-----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, KJ+Z6TPkYkKsJi4RTTqxwNW+R7uzAtDhlDKF5/M4IR4sFsZXQTxc5zDVhfoIb0g8 fYDcgTuIOdP7EiAal8bwhA== 0000063416-00-000009.txt : 20000420 0000063416-00-000009.hdr.sgml : 20000420 ACCESSION NUMBER: 0000063416-00-000009 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20000129 FILED AS OF DATE: 20000419 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: SEC FILE NUMBER: 001-00079 FILM NUMBER: 604462 BUSINESS ADDRESS: STREET 1: 611 OLIVE ST CITY: ST LOUIS STATE: MO ZIP: 63101 BUSINESS PHONE: 3143426300 10-K405 1 1999 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 January 29, 2000 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 the registrant's common stock held by non-affiliates as of April 1, 2000: $9,073,677,069 Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 320,132,360 shares of common stock, $.50 par value, as of April 1, 2000. Documents incorporated by reference: 1. Portions of the registrant's 1999 Annual Report to Shareowners are incorporated into Parts I and II. 2. Portions of the registrant's 2000 Proxy Statement, dated April 19, 2000, are incorporated into Part III. PART I Items 1 and 2. Business and Description of Property The May Department Stores Company ("May"), a corporation organized under the laws of the State of Delaware in 1976, 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 accomplished in 1996. As a result of the share exchange, May NY became a wholly- owned subsidiary of May. May NY was organized under the laws of the State of New York in 1910, as the successor to a business founded by David May, who opened his first store in Leadville, Colorado, in 1877. May operates eight quality regional department store companies nationwide under 12 trade names. At fiscal year-end 1999, May operated 408 department stores in 34 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 31 markets, including New York/New Jersey Metro, Chicago, Boston, Philadelphia Metro, Dallas/Fort Worth, Washington D.C. Metro, Detroit, Houston, Atlanta, and Miami Hecht's and 19 markets, including Washington D.C. Metro, Strawbridge's Philadelphia Metro (Strawbridge's), Baltimore, Norfolk, and Richmond Foley's 17 markets, including Houston, Dallas/Fort Worth, Denver, San Antonio, Austin, and Oklahoma City Robinsons-May 9 markets, including Los Angeles/Orange County, Riverside/San Bernardino, Phoenix, and San Diego Filene's 16 markets, including Boston Metro, Southern Connecticut, Hartford, Providence Metro, and Albany Kaufmann's 21 markets, including Pittsburgh, Cleveland, Buffalo, Rochester, Syracuse, and Akron Famous-Barr, L.S. 23 markets, including St. Louis Metro, Kansas Ayres and The City Metro(The Jones Store), Indianapolis Jones Store (L.S. Ayres), Fort Wayne, and South Bend Meier & Frank and 10 markets, including Portland/Vancouver ZCMI Metro and Salt Lake City Metro (ZCMI) May employs approximately 62,000 full-time and 72,000 part-time associates in 36 states, the District of Columbia, and nine offices overseas. 2 Management's Discussion and Analysis (pages 18-21) of May's 1999 Annual Report to Shareowners is incorporated herein by reference. A. Property Ownership The following summarizes the property ownership of department stores at January 29, 2000: % of Gross Number of Building Stores* Sq. Footage Entirely or mostly owned 236 62% Entirely or mostly leased 99 23 Owned on leased land 73 15 408 100% * Includes a total of 22 department stores subject to financing. B. Credit Sales Sales at May's department stores are made for cash or credit, including May's 30-day charge accounts and open-end credit plans, which include revolving charge accounts and revolving installment accounts. During the fiscal year ended January 29, 2000, 40.7% of net retail sales were made through May's credit plans. In 1991, May formed May National Bank of Arizona (MBA) and May National Bank of Ohio (MBO), which are indirectly wholly-owned and consolidated subsidiaries of May. During fiscal 1999, MBA and MBO extended credit to customers of May's Lord & Taylor, Foley's, Hecht's, Strawbridge's, Robinsons- May, Filene's, Kaufmann's, Famous-Barr, L.S. Ayres, The Jones Store and Meier & Frank department stores companies. Throughout 1999, MBA and MBO sold the resulting accounts receivables at face value to May NY. In addition, MBA and MBO process remittances for their parent, Grande Levee, Inc., and its other subsidiaries. MBA and MBO receive processing fee revenue for this service. C. Competition in Retail Merchandising May conducts its retail merchandising business under highly competitive conditions. Although May is one of the nation's largest department store retailers, it has numerous competitors at the national and local level which compete with May's individual department stores. Competition is characterized by many factors including location, reputation, assortment, advertising, price, quality, service, and credit availability. May believes that it is in a strong competitive position with regard to each of these factors. 3 D. Executive Officers of May The names and ages (as of April 19, 2000) of all executive officers of May, and the positions and offices held with May by each such person are as follows: Name Age Positions and Offices Eugene S. Kahn 50 President and Chief Executive Officer Jerome T. Loeb 59 Chairman of the Board John L. Dunham 53 Vice Chairman and Chief Financial Officer Richard W. Bennet III 47 Vice Chairman William P. McNamara 49 Vice Chairman Anthony J. Torcasio 54 Vice Chairman Judith K. Hofer 60 President and Chief Executive Officer, May Merchandising Company R. Dean Wolfe 56 Executive Vice President Alan E. Charlson 51 Senior Vice President and Chief Counsel Martin M. Doerr 45 Senior Vice President William D. Edkins 47 Senior Vice President Lonny J. Jay 58 Senior Vice President Jan R. Kniffen 51 Senior Vice President Richard A. Brickson 52 Secretary and Senior Counsel Michael G. Culhane 37 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 May and until the officer's successor shall have been elected and shall qualify. Messrs. Kahn, Loeb, Torcasio, Dunham, and Wolfe are also directors of May. Mr. Torcasio will retire as an officer on September 30, 2000. Each of the executive officers has been an officer of May for at least the last five years, with the following exceptions: Mr. Kahn served as president and chief executive officer of Filene's from 1992 to March 1996 when he became vice chairman. He was appointed executive vice chairman in June 1997 and assumed his current position in May 1998. Mr. Dunham served as chairman of May Merchandising Company from 1993 to May 1996 when he became Executive Vice President and Chief Financial Officer and an executive officer of May. He assumed his current position in November of 1999. Mr. Bennet served as president and chief executive officer of Famous-Barr from 1995 to 1997 and as president and chief executive officer of Kaufmann's from 1997 to February 2000 when he became vice chairman and an executive officer of May. Mr. McNamara served as senior vice president and general merchandise manager for May Merchandising Company from 1995 to 1997, president and chief executive officer of Famous-Barr from 1997 to 1998, and president of May Merchandising Company from 1998 to February 2000 when he became vice chairman and an executive officer of May. Ms. Hofer served as president and chief executive officer of Meier & Frank from 1988 to 1996, president and chief executive officer of Filene's from 1996 to 1999, chief executive officer of Filene's from 1999 to February 2000 when she assumed her current position and became an executive officer of May. Mr. Charlson served as senior counsel for May from 1988 to 1998 when he 4 became senior vice president and chief counsel and an executive officer of May. Mr. Culhane was associated with the public accounting firm of Arthur Andersen LLP from 1984 to 1997. He served in a financial position for May from 1997 to 1998 when he became vice president and an executive officer of May. Item 3. Legal Proceedings There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which May 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 No matters were submitted to a vote of security holders during the 13 weeks ended January 29, 2000. PART II Item 5. Market for May's Common Equity and Related Shareowner Matters Common Stock Dividends and Market Prices (page 21) of May's 1999 Annual Report to Shareowners are incorporated herein by reference. Item 6. Selected Financial Data The Eleven Year Financial Summary (pages 32 and 33) of May's 1999 Annual Report to Shareowners is incorporated herein by reference. In addition, basic earnings per share from continuing operations and the weighted average shares used to calculate basic earnings per share for the last five years are as follows: Earnings Shares Per Share (millions) 1999 $ 2.73 332.2 1998 2.43 342.6 1997 2.18 348.5 1996 1.97 370.8 1995 1.82 373.4 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis (pages 18-21) and Notes to Consolidated Financial Statements (pages 26-31) of May's 1999 Annual Report to Shareowners are incorporated herein by reference. Item 8. Financial Statements and Supplementary Data Consolidated Financial Statements (pages 22-25), Notes to Consolidated Financial Statements (pages 26-31), Report of Independent Public Accountants (page 36), and Quarterly Results (page 26) of May's 1999 Annual Report to Shareowners are incorporated herein by reference. 5 SUMMARIZED FINANCIAL INFORMATION - THE MAY DEPARTMENT STORES COMPANY, NEW YORK. Summarized financial information of The May Department Stores Company, New York, is set forth below for 1999, 1998 and 1997. January 29, January 30, (Millions) 2000 1999 Financial Position Current assets $ 5,104 $ 4,984 Noncurrent assets 5,818 5,557 Current liabilities 2,425 2,083 Noncurrent liabilities 8,043 7,815 52 Weeks Ended Jan. 29, Jan. 30, Jan. 31, 2000 1999 1998 Operating Results Revenues $ 13,866 $ 13,090 $ 12,390 Cost of sales 9,370 8,901 8,437 Net earnings before extraordinary loss 739 662 591 Net earnings 739 662 587 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Items 10, 11, 12, 13. Directors and Executive Officers of May, 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 May) is incorporated by reference from the definitive proxy statement dated April 19, 2000, and filed pursuant to Regulation 14A. Information about executive officers of May is set forth in Part I of this Form 10-K, under the heading "Items 1. and 2. Business and Description of Property." 6 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 May's 1999 Annual Report to Shareowners (Exhibit 13): Page in Annual Report Financial Statements- Consolidated Statement of Earnings for the three fiscal years ended January 29, 2000 22 Consolidated Balance Sheet - January 29, 2000, and January 30, 1999 23 Consolidated Statement of Cash Flows for the three fiscal years ended January 29, 2000 24 Consolidated Statement of Shareowners' Equity for the three fiscal years ended January 29, 2000 25 Notes to Consolidated Financial Statements 26-31 Report of Independent Public Accountants 36 Page in this Report (2) Supplemental Financial Statement Schedule (for the three fiscal years ended January 29, 2000): Report of Independent Public Accountants on Schedule II 11 Schedule II Valuation and Qualifying Accounts 12 (3) Exhibits: Location 3.1 Amended and Restated Certificate Incorporated of Incorporation of May, by Reference dated May 22, 1996 to Exhibit 4(a) of Post Effective Amendment No. 1 to Form S-8, filed May 29, 1996. 3.2 Certificate of Amendment of the Incorporated Amended and Restated Certificate of by Reference Incorporation, dated May 21, 1999 to Exhibit 3(b) of Form 10-Q filed June 8, 1999. 3.3 By-Laws of May, as amended Incorporated by Reference to Exhibit 3(c) of Form 10-Q, filed June 8, 1999. 7 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) Location 10.1 1994 Stock Incentive Plan Filed herewith. 10.2 Deferred Compensatiion Plan Filed herewith. 10.3 Executive Incentive Compensation Filed Plan for Corporate Executives herewith. 10.4 Form of Employment Agreement Filed herewith. 12 Computation of Ratio of Filed Earnings to Fixed Charges herewith. 13 The May Department Stores Filed Company 1999 Annual Report to herewith. Shareowners (only those portions specifically incorporated by reference shall be deemed filed with the Commission) 21 Subsidiaries of May Filed herewith. 23 Consent of Independent Public Page 11 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, 1999 (4) Reports on Form 8-K None. All other schedules and exhibits of May 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. 8 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, May has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE MAY DEPARTMENT STORES COMPANY Date: April 19, 2000 By: /s/ John L. Dunham John L. Dunham Director, Vice Chairman 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 May and in the capacities and on the dates indicated. Date Signature Title Principal Executive Officer: April 19, 2000 /s/ Eugene S. Kahn Director, Eugene S. Kahn President and Chief Executive Officer Principal Financial and Accounting Officer: April 19, 2000 /s/ John L. Dunham Director, John L. Dunham Vice Chairman and Chief Financial Officer Directors: April 19, 2000 /s/ Jerome T. Loeb Director and Jerome T. Loeb Chairman of the Board 9 Date Signature Title April 19, 2000 /s/ Anthony J. Torcasio Director and Vice Anthony J. Torcasio Chairman April 19, 2000 /s/ R. Dean Wolfe Director and R. Dean Wolfe Executive Vice President April 19, 2000 /s/ Marsha J. Evans Director Marsha J. Evans April 19, 2000 /s/ Helene L. Kaplan Director Helene L. Kaplan April 19, 2000 /s/ James M. Kilts Director James M. Kilts April 19, 2000 /s/ Russell E. Palmer Director Russell E. Palmer April 19, 2000 /s/ Michael R. Quinlan Director Michael R. Quinlan April 19, 2000 /s/ William P. Stiritz Director William P. Stiritz April 19, 2000 /s/ Robert D. Storey Director Robert D. Storey 10 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The May Department Stores Company: We have audited, in accordance with auditing standards generally accepted in the United States, 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 9, 2000. 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. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP 1010 Market Street St. Louis, Missouri 63101-2089 February 9, 2000 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 January 29, 2000 into the Company's previously filed Registration Statements on Form S-3 (No. 333-71413, 333-71413-01, 333-11539 and 333-11539-01) and Form S-8 (No. 33-21415, 33-98045, 33-58985, 333-00957 and 333-76227). /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP 1010 Market Street St. Louis, Missouri 63101-2089 April 19, 2000 11 SCHEDULE II THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE FISCAL YEARS ENDED January 29, 2000 (Millions) Charges to costs and Balance expenses Balance beginning and other Deductions end of of period adjustments (a) period FISCAL YEAR ENDED January 29, 2000 Allowance for uncollectible accounts $ 82 $ 81 $ (87) $ 76 FISCAL YEAR ENDED January 30, 1999 Allowance for uncollectible accounts $ 96 $ 79 $ (93) $ 82 FISCAL YEAR ENDED JANUARY 31, 1998 Allowance for uncollectible accounts $ 104 $ 104 $ (112) $ 96 (a) Write-off of accounts determined to be uncollectible, net of recoveries of $23 million in 1999, $25 million in 1998 and $26 million in 1997. 12 Exhibit 21 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES SUBSIDIARIES OF MAY The corporations listed below are subsidiaries of May, and all are included in the consolidated financial statements of May 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 Merchandising Company Delaware May Department Stores International, Inc. Delaware May Capital, Inc. Delaware Grande Levee, Inc. Nevada Leadville Insurance Company Vermont Snowdin Insurance Company Vermont EX-10.1 2 1994 STOCK INCENTIVE PLAN I. GENERAL 1. Purpose. The purpose of the Plan is to aid the Company and its Subsidiaries in attracting, retaining, and motivating management employees. 2. Definitions. Whenever used herein, the following terms shall have the meanings set forth below: a. "Board" means the Board of Directors of the Company. b. "Code" means the Internal Revenue Code of 1986, as amended. c. "Committee" means a committee designated by the Board, which shall consist of not less than three members of the Board who shall be appointed by and serve at the pleasure of the Board and who shall be "disinterested" within the meaning of Rule 16b-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, and who shall be "outside" directors within the meaning of Section 162(m) of the Code. d. "Company" means The May Department Stores Company, a Delaware corporation. e. "Disability" means a permanent and total disability which enables the Participant to be eligible for and receive a disability benefit under the Federal Social Security Act. f. "Fair Market Value" means the average of the high and low prices of the Stock on the New York Stock Exchange on the date in question, or, if no sale or sales of the Stock occurred on such Exchange on that day, the average of the high and low prices of the Stock on the last preceding day when the Stock was sold on the New York Stock Exchange; with respect to a Stock Appreciation Right, the term means the average of the high and low prices of the Stock on the New York Stock Exchange on such date or dates as may be provided in the Stock Appreciation Right Agreement. g. "Incentive Stock Option" means an Option granted under the Plan which constitutes and shall be treated as an "incentive stock option" as defined in Section 422 of the Code. h. "Non-Qualified Stock Option" means an Option granted under the Plan which shall not constitute or be treated as an Incentive Stock Option. i. "Non-Tandem Stock Appreciation Right" means a Right described in Part III, Section 3. j. "Option" means a right or rights to purchase shares of Stock described in Part II. k. "Option Agreement" means the agreement between the Company and a Participant evidencing the grant of an Option and containing the terms and conditions, not inconsistent with the Plan, that are applicable to such Option. l. "Participant" means an individual to whom an Option or Right is granted or Restricted Stock Grant is made. m. "Performance Restricted Stock" means Restricted Stock whose provisions include the restrictions described in Part IV, Section 3(b). n. "Plan" means the 1994 Stock Incentive Plan of the Company, as amended from time to time. o. "Related Option" means the Option in relation to which a Tandem Stock Appreciation Right is granted. p. "Restricted Stock Grant" means a grant described in Part IV. q. "Retirement" means retirement as that word is defined in any retirement plan sponsored by the Company or a Subsidiary which is applicable to the Participant. r. "Stock" means the Common Stock of the Company. 2 s. "Stock Appreciation Right" or "Right" means a right described in Part III which provides for the payment of an amount in cash or Stock in accordance with such terms and conditions as are provided in the Stock Appreciation Right Agreement applicable to such Right; provided however, that in Part III, Section 2, "Right" shall refer only to a "Tandem Stock Appreciation Right" and that in Part III, Section 3, "Right" shall refer only to a "Non-Tandem Stock Appreciation Right". t. "Stock Appreciation Right Agreement" means the agreement between the Company and a Participant evidencing the grant of a Stock Appreciation Right and containing the terms and conditions, not inconsistent with the Plan, that are applicable to such Right. u. "Subsidiary" means a subsidiary of the Company or an unincorporated organization controlled, directly or indirectly, by the Company. v. "Tandem Stock Appreciation Right" means a Right described in Part III, Section 2. 3. Administration. The Plan shall be administered by the Committee. Subject to all applicable provisions of the Plan, the Committee is authorized to approve grants of Options or Rights or the making of Restricted Stock Grants in accordance with the Plan, to construe and interpret the Plan, to prescribe, amend, and rescind rules and regulations relating to the Plan and to make all determinations and take all actions necessary or advisable for the Plan's administration. The Committee shall act by vote or written consent of a majority of its members. Whenever the Plan authorizes or requires the Committee to take any action, make any determination or decision or form any opinion, then any such action, determination, decision or opinion by or of the Committee shall be in the absolute discretion of the Committee. 3 4. Shares Subject to the Plan. (a) Maximum Number of Shares. Stock issued under the Plan shall be treasury shares subject to the following limitations: (i) Plan Maximum. The maximum number of shares of Stock which may be issued under the Plan is 41,361,879, of which no more than 3,400,553 may be issued pursuant to Restricted Stock Grants. (ii) Participant Maximum. The maximum number of Options and Stock Appreciation Rights which may be granted to any Participant during the term of the Plan is 1,243,093; provided, however, that if a Stock Appreciation Right is issued in substitution for an existing stock option or in tandem with a stock option, then the grant of such a Stock Appreciation Right shall not count against the limit. The maximum number of shares of Stock which may be issued to each Participant free from restrictions pursuant to a grant of Performance Restricted Stock is 82,873 per year.1 (b) Expired Options or Rights. If an Option or Right expires, terminates, ceases to be exercisable or is surrendered without having been exercised in full, then the shares relating to the Option or Right shall, unless the Plan has been terminated, again become available under the Plan. (c) Lapse of Restrictions on Restricted Stock. If any shares of Stock shall be returned to the Company pursuant to the provisions of Sections 2 or 3 of Part IV or in the instruments evidencing the making of Restricted Stock Grants, then such shares shall, unless the Plan has been terminated, again become available under the Plan. _________________ 1 The number of shares reflected in this paragraph were adjusted as of May 24, 1996 to reflect the spin-off by May of Payless ShoeSource, Inc. and as of March 22, 1999 to reflect a three-for-two stock split. 4 5. Participants. Participants in the Plan shall be determined as follows: (a) Eligibility. The individuals who are eligible to receive Options, Rights or Restricted Stock Grants hereunder shall be limited to management employees of the Company and its Subsidiaries (including employees who are directors and/or officers). (b) Determination. From time to time the Committee shall, in its sole discretion, but subject to all of the provisions of the Plan, determine which of those eligible employees shall receive Option(s), Stock Appreciation Right(s) or Restricted Stock Grant(s) under the Plan and the size, terms, conditions and/or restrictions of the Option(s), Right(s) or Restricted Stock Grant(s). (c) Differing Terms; Effect of Grant. The Committee may approve the grant of Option(s) or Right(s) or the making of Restricted Stock Grant(s) subject to differing terms, conditions and/or restrictions to any eligible employee in any year. The Committee's decision to approve the grant of an Option or Right or the making of a Restricted Stock Grant to an eligible employee in any year shall not require the Committee to approve the grant of an Option or Right or the making of a Restricted Stock Grant to that employee in any other year or to any other employee in any year; nor shall the Committee's decision with respect to the size, terms, conditions and/or restrictions of any Option or Right to be granted to an employee or any Restricted Stock Grant to be made to an employee in any year require the Committee to approve the grant of an Option or Right or the making of a Restricted Stock Grant of the same size or with the same terms, conditions and/or restrictions to that employee in any other year or to any other employee in any year. The Committee shall not be precluded from approving the grant of an Option or Right or the making of a Restricted Stock Grant to any eligible employee solely because such employee may previously have been granted an Option or Right or may previously have received a Restricted Stock Grant. 5 6. Rights with Respect to Shares of Stock. A Participant who has exercised an Option or Right (payable all or in part in Stock) or to whom a Restricted Stock Grant has been made shall have, after a certificate or certificates for the number of shares of Stock granted have been issued in his name, absolute ownership of such shares including the right to vote the same and receive dividends thereon; provided, however that rights with respect to shares issued in connection with a Restricted Stock Grant shall be subject to the terms, conditions and restrictions described in the Plan and in the instrument evidencing the making of the Restricted Stock Grant to such Participant. 7. Employment. In the absence of any specific agreement to the contrary, no grant of an Option or Right or making of a Restricted Stock Grant to a Participant under the Plan shall affect any right of the Company or its Subsidiaries to terminate the Participant's employment at any time. II. OPTIONS 1. General. Each employee chosen to receive an Option(s) may be granted an Incentive Stock Option, a Non-Qualified Stock Option or both, subject to the following terms, conditions and restrictions. Each Option granted under the Plan shall be evidenced by an Option Agreement which shall contain such terms and conditions consistent with the Plan as the Committee shall determine; provided, however, that each Option shall satisfy the following requirements and each Incentive Stock Option shall satisfy the requirement of Part II, Section 2: (a) Option Price. The option price for each share purchased under any Option shall be specified in the Option Agreement and, subject to the provisions of Part V, Section 3, shall not be less than Fair Market Value on the date the Option is granted; provided, however, that in no event shall the option price per share be less than the par value thereof. (b) Option Period. 6 (i) General. The period in which an Option may be exercised shall not exceed ten years from the date the Option is granted; provided, however, that the Option may be sooner terminated in accordance with the provisions of this paragraph (b). Subject to the foregoing, the Committee may provide that any Option may be exercised, in whole or in part, at such time or times as the Committee may in its discretion determine. (ii) Termination of Employment. If the Participant ceases to be an employee of the Company or a Subsidiary for any reason other than Retirement, Disability, or death, all of such Participant's outstanding Options shall immediately terminate. (iii) Retirement or Disability. If a Participant's employment is terminated by Retirement or Disability, the term of any then outstanding Option held by the Participant shall extend for a period specified by the Committee in the agreement pertaining to such Option, and the number of shares in respect of which the Option may be exercised after the Participant's Retirement or Disability shall be determined by the agreement pertaining to such Option; provided, however, that such agreement shall provide that the Committee may cancel the Participant's Option during such period if the Participant's Retirement was without the consent of the Company, or if the Participant engages during such period of Retirement or Disability in employment or activities contrary, in the opinion of the Committee, to the best interests of the Company. 2. Incentive Stock Options. Each Option Agreement evidencing an Incentive Stock Option shall satisfy the requirement that to the extent that the aggregate Fair Market Value of Stock with respect to which Incentive Stock Options are exercisable for the first time by any Participant during any calendar year (under the Plan and all stock option plans of the Company and its Subsidiaries) exceeds $100,000, such Options shall be treated as Non-Qualified Stock Options. For purposes of 7 this Section 2, aggregate Fair Market Value of Stock shall be determined as of the time the Option with respect to such Stock is granted. 3. Death. If a Participant's employment is terminated by death at a time when he or she has not fully exercised any then outstanding Option, or if a Participant dies after Retirement or Disability without having fully exercised any then outstanding Option, the beneficiary designated by the Participant (or, in the absence of such designation, the executors or administrators or legatees or distributees of the Participant's estate) shall have the right to exercise such Option in whole or in part during such period following the Participant's death as is set forth in the Option Agreement. The Company shall prescribe the procedures and requirements for beneficiary designations not inconsistent with this provision and has the right to review and approve such designations. 4. Nonassignability. Each Option shall not be transferable (other than, upon the death of the Participant, by beneficiary designation, by last will and testament or by the laws of descent and distribution) and shall be exercisable during the Participant's lifetime only by the Participant. 5. Payment for Stock. Full payment in cash or, if the Committee approves, in Stock, for shares purchased shall be made at the time of exercising the Option in whole or in part. No certificates for shares so purchased shall be issued until full payment therefor has been made, and a Participant shall have none of the rights of a shareowner until such certificates are issued to him or her. In addition, if the Committee approves, the Option Agreement may provide that the Participant may elect, on terms set forth in the Option Agreement, to have the Company withhold from the shares of Stock payable to the Participant upon exercise of an Option the number of shares of Stock having a fair market value equal to the amount of any required withholding taxes. 