- ---------- 686,448 722,860 723,360 624,372 ========== ========== The May Department Stores Company Common Stock 11,530,716 539,061 11,504,123 484,611 The Bank of New York Short-Term Investment Fund - Master Notes $57,842 57,842 $62,593 62,593 Chase Investors Commingled Equity Index fund 112,782 81,872 117,694 71,097 ---------- ---------- Total $1,401,635 $1,242,673 ========== ========== 4. NOTES PAYABLE: Notes payable as of December 31 consisted of the following (in thousands): 1996 1995 ESOP Notes Payable: Series A, 8.32%, due April 30, 2001 $158,593 $174,067 Series B, 8.49%, due April 30, 2004 203,964 203,964 -------- -------- $362,557 $378,031 ======== ======== The scheduled principal payments for the Series A ESOP Note for the next five years are as follows: 1997 - $20,228,000; 1998 - $25,385,000; 1999 - $31,118,000; 2000 - $37,354,000; and 2001 - $44,508,000. Principal payments on the Series B ESOP Note begin in 2002. As of December 31, 1996 and 1995, the total fair value of the ESOP Notes was approximately $430,341,000 and $468,290,000, respectively. 5. RECONCILIATION TO FORM 5500: As of December 31, 1996 and 1995, the Plan had approximately $13,523,000 and $16,340,000, respectively, of pending distributions to participants. These amounts are included in Net Assets Available for Benefits. For reporting on the Plan's Form 5500 Annual Report, these amounts will be classified as Benefit Claims Payable with a corresponding reduction in Net Assets Available for Benefits. The following table reconciles the financial statements to the Form 5500 which will be filed by the Plan for the Plan year ended December 31, 1996 (thousands): Net Assets Benefits Available Payable to Benefits for Participants Paid Benefits Per financial statements $ - $106,137 $1,063,000 Pending benefit distributions - December 31, 1996 13,523 13,523 (13,523) Pending benefit distributions - December 31, 1995 - (16,340) - ------- -------- ---------- Per Form 5500 $13,523 $103,320 $1,049,477 ======= ======== ========== 6. DISTRIBUTION OF ASSETS UPON TERMINATION OF THE PLAN: May reserves the right to terminate the Plan, in whole or in part, at any time. If an employer shall cease to be a participating employer in the Plan, the accounts of the members of the withdrawing employer shall be revalued as if such withdrawal date were a valuation date. The Plan Committee is then to direct the Trustee either to distribute the accounts of the members of the withdrawing employer as of the date of such withdrawal on the same basis as if the Plan had been terminated, or to deposit in a trust established by the withdrawing employer, pursuant to a plan substantially similar to the Plan, assets equal in value to the assets allocable to the accounts of the members of the withdrawing employer. If the Plan is terminated at any time or contributions are completely discontinued and May determines that the Trust shall be terminated, the members' company accounts shall become fully vested and nonforfeitable, all accounts shall be revalued as if the termination date were a valuation date and such accounts shall be distributed to members. If the Plan is terminated or contributions completely discontinued but May determines that the Trust shall be continued pursuant to the terms of the Trust agreement, no further contributions shall be made by members or the employer and the members' company accounts shall become fully vested, but the Trust shall be administered as though the Plan were otherwise in effect. 