10-Q 1 tenq201.txt 2ND QUARTER FORM 10-Q DATED AUGUST 4, 2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended August 4, 2001 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) (314) 342-6300 (Registrant's telephone number, including area code) 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 and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 299,204,091 shares of common stock, $.50 par value, as of August 4, 2001. 1 PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) (Millions) Aug. 4, July 29, Feb. 3, ASSETS 2001 2000 2001 Current Assets: Cash and cash equivalents $ 58 $ 44 $ 156 Accounts receivable, net 1,731 1,777 2,081 Merchandise inventories 3,140 2,983 2,938 Other current assets 115 77 95 Total Current Assets 5,044 4,881 5,270 Property and Equipment, at cost 8,675 8,092 8,167 Accumulated Depreciation (3,506) (3,247) (3,268) Property and equipment, net 5,169 4,845 4,899 Goodwill and Other Assets 1,539 1,050 1,405 Total Assets $ 11,752 $ 10,776 $ 11,574 LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities: Notes payable $ 191 $ 77 $ - Current maturities of long-term debt 113 61 85 Accounts payable 1,013 1,020 965 Accrued expenses 910 882 871 Income taxes payable 145 62 293 Total Current Liabilities 2,372 2,102 2,214 Long-term Debt 4,419 4,357 4,534 Deferred Income Taxes 603 558 586 Other Liabilities 332 315 335 ESOP Preference Shares 292 307 299 Unearned Compensation (204) (248) (249) Shareowners' Equity 3,938 3,385 3,855 Total Liabilities and Shareowners' Equity $ 11,752 $ 10,776 $ 11,574 The accompanying notes to condensed consolidated financial statements are an integral part of this balance sheet. 2 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (Unaudited) (Millions, except per share) 13 Weeks Ended 26 Weeks Ended Aug. 4, July 29, Aug. 4, July 29, 2001 2000 2001 2000 Net retail sales $ 3,166 $ 3,117 $ 6,297 $ 6,137 Revenues $ 3,173 $ 3,131 $ 6,326 $ 6,181 Cost of sales 2,183 2,154 4,385 4,295 Selling, general and administrative expenses 718 670 1,406 1,308 Interest expense, net 89 82 175 153 Earnings before income taxes 183 225 360 425 Provision for income taxes 72 90 140 170 Net earnings $ 111 $ 135 $ 220 $ 255 Basic earnings per share $ .36 $ .42 $ .71 $ .78 Diluted earnings per share $ .35 $ .41 $ .69 $ .76 Dividends paid per common share $ .23-1/2 $ .23-1/4 $ .47 $ .46-1/2 Weighted average shares outstanding: Basic 299.2 307.6 299.0 315.0 Diluted 320.9 329.2 321.1 336.7 The accompanying notes to condensed consolidated financial statements are an integral part of this statement. 3 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Millions) 26 Weeks Ended Aug. 4, July 29, 2001 2000 Operating Activities: Net earnings $ 220 $ 255 Depreciation and amortization 260 239 Working capital changes: Accounts receivable, net 382 396 Merchandise inventories (166) (167) Other current assets (12) (1) Accounts payable 48 (9) Accrued expenses (8) (8) Income taxes payable (148) (172) Other, net 17 12 593 545 Investing Activities: Net additions to property and equipment (392) (303) Business combination (304) - (696) (303) Financing Activities: Net issuances (repayments): Notes payable 191 77 Long-term debt (42) 639 Net issuances (purchases) of common stock 5 (797) Dividend payments, net of tax benefit (149) (158) 5 (239) (Decrease) Increase in Cash and Cash Equivalents (98) 3 Cash and Cash Equivalents, beginning of period 156 41 Cash and Cash Equivalents, end of period $ 58 $ 44 Cash paid during the period: Interest $ 155 $ 143 Income Taxes 265 315 The accompanying notes to condensed consolidated financial statements are an integral part of this statement. 4 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Interim Results. These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission and should be read in conjunction with the Notes to Consolidated Financial Statements (pages 26-31) in the 2000 Annual Report. In the opinion of management, this information is fairly presented and all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods have been included; however, certain items are included in these statements based on estimates for the entire year. Also, operating results of periods which exclude the Christmas season may not be indicative of the operating results that may be expected for the full fiscal year. The seasonality of David's Bridal varies from department stores, with sales and operating results