6. Use of Proceeds. The proceeds received by the Company from the sale of Stock pursuant to the exercise of an Option may be used for general corporate purposes. 8 7. Restrictions Upon Exercise of Option. The exercise of each Option shall be subject to the condition that if at any time the Company shall determine in its discretion that the satisfaction of withholding tax or other withholding liabilities under any state or Federal law, or that the listing, registration or qualification of any shares otherwise deliverable upon such exercise upon any securities exchange or under any state or Federal law, or that the consent or approval of any regulatory body, is necessary or desirable as a condition of, or in connection with, such exercise or the delivery or purchase of shares thereunder, then in any such event such exercise shall not be effective unless such withholding, listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. 8. Repricing Prohibited. There shall be no grant of an Option(s) to a Participant in exchange for a Participant's agreement to cancellation of a higher-priced Option(s) that was previously granted to such Participant. III. STOCK APPRECIATION RIGHTS 1. General. Each employee chosen to receive a Stock Appreciation Right(s) may be granted a Tandem Stock Appreciation Right, a Non-Tandem Stock Appreciation Right or both, subject to the following terms, conditions and restrictions and subject to such additional terms, conditions and restrictions as may be determined by the Committee from time to time hereafter; provided however, that no Right shall be subject to additional terms, conditions or restrictions which are more favorable to a Participant than the terms, conditions and restrictions set forth in the Plan. 2. Tandem Stock Appreciation Rights. Each Tandem Stock Appreciation Right may be granted only with respect to a share(s) of Stock for which an Option(s) has been granted under the Plan, and may be awarded concurrently with the grant of such Option or at any time thereafter while the Option is outstanding. If the Committee so determines, a Tandem Stock Appreciation Right may also be granted with respect to a share(s) of Stock for which an option has been granted and is outstanding under any other plan 9 of the Company. A Stock Appreciation Right shall be evidenced by a Stock Appreciation Right Agreement which shall contain such terms and conditions (which may include limitations as to the time when such Stock Appreciation Right becomes exercisable and when it ceases to be exercisable that are more restrictive than the limitations applicable to the Related Option(s)) not inconsistent with the Plan as the Committee shall determine; provided, however, that each Tandem Stock Appreciation Right shall satisfy the following requirements: (a) Termination of a Right. If the Related Option is exercised, in whole or in part, then the Right with respect to the shares of Stock purchased pursuant to such exercise (but not with respect to any unpurchased shares of Stock) shall terminate as of the date of the exercise. If an unexercised Right is otherwise exercisable on the date that the Related Option expires, and if the Fair Market Value of the shares of Stock with respect to which such Right was granted, determined as of the date of such expiration, exceeds the Option price of such shares, then, notwithstanding Section 2(b), the Right shall automatically be deemed to have been exercised as of the date of such expiration; otherwise, on the date that the Related Option expires, any outstanding Right related thereto shall be terminated as of the date of such expiration. (b) Exercise. Tandem Stock Appreciation Rights may be exercised (i) only at such time or times as, and to the extent that, the Related Options shall be exercisable, (ii) only upon surrender of the Related Options with respect to the shares for which the Rights are then being exercised, and (iii) subject to the terms and conditions set forth in the Stock Appreciation Right Agreement; provided that no Tandem Stock Appreciation Right may be exercised prior to the expiration of six (6) months from the date of the grant and can only be exercised during the ten-day period beginning on the third business day following the release of the Company's quarterly or annual statement of sales and earnings. 10 3. Non-Tandem Stock Appreciation Rights. Each Non-Tandem Stock Appreciation Right may be granted with respect to a share(s) of Stock or, if the Committee so determines, in exchange for an outstanding Option or an outstanding stock option granted under any other plan of the Company. A Non-Tandem Stock Appreciation Right shall be evidenced by a Stock Appreciation Right Agreement which shall contain such terms and conditions not inconsistent with the Plan as the Committee shall determine; provided, however, that each Non-Tandem Stock Appreciation Right shall satisfy the following requirements: (a) Termination of a Right. A Non-Tandem Stock Appreciation Right shall terminate as of the earlier of (i) the date of exercise of such Right, to the extent that it is exercised; or (ii) the termination date specified in the Stock Appreciation Right Agreement. If an unexercised Right is otherwise exercisable on the date that it expires, and if the Fair Market Value of the shares of Stock with respect to which such Right was granted, determined as of the date of such expiration, exceeds the exercise price of such Right (set forth in the Stock Appreciation Right Agreement), then the Right shall automatically be deemed to have been exercised as of the date of such expiration. (b) Exercise. Non-Tandem Stock Appreciation Rights may be exercised in accordance with the terms and conditions set forth in the Stock Appreciation Right Agreement; provided that (i) no Non-Tandem Stock Appreciation Right that is payable all or in part in Stock may be exercised prior to the expiration of six (6) months from the date of the grant; (ii) the exercise price of any Non-Tandem Stock Appreciation Right granted in exchange for an outstanding Option or for an outstanding stock option granted under any other plan of the Company shall be the same exercise price as that outstanding Option or option and (iii) the exercise price of any Non-Tandem Stock Appreciation Right not granted in exchange for an outstanding Option or for an outstanding stock option granted under any other plan of the Company shall be the Fair Market Value of the Stock on the date of the grant of the Right(s). 11 4. Payment. (a) Amount. Upon the exercise of a Stock Appreciation Right, a Participant shall be entitled to receive the excess of the aggregate Fair Market Value of the shares of Stock with respect to which the Right is being exercised (determined as of the date of such exercise) over (i) the aggregate option price of such shares in the case of Tandem Stock Appreciation Rights; or (ii) the aggregate exercise price (set forth in the Stock Appreciation Right Agreement) in the case of Non-Tandem Stock Appreciation Rights. (b) Form. Any amount which becomes payable upon exercise of a Stock Appreciation Right under the Plan shall be paid entirely in cash, entirely in Stock or partly in cash and partly in Stock in accordance with such terms and conditions as are provided in the applicable Stock Appreciation Right Agreement; provided, however, that notwithstanding any provision in any Stock Appreciation RightAgreement, the Committee may determine in its sole and absolute judgment that any amount which may become payable upon exercise of a Right shall be paid entirely in cash. 5. Termination of Employment. (a) General. If a Participant ceases to be an employee of the Company or of a Subsidiary for any reason other than Retirement, Disability or death, all of such Participant's outstanding Rights shall immediately terminate. (b) Retirement or Disability. If a Participant's employment is terminated by Retirement or Disability, the Participant's right to exercise all or any portion of any Right after the date of such Retirement or Disability shall be determined by the provisions of the Stock Appreciation Right Agreement; provided, however, that such Agreement shall provide that the Committee may terminate the Participant's Right prior to the date on which the Right is exercised if the Participant's Retirement was without the consent of the Company, or if the Participant engages during 12 such period of Retirement or Disability in employment or activities contrary, in the opinion of the Committee, to the best interests of the Company. (c) Death. If a Participant's employment is terminated by death at a time when the Participant has not fully exercised any then outstanding Rights, or if a Participant dies after Retirement or Disability without having fully exercised any then outstanding Rights, the beneficiary designated by the Participant (or, in the absence of such designation, the executors or administrators or legatees or distributees of the Participant's estate) shall have the right to exercise such Right in whole or in part during such period following the Participant's death as set forth in the Stock Appreciation Right Agreement. The Company shall prescribe the procedures and requirements for beneficiary designations not inconsistent with this provision and has the right to review and approve such designations. 6. Expiration. If the period in which a Stock Appreciation Right is exercisable expires and the Right has not been exercised, then such Right shall terminate as of the last day on which it was exercisable. 7. Nonassignability. Each Right shall not be transferable (other than, upon the death of the Participant, by beneficiary designation, by last will and testament or by the laws of descent and distribution) and shall be exercisable during the Participant's lifetime only by the Participant. 8. Restrictions Upon Exercise of Rights. The exercise of each Right shall be subject to the condition that if at any time the Company shall determine in its discretion that the satisfaction of withholding tax or other withholding liabilities under any state or Federal law, or that the consent or approval of any regulatory body, is necessary or desirable as a condition of, or in connection with, such exercise, then, in any such event, such exercise shall not be effective unless such withholding, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. 13 IV. RESTRICTED STOCK GRANTS 1. General. A Restricted Stock Grant made under the Plan shall contain the following terms, conditions and restrictions and such additional terms, conditions and restrictions as may be determined by the Committee from time to time hereafter; provided, however, that no Restricted Stock Grant shall be subject to additional terms, conditions or restrictions which are more favorable to a Participant than the terms, conditions and restrictions set forth in the Plan. 2. Restrictions. Subject to the provisions of Part IV, Section 3, shares of Stock granted to a Participant pursuant to a Restricted Stock Grant: (i) shall not be sold, assigned, conveyed, transferred, pledged, hypothecated, or otherwise disposed of, and (ii) shall be returned to the Company forthwith, and all the rights of the Participant to such shares shall immediately terminate without any payment or consideration by the Company, if the Participant's continuous employment with the Company or any Subsidiary shall terminate for any reason, except as provided in Part IV, Section 4. Such return of such Stock shall be accomplished by the Participant's delivering or causing to be delivered to the Secretary or any Assistant Secretary of the Company the certificate(s) for such shares of Stock, accompanied by such endorsement(s) and/or instrument(s) of transfer as may be required by the Secretary or any Assistant Secretary of the Company. 3. Lapse of Restrictions. (a) General. Subject to the provisions of Part IV, Sections 3(b) and 4 and of Part V, Section 4, the restrictions set forth in Part IV, Section 2 shall lapse on such date or dates on or after the first anniversary and on or before the tenth anniversary of the date as of which the Restricted Stock Grant is made, as the Committee shall determine at the time of the Restricted Stock Grant. 14 (b) Performance Restricted Stock. If the Committee has designated the Stock covered by a Restricted Stock Grant as Performance Restricted Stock, then the lapse of restrictions set forth in Part IV, Section 2 that would otherwise occur on a specified date shall also be subject to the following: (i) if the Company meets or exceeds the Target Long- Term EPS Growth Objective (after adjustment for Relative Performance Rank) for the most recently ended Long-Term Performance Period, then the restrictions that would otherwise lapse on such date shall lapse as to 100% of the shares of such Performance Restricted Stock; and (ii) if the Company meets or exceeds the Threshold Long-Term EPS Growth Objective (after adjustment for Relative Performance Rank) but does not meet or exceed the Target Long-Term Growth Objective (after adjustment for Relative Performance Rank) for the most recently ended Long-Term Performance Period, then the restrictions on the shares of Performance Restricted Stock that would otherwise lapse on such date shall lapse as to (i) 50% of such shares plus (ii) 50% of such shares multiplied by a fraction (not less than zero and not greater than one), the numerator of which is the Company's actual Long-Term EPS Growth for the most recently ended Long-Term Performance Period less the Threshold Long-Term EPS Growth Objective for such period and the denominator of which is the Target Long-Term EPS Growth Objective for such period less the Threshold Long-Term EPS Growth Objective for such period, and the remaining shares of Performance Restricted Stock shall immediately forfeit to the Company; and (iii) if the Company does not meet or exceed the Threshold Long-Term EPS Objective (after adjustment for Relative Performance Rank) for the most recently ended Long-Term Performance Period, then 100% of the shares of such Performance Restricted Stock shall immediately forfeit to the Company. 15 For purposes of this Section 3(b), the terms Long-Term Performance Period, Relative Performance Rank, Target Long- Term EPS Objective and Threshold Long-Term EPS Objective shall have the same meanings as in the Company's Executive Incentive Compensation Plan for Corporate Executives. No restrictions shall lapse on any Performance Restricted Stock until the Committee certifies, in writing, that the requirements set forth in this Section 3(b) have been satisfied. (c) Forfeiture. All shares of Stock forfeited under this Section 3 shall be returned to the Company forthwith, and all the rights of the Participant to such shares shall immediately terminate without any payment or consideration by the Company. 4. Termination of Employment By Reason of Death or Disability. If a Participant who has been in the continuous employment of the Company or of a Subsidiary since the date as of which a Restricted Stock Grant was made to such Participant shall, while in such employment, die or become Disabled and such Participant's death or Disability shall occur more than one year after the date as of which the Restricted Stock Grant was made to such Participant, then the restrictions set forth in Part IV, Section 2 shall lapse as to all shares of Restricted Stock granted to such Participant pursuant to such Restricted Stock Grant on the date of such event. A Participant may file a written designation of beneficiary to receive, in the event of the Participant's death, any shares for which restrictions lapse on the date of death. The Company shall prescribe procedures and requirements for beneficiary designations not inconsistent with this provision and has the right to review and approve such designations. 5. Agreement by Employee Regarding Withholding Taxes. Each Participant shall agree that, subject to the provisions of Part IV, Section 6, (i) no later than the date as of which the restrictions mentioned in Part IV, Section 2 and in the instrument evidencing the making of the Restricted Stock Grant shall 16 lapse, such Participant will pay to the Company in cash, or, if the Committee approves, in Stock, or make other arrangements satisfactory to the Committee regarding payment of, any Federal, state or local taxes of any kind required by law to be withheld with respect to the shares of Stock subject to such Restricted Stock Grant, and (ii) the Company and its Subsidiaries shall, to the extent permitted by law, have the right to deduct from any payment of any kind otherwise due to the Participant any Federal, state or local taxes of any kind required by law to be withheld with respect to the shares of Stock subject to such Restricted Stock Grant. 6. Election to Recognize Gross Income in the Year of Grant. If any Participant properly elects, within thirty (30) days of the date of grant, to include in gross income for Federal income tax purposes an amount equal to the fair market value of the shares of Stock granted on the date of grant, such Participant shall pay to the Company, or make arrangements satisfactory to the Committee to pay to the Company in the year of such grant, any Federal, state or local taxes required to be withheld with respect to such shares. If such Participant shall fail to make such payments, the Company and its Subsidiaries shall, to the extent permitted by law, have the right to deduct from any payment of any kind otherwise due to the employee any Federal, state or local taxes of any kind required by law to be withheld with respect to such shares. 7. Restrictive Legend; Certificates May be Held in Custody. Each certificate evidencing shares of Stock granted pursuant to a Restricted Stock Grant shall, (i) if issued to any person other than the Company for safekeeping while the restrictions apply, bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock Grant and (ii) if issued to the Company for safekeeping while the restrictions apply, be noted as restricted on the records of the transfer agent. Any attempt to dispose of such shares of Stock in contravention of such terms, conditions and restrictions shall be ineffective. The Committee may adopt rules which provide that the certificates evidencing such shares may be held in custody by 17 a bank or other institution, or that the Company may itself hold such shares in custody, until the restrictions thereon shall have lapsed. 8. Restrictions upon Making of Restricted Stock Grants. The listing upon the New York Stock Exchange or the registration or qualification under any Federal or state law of any shares of Stock to be granted pursuant to Restricted Stock Grants (whether to permit the making of Restricted Stock Grants or the resale or other disposition of any such shares of Stock by or on behalf of the employees receiving such shares) may be necessary or desirable as a condition of or in connection with such Restricted Stock Grants and if, in any such event, the Board in its sole discretion so determines, delivery of the certificates for such shares of Stock shall not be made until such listing, registration or qualification shall have been completed. In such connection, the Company agrees that it will use its best effort to effect any such listing, registration or qualification; provided, however, the Company shall not be required to use its best efforts to effect such registration under the Securities Act of 1933 other than on Form S-8, as presently in effect, or such other forms as may be in effect from time to time calling for information comparable to that presently required to be furnished under Form S-8. 9. Restrictions upon Resale of Stock. If the shares of Stock that have been granted to a Participant pursuant to the terms of the Plan are not registered under the Securities Act of 1933, as amended, pursuant to an effective registration statement, such Participant, if the Committee shall deem it advisable, may be required to represent and agree in writing that (i) any shares of Stock acquired by such employee pursuant to the Plan will not be sold except pursuant to an effective registration statement under the Securities Act of 1933, as amended, or pursuant to an exemption from registration under said Act and (ii) such Participant is acquiring such shares of Stock for the Participant's own account and not with a view to the distribution thereof. 18 V. MISCELLANEOUS 1. Effective Date. The Plan became effective on March 18, 1994, subject to approval by shareowners before March 18, 1995. 2. Duration of Plan. Unless sooner terminated, the Plan shall remain in effect until March 18, 2004. Termination of the Plan shall not affect any Options or Rights previously granted, which Options or Rights shall remain in effect until exercised, surrendered, or cancelled, or until they have expired, all in accordance with their terms. Termination of the Plan shall not affect any Restricted Stock Grants previously made, or Stock previously granted pursuant to a Restricted Stock Grant; the terms, conditions and restrictions applicable to shares issued pursuant to a Restricted Stock Grant shall remain in effect until such terms, conditions and restrictions shall have lapsed all in accordance with their terms. 3. Changes in Capital Structure. In the event that there is any change in the capital structure of the Company through merger, consolidation, reorganization, recapitalization, spin-off or otherwise, or if there shall be any dividend on the Company's Stock, payable in such Stock, or if there shall be a Stock split or a combination of shares, then: (i) the number of shares reserved for Options (both in the aggregate and with respect to each Participant) and the number of shares subject to outstanding Options and the price per share of each such Option; (ii) the number of shares with respect to which Rights may be exercised (both in the aggregate and with respect to each Participant); and (iii) the number of shares of Stock reserved for Restricted Stock Grants under the Plan shall be proportionately adjusted by the Board as it deems equitable, in its absolute discretion, to prevent dilution or enlargement of the rights of a Participant and any shares issued pursuant to such change in capital structure shall be subject to 19 the same terms, conditions and restrictions as the shares of Stock with respect to which newly issued shares are issued. The issuance of Stock for consideration and the issuance of Stock rights shall not be considered a change in the Company's capital structure. No adjustment provided for in this Section 3 shall require the issuance of any fractional share. 4. Change in Control. If while unexercised Options, Rights, or Restricted Stock Grants remain outstanding under the Plan: (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the shareowners of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) of this Section) whose election by the Board or nomination for election by the Company's shareowners was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the shareowners of the Company approve a merger or consolidation of the Company with any other Company, other than (1) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining 20 outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (iv) the shareowners of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, then (a) from and after the date of the first of the foregoing events to occur, all Options and Rights held by active employees on such date shall be exercisable in full, whether or not otherwise exercisable; and (b) on the date of the first of the foregoing events to occur, the restrictions set forth in Part IV, Section 2 on all outstanding Restricted Stock Grants, including Performance Restricted Stock Grants, shall lapse. 5. Amendment or Termination. The Board may, by resolution, amend or terminate the Plan at any time; provided, however, that (i) shareowner approval shall be required for any changes to the Plan which would require shareowner approval under the Delaware General Corporation Law, Rule 16b-3 of the Securities Exchange Act of 1934, as amended, or Section 162(m) of the Code; and (ii) the Board may not, without the written consent of the Participant, alter, impair or adversely affect any right of such Participant with respect to any Option or Right previously granted or Restricted Stock Grant previously made to such Participant under the Plan except as authorized herein. Notwithstanding the foregoing, the Board may, by resolution, amend the Plan in any way that it deems necessary or appropriate in order to make income with respect to the Plan deductible for 21 Federal income tax purposes under Section 162(m) of the Code without regard to the foregoing provisos (i) and (ii), and any such amendment shall be effective as of such date as is necessary to make such income under the Plan so deductible. 6. Unfunded Plan. The Plan shall be unfunded. Neither the Company nor the Committee shall be required to segregate any assets that may at any time be represented by Options or Rights under the Plan. Neither the Company nor the Committee shall be deemed to be a trustee of any amounts to be paid under the Plan. Any liability of the Company to any Participant with respect to a right shall be based solely upon any contractual obligations created by the Plan or a Stock Appreciation Right Agreement or Option Agreement; no such obligation shall be deemed to be secured by any pledge or any encumbrance on any property of the Company. VI. CANCELLATION AND RESCISSION 1. Competition; Confidential Information; Termination for Cause (a) Unless an Option Agreement or a Stock Appreciation Right Agreement (any such agreement being referred to herein as an "Agreement") specifies otherwise, the Committee may (1) cancel at any time any unexercised Option or Right; or (2) rescind any exercise of an Option or Right; if the Participant is not in compliance with all other applicable provisions of the Agreement or the Plan or if, prior to any such exercise or within six months after such exercise, the Participant (i) engages in a Competing Business, as such term is defined in the Agreement; or (ii) solicits for employment, hires or offers employment to, or discloses information to or otherwise aids or assists any other person or entity other than the 22 Company in soliciting for employment, hiring or offering employment to, any employee of the Company; or (iii) takes any action which is intended to harm the Company or its reputation, which the Company reasonably concludes could harm the Company or its reputation or which the Company reasonably concludes could lead to unwanted or unfavorable publicity to the Company; (iv) discloses to anyone outside the Company, or uses in other than the Company's business, any "confidential information", as such term is defined in the Agreement; or (v) is terminated by the Company for "cause". (b) Upon exercise of an Option or Right, the Participant shall certify on a form acceptable to the Committee that the Participant is in compliance with the terms and conditions of the Agreement and the Plan. (c) The Company shall immediately notify the Participant in writing of any cancellation of any unexercised Option or Right. Following issuance of such notice, the Participant shall have no further rights with respect to such Option or Right. (d) The Company shall notify the Participant in writing of any rescission of an exercise of an Option or Right within one year after the activity referred to in Part VI, Section 1(a). Within ten days after receiving such a notice from the Company, the Participant shall either (i) pay to the Company the excess of the fair market value of the Stock on the date of exercise of an Option over the exercise price for the Option or the fair market value of the Stock and/or cash distributed to the Participant as a result of the exercise of a Right or (ii) return the Stock received upon the exercise of an Option (in which case the Company will return the exercise price to the Participant) or return the Stock and/or cash distributed upon the exercise of a Right. 23 (e) The term "cause" shall mean (i) an intentional act of fraud, embezzlement, theft or any other material violation of law in connection with the Participant's duties or in the course of the Participant's employment with the Company; or (ii) intentional damage to assets of the Company; or (iii) intentional disclosure of confidential information of the Company contrary to the policy of the Company; or (iv) breach of the Participant's obligations the Company; or (v) intentional engagement in any competitive activity which would constitute a breach of the Partici- pant's duty of loyalty or of the Participant's obligations under any written contract of employment; or (vi) intentional breach of any policy of the Company; or (vii) the willful and continued failure by the Participant to substantially perform the Participant's duties with the Company (other than any such failure resulting from the Participant's incapacity due to physical or mental illness); or (viii) the willful engaging by the Participant in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. 2. Agreement by Participant Regarding Deduction. The Participant shall agree and consent to a deduction from any amounts the Company owes to the Participant from time to time (including amounts owed as wages or other compensation, fringe benefits, or vacation pay, as well as any other amounts owed to the Participant by the Company) to the extent of the amounts the Participant owes the Company under this Part VI. Whether or not the Company elects to make any set-off in whole or in part, if the Company does not recover by means of set-off the full amount owned by the Participant, calculated as set forth in this Part VI, then the Participant agrees to pay immediately the unpaid balance to the Company. 