7. TRANSFER OF PLAN ASSETS - PAYLESS SHOESOURCE, INC.: On May 4, 1996, May completed the "spin-off" of Payless ShoeSource, Inc. ("Payless"). A separate defined contribution profit sharing plan for Payless was established April 1, 1996, and an asset transfer of Payless associate accounts was made from the Plan to the Payless Plan in April 1996. The amount of the asset transfer was approximately $74,728,000. SCHEDULE I THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN EMPLOYER #: 43-1104396 PLAN #: 003 ITEM 27(a): SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES DECEMBER 31, 1996 (c) Number of Shares or (e) (b) Principal (d) Fair (a) Identity of Issue Amount Cost Value (Thousands) ESOP PREFERENCE FUND * The May Department Stores Company 7.5% ESOP Preference Stock: Unallocated 516,956 $262,097 $ 544,377 Member allocated 169,492 85,932 178,483 -------- ---------- ESOP Preference Fund Total $348,029 $ 722,860 ======== ========== MAY COMMON STOCK FUND * The May Department Stores Company Common Stock 11,530,716 $255,650 $ 539,061 * The Bank of New York Short-Term Investment Fund- Master Notes $ 2,507,648 2,508 2,508 -------- ---------- May Common Stock Fund Total $258,158 $ 541,569 ======== ========== MONEY MARKET FUND * The Bank of New York Short-Term Investment Fund- Master Notes $50,700,898 $ 50,701 $ 50,701 ======== ========== COMMON STOCK INDEX FUND Chase Investors Commingled Equity Index Fund 112,782 $ 49,666 $ 81,872 * The Bank of New York Short-Term Investment Fund- Master Notes $ 461,359 461 461 -------- ---------- Common Stock Index Fund Total $ 50,127 $ 82,333 ======== ========== FIXED INCOME INDEX FUND * The Bank of New York Short-Term Investment Fund- Master Notes $ 1,569,823 $ 1,570 $ 1,570 -------- ---------- * Also a party-in-interest. SCHEDULE I (Continued) (c) (e) (b) Principal (d) Fair (a) Identity of Issue Amount Cost Value (Thousands) FIXED INCOME INDEX FUND (Continued) U.S. Government Securities U.S. Treasury Notes: 5.625%, due 8/31/97 $ 300,000 $ 300 $ 300 5.125%, due 6/30/98 $ 3,200,000 3,127 3,171 5.125%, due 12/31/98 $ 2,300,000 2,241 2,268 7.875%, due 11/15/04 $ 700,000 782 764 13.75%, due 8/15/04 $ 525,000 810 756 5.5%, due 4/15/00 $ 2,300,000 2,178 2,259 6.75%, due 6/30/99 $ 4,500,000 4,544 4,579 5.0%, due 1/31/98 $ 1,500,000 1,490 1,489 7.75%, due 1/31/00 $ 400,000 411 419 5.875%, due 2/15/04 $ 1,500,000 1,425 1,460 5.25%, due 1/31/01 $ 1,750,000 1,744 1,694 6.875%, due 5/15/06 $ 1,400,000 1,436 1,443 6.5%, due 5/31/01 $ 900,000 895 910 6.375%, due 8/15/02 $ 1,200,000 1,207 1,208 8.75%, due 8/15/00 $ 700,000 829 759 -------- ---------- Total U.S. treasury notes 23,419 23,479 -------- ---------- U.S. Government Agency Securities: Federal Home Loan Bank Consumer Bonds- 6.12%, due 1/24/01 $ 250,000 251 246 Federal Home Loan Mortgage Corporation- 6.22%, due 3/24/03 $ 200,000 182 197 6.81%, due 6/4/99 $ 200,000 199 201 Federal National Mortgage Association Securities- 8.35%, due 11/10/99 $ 325,000 333 344 Debentures- 9.55%, due 12/10/97 $ 320,000 326 331 7.65%, due 3/10/05 $ 160,000 163 170 Medium Term Notes- 6.41%, due 3/8/06 $ 400,000 402 392 6.69%, due 8/7/01 $ 400,000 402 405 International Bank for Recon & Dev BD- 5.875%, due 7/16/97 $ 300,000 302 301 Tennessee Valley Authority, Power Bond 1992 Series F, 6.875%, due 8/1/02 $ 250,000 259 250 SLMA Medium Term Notes- 6.58%, due 1/2/02 $ 400,000 399 399 -------- ---------- Total U.S. government agency securities 3,218 3,236 -------- ---------- Total U.S. government securities 26,637 26,715 -------- ---------- SCHEDULE I (Continued) (c) (e) (b) Principal (d) Fair (a) Identity of Issue Amount Cost Value (Thousands) FIXED INCOME INDEX FUND (Continued) Fixed Income