peaking in the first half of the fiscal year. David's Bridal joined May in August 2000. Inventories. Merchandise inventories are stated on the LIFO (last- in, first-out) cost basis. The LIFO provision for the second quarter was $8 million in 2001 and 2000. The year-to-date LIFO provision was $16 million in 2001 and 2000. Income Taxes. The effective income tax rate for the second quarter and first six months of 2001 was 38.8%, compared with 40.0% in the second quarter and first six months of 2000, as a result of implementing corporate structure changes which favorably impact the effective tax rate. Business Combination. In March 2001, the company completed the purchase of nine department store locations from Saks Incorporated, eight of which were reopened during the first quarter. The cash purchase price includes approximately $237 million for the stores and approximately $67 million for merchandise inventories and accounts receivable. This transaction was accounted for as a purchase and did not have a material impact on the company's financial statements. Store Purchases. In April 2001, the company completed the purchase of 15 former Wards and Bradlees stores. Nine of the 15 stores are planned as new stores and the remainder will provide expansion in existing malls, with most locations opening in 2002. Store purchases are included in net additions to property and equipment in the accompanying condensed consolidated statement of cash flows. Common Stock Repurchase Program. During the first half of 2000, the company purchased $789 million or 28.4 million shares of May common stock. These repurchases completed the remaining $139 million of stock repurchases related to the 1999 stock repurchase program and the $650 million common stock repurchase program authorized by May's board of directors in 2000. Repurchases by quarter were (in millions): $ Shares First quarter 2000 $ 217 7.8 Second quarter 2000 572 20.6 Total $ 789 28.4 5 Reclassifications. Certain prior period amounts have been reclassified to conform with current year presentation. 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 ("EPS") for the periods shown (millions, except per share). 13 Weeks Ended August 4, 2001 July 29, 2000 Earnings Shares EPS Earnings Shares EPS Net earnings $ 111 $ 135 ESOP preference shares' dividends (4) (4) Basic EPS 107 299.2 $ 0.36 131 307.6 $ 0.42 ESOP preference shares 4 19.7 4 20.6 Assumed exercise of options (treasury stock method) - 2.0 - 1.0 Diluted EPS $ 111 320.9 $ 0.35 $ 135 329.2 $ 0.41 26 Weeks Ended August 4, 2001 July 29, 2000 Earnings Shares EPS Earnings Shares EPS Net earnings $ 220 $ 255 ESOP preference shares' dividends (9) (9) Basic EPS 211 299.0 $ 0.71 246 315.0 $ 0.78 ESOP preference shares 9 19.7 8 20.8 Assumed exercise of options (treasury stock method) - 2.4 - 0.9 Diluted EPS $ 220 321.1 $ 0.69 $ 254 336.7 $ 0.76 Subsequent Events. On August 17, 2001, May's board of directors authorized a common stock repurchase program of up to $400 million. The company expects to make the purchases through open-market transactions based on market conditions. As of September 10, 2001, the company repurchased $55 million or 1.6 million shares of May common stock at an average price of $34 per share. On August 31, 2001, the company called $100 million of 9.875% debentures due in 2021. The redemption will be completed October 9, 2001. The company will record an extraordinary loss of $3 million after tax ($5 million pre-tax) or $.01 per share in the third quarter of fiscal 2001 upon completion of the early redemption. 6 Condensed Consolidating Financial Information. The May Department Stores Company, Delaware ("Parent") has fully and unconditionally guaranteed certain long-term debt obligations of its wholly-owned subsidiary, The May Department Stores Company, New York ("Subsidiary Issuer"). Other subsidiaries of the Parent include May Department Stores International, Inc. (MDSI), Leadville Insurance Company, Snowdin Insurance Company, and David's Bridal, Inc. and subsidiaries. Subsidiary Issuer financial statements have been restated for all periods presented to reflect a February 3, 2001, reorganization of MDSI as a direct wholly-owned subsidiary of Parent rather than of the Subsidiary Issuer. Prior to fiscal year-end 2000, Parent was required to provide only summarized financial information for Subsidiary Issuer, which owned 100% of MDSI's common stock