24 EX-10.2 3 DEFERRED COMPENSATION PLAN Section 1.Purpose. The purpose of this Plan is to provide an additional incentive to the key employees of The May Department Stores Company and its subsidiaries to achieve superior performance. Section 2.Definitions. (a) Board means the Board of Directors of May, as hereinafter defined. (b) Committee means the Committee appointed to administer the Plan, as hereinafter defined, as provided in Section 8 hereof. (c) Common Stock means the Common Stock of May, as hereinafter defined. (d) Corporation means May, as hereinafter defined, or any subsidiary of May which is an employer of an Executive, as hereinafter defined, who is a Participant, as hereinafter defined, in the Plan, as hereinafter defined. (e) Executive means any individual employed by the Corporation in an executive capacity who receives regular stated compensation in respect of such employer-employee relationship other than a pension, retainer or fee under a contract. (f) Fiscal Year means the fiscal year of the Corporation as established from time to time. (g) May means The May Department Stores Company, a Delaware corporation, its successors and assigns. (h) Participant means an Executive who has been designated by the Committee as eligible, and who has elected to participate in the Plan, as hereinafter defined. (i) Plan means the Deferred Compensation Plan of the Corporation, as described herein. (j) Restricted Stock means shares of Common Stock described in Section 10 hereof. (k) Stock Unit means an accounting equivalent of one share of Common Stock. (l) Stock Unit Account means an account on the records of the Corporation in respect of Stock Units which have been and/or may be allocated to a Participant in the manner hereinafter set forth. Section 3.Methods of Payment. (a) Except as hereinafter provided, prior to the commencement of the calendar year that includes the first day of a Fiscal Year, each Participant shall be afforded the opportunity of making an election to have any one or more of the following alternative methods of payment applied to all or a part of any portion (which such portion shall not exceed one-half, unless specifically provided for to the contrary in the participant's written contract of employment) of any compensation of which such Participant shall be the recipient in respect of his performance during such Fiscal Year: (i) Alternative (i): Payment of any such compensation that is paid in the form of a bonus on the first day of April next following the close of such Fiscal Year or on such subsequent date as the amount thereof is ascertainable. (ii) Alternative (ii): Payment thereof at a deferred date or dates either in a lump sum or in annual installments, as may be determined by the Committee, such payment when made to include interest, as hereinafter provided, from the first day of April next following the Fiscal Year in respect of which the compensation was payable to the date of payment. (iii) Alternative (iii): [reserved] (iv) Alternative (iv): Payment thereof at a deferred date or dates either in a lump sum or in annual installments, as may be determined by the Committee, and either in cash or in Common Stock or in both cash and Common Stock, as may be determined by the Committee, in respect of Stock Units to be allocated to the Participant as hereinafter provided. If any Participant shall fail to make an election with respect to any year, he shall be deemed to have elected not to defer any portion of his compensation for such year. Notwithstanding the requirements imposed by this paragraph (a) with respect to the time by which an election must be made, an employee who is designated by the Committee as a Participant for the first time may, within 60 days of such designation, make any election otherwise permitted under this paragraph (a) with respect to the Participant's compensation in respect of employment subsequent to the date on which the election is made. 2 (b) In connection with all determinations to be made by the Committee as respects Alternative (ii) and, except for the determination of whether payment thereunder is to be made in cash or in Common Stock or in both cash and Common Stock (which determination shall be in the absolute discretion to the Committee), Alternative (iv), the Participant shall be given an opportunity at the time he makes his election of indicating his preferences, which preferences shall be taken into account by the Committee in making its determinations. Except as provided in Section 13 and Section 14 in no event shall payments under Alternative (ii) or (iv) commence prior to the earliest of the Participant's retirement, termination of employment or death (or prior to the occurrence of a severe financial hardship, as provided below). The Committee shall make its determination with respect to the payment schedule (i.e., a lump sum payment or payments in annual installments) under Alternative (ii) or (iv) prior to the commencement of the calendar year that includes the first day of the Fiscal Year for which such alternative is elected. Except in the event of a severe financial hardship, as provided below, the Committee's determination with respect to a payment schedule shall become irrevocable as of the first day of the calendar year that includes the first day of the Fiscal Year for which the determination is made. However, upon the written request of the Participant (or if applicable, the beneficiary or distributee) the payment schedule may be revised by the Committee, in its absolute discretion, in the event that the Participant (or if applicable, the beneficiary or distributee) incurs a severe financial hardship. Such severe financial hardship must have been caused by an accident, illness or other event which was beyond the control of the Participant (or, if applicable, the beneficiary or distributee); and the Committee shall revise the payment schedule that it had previously established only to the extent that the Committee considers necessary to eliminate the severe financial hardship. Notwithstanding the requirements imposed by this paragraph (b) regarding the date by which the Committee must make a determination with respect to the payment schedule under Alternative (ii) or (iv) and the date as of which such determination shall become irrevocable (except in the event of a severe financial hardship), when a Participant makes an election pursuant to the last sentence of paragraph (a) of this Section 3, the Committee shall make its determination with respect to the payment schedule at any time prior to the date as of which the Participant's election becomes effective, and its determination shall become irrevocable (except in the event of a severe financial hardship) as of such effective date. 3 (c) In the case of a Participant who elects to have all or any part of his compensation for a particular Fiscal Year paid under Alternative (iv), Stock Units shall be allocated to such Participant by crediting the same to his Stock Unit Account, and the number of Stock Units to be so credited for such Fiscal Year shall be the sum of the following: (i) the quotient, disregarding fractions, resulting from dividing the dollar amount of such portion of the Participant's compensation as is to be so applied to Alternative (iv) by the average closing price of the Common Stock on the New York Stock Exchange during the month of February ending in the Fiscal Year next following the Fiscal Year in respect of which such compensation was payable; plus (ii) the quotient, disregarding fractions, resulting from dividing the aggregate dollar amount of cash dividends which would have been paid to the Participant during such Fiscal Year had the Stock Units standing in his Stock Unit Account from time to time during such Fiscal Year been shares of Common Stock by the average closing price of the Common Stock on the New York Stock Exchange during the month of February ending in the year next following such Fiscal Year; plus (iii) the number of shares of Common Stock, disregarding fractions, which would have been received by the Participant as stock dividends during such Fiscal Year had the Stock Units standing in his Stock Unit Account at the date or dates of payment of such stock dividend(s) been shares of Common Stock. Any allocation of Stock Units to a Participant's Stock Unit Account required to be made pursuant to this paragraph (c) shall be made as of the first day of April next following the Fiscal Year in respect of which such compensation was payable or such dividends were paid, as the case may be. The aggregate value of the fraction or fractions remaining after making the applicable calculations referred to in subparagraphs (c)(i), (c)(ii) and (c)(iii) of this Section 3 (based upon the average closing price of Common Stock on the New York Stock Exchange during the month of February next preceding such month of April), shall not be converted into Stock Units but shall be allocated and added to the amount elected by the Participant to be paid to him under Alternative (ii) above, or, if the Participant shall have made no such election under Alternative (ii), then such remaining amount shall be paid to the Participant as if he had made an election under Alternative (i) above to be so paid. 4 (d) Notwithstanding the provisions of Section 3(c) to the contrary, in the event of a recapitalization of May pursuant to which the outstanding shares of Common Stock shall be changed into a greater or smaller number of shares (including, without limitation, a stock split or a stock dividend of 25% or more of the number of outstanding shares of Common Stock), the number of Stock Units credited to a Participant's Stock Unit Account shall be appropriately adjusted as of the effective date of such recapitalization. (e) Interest to be paid under Alternative (ii) shall be credited annually as of April 1 of each year and shall be at the following rates: (i) to and including March 31, 1974, the rate shall be 3%, compounded annually, and (ii) after March 31, 1974, the rate shall be equal to the average yield on long-term United States Government Bonds (as determined by the Board of Governors of the Federal Reserve Board and published in the Federal Reserve Bulletin) for the calendar year prior to said April 1, compounded annually, provided, however, that if the method of calculation of such average yield shall be changed, or if the determination and/or the publication thereof be discontinued, then the Committee shall substitute therefor such alternative method of determining such interest rate as it, in its discretion, shall deem appropriate. (f) Prior to the commencement of a specified period of time, the Corporation may credit a Participant with a bonus ("Contingent Bonus") with respect to his employment during such period of time. The Contingent Bonus will be subject to forfeiture for such period as the Committee may determine and upon such terms and conditions as the Committee may establish, either by adopting resolutions of general applicability or by making individual determinations on a case-by-case basis. Prior to the date on which a Contingent Bonus is credited with respect to a Participant, the Committee will give the Participant an opportunity to elect that one or more of the alternative methods of payment provided for in Section 3(a)(ii) and (iv) shall be applied to all or a portion of such Contingent Bonus, both with respect to the period during which the Contingent Bonus is forfeitable and with respect to the period after the forfeiture provisions lapse. The forfeiture provisions that are applied to a Contingent Bonus in accordance with this paragraph (f) shall also be applicable to any increments thereon under Alternative (ii) or (iv). In the event that no election is made with respect 5 to a Contingent Bonus (or portion thereof) for the period after the forfeiture provisions lapse, then such Contingent Bonus (or portion thereof) shall be distributed under Alternative (i) upon the lapse of the forfeiture provisions. Section 4.Limitation of Stock Units. In no event shall the aggregate number of Stock Units allocated under this Plan in respect of compensation for any Fiscal Year exceed a number equal to 1/2 of 1% of the total number of shares of Common Stock outstanding at the close of such Fiscal Year (inclusive of any Restricted Stock then outstanding). Section 5.Distribution from the Stock Unit Account. (a) Distribution from a Participant's Stock Unit Account shall be made in accordance with the determinations made by the Committee, as in this Plan provided. Stock Units shall be adjusted from time to time in accordance with this Plan until all distributions to which a Participant is entitled hereunder shall have been made. (b) If the Committee determines that distribution to a Participant is to be made in annual installments, the Committee may determine from time to time whether each particular installment shall be distributed in cash or in Common Stock or in both cash and Common Stock. (c) If the Committee determines that a distribution to a Participant is to be made in a lump sum in Common Stock, the number of shares of Common Stock to be so distributed to such Participant shall equal the number of Stock Units then in his Stock Unit Account. For the purpose of determining the number of shares of Common Stock to be distributed on a particular annual installment distribution date, the Committee shall make its calculations as if that annual installment and all subsequent annual installments were in fact to be made in shares of Common Stock, as follows: the number of shares of Common Stock which would be then so distributable, except in the case of the last distribution, shall be equal to the product, disregarding fractions, of the total number of Stock Units then credited to the Participant's Stock Unit Account, multiplied by a fraction, the numerator of which shall be one and the denominator of which shall be the number of remaining installments; and in the case of the last distribution, shall be the number of shares of Common Stock equal to the Stock Units then remaining in the Participant's Stock Unit Account. The Participant's Stock Unit Account shall be decreased by one Stock Unit for each share of Common Stock distributed to a Participant. 6 (d) If the Committee determines that a particular distribution to a Participant is to be made in cash, a computation shall first be made of the number of shares of Common Stock which would then be distributable pursuant to paragraph (c) of this Section 5 if such distribution were to be made in shares of Common Stock. The number of shares thus determined shall then be converted into cash in respect of each such distribution by valuing such shares at the average closing price of the Common Stock on the New York Stock Exchange during the month of February next preceding the date of such distribution, and the resulting amount of cash shall be distributed to the Participant. The Participant's Stock Unit Account shall then be decreased by one Stock Unit for each share of Common Stock which would have been distributed to the Participant had such cash distribution been made in shares of Common Stock. (e) If the Committee determines that a distribution is to be made in part in Common Stock and in part in cash, paragraphs (c) and (d) of this Section 5 shall be applied separately to the respective parts of such distribution and to the respective parts of the Stock Unit Account with respect to which the distribution is to be made. Section 6.Death of Participant. In the event of the death of a Participant prior to complete distribution under Alternatives (ii) and/or (iv) hereof, all cash and/or Stock Units then remaining undistributed, or which shall thereafter become distributable to him pursuant to such Alternatives, shall be distributed to such beneficiary as the Participant shall have designated in writing to the Corporation, or, in the absence of such designation, to his personal representative. Such distribution shall be made at such date or dates either in a lump sum or in annual installments, as may be determined by the Committee prior to the beginning of the calendar year that includes the first day of the Fiscal Year for which alternative is elected (or, where applicable, the date specified by the last sentence of Section 3(b)); provided, however, that in the event of a severe financial hardship, the Committee may subsequently revise its determination in accordance with the applicable provisions of Section 3(b). Section 7.Participant's Right Unsecured; Investments. The right of a Participant to receive any distribution hereunder shall be an unsecured claim against the general assets of the Corporation. Nothing in this Agreement shall require the Corporation to invest any amount, the payment of which has been deferred under Alternative (iv), in Common Stock or in any other medium. 7 Section 8.Administration of the Plan--Committee. (a) The Plan shall be administered by a Committee of not less than three nor more than five persons designated by the Board (which may, but need not, be the compensation committee of the Board), all of whom shall be directors of the Corporation and shall serve at the pleasure of the Board. In no event shall any member of the Committee be a Participant. The Committee shall act by vote or written consent of a majority of its members. The Plan may be amended, modified or terminated by the Board, except that no change may be made without the approval of the Common Shareowners of May (i) in the maximum number of shares or Stock Units deliverable or allocable in respect of any Fiscal Year under the plan or (ii) in the provisions of subparagraphs (c)(i) and (c)(ii) of Section 3 of this Plan relating to the method of determining the number of Stock Units allocable to a Participant. (b) The Committee shall prescribe such forms as it considers appropriate for the administration of the Plan. The forms shall set forth such terms and conditions not inconsistent with the terms of the Plan as the Committee may determine and shall designate: (i) the alternative or alternatives elected by the Participant pursuant to Section 3(a); (ii) the Committee's determination of the time or times when payment of such compensation will be made to the Participant pursuant to Section 3(b)(in the absence of a severe financial hardship); (iii) the beneficiary (if any) designated by the Participant pursuant to Section 6; and (iv) the Committee's determination of the time or times when payment of such compensation will be made after the Participant's death pursuant to Section 6 (in the absence of a severe financial hardship). Section 9.Successors. The provisions of the Plan with respect to each Participant shall bind the legatees, heirs, executors, administrators or other successors in interest of such Participant. Section 10.Restricted Stock. With respect to Fiscal Years ending prior to February 1, 1970, Participants were entitled to elect a method of payment in shares 8 of fully paid and non-assessable Common Stock of May ("Restricted Stock"), the transfer of which such shares was restricted. The following terms and conditions shall continue to apply to shares of Restricted Stock: (a) Such shares in the hands of the Participant will be subject to the restrictions that they may not be sold, assigned, transferred, discounted or pledged as collateral for a loan or as security for the performance of any obligation or for any purpose by the Participant without the prior written consent of the Committee. Such restrictions shall expire with respect to such shares at the time or times determined by the Committee and specified on the legend affixed to the certificate therefor. (b) Any Participant to whom Restricted Stock is issued shall have all the rights of a shareowner with respect to such stock including, without limitation, the right to receive the dividends and to vote the same, subject only to the restrictions on transfer set forth in paragraph (a) of this Section 10. (c) There shall be imprinted on each certificate for shares of Restricted Stock delivered to a Participant the appropriate legend setting forth the substance of the restriction. In the event that there becomes issuable to a Participant a substitute certificate or an additional certificate by reason of any corporate reorganization, recapitalization, stock dividend or like corporate change, any share represented by such substitute certificate or additional certificate shall be subject to the same restriction as the share in respect of which it was issued and the certificate evidencing the same shall be similarly stamped. (d) In the granting of any consent by the Committee to release Restricted Stock from the aforesaid restrictions, the Committee shall be governed by the basic purpose of the Plan to provide an additional incentive to the Participants, and in no event shall the Committee consent to any such change in the absence of illness, accident or other form of hardship. (e) In the event of the death of a Participant, any shares of Restricted Stock registered in his name may, notwithstanding the restriction on the transfer thereof, be transferred pursuant to his will or the laws of descent and distribution; it being understood, however, that such shares in the hands of the transferee shall be subject to the same restriction as was applicable to their transfer by the Participant. 9 Section 11.Alienation. (a) Subject to the provisions of Section 6 and paragraph (b) of this Section 11, no amount, the payment of which as been deferred under Alternative (ii) or (iv), shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, levy or charge, and any attempt to so anticipate, alienate, sell, transfer, assign, pledge, encumber, levy or charge the same shall be void; nor shall any such amount be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the person entitled to such benefit. (b) Nothing in this Section 11 shall prohibit the personal representative of a Participant from designating that any amount be distributed in accordance with the terms of the Participant's will or pursuant to the laws of descent and distribution. Section 12.Withholding. There shall be deducted from all amounts paid under this Plan any taxes required to be withheld by any federal, state or local government. The Participants and their beneficiaries, distributees and personal representatives will bear any and all federal, foreign, state, local or other income or other taxes imposed on amounts paid under this Plan as to which no amounts are withheld, irrespective of whether withholding is required. Section 13.Discretionary Payment. (a) Notwithstanding any other provision in any other Section of the Plan to be contrary, the Committee may, in its sole and absolute discretion, direct an immediate payment of cash, distribution of Stock and/or release of restrictions on Restricted Stock with respect to amounts (except those referred to in the next proviso) previously deferred under this Plan if the Committee determines that such action is in the best interests of May, the Participants and their beneficiaries; provided, however, that the Committee may not direct an immediate payment, distribution and/or release with respect to amounts deferred pursuant to elections filed on or before October 1, 1985, by a Participant unless such Participant shall have consented, during the period, not to exceed thirty (30) days, designated by the Corporation and communicated to all such Participants, to the application of this Section 13 to such amounts (which consent, once given, shall be irrevocable). (b) In the event that the Committee shall so direct an immediate payment, distribution and/or release in accordance with Section 13(a), then 10 (i) the amounts of cash and the numbers of shares of Stock to be so paid and/or distributed shall be determined by the Committee so as to reflect fairly and equitably appropriate interest and dividends since the preceding April 1 and so as to reflect fairly and equitably such other facts and circumstances as the Committee deems appropriate, including, without limitation, recent price of the Stock; (ii) amounts which were otherwise deferred or to be deferred with respect to the Fiscal Year or long-term period in which such payment or distribution occurs shall be paid when otherwise payable (such amounts which would otherwise have been payable prior to the date of such payment or distribution shall be paid as soon as practicable thereafter); (iii) in the event that cash is not paid or made available to a Participant when otherwise due or that shares of Stock are not distributed or otherwise made available to a Participant when otherwise due, then such Participant may file a claim for such payment or distribution and, if such Participant is successful, then the Corporation shall reimburse such Participant for reasonable attorneys' fees actually paid by the Participant in enforcing such Participant's rights to such payment or distribution; and (iv) in the event that cash is not paid or made available to a Participant when otherwise due, then interest will accrue with respect to such unpaid amount from the date it was otherwise due until the date it is actually paid at a rate equal to two percentage points over the prime rate as in effect from time to time, as determined in good faith the Committee based on the prime rate charged from time to time by major banks in the City of New York. Section 14.Change in Control. Notwithstanding any other provision in any other Section of this Plan to the contrary, (i) the value of all amounts deferred by a Participant which have not yet been credited to the Participant's accounts under this Plan and (ii) the value of all of a Participant's accounts under this Plan shall be paid to such Participant in each case in a lump sum cash payment on the occurrence of a Change in Control of the Corporation or as soon thereafter as practicable, but in no event later than five days after the Change in Control of the Corporation, and (iii) restrictions on all Restricted Stock, as defined in Section 10 of this Plan shall lapse upon the occurrence of Change in Control of 11 the Corporation. The amounts of cash credited to each Participant's accounts prior to determining the amount of cash to be paid from these accounts shall be determined by the Committee (which, for this purpose, shall be comprised of members of the Board prior to the Change in Control of the Corporation) so as to reflect fairly and equitably appropriate interest and dividends since the preceding April 1 and so as to reflect fairly and equitably such other facts and circumstances as the Committee deems appropriate, including, without limitation, recent price of the stock. For purposes of payments under this Section 14, the value of Stock Unit shall be computed as the greater of (a) the closing price of shares of Common Stock as reported on the New York Stock Exchange on or nearest the date on which the Change in Control is deemed to occur (or, if not listed on such exchange, on a nationally recognized exchange or quotation system on which trading volume in the Common Stock is highest) or (b) the highest per share price for shares of Common Stock actually paid in connection with any Change in Control. For purposes of this Plan, a "Change in Control of the Corporation" shall be deemed to have occurred if (a) any "person" as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Corporation, any trustee or other fiduciary holding securities under an employee benefit plan of the Corporation, or any company owned, directly or indirectly, by the shareowners of the Corporation in substantially the same proportions as their ownership of stock of the Corporation), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under Exchange Act), directly or indirectly of securities of the Corporation representing 50% or more of the combined voting power of the Corporation's then outstanding securities; (b) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in clause (a), (c) or (d) of this Section whose election by the Board or nomination for election by the Corporation's shareowners was approved by a vote of at least two- thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved cease for any reason to constitute at least a majority thereof; 12 (c) the shareowners of the Corporation approve a merger or consolidation of the Corporation with any other Corporation, other than (1) a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Corporation or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Corporation (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 50% of the combined voting power of the Corporation's then outstanding securities; or (d) the shareowners of the Corporation approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets. Records/Notes 13 EX-10.3 4 EXECUTIVE INCENTIVE COMPENSATION PLAN FOR CORPORATE EXECUTIVES This document constitutes and sets forth the terms of The May Department Stores Company Executive Incentive Compensation Plan for Corporate Executives. Section 1. Purposes of the Plan. The purposes of the Plan are (i) to provide a means to attract, retain and motivate talented personnel and (ii) to provide to participating management employees added incentive for high levels of performance and for additional effort to improve the Company's financial performance. Payments of awards under this Plan are intended to qualify for tax deductibility under the provisions of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Notwithstanding any other provisions of this Plan, if any decision must be made before a specified date in order for payments to qualify for such tax deductibility under the tax rules in effect from time to time, then such decision is to be made before such date. Section 2. Definitions. Whenever used herein, the following terms shall have the following meanings: (a) "Annual Award" means, for a Participant for a Fiscal Year, the product of the Participant's Minimum Annual Compensation for such Fiscal Year multiplied by the aggregate of: (i) the Participant's Annual EPS Factor for such Fiscal Year, plus (ii) the Participant's Annual RONA Factor for such Fiscal Year. (b) "Annual EPS Factor" means, for a Participant for a Fiscal Year (1) if actual EPS Growth for such Fiscal Year equals or exceeds the Participant's Threshold Annual EPS Growth Objective for such Fiscal Year but is less than the Participant's Target Annual EPS Growth Objective for such Fiscal Year, (i) seven and one-half percent (up to fifteen percent for the Chairman of the Board or the Chief Executive Officer), plus (ii) seven and one-half percent (up to fifteen percent for the Chairman of the Board or the Chief Executive Officer) multiplied by a fraction (not less than zero and not greater than one), the numerator of which is the actual EPS Growth for such Fiscal Year less the Participant's Threshold Annual EPS Growth Objective for such Fiscal Year and the denominator of which is the Participant's Target Annual EPS Growth Objective for such Fiscal Year less the Participant's Threshold Annual EPS Growth Objective for such Fiscal Year; or (2) if actual EPS Growth for such Fiscal Year equals or exceeds the Participant's Target Annual EPS Growth Objective for such Fiscal Year but is less than the Participant's Maximum Annual EPS Growth Objective for such Fiscal Year, (i) fifteen percent (up to thirty percent for the Chairman of the Board or the Chief Executive Officer), plus (ii) seven and one-half percent (up to fifteen percent for the Chairman of the Board or the Chief Executive Officer) multiplied by a fraction (not less than zero and not greater than one), the numerator of which is the actual EPS Growth for such Fiscal Year less the Participant's Target Annual EPS Growth Objective for such Fiscal Year and the denominator of which is the Participant's Maximum Annual EPS Growth Objective for such Fiscal Year less the Participant's Target Annual EPS Growth Objective for such Fiscal Year; or (3) if actual EPS Growth for such Fiscal Year equals or exceeds the Participant's Maximum Annual EPS Growth Objective for such Fiscal Year, twenty-two and one-half percent (up to forty-five percent for the Chairman of the Board or the Chief Executive Officer); provided, however, (1) that the Annual EPS Factor shall be subject to adjustment as provided in Section 6(b); and (2) that the percentages referred to in this definition may be adjusted by the Committee as provided in Section 4(b). 