Investments Bank Corporate Bonds: Bank America Corporation, 7.75%, due 7/15/02 $ 300,000 $ 306 $ 314 Republic NY Corporation, 7.25%, due 7/15/02 $ 100,000 98 103 NCNB Corporation, 9.125%, due 10/15/01 $ 268,000 306 294 -------- ---------- Total bank corporate bonds 710 711 -------- ---------- Finance and Insurance Corporate Bonds: American Express Company, 8.5%, due 8/15/01 $ 200,000 201 215 Commercial Credit Corporation, 8.125%, due 3/1/97 $ 200,000 179 201 Ford Motor Credit Co., 6.25%, due 2/26/98 $ 400,000 405 401 ABN-AMRO Bank, 6.625%, due 10/31/01 $ 300,000 300 300 General Electric Capital Corporation, 8.85%, due 4/1/05 $ 300,000 364 337 Grace W R T Company, 8.00%, due 8/15/04 $ 500,000 519 529 Simon Debartolo Group, 6.875%, due 11/15/06 $ 500,000 498 487 Travelers/Aetna Property Casualty Corporation, 6.75%, due 4/15/01 $ 300,000 301 301 -------- ---------- Total finance and insurance corporate bonds 2,767 2,771 -------- ---------- Industrial Corporate Bonds: Coca Cola Company, 7.875%, due 9/15/98 $ 200,000 203 206 Eli Lilly & Co., 8.125%, due 12/1/01 $ 200,000 199 213 General Motors Corporation, 7.10%, due 3/15/06 $ 300,000 303 302 Philip Morris Companies, Inc., 8,625% due 3/1/99 $ 250,000 248 260 Lockheed Martin Corporation, 6.85%, due 5/15/01 $ 400,000 400 403 -------- ---------- Total industrial corporate bonds 1,353 1,384 -------- ---------- Oil Corporate Bond: Tenneco Inc., 7.875%, due 10/1/02 $ 250,000 248 263 -------- ---------- Utilities Corporate Bonds: Duke Power Company, 1st and Refunding Mortgage Note, 7%, due 6/1/00 $ 195,000 203 198 -------- ---------- SCHEDULE I (Continued) (c) (e) (b) Principal (d) Fair (a) Identity of Issue Amount Cost Value (Thousands) FIXED INCOME INDEX FUND (Continued) Foreign Obligations: Finland Rep NT, 7.875%, due 7/28/04 $ 150,000 150 162 Hydro-Quebec Debenture, Series IF, 7.375%, due 2/1/03 $ 150,000 161 154 Province of Ontario, Canada Debenture, 8%, due 10/17/01 $ 150,000 149 159 -------- ---------- Total foreign obligations 460 475 -------- ---------- Total fixed income investments 5,741 5,802 -------- ---------- Fixed Income Index Fund Total $ 33,948 $ 34,087 ======== ========== DISTRIBUTION ACCOUNT * The Bank of New York Short-Term Investment Fund- Master Notes $ 2,602,126 $ 2,602 $ 2,602 ======== ========== TOTAL ASSETS HELD FOR INVESTMENT PURPOSES AT DECEMBER 31, 1996 $743,565 $1,434,152 ======== ========== * Also a party-in-interest. SCHEDULE II THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN ITEM 27(d): SCHEDULE OF REPORTABLE TRANSACTIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (Thousands, except number of transactions) Purchases Sales ---------------- ----------------------------------- No. of No. of Sales Gain or Trans. Cost Trans. Cost Price (Loss) The Bank of New York Short-Term Investment Fund-Master Notes (1) 414 $134,559 241 $140,252 $140,252 $ - The May Department Stores Company Common Stock (1) (2) 67 80,241 51 34,701 76,853 42,152 Payless ShoeSource, Inc. Common Stock (1) - - 30 20,723 47,964 27,241 -------- -------- -------- ------- $214,800 $195,676 $265,069 $69,393 ======== ======== ======== ======= (1) Also a party-in-interest. (2) Includes conversion of ESOP Preference Shares. EXHIBIT CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report on The May Department Stores Company Profit Sharing Plan financial statements included in this Form 11-K, into the Company's previously filed Registration Statements on Form S-8 Files No. 33-26016, 33-38104, 33-51849 and 333-00957. ARTHUR ANDERSEN LLP St. Louis, Missouri, April 23, 1997 -----END PRIVACY-ENHANCED MESSAGE-----