before the reorganization. Below is a restatement of Subsidiary Issuer's summarized financial position as of July 29, 2000, and summarized operating results for the thirteen week and twenty-six week periods ending July 29, 2000, as if the reorganization had occurred on February 1, 1998. The "As Reported" information was previously reported in Parent's Form 10-Q filed September 12, 2000. Thirteen weeks ended July 29, 2000 As Reported Adjustments As Restated Financial Position Current assets $ 4,866 $ (57) $ 4,809 Noncurrent assets 6,781 (187) 6,594 Current liabilities 2,117 (91) 2,026 Noncurrent liabilities 8,869 - 8,869 Thirteen weeks ended July 29, 2000 As Reported Adjustments As Restated Operating Results Revenues $ 3,131 $ - $ 3,131 Net earnings 83 (17) 66 Twenty-six weeks ended July 29, 2000 As Reported Adjustments As Restated Operating Results Revenues $ 6,181 $ - $ 6,181 Net earnings 151 (26) 125 Condensed consolidating balance sheets as of August 4, 2001, July 29, 2000 and February 3, 2001, the related condensed consolidating statements of earnings for the thirteen week and twenty-six week periods ended August 4, 2001 and July 29, 2000, and the related condensed consolidating statement of cash flows for the twenty-six week periods ended August 4, 2001 and July 29, 2000, are presented on pages 8 through 14. 7 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Balance Sheet As of August 4, 2001 (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated ASSETS Current Assets: Cash and cash equivalents $ - $ 38 $ 20 $ - $ 58 Accounts receivable, net - 1,726 42 (37) 1,731 Merchandise inventories - 3,053 87 - 3,140 Other current assets - 103 12 - 115 Total Current Assets - 4,920 161 (37) 5,044 Property and Equipment, at cost - 8,588 87 - 8,675 Accumulated Depreciation - (3,488) (18) - (3,506) Property and equipment, net - 5,100 69 - 5,169 Goodwill and Other Assets - 1,200 339 - 1,539 Intercompany (Payable)/ Receivable (714) 437 277 - - Investment in Subsidiaries 4,747 - - (4,747) - Total Assets $ 4,033 $11,657 $ 846 $(4,784) $11,752 LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities: Notes payable $ - $ 191 $ - $ - $ 191 Current maturities of long- term debt - 113 - - 113 Accounts payable - 919 94 - 1,013 Accrued expenses 7 883 57 (37) 910 Income taxes payable - 143 2 - 145 Total Current Liabilities 7 2,249 153 (37) 2,372 Long-term Debt - 4,418 1 - 4,419 Intercompany Note Payable (Receivable) - 3,200 (3,200) - - Deferred Income Taxes - 600 3 - 603 Other Liabilities - 784 - (452) 332 ESOP Preference Shares 292 - - - 292 Unearned Compensation (204) (204) - 204 (204) Shareowners' Equity 3,938 610 3,889 (4,499) 3,938 Total Liabilities and Shareowners' Equity $ 4,033 $11,657 $ 846 $(4,784) $11,752
8 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Statement of Earnings For the Thirteen Weeks Ended August 4, 2001 (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Revenues $ - $ 3,093 $ 416 $ (336) $ 3,173 Cost of sales - 2,153 343 (313) 2,183 Selling, general, and administrative expenses - 710 36 (28) 718 Interest expense (income), net: External - 89 - - 89 Intercompany - 71 (71) - - Equity in earnings of subsidiaries 111 - - (111) - Earnings before income taxes 111 70 108 (106) 183 Provision for income taxes - 32 40 - 72 Net earnings $ 111 $ 38 $ 68 $ (106) $ 111
Condensed Consolidating Statement of Earnings For the Twenty-six Weeks Ended August 4, 2001 (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Revenues $ - $ 6,154 $ 750 $ (578) $ 6,326 Cost of sales - 4,317 605 (537) 4,385 Selling, general, and administrative expenses - 1,384 73 (51) 1,406 Interest expense (income), net: External - 175 - - 175 Intercompany - 142 (142) - - Equity in earnings of subsidiaries 220 - - (220) - Earnings before income taxes 220 136 214 (210) 360 Provision for income taxes - 62 78 - 140 Net earnings $ 220 $ 74 $ 136 $ (210) $ 220
9 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Statement of Cash Flows For the Twenty-six Weeks Ended August 4, 2001 (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Operating activities: Net earnings $ 220 $ 74 $ 136 $ (210) $ 220 Equity in earnings of subsidiaries (220) - - 220 - Depreciation and amortization - 250 10 - 260 Decrease in working capital - 54 42 - 96 Other, net 66 41 (80) (10) 17 66 419 108 - 593 Investing activities: Net additions to property and Equipment - (379) (13) - (392) Business combination - (304) - - (304) - (683) (13) - (696) Financing activities: Net issuances of notes payable - 191 - - 191 Net repayments of long-term debt - (41) (1) - (42) Net (purchases) issuances of common stock (8) 13 - - 5 Dividend payments, net of tax benefit (151) 2 - - (149) Intercompany activity, net 93 - (93) - - (66) 165 (94) - 5 (Decrease) Increase in Cash and Cash Equivalents - (99) 1 - (98) Cash and Cash Equivalents, beginning of period - 137 19 - 156 Cash and Cash Equivalents, end of year $ - $ 38 $ 20 $ - $ 58