2 (c) "Annual RONA Factor" means, for a Participant for a Fiscal Year (1) if actual RONA for such Fiscal Year equals or exceeds the Participant's Threshold Annual RONA Objective for such Fiscal Year but is less than the Participant's Target Annual RONA Objective for such Fiscal Year, (i) seven and one-half percent (up to fifteen percent for the Chairman of the Board or the Chief Executive Officer), plus (ii) seven and one-half percent (up to fifteen percent for the Chairman of the Board or Chief Executive Officer) multiplied by a fraction (not less than zero and not greater than one), the numerator of which is the actual RONA for such Fiscal Year less the Participant's Threshold Annual RONA Objective for such Fiscal Year and the denominator of which is the Participant's Target Annual RONA Objective for such Fiscal Year less the Participant's Threshold Annual RONA Objective for such Fiscal Year; or (2) if actual RONA for such Fiscal Year equals or exceeds the Participant's Target Annual RONA Objective for such Fiscal Year but is less than the Participant's Maximum Annual RONA Objective for such Fiscal Year, (i) fifteen percent (up to thirty percent for the Chairman of the Board or the Chief Executive Officer), plus (ii) seven and one-half percent (up to fifteen percent for the Chairman of the Board or Chief Executive Officer) multiplied by a fraction (not less than zero and not greater than one), the numerator of which is the actual RONA for such Fiscal Year less the Participant's Target Annual RONA Objective for such Fiscal Year and the denominator of which is the Participant's Maximum Annual RONA Objective for such Fiscal Year less the Participant's Target Annual RONA Objective for such Fiscal Year; or (3) if actual RONA for such Fiscal Year equals or exceeds the Participant's Maximum Annual RONA Objective for such Fiscal Year, twenty-two and one-half percent (up to forty-five percent for the Chairman of the Board or the Chief Executive Officer); 3 provided, however, (1) that the Annual RONA Factor shall be subject to adjustment as provided in Section 6(b); and (2) that the percentages referred to in this definition may be adjusted by the Committee as provided in Section 4(b). (d) "Average Annual Compensation" means, for a Long-Term Performance Period, the Participant's average annual salary rate during such period, determined on a monthly basis, or such lesser amount as the Participant and the Company shall agree to, in writing. (e) "Board" means the Board of Directors of the Company. (f) "Committee" means a committee designated by the Board, which shall consist of not less than three members of the Board who shall be appointed by and serve at the pleasure of the Board and who shall be "outside" directors within the meaning of Section 162(m) of the Code. (g) "Company" means The May Department Stores Company, a Delaware corporation.1 (h) "Disability" means the inability of a Participant to perform the normal duties of the Participant's regular occupation. (i) "EPS Growth" means (i) for a Fiscal Year, the annual growth rate in EPS measured from the immediately preceding Fiscal Year; and (ii) for a Long-Term Performance Period, the compound annual growth rate in EPS measured from the Fiscal Year immediately preceding the Long-Term Performance Period to the last Fiscal Year in the Long-Term Performance Period. For purposes of this definition, "EPS" for a Fiscal Year means the Company's EPS for such Fiscal Year as reported in the Company's annual report to its shareholders for the year of determination (or, in the event that such 1 The definition of "Company" was amended on May 24, 1996 to reflect the reincorporation of the company from New York to Delaware pursuant to a statutory share exchange approved by shareowners on May 24, 1996. 4 item is not included in such annual report, such comparable figure as may be determined by the Committee) adjusted by the Company's independent certified public accountants to exclude such non-recurring or extraordinary items as the Committee shall determine are not representative of the on- going operations of the Company. (j) "Fiscal Year" means the fiscal year of the Company. (k) "Long-Term Award" means, for a Participant for a Long-Term Performance Period, the product of the Participant's Average Annual Compensation for such period multiplied by the aggregate of: (i) the Participant's Long-Term EPS Factor for such period, plus (ii) the Participant's Long-Term RONA Factor for such period as such product is adjusted in accordance with Section 5(b) of the Plan. (l) "Long -Term EPS Factor" means, for a Participant for a Long-Term Performance Period, (1) if actual EPS Growth for such period equals or exceeds the Participant's Threshold Long-Term EPS Growth Objective for such period but is less than the Participant's Target Long-Term EPS Growth Objective for such period, (i) five percent (up to ten percent for the Chairman of the Board or the Chief Executive Officer), plus (ii) five percent (up to ten percent for the Chairman of the Board or the Chief Executive Officer) multiplied by a fraction (not less than zero and not greater than one), the numerator of which is the actual EPS Growth for such period less the Participant's Threshold Long-Term EPS Growth Objective for such period and the denominator of which is the Participant's Target Long-Term EPS Growth Objective for such period less the Participant's Threshold Long-Term EPS Growth Objective for such period; or 5 (2) if actual EPS Growth for such period equals or exceeds the Participant's Target Long-Term EPS Growth Objective for such period but is less than the Participant's Maximum Long-Term EPS Growth Objective for such period, (i) ten percent (up to twenty percent for the Chairman of the Board or the Chief Executive Officer), plus (ii) five percent (up to ten percent for the Chairman of the Board or the Chief Executive Officer) multiplied by a fraction (not less than zero and not greater than one), the numerator of which is the actual EPS Growth for such period less the Participant's Target Long-Term EPS Growth Objective for such period and the denominator of which is the Participant's Maximum Long-Term EPS Growth Objective for such period less the Participant's Target Long- Term EPS Growth Objective for such period; or (3) if actual EPS Growth for such period equals or exceeds the Participant's Maximum Long-Term EPS Growth Objective for such period, fifteen percent (up to thirty percent for the Chairman of the Board or the Chief Executive Officer); provided, however, that the Long-Term EPS Factor shall be subject to adjustment as provided in Section 6(b). (m) "Long-Term Performance Period" means three consecutive Fiscal Years. (n) "Long-Term RONA Factor" means, for a Participant for a Long-Term Performance Period (1) if actual RONA for such period equals or exceeds the Participant's Threshold Long-Term RONA Objective for such period but is less than the Participant's Target Long- Term RONA Objective for such period, (i) five percent (up to ten percent for the Chairman of the Board or the Chief Executive Officer), plus (ii) five percent (up to ten percent for the Chairman of the Board or the Chief Executive Officer) multiplied by a fraction (not less than zero and not 6 greater than one), the numerator of which is the actual RONA for such period less the Participant's Threshold Long-Term RONA Objective for such period and the denominator of which is the Participant's Target Long-Term RONA Objective for such period less the Participant's Threshold Long-Term RONA Objective for such period; or (2) if actual RONA for such period equals or exceeds the Participant's Target Long-Term RONA Objective for such period but is less than the Participant's Maximum Long- Term RONA Objective for such period, (i) ten percent (up to twenty percent for the Chairman of the Board or the Chief Executive Officer), plus (ii) five percent (up to ten percent for the Chairman of the Board or the Chief Executive Officer) multiplied by a fraction (not less than zero and not greater than one), the numerator of which is the actual RONA for such period less the Participant's Target Long-Term RONA Objective for such period and the denominator of which is the Participant's Maximum Long-Term RONA Objective for such period less the Participant's Target Long-Term RONA Objective for such period; or (3) if actual RONA for such period equals or exceeds the Participant's Maximum Long-Term RONA Objective for such period, fifteen percent (up to thirty percent for the Chairman of the Board or the Chief Executive Officer); provided, however, that the Long-Term RONA Factor shall be subject to adjustment as provided in Section 6(b). (o) "Market Value" means the average closing price of the Stock on the New York Stock Exchange, Inc. during the month of February of the year specified. (p) "Minimum Annual Compensation" means, for a Fiscal Year, the Participant's rate of minimum annual salary on the first day of the fiscal month of November in the Fiscal Year. (q) "Participant" means an individual who has been designated to participate in the Plan in accordance with Section 3 of the Plan. 7 (r) "Plan" mean The May Department Stores Company Executive Incentive Compensation Plan for Corporate Executives. (s) "Relative Performance Rank" means, for a Fiscal Year or for a Long-Term Performance Period, the relative rank of the Company (as among the Company and a group of competitors designated by the Committee) based on the EPS Growth and RONA, respectively, of all such corporations for such corporations' comparable fiscal periods, as determined by the Committee. Relative Performance Rank shall be determined based on data provided by the Company's independent certified public accountants from publicly available information about all such corporations, and adjusted by such independent certified public accountants for comparability (adjustments for LIFO, major non-recurring transactions, etc.) subject to the direction and approval of the Committee. The competitors designated by the Committee for the 1994 Fiscal Year and for the Long-Term Performance Period commencing in 1994 are Dayton-Hudson Company, Dillard Department Stores, J.C. Penney, Melville Stores, Mercantile Stores and Nordstrom. The Committee may change the number of competitors or corporations included in the group when, as a result of extraordinary or unforeseen events, it is no longer appropriate for a particular corporation to be included in the competitor group (such as when one of the group ceases operations, merges with another corporation, files for bankruptcy protection or significantly changes the nature of its business).2 3 _____________________ 2 March 15, 1996: The Committee changed the competitor group to drop Melville and to add Sears for Fiscal Years and Long-Term Performance Periods ending after March 15, 1996. Melville had announced its planned restructuring; the Company had announced its planned spin-off of Payless; Sears was more closely positioned to the Company in the marketplace. 3 November 20, 1998: The Committee changed the competitor group to drop Mercantile Stores and to add Federated Department Stores and Kohl's for Fiscal Years and Long-Term Performance Periods ending after November 20, 1998. Mercantile Stores was acquired by other retailers in the fall of 1998. 8 (t) "Retirement" means, as to a Participant, retirement as that word is defined in any retirement plan sponsored by the Company or any Subsidiary which is applicable to such Participant. (u) "RONA" means (i) for a Fiscal Year, the Company's return on beginning net assets for such Fiscal Year as reported in the Company's annual report to its shareowners for the year of determination (or, in the event that such item is not included in such annual report, such comparable figure as may be determined by the Committee) adjusted by the Company's independent certified public accountants to exclude such non-recurring or extraordinary items as the Committee shall determine are not representative of the ongoing operations of the Company; and (ii) for a Long-Term Performance Period, the sum of the RONA for each Fiscal Year in the Long-Term Performance Period divided by three. (v) "Stock" means the common stock of the Company. (w) "Subsidiary" means a subsidiary corporation of the Company within the meaning of Section 425(f) of Code. (x) The terms "Maximum Annual EPS Growth Objective," "Maximum Long-Term EPS Growth Objective," "Target Annual EPS Growth Objective," "Target Long-Term EPS Growth Objective," "Threshold Annual EPS Growth Objective," "Threshold Long- Term EPS Growth Objective," "Maximum Annual RONA Objective," "Maximum Long-Term RONA Objective," "Target Annual RONA Objective," "Target Long-Term RONA Objective," "Threshold Annual RONA Objective" and "Threshold Long-Term RONA Objective" shall mean the respective objectives determined by the Committee for each Participant pursuant to Section 7 of the Plan. Section 3. Eligibility. Management employees of the Company and its Subsidiaries shall be eligible to participate in the Plan. The Committee may, in its sole discretion, designate any such individual as a Participant for a particular Fiscal Year and/or for a particular Long-Term Performance Period before the end of such Fiscal Year and Long-Term Performance Period, respectively. Designation of an individual as a Participant for any period shall not require designation of such individual as a Participant in any other period, and designation of one individual as a Participant shall not require designation of any other individual as a Participant in such period or in any other period. 9 Section 4. Annual Award. (a) Subject to the other provisions of the Plan, a Participant for a Fiscal Year who is designated as such for an entire Fiscal Year shall be entitled to an Annual Award for such Fiscal Year. Subject to the other provisions of the Plan, a Participant for a Fiscal Year who is designated as such for less than an entire Fiscal Year shall be entitled to a reduced Annual Award for such Fiscal Year equal to the Annual Award for such Fiscal Year multiplied by a fraction, the numerator of which shall be the number of complete fiscal months between (i) the first day of the fiscal month in which occurs the date as of which the Participant was so designated and (ii) the end of such Fiscal Year and the denominator of which shall be twelve. (b) The Committee may change the percentages referred to in the definitions of "Annual EPS Factor" and "Annual RONA Factor" for any Fiscal Year, provided that the maximum Annual Award which may be paid under such different percentages may not be greater than 45% (90% for the Chairman of the Board or the Chief Executive Officer) of the Participant's Minimum Annual Compensation for such Fiscal Year. (c) Notwithstanding any other provision of the Plan, the maximum dollar amount of any Annual Award for any Participant for any Fiscal Year shall not exceed $2,000,000. Section 5. Long-Term Award. (a) Subject to the other provisions of the Plan, a Participant for a Long-Term Performance Period who is designated as such for an entire Long-Term Performance Period shall be entitled to a Long-Term Award for such period. Subject to the other provisions of the Plan, a Participant for a Long-Term Performance Period who is designated as such for less than an entire Long-Term Performance Period shall be entitled to a reduced Long-Term Award for such period equal to the Long-Term Award for such period multiplied by a fraction, the numerator of which shall be the number of complete fiscal months between (i) the first day of the fiscal month in which occurs the date as of which the Participant was so designated and (ii) the end of such Long-Term Performance Period and the denominator of which shall be thirty-six. (b) The Long-Term Award otherwise payable pursuant to Section 5(a) of the Plan for a Long-Term Performance Period shall be adjusted by multiplying such Long-Term Award by a percentage equal to a fraction, the numerator of which shall be the Market Value of the Stock in February of the calendar year in which such Long-Term Performance Period ends and the denominator of which 10 shall be the Market Value of the Stock in February of the calendar year in which such Long-Term Performance Period begins; provided, however, that such percentage shall in no event be greater than one hundred fifty percent nor less than seventy-five percent. (c) Notwithstanding any other provision of the Plan, the maximum dollar amount of any Long-Term Award for any Participant for any Long-Term Performance Period shall not exceed $2,000,000. Section 6. Adjustments. (a) Discretionary Adjustment of Awards. In the event that the Committee determines, in its absolute discretion, that an Annual Award or a Long-Term Award payable to a Participant in accordance with the other terms of the Plan should be adjusted, upwards or downwards, based on all the facts and circumstances known to the Committee at the time, then, the Committee may, in its sole and absolute discretion, increase or decrease any such Annual Award or Long-Term Award to such amount as it determines; provided, however, that the Committee may not adjust upwards any Annual Award or Long-Term Award of any Participant who is a "covered employee" (as defined in Section 162 (m) of the Code and the regulations thereunder) with respect to the particular performance period for which the Annual Award or Long-Term Award is being granted. (b) Adjustment for Relative Rank. A Participant's Annual EPS Factor, Annual RONA Factor, Long-Term EPS Factor and Long- Term RONA Factor shall be adjusted in the following manner based upon the number of competitors in the group of competitors used to determine the Company's Relative Performance Rank and the Company's Relative Performance Rank therein: Number of Competitor Companies (not including the Company) 10 9 8 7 6 5 4 Factor will be no less than "Target" if the Company's 1st- 1st- 1st- 1st- 1st- 1st- 1st- rank is: 3rd 3rd 3rd 2nd 2nd 2nd 2nd Factor will be no less than "Threshold" if the Company's 4th- 4th- 4th- 3rd- 3rd- 3rd- 3rd - rank is: 6th 6th 6th 4th 4th 4th 4th Factor will be no higher than "Threshold" if the Company's 9th- 8th- 7th- 7th- 6th- 5th- 5th rank is: 11th 10th 9th 8th 7th 6th 11 Section 7. Annual and Long-Term Targets. Threshold, target and maximum annual and long-term objectives with respect to EPS Growth and with respect to RONA shall be determined by the Committee as soon as practicable prior to the commencement of each Fiscal Year and each Long-Term Performance Period for each Participant or within the period permitted by applicable law. The Committee shall cause the respective objectives for each Participant to be provided to such Participant as soon thereafter as practicable. Such objectives shall remain in effect for the entire Fiscal Year or Long-Term Performance Period, as appropriate. Section 8. Payment of Awards. (a) Annual Awards for a Fiscal Year shall be payable in cash within three months after the close of such Fiscal Year or as soon thereafter as practicable. (b) Long-Term Awards for a Long-Term Performance Period shall be payable in cash within three months after the close of such Long-Term Performance Period or as soon thereafter as practicable. (c) A Participant may elect to defer all or a portion of an award by making such election under the Deferred Compensation Plan with respect to such award. Such election must be made not later than December 31 of the calendar year preceding the commencement of the Fiscal Year or Long-Term Performance Period, as appropriate. (d) The Company shall have the right to deduct any sums that federal, state or local tax laws require to be withheld with respect to any payment of awards. (e) Before any award is paid to a Participant who is a "covered employee" (as defined in Section 162(m) of the Code and the regulations thereunder), the Committee shall certify in writing that the material terms of the Plan have been satisfied. Section 9. Termination of Employment. (a) Death or Disability. In the event of either the death or Disability of the Participant while employed (a "Section 9(a) Event"), the Participant shall be entitled to the following: (i) An Annual Award with respect to the Fiscal Year in which the Section 9(a) Event occurs equal to the Annual Award otherwise payable (if any) for that Fiscal Year, 12 prorated to the end of the fiscal month in which such Section 9(a) Event occurs; and (ii) A Long-Term Award with respect to each Long-Term Performance Period which includes the Fiscal Year of the Section 9(a) Event; provided, however, that for purposes of this Section 9(a)(ii) the Long-Term Award for any Long- Term Performance Period (1) shall be determined at the end of the Fiscal Year in which the Section 9(a) Event occurs, (2) shall be determined (and averages used in that determination shall be calculated) based only on the Fiscal Year and any preceding Fiscal Years otherwise included in the Long-Term Performance Period and (3) shall be prorated to the end of the fiscal month in which the Section 9(a) Event occurs. (b) Retirement. (i) In the event of the Retirement of the Participant with the written consent of the Company, such event shall be deemed to be a Section 9(a) Event, and the Participant shall be entitled to an Annual Award and to a Long-Term Award as provided in Section 9(a). (ii) In the event of the Retirement of the Participant without the consent of the Company (a "Section 9(b)(ii) Event"), the Participant shall be entitled to the following: (1) An Annual Award with respect to the Fiscal Year in which the Section 9(b)(ii) Event occurs equal to the Annual Award otherwise payable (if any) for the Fiscal Year, prorated to the end of the fiscal month in which the Section 9(b)(ii) Event occurs; and (2) No Long-Term Award following the Section 9(b)(ii) Event. The Participant shall forfeit any right or entitlement to any award with respect to any Long-Term Performance Period which has not been completed on the date of the Section 9(b)(ii) Event. Any Long-Term Award for a period which ended prior to the Section 9(b)(ii) Event shall remain unaffected. (c) Termination of Employment. (i) In the event of the termination of employment of the Participant not covered by Sections 9(a) or 9(b) above 13 which occurs at the end of the term of the Participant's then-current written employment agreement (if any) with the Company or Subsidiary, or in the event of such a termination of a Participant who has no current written employment agreement with the Company or Subsidiary, such event shall be deemed to be a Section 9(b)(ii) Event, and the Participant shall be entitled to an Annual Award (but not to a Long-Term Award) as provided in Section 9(b)(ii). (ii) In the event of the termination of employment of the Participant not covered by Sections 9(a) or 9(b) above before the end of the term of the Participant's then- current written employment agreement (if any) with the Company or Subsidiary, with the written consent of the Company (a "Section 9(c)(ii) Event"), the Participant shall be entitled to the following: (1) An Annual Award with respect to the Fiscal Year in which the Section 9(c)(ii) Event occurs equal to the actual award otherwise payable for the Fiscal Year (if any); provided, however, that in the event that the term of the Participant's then-current employment agreement is due to expire during that Fiscal Year, then the Annual Award shall be prorated to the end of the fiscal month in which such term is due to expire; and (2) A Long-Term Award with respect to each Long-Term Performance Period which includes the Fiscal Year of the 9(c)(ii) Event equal to the Long-Term Award otherwise payable with respect to each Long-Term Performance Period; provided, however, that in the event that the term of the Participant's then-current employment agreement (if any) with the Company is otherwise due to expire during any such period, then the Long-Term Award with respect to such period shall be prorated to the end of the calendar month in which such term is due to expire. (iii) In the event of the termination of employment of the Participant not otherwise covered by this Section 9 before the end of the term of the then-current written employment agreement (if any) with the Company or Subsidiary, without the written consent of the Company, the Participant shall not be entitled to any Annual Award or to any Long-Term Award with respect to any Fiscal Year or Long-Term Performance Period which has not been completed as of the 14 date of such termination of employment. The Participant shall forfeit any right or interest in any award for any such Fiscal Year or Long-Term Performance Period. Annual Awards and Long-Term Awards with respect to Fiscal Years and Long-Term Performance Periods which ended prior to the date of such termination of employment shall remain unaffected. (d) For purposes of this Section 9, the term "written consent of the Company" shall refer to an express written consent of the Company, duly executed by the Company, which, by its own terms, expressly refers to this Section 9 of the Plan. Section 10. Transfers and Changes in Responsibilities. In the event that (i) the duties of a Participant change and the Participant becomes eligible to participate in another bonus plan of the Company, or (ii) the duties of an employee who is a participant in another bonus plan of the Company change and the employee is newly designated by the Committee as a Participant in this Plan, then the maximum amount that such Participant would be entitled to receive under the Plan shall be (1) the Annual Award determined in accordance with the provisions of the Plan with respect to the entire Fiscal Year in which such event occurred; and (2) a Long-Term Award with respect to each Long-Term Performance Period which has commenced at the time of the event, determined in accordance with the provisions of the Plan, subject, in all events, to the Committee's right to adjust such awards in accordance with and subject to the restrictions set forth in Section 6(a), in its absolute discretion, which may be exercised in such a way that the Committee deems fair and equitable based on the performance of Participant while participating in the other bonus plan of the Company. Section 11. Rights of Participants and Beneficiaries. (a) Nothing contained in the Plan shall confer upon any Participant any right to continue in the employ of the Company or constitute any contract or agreement of employment or interfere in any way with the right of the Company to terminate or change the conditions of employment. (b) The Company shall pay all amounts payable hereunder only to the Participant or his or her personal representatives. In 15 the event of the death of a Participant, payments of all amounts otherwise due to the Participant under the Plan shall be made to the Participant's beneficiary at the time of death under the Company Paid Life Plan of The May Department Stores Company or to such other beneficiary as the Participant shall have designated, in writing, for purposes of this Plan on a form provided by the Company. (c) Subject to the provisions of Section 11(d), rights to payments under the Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, levy or charge, and any attempt to do so shall be void; nor shall any such amounts be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the Participant or his or her beneficiaries. (d) Nothing in this Section 11 shall prohibit the personal representatives of a Participant from designating that any amount that would otherwise be distributed to the Participant's estate should be distributed in accordance with the terms of the Participant's last will and testament or pursuant to the laws of descent and distribution. Section 12. Unfunded Character of the Plan. The right of a Participant to receive any Annual Award or Long-Term Award hereunder shall be an unsecured claim against the general assets of the Company. Nothing in the Plan shall require the Company to invest any amounts in Stock or in any other medium. Section 13. Changes in Capital Structure. In the event that there is any change in the Stock through merger, consolidation, reorganization, recapitalization, spin-off or otherwise, or if there shall be any dividend on the Stock, payable in such Stock, or if there shall be a stock split or combination of shares, then the fraction provided for in Section 5(b) of the Plan shall be adjusted by the Committee as it deems desirable, in its absolute discretion, to prevent dilution or enlargement of the rights of Participants. The issuance of Stock for consideration and the issuance of Stock rights shall not be considered a change in the Company's capital structure. Section 14. Amendment or Termination. The Committee may, by resolution, amend or terminate the Plan at any time. Any amendment necessary to bring the Plan into compliance with Section 162(m) of the Code and any regulations thereunder shall not require shareowner approval and the effectiveness of such amendment shall be as of the effective date of the provision in 16 Section 162(m) of the Code or regulations thereunder giving rise to the amendment. However, (i) shareowner approval shall be sought for any changes to the Plan which would require shareowner approval under Section 162(m) of the Code and (ii) except as provided in the preceding sentence, the Committee may not, without the consent of the Participant, amend or terminate the Plan in such a manner as to affect adversely any Annual Award or Long-Term Award which would have been payable, based on the terms of the Plan immediately prior to any such amendment or termination, for any Fiscal Year or Long-Term Performance Period which has already commenced as of the effective date of the amendment or termination. 17 EX-10.4 5 EMPLOYMENT AGREEMENT This Agreement is entered into as of the [first day of the Contract Term] between THE MAY DEPARTMENT STORES COMPANY ("May") and [name] (generally referred to as "you"). 1. Employment. (a) May will employ you and you will provide personal services to May, from [start date] to [end date] (the "Contract Term") as [position] and/or perform such other executive duties as may be required of you by May. You represent that you are not subject to any other employment agreement or other obligation that would prevent you from performing or would interfere with your ability to perform your obligations under this Agreement. (b) May will pay you basic compensation for your services at the annual rate of [annual rate], payable semi-monthly. The annual rate will be subject to review by May each year and may be increased but not decreased. If you are selected to participate in a May bonus plan (the "Incentive Plan"), you will be entitled to the awards, if any, that may be payable under the terms of the Incentive Plan. You may elect to have all or any part of your compensation paid under the terms of any applicable deferred compensation plan. (c) May will reimburse you for all reasonable normal expenses you incur in accordance with May's employee expense reimbursement policies. (d) If you continue as a May employee after the Contract Term expires, this Agreement will continue in full force, except that your employment will then become terminable "at will" by either you or May. (e) The most recent Executive Compensation Change Memorandum, as initialed by May and by you, is incorporated by reference and is a part hereof. (f) May provides to its executives certain employee benefit plans and fringe benefits. May reserves the right to amend, modify or terminate any of these plans and benefits. You will be entitled to whatever benefits may be provided to you in accordance with the terms of these plans and benefits, as amended from time to time. 2. Your Duties. For the remaining period of the Contract Term and for any period you may continue to work for May after the Contract Term expires, (a) you will (i) faithfully and diligently perform your duties in accordance with May's directions and serve May to the best of your ability; (ii) devote your undivided time and attention to May's business, subject to reasonable vacations in accordance with May's vacation policy, to such extent as may be reasonably necessary for you to perform your personal services properly; and (iii) maintain your residence in [principal city] or within reasonable access to the business activities of May in that city; and (b) you will not (i) engage in any activity that conflicts with or adversely affects your performance of your duties under this Agreement; (ii) accept any other employment, whether as an executive, as a consultant or in any other capacity, whether or not you are compensated therefor, or (iii) violate any of the policies described in May's then applicable Policy of Business Conduct. 3. Disability. You will be "Totally Disabled" if you are unable to substantially fulfill the normal duties of your position under this Agreement. If you remain Totally Disabled for more than 180 days during any 360 day period, May may terminate its obligations under this Agreement by giving you written notice. If May does so, your employment will terminate on the last day of the month in which notice is given. If you have previously elected to participate in May's Long Term Disability Plan, then the terms of that plan will apply. 4. Termination of Employment. (a) If your employment terminates because of your death or Total Disability or your voluntary termination of employment or if it is terminated by May for Cause, (i) you will not be entitled to receive basic compensation and employee benefits following your termination or any other payment or benefit except as expressly provided herein or in any applicable employee benefit plan or arrangement; and 2 (ii) you (or your legal representative(s)) will be entitled to receive any incentive compensation payable under the terms of the Incentive Plan. (b) If your employment terminates because of your voluntary termination of employment, or if it is terminated by May for Cause, then your obligations under this Agreement, including those contained in Paragraphs 5 through 13, remain in full force and effect, and May will be entitled to all legal and equitable rights and remedies under this Agreement. (c) If your employment is terminated by May without Cause, then (i) your obligations under this Agreement, including those contained in Paragraphs 5 through 13, remain in full force and effect, and May will be entitled to all legal and equitable rights and remedies under this Agreement; and (ii) you will be entitled to your basic compensation and the other benefits provided for in Paragraph 1(f) for the remaining period of the Contract Term, subject to the provisions of Paragraph 4(c)(v); and (iii) you will be entitled to any incentive compensation payable under the terms of the Incentive Plan; and (iv) you will be entitled to post-termination benefits payable under May's employee benefit plans, including any right to participate in May's medical plans under COBRA, based on your service up to the termination date; and (v) you will use your best efforts to obtain other employment consistent with the terms of Paragraph 5. If you accept other employment, you will promptly notify May of the compensation receivable or which you expect to receive from that employment that is attributable to the remaining period of the Contract Term. All basic compensation otherwise payable under Paragraph 4(c) (except pursuant to Paragraph 4(c)(vi)) for any remaining period of the Contract Term will be reduced by the amount of any compensation receivable or which you expect to receive from your subsequent employment; and 3 (vi) notwithstanding the foregoing, the minimum amount payable to you upon your termination shall be your basic compensation for the period during which your post-termination obligations under Paragraph 5 are in force. (d) "Cause" in this Agreement means (i) an intentional act of fraud, embezzlement, theft or any other material violation of law that occurs during or in the course of your employment with May; (ii) intentional damage to May's assets; (iii) intentional disclosure of May's confidential information contrary to May's policies; (iv) breach of your obligations under this Agreement; (v) intentional engagement in any competitive activity which would constitute a breach of your duty of loyalty or of your obligations under this Agreement; (vi) intentional breach of any of May's policies; (vii) the willful and continued failure to substantially perform your duties for May (other than as a result of incapacity due to physical or mental illness); or (viii) willful conduct by you that is demonstrably and materially injurious to May, monetarily or otherwise. For purposes of this Paragraph 4(d), an act, or a failure to act, shall not be deemed "willful" or "intentional" unless it is done, or omitted to be done, by you in bad faith or without a reasonable belief that your action or omission was in the best interest of May. Failure to meet performance standards or objectives, by itself, does not constitute "Cause". "Cause" also includes any of the above grounds for dismissal regardless of whether May learns of it before or after terminating your employment. (e) In addition to any other remedies, May can offset any amount due to you as wages, compensation, bonus, deferred compensation or otherwise by any unpaid amount which you owe to May. 5. Avoiding Conflict of Interest. (a) At all times while you are employed by May and for two years after your employment terminates, you will not directly or indirectly: (i) own, manage, operate, finance, join, control, advise, consult, render services to, have an interest or future interest in or participate in the ownership, management, 4 operation, financing or control of, or be employed by or connected in any manner with any Competing Business; (ii) solicit for employment, hire or offer employment to, or otherwise aid or assist (by disclosing information about employees or otherwise) any other person or entity other than May or a May subsidiary in soliciting for employment, hiring or offering employment to, any employee of May or a May subsidiary; or (iii) take any action which is intended to harm May or its reputation, or that May reasonably concludes could harm May or its reputation or lead to unwanted or unfavorable publicity for May. Ownership of an investment of less than the greater of $25,000 or 1% of any class of equity or debt security of a Competing Business will not be deemed ownership or participation in ownership for purposes of Paragraph 5(a). (b) "Competing Business" includes, but is not limited to, (i) any (x) retail department store, specialty store or other retail business that sells goods or merchandise of the types sold in May's (or its subsidiaries' or divisions') stores at retail to consumers or (y) any group of such stores or businesses or any other business that (A) competes (for customers, suppliers, employees or any other resource) with May or a May subsidiary, division or store; (B) is located in the United States or another country where May or a May subsidiary or division operates a store or stores; and (C) had annual gross sales volume or revenues (including sales in leased departments) in the prior fiscal year of more than $25 million or is reasonably expected to have gross sales volume or revenues in either of the current fiscal year or the next following fiscal year of more than $25 million; or (ii) any business that provides buying office services to any store or group of stores or businesses referred to in Paragraph 5(b)(i); or 5 (iii) any business in the United States or another country where May or a May subsidiary or division operates a store or stores in which your duties and functions would be substantially similar to your duties and functions under this Agreement and that is in material competition with May or a May subsidiary or division. (c) You agree that the restrictions set forth above are reasonable, appropriate and enforceable because: (i) May is one of the leading retail companies in the United States, with department stores throughout the United States; (ii) as an integral part of its business, May has expended a great deal of time, money and effort to develop and maintain confidential, proprietary and trade secret information to compete against similar businesses; this information, if misused or disclosed, could be very harmful to May's business and its competitive position in the marketplace; (iii) your position with May provides you with access to May's confidential and proprietary trade secret information, strategies and other confidential business information that would be of considerable value to a Competing Business; (iv) May compensates its executives and other associates to, among other things, develop and maintain valuable goodwill and relationships on May's behalf and to develop and maintain business information for May's exclusive ownership and use; (v) long-term customer and supplier relationships are difficult to develop and maintain and require a significant investment of time, effort and expense; (vi) May is entitled to appropriate safeguards (x) to ensure that you do not use any confidential information given to you during your employment by May or take any other action that could result in a loss of May's goodwill developed on May's behalf and at its expense, and (y) to prevent you and/or any Competing Business from having an unfair competitive advantage over May; 6 (vii) the amount of compensation and benefits you receive from May is based in considerable part on your express agreement to refrain from competing with May and to maintain the confidentiality of May's proprietary information in accordance with the terms of this Agreement; (viii) the limited time period during which you have agreed not to compete with May after leaving May's employment, the limited scope of the restriction and the limited prohibition on your activities are reasonable to ensure that May's confidential current and long-term business methods, strategies and plans are not made available to its competitors; and (ix) on balance, in light of your training and background, the restrictions will not pose an undue hardship on you. (d) If you engage in any activity which would violate your obligations under this Agreement (including this Paragraph 5) and which involves another person or employer or a Competing Business, you will disclose your obligations under this Agreement to that other person, employer or Competing Business. (e) Any time during which you violate any of these restrictions will not be counted in determining the time during which the restrictions apply. For example, if you were to join a Competing Business in violation of the restrictions in Paragraph 5(a) and work for that business for a month before a court enjoined this violation, then the time period of the restriction would begin when the injunction was issued and the month during which you violated the restriction would not be included in the time that the restriction is to apply. 6. Preservation of Confidential Information. (a) You will not, at any time, directly or indirectly, use or disclose any of May's Confidential Information except as authorized and within the scope of your employment with May. (b) At May's request and/or on termination of your employment with May, you will return to May all documents, records, 7 notebooks, computer diskettes and tapes and anything else containing May's Confidential Information, including all copies thereof, as well as any other May property, in your possession, custody or control. You will also delete from your own computer or other electronic storage medium any of May's proprietary or confidential information. Not later than 20 days after your employment is terminated, you will certify in writing to May that you have complied with these obligations. (c) During your employment with May and thereafter, you will (i) notify and provide May immediately with the details of any unauthorized possession, use or knowledge of any of May's Confidential Information, (ii) assist in preventing any reoccurrence of this possession, use or knowledge, and (iii) cooperate with May in any litigation or other action to protect or retrieve May's Confidential Information. (d) "Confidential Information" means any non-public information pertaining to May's business. Confidential Information includes information disclosed by May to you, and information developed or learned by you during the course of or as a result of your employment with May, which you also agree is May's property. You further agree that any item of intellectual or artistic property generated or prepared by you, by yourself or with others, in connection with your employment by May is May's sole property and shall remain so unless May otherwise specifically agrees in writing. Confidential Information includes, without limitation, information and documents concerning May's processes; suppliers (including May's terms, conditions and other business arrangements with suppliers); supplier and customer lists; advertising and marketing plans and strategies; profit margins; seasonal plans, goals, objectives and projections; compilations, analyses and projections regarding May's divisions, stores, product segments, product lines, suppliers, sales and expenses; files; trade secrets and patent applications (prior to their being public); salary, staffing and employment information (including information about performance of other executives); and "know-how," techniques or any technical information not of a published nature relating, for example, to how May conducts its business. 8 (e) You agree that you will not disclose to May or use, or induce May to use, any proprietary information, trade secret or confidential business information of any other person or entity, including any previous employer of yours. You also represent that you have returned all property, proprietary information, trade secret and confidential business information belonging to any prior employer. 7. Automatic Amendment by Court Order and Interim Enforcement. (a) If a court determines that, but for the provisions of this Paragraph 7, any part of this Agreement is illegal, void as against public policy or otherwise unenforceable, then the relevant part will automatically be amended to the extent necessary to make it sufficiently narrow in scope, time and geographic area to be legally enforceable. All other terms will remain in full force and effect. (b) If you raise any question as to the enforceability of any part or terms of this Agreement, including, without limitation, Paragraphs 5 and 6, you specifically agree that you will comply fully with this Agreement unless and until an appropriate court designated in Paragraph 13 has entered a final judgment to the contrary. (c) You agree that the restrictions in Paragraphs 5 and 6 will apply regardless of the manner in which your employment with May is terminated, whether voluntarily, for Cause, without Cause or otherwise. 8. Equitable and Legal Remedies. (a) May and you shall each be entitled to pursue all legal and equitable rights and remedies to secure performance of their respective obligations and duties under this Agreement, unless otherwise expressly provided herein, and enforcement of one or more of these rights and remedies will not preclude May or you from pursuing any other rights and remedies. (b) You acknowledge and agree that the individualized services and capabilities that you will provide to May under this Agreement are of a personal, special, unique, unusual, extraordinary and intellectual character. 9 (c) You acknowledge and agree that the restrictions in this Agreement are reasonable to protect May's rights under this Agreement and to safeguard May's Confidential Information. You expressly consent to injunctive and other equitable relief. Without limiting the foregoing, if you breach or threaten to breach your obligations under Paragraphs 5 or 6, you consent to entry of a temporary, preliminary and/or permanent injunction enjoining you from breaching those obligations. (d) If any legal proceeding is instituted, neither you nor May will be entitled to seek or obtain punitive or exemplary damages of any kind from the other or, in your case, from May's subsidiaries or divisions, or from the officers, directors or employees of May, its subsidiaries or divisions, or to seek or obtain damages or compensation for emotional distress. Nothing herein shall preclude an award of compensatory and punitive damages against any other third party. (e) If you terminate your employment voluntarily or if your employment is terminated by May for Cause, you will be liable for all attorneys' fees and costs incurred by May in seeking to enforce its rights under this Agreement. 9. Entire Understanding. The entire understanding and agreement between you and May has been incorporated into this Agreement, and this Agreement supersedes any other agreements and understandings between you and May with respect to your employment by May. There are no other promises, representations, understandings or inducements other than those specifically set forth in this Agreement. This Agreement may not be altered, amended or added to except in a single writing signed by both you and May. 10. Arm's Length. This Agreement was entered into at arm's length, without duress or coercion, and is to be interpreted as an agreement between two parties of equal bargaining strength. Both you and May agree that this Agreement is clear and unambiguous as to its terms, and that no parol or other evidence will be used or admitted to alter or explain the terms of this Agreement, but that it will be interpreted based on the language 10 within its four corners in accordance with the purposes for which it is entered into. 11. Successors and Assigns. This Agreement will inure to the benefit of, and will be binding upon, May, its successors and assigns and you and your heirs, successors and assigns; provided, however, that, because this is an agreement for the personal services, you cannot assign any of your obligations under this Agreement to anyone else. May may assign its obligations under this Agreement to a May subsidiary; any assignment, however, will not relieve May of any of its obligations hereunder except to the extent that they are actually discharged by the subsidiary. Whenever this Agreement refers to May, that reference includes any of May's subsidiaries or divisions in existence at any time during which this Agreement governs the conduct of you and May. 12. Signing this Agreement. This Agreement may be executed in counterparts, in which case each of the two counterparts will be deemed to be an original and the final counterpart will be deemed to have been executed in St. Louis, Missouri. 13. Missouri Law Governs. This Agreement has been executed by May at May's corporate headquarters and principal executive offices in St. Louis, Missouri. May and you agree that your relationship with May is centered in St. Louis, Missouri and that the weight of your contacts with and obligations to May is also in St. Louis, Missouri. Any questions or other matter arising under this Agreement, whether of validity, interpretation, performance or otherwise, will therefore be governed by and construed in accordance with the laws of the State of Missouri applicable to agreements made and to be performed in Missouri without regard to Missouri's choice of law rules. All actions and proceedings arising out of or relating directly or indirectly to this Agreement will be filed and litigated exclusively in any state court or federal court located in the City or County of St. Louis, Missouri. May and you expressly consent to the jurisdiction of these courts, agree that venue is proper is these courts and consent to service of process made upon the Secretary of State of the State of Missouri or at your last known address in May's records. 11 BY SIGNING THIS AGREEMENT, YOU HEREBY CERTIFY THAT YOU (A) HAVE RECEIVED A COPY OF THIS AGREEMENT TO REVIEW AND STUDY BEFORE SIGNING IT; (B) HAVE READ THIS AGREEMENT CAREFULLY BEFORE SIGNING IT; (C) HAVE HAD SUFFICIENT OPPORTUNITY BEFORE SIGNING IT TO ASK ANY QUESTIONS ABOUT IT AND HAVE RECEIVED SATISFACTORY ANSWERS TO ALL YOUR QUESTIONS; (D) HAVE HAD AN OPPORTUNITY TO DISCUSS IT WITH YOUR OWN LEGAL COUNSEL AND TO BE ADVISED AS TO ITS TERMS AND YOUR OBLIGATIONS AND RIGHTS UNDER IT, AND (E) UNDERSTAND YOUR RIGHTS AND OBLIGATIONS UNDER THIS AGREEMENT. IN WITNESS WHEREOF, this Agreement has been executed by you and then by May in St. Louis, Missouri on the dates shown below, but effective as of the date and year first above written. Date: Executive THE MAY DEPARTMENT STORES COMPANY Date: BY: 12 EX-12 6
Exhibit 12 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES FOR THE FIVE FISCAL YEARS ENDED JANUARY 29, 2000 (Dollars in Millions) Fiscal Year Ended Jan. 29, Jan. 30, Jan. 31, Feb. 1, Feb. 3, 2000 1999 1998 1997 1996 Earnings Available for Fixed Charges: Pretax earnings from continuing operations $ 1,523 $ 1,395 $ 1,279 $ 1,232 $ 1,160 Fixed charges (excluding interest capitalized and pretax preferred stock dividend requirements) 346 344 363 346 317 Dividends on ESOP Preference Shares (24) (25) (26) (26) (28) Capitalized interest amortization 7 7 6 6 5 1,852 1,721 1,622 1,558 1,454 Fixed Charges: Gross interest expense (a) $ 340 $ 339 $ 353 $ 341 $ 316 Interest factor attributable to rent expense 22 21 23 22 20 362 360 376 363 336 Ratio of Earnings to Fixed Charges 5.1 4.8 4.3 4.3 4.3 (a) Represents interest expense on long-term and short-term debt, ESOP debt and amortization of debt discount and debt issue expense.
EX-13 7 Management's Discussion and Analysis Our 25th consecutive year of record sales and earnings per share marks an important milestone for May and is a performance record few companies in retailing can match. Our 25-year compound earnings per share growth rate of 11.0% and total return to shareowners of 16.1% demonstrate the underlying strength of our store companies to perform under a range of economic conditions. Our 1999 performance was highlighted by a 13.0% increase in diluted earnings per share to $2.60 from last year's $2.30. Net earnings totaled $927 million versus $849 million last year. Our three-year earnings per share compound growth rate of 11.6%, our return on equity of 24.1%, and our return on net assets of 20.7% continue to be among the best in retailing. Sales were $13.9 billion, an increase of 6.3% over 1998 sales of $13.0 billion. The increase reflects a 2.6% rise in store-for-store sales, 1999 store openings, and the full-year impact of 1998 store openings. We discontinued our consumer electronics business in 1999, which penalized sales by about 1% for the year. We also opened the following 18 department stores during 1999, adding 2.5 million square feet of retail space: Lord & Taylor: 5 stores Emerald Square North Attleboro, MA Lynnhaven Mall Virginia Beach, VA Mall of Georgia Atlanta, GA Meriden Square Meriden, CT Park Meadows Denver, CO Hecht's: 3 stores Operating as Hecht's: Chesapeake Sq. Chesapeake, VA Valley Mall Hagerstown, MD Operating as Strawbridge's: Moorestown Mall Moorestown, NJ Robinsons-May: 2 stores Pacific View Mall San Buenaventura, CA The Promenade Temecula, CA Filene's: 2 stores Burlington Square Burlington, VT Providence Place Providence, RI Kaufmann's: 2 stores Washington Crown Ctr. Washington, PA Nittany Mall State College, PA Famous-Barr: 4 stores Operating as Famous-Barr: Eastland Mall Bloomington, IL Greenwood Mall Bowling Green, KY Market Place Mall Champaign, IL Operating as The Jones Store: Westroads Mall Omaha, NE We remodeled 23 department stores in 1999 totaling 1.5 million square feet, which included the expansion of 17 stores by 519,000 square feet. We continued aggressively pursuing home store sales by converting space previously dedicated to consumer electronics in 181 stores in 1999. At fiscal year-end we operated 408 department stores in 34 states and the District of Columbia. On December 31, 1999 we completed the acquisition of Zions Co-operative Mercantile Institution (ZCMI) stores. Our Meier & Frank division opened 13 ZCMI stores located in Utah and Idaho on January 31, 2000. Our 2000 new-store plan includes 10 new department stores in addition to the ZCMI stores, adding 3.3 million square feet of retail space. We also plan to remodel 30 department stores totaling 1.9 million square feet of retail space that includes the expansion of 17 stores by a total of 535,000 square feet. The new-store plan for 2000 through 2004 would add 83 new department stores totaling 13 million retail square feet, a 4% annualized increase. During this five-year period the major components of our $3.5 billion capital plan include plans to invest $1.4 billion for new stores, $1.0 billion to expand and remodel existing stores, and $370 million related to systems and operations improvements. Common stock repurchase programs authorized by May's board of directors since 1996 totaled more than $2.5 billion, as shown below: Shares Repurchased (in millions) Authorized $ Shares 2000 $650 $ - - 1999 500 361 9.9 1998 500 500 12.5 1997 300 300 9.6 1996 600 600 19.1 Review of Operations Diluted earnings per share reached $2.60 in 1999, compared with $2.30 in 1998 and $2.07 in 1997. Net earnings totaled $927 million in 1999, compared with $849 million in 1998 and $779 million in 1997. The 1999, 1998, and 1997 diluted earnings per share growth rates were 13.0%, 11.1%, and 10.7%, respectively. Return on revenues was 6.7% in 1999, compared with 6.5% in 1998 and 6.3% in 1997. Results for the past three years and the related percent of revenues were as follows:
1999 1998 1997 (dollars in millions, except per share data) $ % $ % $ % Net retail sales $13,869 $13,048 $12,265 Revenues $13,866 100.0% $13,090 100.0% $12,390 100.0% Cost of sales 9,370 67.6 8,901 68.0 8,437 68.1 Selling, general, and administrative 2,686 19.4 2,516 19.2 2,375 19.2 Interest expense, net 287 2.0 278 2.1 299 2.4 Earnings before income taxes 1,523 11.0 1,395 10.7 1,279 10.3 Provision for income taxes* 596 39.1 546 39.1 500 39.1 Net earnings $ 927 6.7% $ 849 6.5% $ 779 6.3% Diluted earnings per share** $ 2.60 13.0% $ 2.30 11.1% $ 2.07 10.7% *Percent of revenues columns represent effective income tax rates. **Percent of revenues columns represent diluted earnings per share growth rates.