10 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Balance Sheet As of July 29, 2000 (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated ASSETS Current Assets: Cash and cash equivalents $ - $ 23 $ 21 $ - $ 44 Accounts receivable, net - 1,777 36 (36) 1,777 Merchandise inventories - 2,934 49 - 2,983 Other current assets - 75 2 - 77 Total Current Assets - 4,809 108 (36) 4,881 Property and Equipment, at cost - 8,074 18 - 8,092 Accumulated Depreciation - (3,237) (10) - (3,247) Property and equipment, net - 4,837 8 - 4,845 Goodwill and Other Assets - 1,049 1 - 1,050 Intercompany (Payable)/ Receivable (888) 708 180 - - Investment in Subsidiaries 4,337 - - (4,337) - Total Assets $ 3,449 $ 11,403 $ 297 $ (4,373) $ 10,776 LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities: Notes payable $ - $ 77 $ - $ - $ 77 Current maturities of long- term debt - 61 - - 61 Accounts payable - 940 80 - 1,020 Accrued expenses 5 887 25 (35) 882 Income taxes payable - 61 1 - 62 Total Current Liabilities 5 2,026 106 (35) 2,102 Long-term Debt - 4,357 - - 4,357 Intercompany Note Payable (Receivable) - 3,200 (3,200) - - Deferred Income Taxes - 558 - - 558 Other Liabilities - 754 - (439) 315 ESOP Preference Shares 307 - - - 307 Unearned Compensation (248) (248) - 248 (248) Shareowners' Equity 3,385 756 3,391 (4,147) 3,385 Total Liabilities and Shareowners' Equity $ 3,449 $ 11,403 $ 297 $ (4,373) $ 10,776
11 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Statement of Earnings For the Thirteen Weeks Ended July 29, 2000 (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Revenues $ - $3,131 $ 311 $ (311) $3,131 Cost of sales - 2,164 279 (289) 2,154 Selling, general, and administrative expenses - 692 5 (27) 670 Interest expense (income), net: External - 82 - - 82 Intercompany - 72 (72) - - Equity in earnings of subsidiaries 135 - - (135) - Earnings before income taxes 135 121 99 (130) 225 Provision for income taxes - 55 35 - 90 Net earnings $ 135 $ 66 $ 64 $ (130) $ 135
Condensed Consolidating Statement of Earnings For the Twenty-six Weeks Ended July 29, 2000 (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Revenues $ - $6,181 $ 519 $ (519) $6,181 Cost of sales - 4,307 469 (481) 4,295 Selling, general, and administrative expenses - 1,348 8 (48) 1,308 Interest expense (income), net: External - 153 - - 153 Intercompany - 143 (143) - - Equity in earnings of subsidiaries 255 - - (255) - Earnings before income taxes 255 230 185 (245) 425 Provision for income taxes - 105 65 - 170 Net earnings $ 255 $ 125 $ 120 $ (245) $ 255
12 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Statement of Cash Flows For the Twenty-six Weeks Ended July 29, 2000 (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Operating activities: Net earnings $ 255 $ 125 $ 120 $ (245) $ 255 Equity in earnings of subsidiaries (255) - - 255 - Depreciation and amortization - 238 1 - 239 (Increase) Decrease in working capital (9) 52 (4) - 39 Other, net 888 (840) (26) (10) 12 879 (425) 91 - 545 Investing activities: Net additions to property and equipment - (303) - - (303) - (303) - - (303) Financing activities: Net issuances of notes payable - 77 - - 77 Net issuances of long-term debt - 639 - - 639 Net (purchases) issuances of common stock (813) 16 - - (797) Dividend payments, net of tax benefit (160) 2 - - (158) Intercompany activity, net 94 (14) (80) - - (879) 720 (80) - (239) (Decrease) Increase in Cash and Cash Equivalents - (8) 11 - 3 Cash and Cash Equivalents, beginning of period - 31 10 - 41 Cash and Cash Equivalents, end of period $ - $ 23 $ 21 $ - $ 44