The following table shows earnings before interest and taxes excluding the LIFO (last-in, first-out) credit of $30 million in 1999, $28 million in 1998, and $5 million in 1997: (dollars in millions) 1999 1998 1997 Operating earnings $1,780 $1,645 $1,573 Percent of revenues 12.8% 12.6% 12.7% Our 408 quality department stores are operated by eight regional department store companies across the United States under 12 long-standing and widely recognized trade names. Each store company holds a leading market position in its region. The table below summarizes net retail sales, sales per square foot, gross retail square footage, and the number of stores for each store company:
Net Retail Gross Retail Sales in Millions Sales per Square Footage of Dollars Square Foot in Thousands Number of Stores Store Company: Headquarters 1999 1998 1999 1998 1999 1998 1999 New Closed 1998 Lord & Taylor: New York City $ 2,129 $ 1,976 $222 $232 10,070 9,461 78 5 0 73 Hecht's, Strawbridge's: Washington, D.C. 2,457 2,368 203 200 12,668 12,231 74 3 0 71 Foley's: Houston 2,174 2,060 203 196 10,975 10,993 57 0 0 57 Robinsons-May: Los Angeles 2,057 1,925 210 196 10,198 10,156 55 2 2 55 Filene's: Boston 1,703 1,578 253 244 7,212 6,710 44 2 0 42 Kaufmann's: Pittsburgh 1,597 1,549 196 199 8,513 8,177 50 2 0 48 Famous-Barr, L.S. Ayres, The Jones Store: St. Louis 1,348 1,193 189 207 7,655 7,159 42 4 1 39 Meier & Frank, ZCMI*: Portland, Ore. 404 399 233 231 1,769 1,768 8 0 0 8 The May Department Stores Company $13,869 $13,048 $210 $209 69,060 66,655 408 18 3 393 Net retail sales exclude the sales of stores that have been closed and not replaced and include lease department sales. Sales per square foot are calculated from net retail sales plus finance charge revenues and average gross retail square footage. Gross retail square footage represents square footage of stores open at the end of the period presented. *Table excludes 13 ZCMI stores that opened in fiscal 2000.
(in millions) 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 Net retail sales $13,869 $13,048 $12,265 $11,465 $10,347 $9,643 $8,905 $8,291 $7,748 $7,378 $6,907
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 Earnings per share $2.60 $2.30 $2.07 $1.87 $1.75 $1.62 $1.43 $1.18 $1.02 $1.01 $1.00
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 Sales per square foot $210 $209 $204 $201 $201 $200 $191 $179 $171 $172 $168
(in millions) 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 Cash flows $1,396 $1,288 $1,191 $1,123 $1,033 $947 $859 $755 $677 $657 $659 Depreciation and amortization $469 $439 $412 $374 $333 $297 $281 $283 $273 $253 $234 Net earnings $927 $849 $779 $749 $700 $650 $578 $472 $404 $404 $425
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 Return on equity 24.1% 22.2% 21.2% 19.4% 20.8% 21.3% 22.1% 21.5% 20.7% 21.8% 18.0%
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 Return on net assets 20.7% 19.8% 18.5% 18.8% 20.1% 20.1% 19.0% 15.4% 14.5% 15.8% 16.9%
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 Dividend rate at year-end (per common share) $0.89 $0.85 $0.80 $0.77 $0.76 $0.69 $0.61 $0.55 $0.54 $0.53 $0.47
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 Common stock closing price and price range: Low price $29.19 $33.17 $29.08 $27.00 $22.33 $21.50 $22.29 $17.33 $15.08 $12.46 $11.54 High price $45.38 $47.25 $38.08 $34.83 $30.83 $30.08 $31.00 $24.83 $20.13 $19.71 $17.54 Closing price $31.25 $40.25 $35.04 $29.67 $29.25 $23.42 $26.50 $23.46 $18.29 $15.17 $15.25
Net Retail Sales Net retail sales (sales) exclude the sales of stores that have been closed and not replaced and include lease department sales. Sales increases for 1999 and 1998 were as follows: 1999 1998 Store-for- Store-for- Quarter Total Store Total Store First 8.1% 3.5% 6.3% 4.6% Second 9.2 4.7 5.9 4.3 Third 5.4 1.1 4.6 2.2 Fourth 4.0 1.6 8.0 3.3 Year 6.3% 2.6% 6.4% 3.5% The total sales increase for 1999 reflects a 2.6% rise in store-for-store sales, the opening of 15 net new stores in 1999, and the full-year impact of 1998 store openings. We discontinued our consumer electronics business in 1999, which penalized sales comparisons by about 1% for the year. The total sales increase for 1998 includes a 3.5% store-for-store sales increase, the opening of 24 net new stores, and the full-year impact of 1997 store openings. Revenues (see page 26 for definition) include finance charge revenues of $304 million, $298 million, and $319 million in 1999, 1998, and 1997, respectively. Cost of Sales Cost of sales includes cost of merchandise sold and buying and occupancy costs. The impact of LIFO on cost of sales and the related percent of revenues is shown below: 1999 1998 1997 (dollars in millions) $ % $ % $ % Cost of sales $9,370 67.6% $8,901 68.0% $8,437 68.1% LIFO credit 30 0.2 28 0.2 5 0.0 Cost of sales before LIFO credit $9,400 67.8% $8,929 68.2% $8,442 68.1% Before the LIFO credit, cost of sales as a percentage of revenues decreased in 1999 compared with 1998 due to the elimination of the lower-margin consumer electronics business. Before the LIFO credit, cost of sales as a percentage of revenues increased in 1998 compared with 1997 as a result of higher promotional mark-down levels. Selling, General, and Administrative Expenses Selling, general, and administrative expenses were $2.69 billion in 1999, compared with $2.52 billion in 1998, a 6.8% increase. The overall increase was due to a 6.3% increase in sales. As a percent of revenues, selling, general, and administrative expenses increased from 19.2% in 1998 to 19.4% in 1999 as a result of increases in payroll, retirement, and profit sharing expense. Selling, general, and administrative expenses were $2.52 billion in 1998, compared with $2.38 billion in 1997, a 5.9% increase. The overall increase was due to a 6.4% increase in sales. As a percent of revenues, selling, general, and administrative expenses remained constant at 19.2% in 1998 and 1997. A decrease in credit expense partly related to lower bankruptcy rates was offset by increases in advertising, retirement, and profit sharing expense. Selling, general, and administrative expenses included advertising and sales promotion costs of $540 million, $500 million, and $463 million in 1999, 1998, and 1997, respectively. Interest Expense Interest expense components were: (dollars in millions) 1999 1998 1997 Interest expense $315 $311 $324 Interest income (12) (19) (11) Capitalized interest (16) (14) (14) Interest expense, net $287 $278 $299 Percent of revenues 2.0% 2.1% 2.4% Interest expense principally relates to long-term debt. Seasonal working capital requirements were met through commercial paper borrowings. We did not issue any long-term debt in 1999 or 1997. In the third quarter of 1998, we issued $350 million in new debt. Impact of Inflation Inflation did not have a material impact on our 1999 sales and earnings growth. We value inventory on a LIFO basis, and as a result, the current cost of merchandise is reflected in current operating results. 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 for 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 24.1% in 1999, compared with 22.2% in 1998 and 21.2% in 1997. Return on Net Assets Return on net assets measures performance independent of capital structure. Return on net assets is pretax earnings before net interest expense and the interest component of operating leases, divided by beginning-of-year net assets (including present value of operating leases). Return on net assets was 20.7% in 1999, compared with 19.8% in 1998 and 18.5% in 1997. Cash Flows Cash flows from operations (net earnings plus depreciation/amortization) was $1.4 billion, or 10.1% of revenues in 1999. This compares with 9.8% in 1998 and 9.6% in 1997. Our cash flows as a percent of revenues continues to be one of the highest in the retail industry and provides us with significant resources to enhance shareowners' value. Sources (uses) of cash flows are summarized below: (dollars in millions) 1999 1998 1997 Net earnings plus depreciation/amortization $1,396 $1,288 $1,191 Working capital decreases 14 158 265 Other operating activities 120 59 70 Capital expenditures and other investing activities (718) (888) (463) Net long-term debt issuances (repayments) (135) 129 (340) Net purchases of common stock (434) (525) (329) Dividend payments (314) (308) (297) Increase (decrease) in cash and cash equivalents $ (71) $ (87) $ 97 See "Consolidated Statement of Cash Flows" on page 24. Available Credit and Debt Ratings We can borrow up to $780 million under our multiyear credit agreements. In addition we have filed with the Securities and Exchange Commission shelf registration statements that enable us to issue up to $1.0 billion of debt securities, of which $200 million was issued in February 2000. In July 1999, our bond rating by Standard & Poor's Corporation was increased from A to A+. Our bonds continue to be rated A1 by Moody's Investors Service, Inc. Our commercial paper is rated P1 by Moody's and A1 by Standard & Poor's. Our senior unsecured bank credit agreement is rated A1 by Moody's. Capital Expenditures Our strong financial condition enables us to make capital expenditures to enhance shareowners' returns. The operating measures we emphasize when we invest in new stores and remodel or expand existing stores include return on net assets, internal rate of return, and sales per square foot. Financial Ratios Our debt-to-capitalization and fixed-charge coverage ratios are consistent with our capital structure objective. Our capital structure provides us with substantial financial and operational flexibility. The debt-to-capitalization ratios were 44%, 45%, and 44% for 1999, 1998, and 1997, respectively. For purposes of the debt-to-capitalization ratio, we define total debt as short-term and long-term debt (including the Employee Stock Ownership Plan (ESOP) debt reduced by unearned compensation) and the capitalized value of all leases including operating leases. We define capitalization as total debt, noncurrent deferred taxes, ESOP preference shares, and shareowners' equity. See "Profit Sharing" on page 27 for discussion of the ESOP. The fixed-charge coverage ratios were 4.8x in 1999, 4.5x in 1998, and 4.1x in 1997. We define fixed charges as gross interest expense, interest expense on the ESOP debt, total rent expense, and the pretax equivalent of dividends on redeemable preferred stock. Common Stock Dividends and Market Prices Our dividend policy is based on earnings growth and capital investment requirements. We increased the annual dividend by 4.5%, or 4 cents, to 93 cents per share effective with the March 2000 dividend. This is our 25th consecutive annual dividend increase. We have paid consecutive quarterly dividends since 1911. During the first quarter of 1999, we effected a three-for-two common stock split. All share and per share data included in this annual report have been restated to reflect the split. The quarterly price ranges of the common stock and dividends per share in 1999 and 1998 were: 1999 1998 Market Price Dividends Market Price Dividends Quarter High Low per Share High Low per Share First $42-3/16 $36 $.22-1/4 $44-5/16 $35-5/16 $.21-1/6 Second 45-3/8 38-1/8 .22-1/4 47-1/4 41-5/16 .21-1/6 Third 41-9/16 32-1/2 .22-1/4 44-11/16 33-3/16 .21-1/6 Fourth 34-5/8 29-3/16 .22-1/4 43 37-11/16 .21-1/6 Year $45-3/8 $29-3/16 $.89 $47-1/4 $33-3/16 $.84-2/3 The approximate number of common shareowners as of March 1, 2000, was 45,000. Forward-looking Statements Management's Discussion and Analysis contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. While such statements reflect all available information and management's judgment and estimates of current and anticipated conditions and circumstances and are prepared with the assistance of specialists within and outside the company, there are many factors outside of our control that have an impact on our operations. Such factors include but are not limited to competitive changes, general and regional economic conditions, consumer preferences and spending patterns, availability of adequate locations for building or acquiring new stores, and our ability to hire and retain qualified associates. Because of these factors, actual performance could differ materially from that described in the forward-looking statements. Consolidated Statement of Earnings (dollars in millions, except per share) 1999 1998 1997 Net retail sales $13,869 $13,048 $12,265 Revenues $13,866 $13,090 $12,390 Cost of sales 9,370 8,901 8,437 Selling, general, and administrative expenses 2,686 2,516 2,375 Interest expense, net 287 278 299 Earnings before income taxes 1,523 1,395 1,279 Provision for income taxes 596 546 500 Net earnings before extraordinary loss 927 849 779 Extraordinary loss, net of income taxes - - (4) Net earnings $ 927 $ 849 $ 775 Basic earnings per share: Net earnings before extraordinary loss $ 2.73 $ 2.43 $ 2.18 Extraordinary loss - - (0.01) Basic earnings per share $ 2.73 $ 2.43 $ 2.17 Diluted earnings per share: Net earnings before extraordinary loss $ 2.60 $ 2.30 $ 2.07 Extraordinary loss - - (0.01) Diluted earnings per share $ 2.60 $ 2.30 $ 2.06 See Notes to Consolidated Financial Statements. Consolidated Balance Sheet January 29, January 30, (dollars in millions, except per share) 2000 1999 Assets Current assets: Cash $ 16 $ 15 Cash equivalents 25 97 Accounts receivable, net 2,173 2,144 Merchandise inventories, net of LIFO reserves of $35 and $65 2,817 2,655 Other current assets 84 76 Total current assets 5,115 4,987 Property and equipment: Land 326 316 Buildings and improvements 3,863 3,656 Furniture, fixtures, and equipment 3,543 3,232 Property under capital leases 65 56 Total property and equipment 7,797 7,260 Accumulated depreciation (3,028) (2,747) Property and equipment, net 4,769 4,513 Goodwill, net of accumulated amortization of $228 and $199 981 933 Other assets 70 100 Total assets $10,935 $10,533 Liabilities and shareowners' equity Current liabilities: Current maturities of long-term debt $ 259 $ 98 Accounts payable 1,030 965 Accrued expenses 892 807 Income taxes payable 234 189 Total current liabilities 2,415 2,059 Long-term debt 3,560 3,825 Deferred income taxes 540 482 Other liabilities 314 309 ESOP preference shares 315 327 Unearned compensation (286) (305) Shareowners' equity: Common stock 163 167 Additional paid-in capital - - Retained earnings 3,914 3,669 Total shareowners' equity 4,077 3,836 Total liabilities and shareowners' equity $10,935 $10,533 Common stock has a par value of $.50 per share; 1 billion shares are authorized and 470.5 million shares were issued. At January 29, 2000, 325.5 million shares were outstanding, and 145.0 million shares were held in treasury. At January 30, 1999, 334.7 million shares were outstanding, and 135.8 million shares were held in treasury. ESOP preference shares have a par value of $.50 per share and a stated value of $507 per share; 800,000 shares are authorized. At January 29, 2000, 622,197 shares (convertible into 21.0 million shares of common stock) were issued and outstanding. At January 30, 1999, 645,320 shares (convertible into 21.8 million shares of common stock) were issued and outstanding. See Notes to Consolidated Financial Statements. Consolidated Statement of Cash Flows (dollars in millions) 1999 1998 1997 Operating activities Net earnings $ 927 $ 849 $ 775 Adjustments for noncash items included in earnings: Depreciation and amortization 469 439 412 Deferred income taxes 75 48 58 Working capital changes: Accounts receivable, net 13 20 262 Merchandise inventories (137) (176) (53) Other current assets (22) 12 46 Accounts payable 57 176 (30) Accrued expenses 57 89 26 Income taxes payable 46 37 14 Other assets and liabilities, net 45 11 16 Total operating activities 1,530 1,505 1,526 Investing activities Capital expenditures (703) (630) (496) Dispositions of property and equipment 25 44 33 Acquisitions (40) (302) - Total investing activities (718) (888) (463) Financing activities Issuances of long-term debt - 350 - Repayments of long-term debt (135) (221) (340) Purchases of common stock (468) (589) (394) Issuances of common stock 34 64 65 Dividend payments (314) (308) (297) Total financing activities (883) (704) (966) Increase (decrease) in cash and cash equivalents (71) (87) 97 Cash and cash equivalents, beginning of year 112 199 102 Cash and cash equivalents, end of year $ 41 $ 112 $ 199 Cash paid during the year: Interest expense $ 307 $ 297 $ 319 Income taxes 463 411 355 See Acquisitions in Notes to Consolidated Financial Statements for a description of noncash transactions. See Notes to Consolidated Financial Statements.
Consolidated Statement of Shareowners' Equity Outstanding Additional Total Common Stock Paid-in Retained Shareowners' (dollars in millions, shares in thousands) Shares Dollars Capital Earnings Equity Balance at February 1, 1997 355,389 $178 $ - $3,472 $3,650 Net earnings - - - 775 775 Dividends paid: Common stock ($0.80 per share) - - - (279) (279) ESOP preference shares, net of tax benefit - - - (18) (18) Common stock issued 3,419 2 73 - 75 Common stock purchased (12,296) (7) (73) (314) (394) Balance at January 31, 1998 346,512 173 - 3,636 3,809 Net earnings - - - 849 849 Dividends paid: Common stock ($0.84-2/3 per share) - - - (290) (290) ESOP preference shares, net of tax benefit - - - (18) (18) Common stock issued 3,141 1 74 - 75 Common stock purchased (14,989) (7) (74) (508) (589) Balance at January 30, 1999 334,664 167 - 3,669 3,836 Net earnings - - - 927 927 Dividends paid: Common stock ($0.89 per share) - - - (295) (295) ESOP preference shares, net of tax benefit - - - (19) (19) Common stock issued 3,678 2 94 - 96 Common stock purchased (12,877) (6) (94) (368) (468) Balance at January 29, 2000 325,465 $163 $ - $3,914 $4,077
Treasury Shares (shares in thousands) 1999 1998 1997 Balance, beginning of year 135,791 123,943 115,066 Common stock issued: Exercise of stock options (673) (1,914) (2,372) Deferred compensation plan (224) (227) (243) Restricted stock grants, net of forfeitures (372) (306) (156) Conversion of ESOP preference shares (781) (694) (648) Acquisition (1,628) - - (3,678) (3,141) (3,419) Common stock purchased 12,877 14,989 12,296 Balance, end of year 144,990 135,791 123,943 Outstanding common stock excludes shares held in treasury. See Notes to Consolidated Financial Statements. 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 1999, 1998, and 1997 ended on January 29, 2000, January 30, 1999, and January 31, 1998, respectively. References to years in this annual report relate to fiscal years or year-ends rather than calendar years. Basis of Reporting The consolidated financial statements include the accounts of The May Department Stores Company, a Delaware corporation, and all wholly owned subsidiaries (May or the company). The company's 408 quality department stores are operated by eight regional department store companies across the United States under 12 long-standing and widely recognized trade names. The company aggregates its eight store companies into one reportable segment. Use of Estimates Management makes estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from these estimates. Net Retail Sales Net retail sales (sales) represent sales of stores operating at the end of the latest period including lease department sales and excluding finance charge revenues and the sales of stores that have been closed and not replaced. Store-for-store sales represent sales of those stores open during both years. Revenues Revenues include sales from all stores operating during the period, finance charge revenues, and lease department income. Sales are net of returns and exclude sales tax. A reserve is provided for estimated merchandise returns based on experience. In December 1999 new accounting rules were issued requiring lease department income rather than lease department sales to be included in revenues. The company has restated its revenues and cost of sales to reflect this accounting change with no impact on earnings or earnings per share. Cost of Sales Cost of sales includes the cost of merchandise sold and the company's buying and occupancy costs. Advertising Costs Advertising and sales promotion costs are expensed at the time the advertising takes place. Preopening Expenses Preopening expenses of new stores are expensed as incurred. Income Taxes Income taxes are accounted for by the liability method. The liability method applies 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. Earnings per Share References to earnings per share relate to diluted earnings per share. Common Stock Split All share and per share data included in this annual report have been restated to reflect a three-for-two common stock split effective March 22, 1999. Stock-based Compensation The company accounts for stock-based compensation by applying APB Opinion No. 25, as allowed under SFAS No. 123, "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. Merchandise Inventories Merchandise inventories are valued by the retail method and are stated on the lower of LIFO (last-in, first-out) cost basis or market. Property and Equipment Property and equipment are recorded at cost and 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 related lease terms. Costs associated with the acquisition or development of software for internal use are capitalized and amortized over the expected useful life of the software. 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. Long-lived Assets Long-lived assets and certain identifiable intangibles are reviewed to determine whether the net book value is recoverable. Impairment losses resulting from these reviews have not been significant. Financial Derivatives The company uses financial derivatives only to reduce risk in specific business transactions. The company periodically purchases forward contracts on firm commitments to minimize the risk of foreign currency fluctuations. These contracts are not significant. The company will adopt SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," in 2000. This statement will not have a material impact on the company. Reclassifications Certain prior-period amounts have been reclassified to conform with the current-year presentation. Quarterly Results (Unaudited) Quarterly results are determined in accordance with 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: (dollars in millions, 1999 except per share) First Second Third Fourth Year Revenues $2,989 $3,067 $3,176 $4,634 $13,866 Cost of sales 2,086 2,098 2,218 2,968 9,370 Selling, general, and administrative expenses 629 640 660 757 2,686 Pretax earnings 203 257 228 835 1,523 Net earnings 122 154 138 513 927 Earnings per share: Basic $ 0.35 $ 0.45 $ 0.40 $ 1.53 $ 2.73 Diluted 0.34 0.43 0.38 1.45 2.60 (dollars in millions, 1998 except per share) First Second Third Fourth Year Revenues $2,760 $2,826 $3,027 $4,477 $13,090 Cost of sales 1,926 1,956 2,118 2,901 8,901 Selling, general, and administrative expenses 584 587 625 720 2,516 Pretax earnings 183 218 215 779 1,395 Net earnings 110 131 130 478 849 Earnings per share: Basic $ 0.30 $ 0.37 $ 0.36 $ 1.40 $ 2.43 Diluted 0.29 0.35 0.35 1.31 2.30 There are variables and uncertainties in the factors used to estimate the annual LIFO provision (credit) on an interim basis. If the final variables and factors had been known at the beginning of the year, the pro forma diluted earnings (loss) per share impact of LIFO would have been as follows: 1999 1998 Pro As Pro As Quarter Forma Reported Forma Reported First $0.01 $(0.01) $0.01 $(0.01) Second 0.01 (0.01) 0.01 (0.01) Third 0.01 (0.01) 0.01 (0.01) Fourth 0.02 0.08 0.02 0.08 Year $0.05 $ 0.05 $0.05 $ 0.05 Profit Sharing The company has a qualified profit sharing plan that covers 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 $54 million for 1999, an effective match rate of 100%. The matching allocation values were $57 million in 1998 and $48 million in 1997. The plan includes an Employee Stock Ownership Plan (ESOP) under which the plan borrowed $400 million in 1989, guaranteed by the company, at an average rate of 8.5%. The proceeds were used to purchase $400 million (788,955 shares) of convertible preference stock of the company (ESOP preference shares). Each share is convertible into 33.787 shares of common stock and has a stated value of $15.01 per common share equivalent. The annual dividend rate on the ESOP preference shares is 7.5%. The $286 million outstanding portion of the guaranteed ESOP debt is reflected on the consolidated balance sheet as long-term debt because the company will fund the required debt service through 2004. The company's contributions to the ESOP and the dividends on the ESOP preference shares are used to repay the loan principal and interest. Interest expense associated with the ESOP debt was $25 million in 1999, $27 million in 1998, and $29 million in 1997. ESOP preference shares' dividends were $24 million in 1999, $25 million in 1998, and $26 million in 1997. The release of ESOP preference shares is based upon debt-service payments. Upon release, 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. It is reduced as principal is repaid. The company's profit sharing expense was $40 million in 1999, $28 million in 1998, and $24 million in 1997. At January 29, 2000, the plan beneficially owned 15.3 million shares of the company's common stock and 100% of the company's ESOP preference shares, representing 10.5% of the company's common stock. Pension and Other Postretirement Benefits The company has two qualified defined-benefit plans that cover associates who work 1,000 hours or more in a year and have attained age 21. The company also maintains two nonqualified, supplementary defined-benefit plans for certain associates. All plans are noncontributory and provide benefits based upon years of service and pay during employment. Pension expense is based on information provided by an outside actuarial firm that uses assumptions to estimate the total benefits ultimately payable to associates and allocates this cost to service periods. The actuarial assumptions used to calculate pension costs are reviewed annually. The accumulated benefit obligations (ABO), change in projected benefit obligations (PBO), change in net plan assets, and funded status of the benefit plans are summarized in the tables below: Qualified Plans Nonqualified Plans (dollars in millions) 1999 1998 1999 1998 Change in PBO (1) PBO at beginning of year $ 517 $476 $ 122 $ 102 Service cost 36 30 3 3 Interest cost 36 32 9 8 Business combinations 27 8 - - Actuarial loss (gain) (2) (74) 24 1 12 Plan amendments 68 - - 2 Benefits paid (68) (53) (6) (5) PBO at end of year $ 542 $517 $ 129 $ 122 ABO at end of year (3) $ 516 $464 $ 104 $ 99 Change in net plan assets Fair value of net plan assets at beginning of year $ 579 $490 $ - $ - Actual return on plan assets 38 89 - - Employer contribution 48 44 - - Business combinations 25 9 - - Benefits paid (68) (53) - - Fair value of net plan assets at end of year $ 622 $579 $ - $ - Funded status Plan assets in excess of (less than) PBO $ 80 $ 62 $(129) $(122) Unrecognized net actuarial loss (gain) (124) (50) 19 21 Unrecognized prior service cost 66 2 14 14 Additional minimum liability (4) - - (8) (12) Prepaid (accrued) benefit cost $ 22 $ 14 $(104) $ (99) Plan assets in excess of (less than) ABO $ 106 $115 $(104) $ (99) (1) PBO is the actuarial present value of benefits attributed by the benefit formula to prior associate service; it takes into consideration future salary increases. (2) Actuarial loss (gain) is the change in value of the benefit obligations or the plan assets resulting from changes in actuarial assumptions or from experience different than assumed. (3) ABO is the actuarial present value of benefits attributed by the pension benefit formula to prior associate service based on current and past compensation levels. (4) The additional minimum liability represents the excess of the accumulated benefit obligation over the accrued pension costs recognized. Recognizing the additional minimum liability results in an intangible asset being recorded for an equal amount. The components of net periodic benefit costs and actuarial assumptions for the benefit plans are summarized in the following tables: (dollars in millions) 1999 1998 1997 Components of pension expense (all plans) Service cost $ 39 $ 33 $ 28 Interest on PBO 45 40 34 Expected return on assets (39) (34) (30) Net amortization (1) 8 3 2 Total $ 53 $ 42 $ 34 (1) Prior service cost and actuarial (gain) loss are amortized over the remaining service period. (as of January 1) 2000 1999 1998 Actuarial assumptions Discount rate 8.00% 6.75% 7.00% Expected return on plan assets 8.25 7.00 7.25 Salary increase 4.50 4.25 4.50 The accrued pension costs are included in other liabilities. Prepaid pension costs and intangible assets are included in other assets. The company also provides postretirement life and/or health benefits for certain associates. As of January 29, 2000 the company's estimated PBO (at a discount rate of 8.00%) for postretirement benefits was $48 million, which was accrued in other liabilities. As of January 30, 1999 the company's estimated PBO (at a discount rate of 6.75%) for postretirement benefits was $48 million, of which $45 million was accrued in other liabilities. The postretirement plan is unfunded. The postretirement benefit expense was $4 million in 1999 and 1998 and $3 million in 1997. The estimated future obligations for postretirement medical benefits are based upon assumed annual healthcare cost increases of 12% for 2000 and 2001, decreasing by 1% annually to 8% for 2005 and future years. A 1% increase or decrease in the assumed annual health care cost increases would increase or decrease the present value of estimated future obligations for postretirement benefits by approximately $2 million. Another important element in the retirement programs is the Social Security system, into which the company paid $163 million in 1999 as its matching contribution to the $163 million paid in by associates. Taxes The provision for income taxes and the related percent of pretax earnings for the last three years were as follows: 1999 1998 1997 (dollars in millions) $ % $ % $ % Federal $440 $420 $359 State and local 81 77 65 Current taxes 521 34.2% 497 35.6% 424 33.2% Federal 63 41 64 State and local 12 8 12 Deferred taxes 75 4.9 49 3.5 76 5.9 Total $596 39.1% $546 39.1% $500 39.1% The reconciliation between the statutory federal income tax rate and the effective income tax rate for the last three years follows: (percent of pretax earnings) 1999 1998 1997 Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes 6.1 6.1 6.0 Federal tax benefit of state and local income taxes (2.2) (2.2) (2.1) Other, net 0.2 0.2 0.2 Effective income tax rate 39.1% 39.1% 39.1% Major components of deferred tax assets (liabilities) were as follows: (dollars in millions) 1999 1998 Accrued expenses and reserves $ 96 $ 102 Deferred and other compensation 139 123 Depreciation/amortization and basis differences (528) (474) Other deferred income tax liabilities, net (216) (206) Net deferred income taxes (509) (455) Less: Net current deferred income tax assets 31 27 Noncurrent deferred income taxes $(540) $(482) Net current deferred income tax assets are included in other current assets in the accompanying balance sheet. Earnings per Share The following tables reconcile net earnings and weighted average shares outstanding to amounts used to calculate basic and diluted earnings per share for 1999, 1998, and 1997. 1999 Net Earnings (in millions, except per share) Earnings Shares per Share Net earnings $927 ESOP preference shares' dividends (19) Basic earnings per share $908 332.2 $2.73 ESOP preference shares 16 21.5 Assumed exercise of options (treasury stock method) - 1.9 Diluted earnings per share $924 355.6 $2.60 1998 Net Earnings (in millions, except per share) Earnings Shares per Share Net earnings $849 ESOP preference shares' dividends (18) Basic earnings per share $831 342.6 $2.43 ESOP preference shares 15 22.2 Assumed exercise of options (treasury stock method) - 2.6 Diluted earnings per share $846 367.4 $2.30 1997 Net Earnings (in millions, except per share) Earnings Shares per Share Net earnings $779 ESOP preference shares' dividends (18) Basic earnings per share $761 348.5 $2.18 ESOP preference shares 14 22.9 Assumed exercise of options (treasury stock method) - 2.2 Diluted earnings per share $775 373.6 $2.07 Accounts Receivable Credit sales under department store credit programs as a percent of net retail sales were 40.7% in 1999. This compares with 42.3% in 1998 and 44.3% in 1997. An estimated 26 million customers hold credit cards under the company's various credit programs. Sales made through third-party credit cards totaled $4.6 billion in 1999, compared with $4.1 billion in 1998 and $3.6 billion in 1997. Net accounts receivable consisted of: (dollars in millions) 1999 1998 Customer accounts receivable $2,124 $2,127 Other accounts receivable 125 99 Total accounts receivable 2,249 2,226 Allowance for uncollectible accounts (76) (82) Accounts receivable, net $2,173 $2,144 In accordance with industry practice, installments on deferred-payment accounts receivable maturing in more than one year have been included in current assets. The fair value of customer accounts receivable approximates their carrying values at January 29, 2000 and January 30, 1999 due to the short-term nature of these accounts. Other Current Assets In addition to net current deferred income tax assets, other current assets consisted of prepaid expenses and supply inventories of $53 million in 1999 and $49 million in 1998. Other Assets Other assets consisted of: (dollars in millions) 1999 1998 Prepaid and intangible pension asset $32 $ 26 Deferred debt expense 31 33 Notes receivable - 30 Other 7 11 Total $70 $100 Accrued Expenses Accrued expenses consisted of: (dollars in millions) 1999 1998 Salaries, wages, and employee benefits $196 $147 Insurance costs 184 178 Interest and rent expense 143 156 Advertising and other operating expenses 128 112 Sales, use, and other taxes 110 106 Construction costs 71 59 Other 60 49 Total $892 $807 Short-term Debt and Lines of Credit Short-term borrowings for the last three years were: (dollars in millions) 1999 1998 1997 Balance outstanding at year end $ - $ - $ - Average balance outstanding 67 195 182 Average interest rate on average balance 5.7% 5.4% 5.7% Maximum balance outstanding $407 $621 $487 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 $780 million available under credit agreements. Long-term Debt Long-term debt and capital lease obligations were: (dollars in millions) 1999 1998 5.7% to 10.6% unsecured notes and sinking-fund debentures due 2000-2036 $3,638 $3,741 3.0% to 10.0% mortgage notes and bonds due 2000-2015 124 134 Capital lease obligations 57 48 Total debt 3,819 3,923 Less: Current maturities of long-term debt 259 98 Long-term debt $3,560 $3,825 The annual maturities of long-term debt, including sinking fund requirements, are $259 million, $85 million, $329 million, $132 million, and $258 million for 2000 through 2004. The net book value of property encumbered under long-term debt agreements was $143 million at January 29, 2000. The company recorded an extraordinary aftertax loss of $4 million ($5 million pretax) in 1997 related to the early retirement of debt. The fair value of long-term debt (excluding capital lease obligations) was approximately $3.7 billion and $4.5 billion at January 29, 2000, and January 30, 1999, respectively. The fair value was determined using borrowing rates for debt instruments with similar terms and maturities. Lease Obligations The company owns approximately 77% of its stores. Rental expense for the company's operating leases consisted of: (dollars in millions) 1999 1998 1997 Minimum rentals $48 $49 $47 Contingent rentals based on sales 18 18 17 Real property rentals 66 67 64 Equipment rentals 3 3 4 Total $69 $70 $68 Future minimum lease payments at January 29, 2000 were as follows: Capital Operating (dollars in millions) Leases Leases Total 2000 $ 7 $ 51 $ 58 2001 7 46 53 2002 7 43 50 2003 7 40 47 2004 7 38 45 After 2004 93 264 357 Minimum lease payments $128 $482 $610 The present value of minimum lease payments under capital leases was $57 million at January 29, 2000, of which $1 million was included in current liabilities. The present value of operating leases was $291 million at January 29, 2000. Property under capital leases is summarized as follows: (dollars in millions) 1999 1998 Cost $ 65 $ 56 Accumulated amortization (32) (31) Total $ 33 $ 25 Other Liabilities In addition to accrued pension and postretirement costs, other liabilities consisted principally of deferred compensation liabilities of $162 million at January 29, 2000 and $161 million at January 30, 1999. Under the company's deferred compensation plan, eligible associates may elect to defer part of their compensation each year into cash and/or stock unit alternatives. The company issues shares to settle obligations with participants who defer in stock units and it maintains shares in treasury sufficient to settle all outstanding stock unit obligations. Acquisitions On December 31, 1999 May completed the acquisition of Zions Co-operative Mercantile Institution (ZCMI) stores. May issued 1.6 million shares of May common stock valued at $50 million to ZCMI shareholders and assumed $73 million of debt, of which $40 million was repaid at closing. The company repurchased a comparable number of shares in the open market as were issued to acquire ZCMI. In September 1998, May purchased 11 former Mercantile stores for approximately $302 million including merchandise inventories. At the date of acquisition nine of these stores were leased. The leases have both put and call options that obligate the company to buy the underlying properties for approximately $100 million. As of January 29, 2000 the company has purchased three of these stores for $42 million. These acquisitions have been accounted for as purchases and did not have a material effect on the results of operations or financial position. 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 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 company's plans are accounted for as provided by 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. A combined summary of the stock option plans at the end of 1999, 1998, and 1997 and of the changes in outstanding shares within years is presented below: 1999 1998 1997 Average Average Average Exercise Exercise Exercise (shares in thousands) Shares Price Shares Price Shares Price Beginning of year 11,764 $33 10,230 $28 10,081 $25 Granted 4,329 44 4,230 43 3,158 32 Exercised (690) 25 (1,922) 25 (2,384) 21 Forfeited or expired (531) 42 (774) 33 (625) 28 End of year 14,872 $37 11,764 $33 10,230 $28 Exercisable at end of year 5,904 $30 3,719 $26 3,214 $24 Shares available for grants 4,218 8,015 11,471 Fair value of options granted $14 $12 $11 The following table summarizes information about stock options outstanding at January 29, 2000: Options Outstanding Options Exercisable Average Exercise Number Remaining Average Number Average Price Outstanding Contractual Exercise Exercisable Exercise Range (in thousands) Life Price (in thousands) Life $ 7 2 1 $ 7 2 1 16-24 1,699 4 22 1,699 4 25-33 5,119 7 30 3,127 7 35-45 8,052 9 42 1,076 8 14,872 7 $30 5,904 6 Under the 1994 Stock Incentive Plan, the company is authorized to grant up to 2.9 million shares of restricted stock to management associates with or without performance restrictions. No monetary consideration is paid by associates who receive restricted stock. All restrictions lapse over periods of up to 10 years. In 1999 and 1998 the company granted 407,167 and 328,356 shares of restricted stock, respectively, under the 1994 Stock Incentive Plan. For restricted stock grants, compensation expense is based upon the grant date market price; it is recorded over the lapsing period. For performance-based restricted stock, compensation expense is recorded over the performance period and is based on estimates of performance levels. As an alternative to accounting for stock-based compensation under APB No. 25, SFAS No. 123, "Accounting for Stock-based Compensation," establishes a fair-value method of accounting for employee stock options or similar equity instruments. The company used the Black-Scholes option pricing model to estimate the grant date fair value of its 1995 and later option grants. The fair value is recognized over the option vesting period, which is typically four years. 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: (dollars in millions, except per share) 1999 1998 1997 Net earnings: As reported $ 927 $ 849 $ 779 Pro forma 903 833 766 Basic earnings per share: As reported $2.73 $2.43 $2.18 Pro forma 2.66 2.38 2.14 Diluted earnings per share: As reported $2.60 $2.30 $2.07 Pro forma 2.54 2.27 2.04 The following Black-Scholes assumptions were used: Assumptions 1999 1998 1997 Risk-free interest rate 5.5% 5.6% 6.6% Expected dividend yield $0.89 $0.85 $0.80 Expected option life (years) 7 7 7 Expected volatility 26% 23% 24% Common Stock Repurchase Programs During 1999, the company purchased $361 million or 9.9 million shares under a $500 million stock repurchase program authorized in fiscal 1999. The 1999 buyback was in addition to a $500 million 1998 stock repurchase program totaling 12.5 million shares and a $300 million 1997 stock repurchase program totaling 9.6 million shares. In February 2000, the company announced plans to repurchase up to an additional $650 million of May shares. Preference Stock The company is authorized to issue up to 25 million shares of $.50 par value preference stock. As of January 29, 2000, 800,000 ESOP preference shares were authorized and 622,197 were outstanding. The ESOP preference shares are shown outside of shareowners' equity in the consolidated balance sheet because the shares are redeemable by the holder or by the company in certain situations. Shareowner Rights Plan The company has a shareowner rights plan 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 May's common stock by a person or by affiliated persons. Depending upon the circumstances 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.
Eleven-Year Financial Summary (in millions, except per share and operating statistics) 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 Net retail sales $13,869 $13,048 $12,265 $11,465 $10,347 $9,643 $8,905 $8,291 $7,748 $7,378 $6,907 Total percent increase 6.3% 6.4% 7.0% 10.8% 7.3% 8.3% 7.4% 7.0% 5.0% 6.8% 14.0% Store-for-store percent increase 2.6% 3.5% 3.6% 4.3% 2.5% 5.4% 5.4% 4.5% (0.6%) 0.6% 6.4% Operations Revenues $13,866 $13,090 $12,390 $11,727 $10,708 $9,886 $9,353 $9,154 $8,864 $8,497 $8,169 Cost of sales 9,370 8,901 8,437 7,953 7,217 6,658 6,328 6,251 6,071 5,844 5,547 Selling, general, and administrative expenses 2,686 2,516 2,375 2,265 2,081 1,916 1,824 1,859 1,861 1,772 1,735 Interest expense, net 287 278 299 277 250 233 244 279 315 278 231 Earnings before income taxes 1,523 1,395 1,279 1,232 1,160 1,079 957 579* 617 603 656 Provision for income taxes 596 546 500 483 460 429 379 107* 213 199 231 Net earnings (1) 927 849 779 749 700 650 578 472 404 404 425 Percent of revenues 6.7% 6.5% 6.3% 6.4% 6.5% 6.6% 6.2% 5.2% 4.6% 4.8% 5.2% LIFO provision (credit) $ (30)$ (28)$ (5)$ (20)$ (53)$ (46)$ 7 $ 10 $ 26 $ 39 $ (22) Per share Net earnings (1) $ 2.60 $ 2.30 $ 2.07 $ 1.87 $ 1.75 $ 1.62 $ 1.43 $ 1.18 $ 1.02 $ 1.01 $ 1.00 Dividends paid (2) .89 .85 .80 .77 .74 .67 .60 .55 .54 .51 .46 Book value 12.53 11.46 10.99 10.27 12.28 11.10 9.77 8.55 7.51 6.69 6.22 Market price - high 45.38 47.25 38.08 34.83 30.83 30.08 31.00 24.83 20.13 19.71 17.54 Market price - low 29.19 33.17 29.08 27.00 22.33 21.50 22.29 17.33 15.08 12.46 11.54 Market price - year-end close 31.25 40.25 35.04 29.67 29.25 23.42 26.50 23.46 18.29 15.17 15.25 Financial statistics Return on equity 24.1% 22.2% 21.2% 19.4% 20.8% 21.3% 22.1% 21.5% 20.7% 21.8% 18.0% Return on net assets 20.7 19.8 18.5 18.8 20.1 20.1 19.0 15.4** 14.5 15.8 16.9 Operating statistics Stores open at year-end 408 393 369 365 346 314 301 303 318 324 288 Gross retail square footage (in millions) 69.1 66.7 62.8 62.1 57.6 52.0 49.4 49.5 51.9 52.4 48.4 Sales per square foot (3) $ 210 $ 209 $ 204 $ 201 $ 201 $ 200 $ 191 $ 179 $ 171 $ 172 $ 168 Cash flows and financial position Cash flows from operations (4) $ 1,396 $ 1,288 $ 1,191 $ 1,123 $ 1,033 $ 947 $ 859 $ 755 $ 677 $ 657 $ 659 Percent of revenues 10.1% 9.8% 9.6% 9.6% 9.6% 9.6% 9.2% 8.3% 7.6% 7.7% 8.1% Depreciation and amortization $ 469 $ 439 $ 412 $ 374 $ 333 $ 297 $ 281 $ 283 $ 273 $ 253 $ 234 Capital expenditures 703 630 496 632 801 682 560 284 366 466 470 Dividends on common stock 295 290 279 287 277 251 223 204 198 191 186 Working capital 2,700 2,928 3,012 3,156 3,536 3,069 2,960 2,730 3,089 2,672 2,094 Long-term debt and preference stock 3,875 4,152 3,849 4,196 3,701 3,240 3,192 3,256 4,299 3,948 3,387 Shareowners' equity 4,077 3,836 3,809 3,650 4,585 4,135 3,639 3,181 2,781 2,467 2,319 Total assets 10,935 10,533 9,930 10,059 10,122 9,237 8,614 8,376 8,566 8,083 7,570 Average diluted shares outstanding and equivalents 355.6 367.4 373.6 396.2 397.3 397.3 398.2 397.0 394.3 397.1 419.3 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) Represents net earnings and diluted earnings per share from continuing operations. (2) The annual dividend was increased to $.93 per share effective with the March 15, 2000, dividend payment. (3) Sales per square foot are calculated from net retail sales plus finance charge revenues and average gross retail square footage. (4) Cash flows from operations represents net earnings plus depreciation/amortization. It is different from cash flows from operating activities as shown on the statement of cash flows. * Pretax earnings include a net special and nonrecurring charge of $187 million, and the provision for income taxes includes a nonrecurring tax benefit of $187 million. ** Based on pretax earnings before special and nonrecurring items.