13 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Balance Sheet As of February 3, 2001 (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated ASSETS Current assets: Cash and cash equivalents $ - $ 137 $ 19 $ - $ 156 Accounts receivable, net - 2,076 43 (38) 2,081 Merchandise inventories - 2,877 61 - 2,938 Other current assets - 86 10 (1) 95 Total current assets - 5,176 133 (39) 5,270 Property and Equipment, at cost - 8,093 74 - 8,167 Accumulated Depreciation - (3,254) (14) - (3,268) Property and equipment, net - 4,839 60 - 4,899 Goodwill and Other Assets - 1,062 343 - 1,405 Intercompany (Payable) Receivable (648) 449 199 - - Investment in Subsidiaries 4,559 - - (4,559) - Total Assets $ 3,911 $11,526 $ 735 $(4,598) $11,574 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Current maturities of long- term debt $ - $ 85 $ - $ - $ 85 Accounts payable - 922 43 - 965 Accrued expenses 6 857 47 (39) 871 Income taxes payable (receivable) - 299 (6) - 293 Total Current Liabilities 6 2,163 84 (39) 2,214 Long-term Debt - 4,531 3 - 4,534 Intercompany Note Payable (Receivable) - 3,200 (3,200) - - Deferred Income Taxes - 583 3 - 586 Other Liabilities - 777 - (442) 335 ESOP Preference Shares 299 - - - 299 Unearned Compensation (249) (249) - 249 (249) Shareowners' Equity 3,855 521 3,845 (4,366) 3,855 Total Liabilities and Shareowners' Equity $ 3,911 $11,526 $ 735 $(4,598) $11,574 14
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations 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 periods. David's Bridal sales are included in the total sales for fiscal 2001, but are not included in store-for-store sales. Sales percent increases (decreases) are as follows: Second Quarter First Six Months Store-for- Store-for- Total Store Total Store 1.6% (3.1)% 2.6% (2.1)% The following table presents the components of costs and expenses, as a percent of revenues. Revenues include sales from all stores operating during the period, finance charge revenues and lease department income. Second Quarter First Six Months 2001 2000 2001 2000 Revenues 100.0% 100.0% 100.0% 100.0% Cost of sales 68.8 68.8 69.3 69.5 Selling, general and administrative expenses 22.6 21.4 22.2 21.1 Interest expense, net 2.8 2.6 2.8 2.5 Earnings before income taxes 5.8 7.2 5.7 6.9 Provision for income taxes 38.8* 40.0* 38.8* 40.0* Net earnings 3.5% 4.3% 3.5% 4.1% * - Percent represents effective income tax rate. Cost of sales was $2,183 million in the 2001 second quarter, up 1.3% from $2,154 million in the 2000 second quarter. For the first six months of 2001, cost of sales was $4,385 million, a 2.1% increase from $4,295 million in the 2000 period. The overall increases are primarily related to higher sales. As a percent of revenues, cost of sales for the second quarter of 2001 was equal to last year in the second quarter as increases in department store buying and occupancy costs were offset by the addition of David's Bridal. For the first six months of 2001, cost of sales as a percent of revenues decreased 0.2% principally due to the addition of David's Bridal, partially offset by department store buying and occupancy costs, which grew at a faster rate than revenues. Selling, general and administrative expenses were $718 million in the 2001 second quarter, compared with $670 million in the 2000 second quarter, a 7.2% increase. For the first six months of 2001, selling, general and administrative expenses were $1,406 million compared with $1,308 million in the 2000 period, a 7.5% increase. Selling, general and administrative expenses as a percent of revenues increased 1.2% for the second quarter of 2001 as compared with 2000. Selling, general and administrative expenses as a 15 percent of revenues increased 1.1% in the first six months of 2001 compared with the first six months of 2000. The increases are primarily due to department store payroll, advertising, employee benefit expenses, and credit, which grew at a faster rate than revenues, and the addition of David's Bridal. Components of net interest expense for the second quarter and first six months of 2001 and 2000 were as follows (millions): Second Quarter First Six Months 2001 2000 2001 2000 Interest expense $ 96 $ 89 $190 $ 168 Interest income (1) (3) (5) (7) Capitalized interest (6) (4) (10) (8) Net Interest Expense $ 89 $ 82 $175 $ 153 Interest expense principally relates to long-term debt. In 2000, we issued $1.1 billion in new debt of which $225 million was issued subsequent to the second quarter of 2000. In the first quarter of 2001, we financed the previously described business combination and store purchases principally through short-term borrowings and cash and cash equivalents. Short-term borrowings for the second quarter and first six months