REPORTS OF MANAGEMENT AND 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. 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 January 29, 2000, and January 30, 1999, and the related consolidated statements of earnings, shareowners' equity and cash flows for each of the three fiscal years in the period ended January 29, 2000. 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 auditing standards generally accepted in the United States. 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 January 29, 2000, and January 30, 1999, and the results of their operations and their cash Flows for each of the three fiscal years in the period ended January 29, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP 1010 Market Street St. Louis, Missouri 63101-2089 February 9, 2000 EX-27 8
5 This schedule contains summary financial information extracted from the consolidated balance sheet, statement of earnings, and notes to consolidated financial statements on pages 22, 23 and 26-31, respectively, of The May Department Stores Company 1999 Annual Report and is qualified in its entirety to such financial statements. 1,000,000 YEAR JAN-29-2000 JAN-29-2000 16 25 2,249 76 2,817 5,115 7,797 3,028 10,935 2,415 3,560 0 0 163 3,914 10,935 13,869 13,866 9,370 9,370 0 0 287 1,523 596 927 0 0 0 927 2.73 2.60
EX-99 9 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, 1999 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, 1999 4 Statement of Net Assets Available for Benefits - December 31, 1998 7 Statement of Changes in Net Assets Available for Benefits for the Year Ended December 31, 1999 10 Notes to Financial Statements - December 31, 1999 and 1998 12 Schedule I - Item 27(a): Schedule of Assets Held for Investment Purposes - December 31, 1999 18 Schedule II - Item 27(d): Schedule of Reportable Transactions for the Year Ended December 31, 1999 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 19, 2000 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 of The May Department Stores Company Profit Sharing Plan as of December 31, 1999 and 1998, and the related statement of changes in net assets available for benefits for the year ended December 31, 1999. These financial statements and the 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 auditing standards generally accepted in the United States. 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, 1999 and 1998, and the changes in net assets available for benefits for the year ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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. /s/ Arthur Andersen LLP St. Louis, Missouri, March 24, 2000 THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1999 (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 $384,040 $294,220 $ - Common stock - - 123,490 Commingled equity index fund - - - Short-term investments - - 397 U.S. government securities - - - Fixed income investments - - - -------- -------- -------- Total investments 384,040 294,220 123,887 OTHER ASSETS: Receivable (payable) for allocation to member accounts (44,275) 44,275 8,546 Dividends and interest receivable - - 3 Receivable - withholdings of member contributions - - - Member interfund transfers - (286) (420) -------- -------- -------- Total assets 339,765 338,209 132,016 -------- -------- -------- LIABILITIES LIABILITIES: Notes payable 285,826 - - Accrued interest payable 4,021 - - Net amount (receivable) payable for investment securities transactions and other - - - Amounts payable for administrative expenses - - 111 -------- -------- -------- Total liabilities 289,847 - 111 -------- -------- -------- NET ASSETS AVAILABLE FOR BENEFITS $ 49,918 $338,209 $131,905 ======== ======== ======== NUMBER OF UNITS AT DECEMBER 31, 1999 2,589 ======== VALUE PER UNIT AT DECEMBER 31, 1999 $ 50.95 ======== (Continued on following page) THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1999 (Thousands, except per unit information) Participant Directed Investment Funds ------------------------------------ May Common Fixed Common Stock Money Income ASSETS Stock Index Market Index INVESTMENTS, at fair value: The May Department Stores Company- Convertible preferred stock $ - $ - $ - $ - Common stock 367,330 - - - Commingled equity index fund - 221,180 - - Short-term investments 1,182 479 60,039 298 U.S. government securities - - - 27,859 Fixed income investments - - - 14,486 -------- -------- ------- ------- Total investments 368,512 221,659 60,039 42,643 OTHER ASSETS: Receivable (payable) for allocation to member accounts - - - - Dividends and interest receivable 10 9 306 693 Receivable - withholdings of member contributions 1,302 805 231 174 Member interfund transfers (1,219) 1,991 208 (274) -------- -------- ------- ------- Total assets 368,605 224,464 60,784 43,236 -------- -------- ------- ------- LIABILITIES LIABILITIES: Notes payable - - - - Accrued interest payable - - - - Net amount (receivable) payable for investment securities transactions and other - (1,250) - - Amounts payable for administrative expenses 330 253 132 125 -------- -------- ------- ------- Total liabilities 330 (997) 132 125 -------- -------- ------- ------- NET ASSETS AVAILABLE FOR BENEFITS $368,275 $225,461 $60,652 $43,111 ======== ======== ======= ======= NUMBER OF UNITS AT DECEMBER 31, 1999 7,228 35,562 34,074 21,237 ======== ======== ======= ======= VALUE PER UNIT AT DECEMBER 31, 1999 $ 50.95 $ 6.34 $ 1.78 $ 2.03 ======== ======== ======= ======= (Continued on following page) THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1999 (Thousands, except per unit information) Distribution ASSETS Account Total INVESTMENTS, at fair value: The May Department Stores Company- Convertible preferred stock $ - $ 678,260 Common stock - 490,820 Commingled equity index fund - 221,180 Short-term investments 4,206 66,601 U.S. government securities - 27,859 Fixed income investments - 14,486 ------ ---------- Total investments 4,206 1,499,206 OTHER ASSETS: Receivable (payable) for allocation to member accounts - 8,546 Dividends and interest receivable - 1,021 Receivable - withholdings of member contributions - 2,512 Member interfund transfers - - ------ ---------- Total assets 4,206 1,511,285 ------ ---------- LIABILITIES LIABILITIES: Notes payable - 285,826 Accrued interest payable - 4,021 Net amount (receivable) payable for investment securities transactions and other 4,206 2,956 Amounts payable for administrative expenses - 951 ------ ---------- Total liabilities 4,206 293,754 ------ ---------- NET ASSETS AVAILABLE FOR BENEFITS $ - $1,217,531 ====== ========== 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, 1998 (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 $558,434 $322,703 $ - Common stock - - 165,401 Commingled equity index fund - - - Short-term investments - - 443 U.S. government securities - - - Fixed income investments - - - -------- -------- -------- Total investments 558,434 322,703 165,844 OTHER ASSETS: Receivable (payable) for allocation to member accounts (53,934) 53,934 - Dividends and interest receivable - - 3 Receivable - withholdings of member contributions - - - Member interfund transfers - (314) (379) -------- -------- -------- Total assets 504,500 376,323 165,468 -------- -------- -------- LIABILITIES LIABILITIES: Notes payable 316,944 - - Accrued interest payable 4,453 - - Net amount (receivable) payable for investment securities transactions and other - - - Amounts payable for administrative expenses - - 172 -------- -------- -------- Total liabilities 321,397 - 172 -------- -------- -------- NET ASSETS AVAILABLE FOR BENEFITS $183,103 $376,323 $165,296 ======== ======== ======== NUMBER OF UNITS AT DECEMBER 31, 1998 2,652 ======== VALUE PER UNIT AT DECEMBER 31, 1998 $ 62.34 ======== (Continued on following page) THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1998 (Thousands, except per unit information) Participant Directed Investment Funds ------------------------------------ May Common Fixed Common Stock Money Income ASSETS Stock Index Market Index INVESTMENTS, at fair value: The May Department Stores Company- Convertible preferred stock $ - $ - $ - $ - Common stock 465,418 - - - Commingled equity index fund - 171,212 - - Short-term investments 1,248 1,039 60,591 878 U.S. government securities - - - 32,801 Fixed income investments - - - 11,731 -------- -------- ------- ------- Total investments 466,666 172,251 60,591 45,410 OTHER ASSETS: Receivable (payable) for allocation to member accounts - 6 (4) (2) Dividends and interest receivable 9 4 275 781 Receivable - withholdings of member contributions 1,307 582 224 182 Member interfund transfers (1,069) 599 821 342 -------- -------- ------- ------- Total assets 466,913 173,442 61,907 46,713 -------- -------- ------- ------- LIABILITIES LIABILITIES: Notes payable - - - - Accrued interest payable - - - - Net amount (receivable) payable for investment securities transactions and other - (454) - 533 Amounts payable for administrative expenses 484 345 238 200 -------- -------- ------- ------- Total liabilities 484 (109) 238 733 -------- -------- ------- ------- NET ASSETS AVAILABLE FOR BENEFITS $466,429 $173,551 $61,669 $45,980 ======== ======== ======= ======= NUMBER OF UNITS AT DECEMBER 31, 1998 7,482 32,932 36,276 22,429 ======== ======== ======= ======= VALUE PER UNIT AT DECEMBER 31, 1998 $ 62.34 $ 5.27 $ 1.70 $ 2.05 ======== ======== ======= ======= (Continued on following page) THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1998 (Thousands, except per unit information) Distribution ASSETS Account Total INVESTMENTS, at fair value: The May Department Stores Company- Convertible preferred stock $ - $ 881,137 Common stock - 630,819 Commingled equity index fund - 171,212 Short-term investments 4,217 68,416 U.S. government securities - 32,801 Fixed income investments - 11,731 ------ ---------- Total investments 4,217 1,796,116 OTHER ASSETS: Receivable (payable) for allocation to member accounts - - Dividends and interest receivable - 1,072 Receivable - withholdings of member contributions - 2,295 Member interfund transfers - - ------ ---------- Total assets 4,217 1,799,483 ------ ---------- LIABILITIES LIABILITIES: Notes payable - 316,944 Accrued interest payable - 4,453 Net amount (receivable) payable for investment securities transactions and other 4,217 4,296 Amounts payable for administrative expenses - 1,439 ------ ---------- Total liabilities 4,217 327,132 ------ ---------- NET ASSETS AVAILABLE FOR BENEFITS $ - $1,472,351 ====== ========== 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, 1999 (Thousands) Nonparticipant Directed Investment Funds -------------------------------- ESOP Preference ---------------------- May Member Common Unallocated Allocated Stock NET (DEPRECIATION) APPRECIATION IN FAIR VALUE OF INVESTMENTS $(110,999) $(58,645) $(29,220) --------- -------- -------- INVESTMENT INCOME: Dividends 14,690 9,404 3,516 Interest - - 32 --------- -------- -------- 14,690 9,404 3,548 --------- -------- -------- CONTRIBUTIONS: Member - - - Employer allocation (44,332) 44,332 - Employer ESOP contribution 32,446 - 8,546 Member interfund transfers - (4,046) (3,577) --------- -------- -------- (11,886) 40,286 4,969 --------- -------- -------- DEDUCTIONS: Member terminations and withdrawals - 29,159 12,068 Interest expense 24,990 - - Administrative expenses - - 620 --------- -------- -------- 24,990 29,159 12,688 --------- -------- -------- (DECREASE) INCREASE IN NET ASSETS AVAILABLE FOR BENEFITS (133,185) (38,114) (33,391) NET ASSETS AVAILABLE FOR BENEFITS AT DECEMBER 31, 1998 183,103 376,323 165,296 --------- -------- -------- NET ASSETS AVAILABLE FOR BENEFITS AT DECEMBER 31, 1999 $ 49,918 $338,209 $131,905 ========= ======== ======== (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, 1999 (Thousands) Participant Directed Investment Funds ------------------------------------ May Common Fixed Common Stock Money Income Stock Index Market Index Total NET (DEPRECIATION) APPRECIATION IN FAIR VALUE OF INVESTMENTS $(91,796) $ 36,061 $ - $(2,674) $ (257,273) -------- -------- ------- ------- ---------- INVESTMENT INCOME: Dividends 10,209 1,172 - - 38,991 Interest 95 118 3,286 2,767 6,298 -------- -------- ------- ------- ---------- 10,304 1,290 3,286 2,767 45,289 -------- -------- ------- ------- ---------- CONTRIBUTIONS: Member 48,680 26,188 7,802 6,598 89,268 Employer allocation - - - - - Employer ESOP contribution - - - - 40,992 Member interfund transfers (15,724) 10,593 15,033 (2,279) - -------- -------- ------- ------- ---------- 32,956 36,781 22,835 4,319 130,260 -------- -------- ------- ------- ---------- DEDUCTIONS: Member terminations and withdrawals 47,793 21,132 26,510 6,733 143,395 Interest expense - - - - 24,990 Administrative expenses 1,825 1,090 628 548 4,711 -------- -------- ------- ------- ---------- 49,618 22,222 27,138 7,281 173,096 -------- -------- ------- ------- ---------- (DECREASE) INCREASE IN NET ASSETS AVAILABLE FOR BENEFITS (98,154) 51,910 (1,017) (2,869) (254,820) NET ASSETS AVAILABLE FOR BENEFITS AT DECEMBER 31, 1998 466,429 173,551 61,669 45,980 1,472,351 -------- -------- ------- ------- ---------- NET ASSETS AVAILABLE FOR BENEFITS AT DECEMBER 31, 1999 $368,275 $225,461 $60,652 $43,111 $1,217,531 ======== ======== ======= ======= ========== The accompanying notes are an integral part of this statement. THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 AND 1998 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 July 1999 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 as defined. 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 $15.01 per common share equivalent. 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 $15.01 per share. This market value of the employer allocation (including any supplemental contributions), 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 are used for the employer allocation and no May common shares are contributed as a supplemental contribution. The effective matching rate is also 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. Common Stock Index Fund - For investment of contributions in the Collective Daily Stock Index Fund, a collective trust which invests in 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. 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. 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, 1999, the nonparticipant directed May Common Stock and ESOP Member Allocated Funds include approximately $51.8 million and $79.4 million, 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 contribution 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, 1999, will be made in May 2000 and will be in the form of 40,633 ESOP Preference Shares and a supplemental contribution from May of 313,316 shares of May Common Stock. 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, receives a fixed annual dividend of $38.03 and is convertible into 33.78747 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. 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, 1999 and 1998. 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 tomembers; (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 makes supplemental contributions to the Plan for the difference, subject to the 100% effective matching rate limitations described above. 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 (in accordance with applicable law) 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). 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 reported 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, 1999 and 1998, the ESOP Preference Shares were valued at their conversion values of $1,089.65 and $1,359.95, respectively. Federal Income Taxes The Trust established under the Plan to hold the Plan's assets is qualified pursuant to Sections 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 dated December 13, 1994. The Plan has been amended since receiving the determination letter. The Plan administrators believe that the amendments do not affect the tax-exempt status of the Plan. 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. 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 accounting principles generally accepted in the United States 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, 1999 and 1998, are as follows (dollars in thousands): December 31, 1999 December 31, 1998 ---------------------- ---------------------- Number of Number of Shares or Shares or Principal Fair Principal Fair Amount Value Amount Value The May Department Stores Company ESOP Preference Stock: Unallocated 352,448 $ 384,040 410,629 $ 558,434 Member allocated 270,014 294,220 237,291 322,703 ---------- ---------- ---------- ---------- 622,462 678,260 647,920 881,137 ========== ========== The May Department Stores Company Common Stock 15,219,239 490,820 15,672,525 630,819 Northern Trust Equity Index Fund 6,020,138 221,180 141,865 171,212 The Bank of New York Short-Term Investment Fund - Master Notes 66,601 $66,601 68,416 $68,416 ---------- ---------- Total $1,456,861 $1,751,584 ========== ========== 4. NOTES PAYABLE: Notes payable as of December 31 consisted of the following (in thousands): 1999 1998 ESOP Notes Payable: Series A, 8.32%, due April 30, 2001 $ 81,862 $112,980 Series B, 8.49%, due April 30, 2004 203,964 203,964 -------- -------- $285,826 $316,944 ======== ======== The scheduled principal payments for the Series A ESOP Note for the remaining two years are as follows: 2000 - $37,354,000; and 2001 - $44,508,000. Principal payments on the Series B ESOP Note begin in 2002 with the payments as follows: 2002 - $52,317,000; 2003 - $60,787,000; and 2004 - $90,860,000. As of December 31, 1999 and 1998, the total fair value of the ESOP Notes was approximately $357,816,000 and $361,445,000, respectively. 5. RECONCILIATION TO FORM 5500: As of December 31, 1999 and 1998, the Plan had approximately $8,630,000 and $15,929,000, respectively, of pending distributions to participants. These amounts are included in Net Assets Available for Benefits. For reporting on the Plan's Form 5500, 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, 1999 (dollars in thousands): Net Assets Benefits Available Payable to Benefits for Participants Paid Benefits Per financial statements $ - $143,395 $1,217,531 Pending benefit distributions - December 31, 1999 8,630 8,630 (8,630) Pending benefit distributions - December 31, 1998 - (15,929) - ------ -------- ---------- Per Form 5500 $8,630 $136,096 $1,208,901 ====== ======== ========== 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. 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, 1999 (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 ESOP Preference Stock: Unallocated 352,448 $178,689 $ 384,040 Allocated 270,014 136,897 294,220 -------- ---------- ESOP Preference Fund Total $315,586 $ 678,260 ======== ========== MAY COMMON STOCK FUND * The May Department Stores Company Common stock 15,219,239 $283,196 $ 490,820 * The Bank of New York Short-Term Investment Fund- Master Notes $ 1,579,346 1,579 1,579 -------- ---------- May Common Stock Fund Total $284,775 $ 492,399 ======== ========== COMMON STOCK INDEX FUND Northern Trust Equity Index Fund 6,020,138 $194,335 $ 221,180 * The Bank of New York Short-Term Investment Fund- Master notes $ 478,573 479 479 -------- ---------- Common Stock Index Fund Total $194,814 $ 221,659 ======== ========== MONEY MARKET FUND * The Bank of New York Short-Term Investment Fund- Master Notes $60,038,938 $ 60,039 $ 60,039 ======== ========== FIXED INCOME INDEX FUND * The Bank of New York Short-Term Investment Fund- Master Notes $ 297,976 $ 298 $ 298 -------- ---------- * 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: 6.5%, due 10/15/06 $1,500,000 $ 1,529 $ 1,496 6.3750%, due 8/15/02 $3,800,000 3,917 3,807 5.75%, due 08/15/03 $3,200,000 3,219 3,133 6.8750%, due 05/15/06 $1,900,000 2,040 1,933 5.6250%, due 05/15/08 $1,250,000 1,219 1,176 5.25%, due 01/31/01 $3,900,000 3,860 3,867 6.6250%, due 05/15/07 $1,200,000 1,253 1,205 8.750%, due 08/15/00 $ 450,000 500 458 13.750%, due 08/15/04 $ 525,000 810 675 6.125%, due 12/31/01 $2,550,000 2,587 2,544 5.25%, due 05/15/04 $1,900,000 1,838 1,820 -------- ---------- Total U.S. treasury notes 22,772 22,114 -------- ---------- U.S. Government Agency Securities: Federal Home Loan Mortgage Corp.: 6.22%, due 3/24/03 $ 200,000 181 197 4.75%, due 12/14/01 $1,000,000 997 968 6.25%, due 7/15/04 $ 500,000 501 488 Federal National Mortgage Assoc. Securities- 5.1250%, due 2/13/04 $ 660,000 648 619 5.75%, due 6/15/05 $ 800,000 824 760 4.625%, due 10/15/01 $ 500,000 499 484 Debentures- 5.75%, due 7/15/03 $ 400,000 406 387 6.25%, due 8/13/04 $ 500,000 496 488 6.3750%, due 6/15/09 $1,000,000 982 953 Medium Term Notes- 6.69%, due 8/7/01 $ 400,000 402 401 -------- ---------- Total U.S. government agency securities 5,936 5,745 -------- ---------- Total U.S. government securities 28,708 27,859 -------- ---------- Fixed Income Investments Bank Corporate Bonds: Bank America Corp., 7.75%, due 7/15/02 $ 300,000 306 305 Republic NY Corp., 7.25%, due 7/15/02 $ 100,000 98 99 National Westminster, 7.375%, due 10/01/09 $ 400,000 398 391 Bayerische Landesbank, 5.875%, due 12/01/08 $ 450,000 450 403 Interamerican Development Bank, 5.75%, due 2/26/08 $ 400,000 398 367 -------- ---------- Total bank corporate bonds 1,650 1,565 -------- ---------- SCHEDULE I (Continued) (c) (e) (b) Principal (d) Fair (a) Identity of Issue Amount Cost Value (Thousands) FIXED INCOME INDEX FUND (Continued) Finance and Insurance Corporate Bonds: American Express Co., 8.5%, due 8/15/01 $ 200,000 201 205 Corestates Cap. Corp., 5.75%, due 1/15/01 $ 400,000 388 395 Finovia Cap Corp., 5.875%, due 10/15/01 $ 450,000 450 441 ABN-AMRO Bank, 6.625%, due 10/31/01 $ 300,000 300 297 General Electric Capital Corp., 8.85%, due 4/1/05 $ 300,000 364 319 Simon Debartolo Group, 6.875%, due 11/15/06 $ 500,000 498 459 Travelers/Aetna Property Casualty Corp., 6.75%, due 4/15/01 $ 300,000 300 299 Toyota Motor Corp., 5.5%, due 12/15/08 $ 450,000 449 393 United Dominion Realty Tr. Inc., 8.125%, due 11/15/00 $ 400,000 400 402 Associates Corp. North America, 5.50%, due 2/15/04 $ 400,000 398 376 Marsh & McLennan Cos., Inc., 6.625%, due 6/15/04 $ 400,000 398 391 -------- ---------- Total finance and insurance corporate bonds 4,146 3,977 -------- ---------- Industrial Corporate Bonds: Comcast Cable, 6.2%, due 11/15/08 $ 450,000 450 408 Eli Lilly & Co., 8.125%, due 12/1/01 $ 200,000 199 205 General Motors Corp., 7.10%, due 3/15/06 $ 300,000 303 294 Lockheed Martin Corp., 6.85%, due 5/15/01 $ 400,000 400 396 Hercules, Inc., 6.15%, due 8/1/00 $ 400,000 401 397 Nabisco, Inc. NT, 6.00%, due 2/15/11 $ 400,000 399 395 Atlantic Richfield Co., 5.9%, due 4/15/09 $ 450,000 448 408 Delphi Auto Systems, 6.1250%, due 5/01/04 $ 400,000 401 379 Electronic Data Systems Corp., 7.125%, due 10/15 $ 400,000 400 390 Guidant Corp., 6.15%, due 2/15/06 $ 450,000 448 415 International Business Machine, 5.375%, due 2/01 $ 400,000 399 351 Wal-Mart Stores, 6.55%, due 8/10/04 $ 400,000 399 393 -------- ---------- Total industrial corporate bonds 4,647 4,431 -------- ---------- Oil Corporate Bonds: Tenneco, Inc., 7.875%, due 10/1/02 $ 250,000 248 251 El Paso Nat. Gas Co., 6.75%, due 11/15/03 $ 300,000 305 292 -------- ---------- Total oil corporate bonds 553 543 -------- ---------- SCHEDULE I (Continued) (c) (e) (b) Principal (d) Fair (a) Identity of Issue Amount Cost Value (Thousands) FIXED INCOME INDEX FUND (Continued) Utilities Corporate Bonds: Duke Energy Co., 1st & Refunding Mortgage Note, 7%, due 6/1/00 $ 195,000 $ 203 $ 195 Enron Corp., 9.5%, due 6/15/01 $ 100,000 110 103 Enron Corp., 6.50% due 8/1/02 $ 300,000 298 295 -------- ---------- Total utilities corporate bonds 611 593 -------- ---------- Telephone Corporate Bonds: Cable & Wireless Com. 6.625%, due 3/6/05 $ 400,000 399 396 Worldcom Inc. GA, 8.875%, due 1/15/06 $ 400,000 434 418 AT&T Corp., 6.0%, due 3/15/09 $ 500,000 499 456 -------- ---------- Total telephone corporate bonds 1,332 1,270 -------- ---------- Asset Backed Securities: California Infrastructure, 6.32%, due 9/25/05 $ 400,000 402 393 -------- ---------- 402 393 -------- ---------- Foreign Obligations: Finland Rep NT, 7.875%, due 7/28/04 $ 225,000 229 235 Hydro-Quebec Debenture, Series IF, 7.375%, due 2/1/03 $ 150,000 161 151 Province of Ontario, Canada Debenture, 8%, due 10/17/01 $ 150,000 150 153 Province of Ontario, Canada Debenture, 7.375%, due 1/27/03 $ 400,000 415 404 British Columbia Prov. Canada, 5.375%, due 10/29/08 $ 450,000 448 396 Tyco International Grp. SA, 6.375%, due 6/15/05 $ 400,000 398 375 -------- ---------- Total foreign obligations 1,801 1,714 -------- ---------- Total fixed income investments 15,142 14,486 -------- ---------- Fixed Income Index Fund Total $ 44,148 $ 42,643 ======== ========== DISTRIBUTION ACCOUNT * The Bank of New York Short-Term Investment Fund- Master Notes $4,205,982 $ 4,206 $ 4,206 ======== ========== TOTAL ASSETS HELD FOR INVESTMENT PURPOSES AT DECEMBER 31, 1999 $903,568 $1,499,206 ======== ========== * Also a party-in-interest. SCHEDULE II THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN EMPLOYER #: 43-1104396 PLAN #: 003 ITEM 27(d): SCHEDULE OF REPORTABLE TRANSACTIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (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) 426 $127,846 265 $129,650 $129,650 $ - The May Department Stores Company Common Stock (1) (2) 53 $ 46,192 46 $ 24,521 $ 21,432 $(3,089) (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 Statement on Form S-8 Files No. 333-00957 and 333-76227. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP St. Louis, Missouri, April 19, 2000 -----END PRIVACY-ENHANCED MESSAGE-----