were (dollars in millions): Second Quarter First Six Months 2001 2000 2001 2000 Average balance outstanding $371 $124 $242 $71 Average interest rate on average balance 4.0% 6.5% 4.2% 6.5% The effective income tax rate for the second quarter and first six months of 2001 was 38.8%, compared with 40.0% in the second quarter and first six months of 2000, as a result of implementing corporate structure changes which favorably impact our effective tax rate. Operating results for the trailing years were as follows (millions, except per share): 52 Weeks Ended Aug. 4, July 29, 2001 2000 Net retail sales $ 14,548 $ 13,997 Revenues 14,656 13,991 Net earnings 823 906 Diluted earnings per share 2.55 2.59 Financial Condition Cash Flows. Cash flows from operations (net earnings plus depreciation and amortization) were $480 million and $494 million in the first six months of 2001 and 2000, respectively. A portion of the cash flows from operations was used to fund seasonal working capital changes during the quarter as detailed on the accompanying condensed consolidated statement of cash flows. Available Credit and Debt Ratings. We can borrow up to $1.030 billion under our credit agreements. In addition, we have filed with the Securities and Exchange Commission shelf registration statements that enable us to issue up to $775 million of debt securities. 16 Financial Ratios. Key financial ratios for the periods indicated are as follows: Aug. 4, July 29, Feb. 3, 2001 2000 2001 Current Ratio 2.1 2.3 2.4 Debt-Capitalization Ratio 51% 52% 50% Fixed Charge Coverage* 3.7x 4.6x 4.0x The fixed charge coverage ratio for the 52 weeks ended August 4, 2001 declined from the 52 weeks ended July 29, 2000 due to higher interest expense and lower operating earnings. * Fixed charge coverage, which is presented for the 52 weeks ended August 4, 2001, July 29, 2000, and February 3, 2001, is defined as earnings before gross interest expense, the expense portion of interest on the ESOP debt, rent expense and income taxes divided by gross interest expense, interest expense on the ESOP debt, and total rent expense. Subsequent Events and Recent Sales Results On August 17, 2001, May's board of directors authorized a common stock repurchase program of up to $400 million. The company expects to make the purchases through open-market transactions based on market conditions. As of September 10, 2001, the company repurchased $55 million or 1.6 million shares of May common stock at an average price of $34 per share. On August 31, 2001, the company called $100 million of 9.875% debentures due in 2021. The redemption will be completed October 9, 2001. The company will record an extraordinary loss of $3 million after tax ($5 million pre-tax) or $.01 per share in the third quarter of fiscal 2001 upon completion of the early redemption. Sales for the four-week period ending September 1, 2001 were $1.05 billion, a 3.3% increase over $1.01 billion in the similar period last year. Store-for-store sales increased 0.3%. Sales for the first seven months of fiscal 2001 were $7.34 billion, a 2.7% increase, compared with $7.15 billion during the first seven months of fiscal 2000. Store-for-store sales decreased 1.7%. Impact of New Accounting Pronouncements In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for using the purchase method of accounting and requires separate recognition of intangible assets that meet certain criteria. This statement applies to all business combinations after June 30, 2001. SFAS No. 142 requires that goodwill and other intangible assets that are acquired shall be initially recognized and measured based on their fair value. This statement also provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment. SFAS No. 142 is effective for fiscal 2002 which commences on February 3, 2002. Our preliminary evaluation of the impact of these new standards indicates that adoption of these standards in fiscal 2002 will not have a material impact on the company's annual operating results or financial position. 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 17 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. PART II - OTHER INFORMATION Item 1 - Legal Proceedings There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which registrant or any of its subsidiaries is a party or of which any of their property is the subject. Item 2 - Changes in Securities - None. Item 3 - Defaults Upon Senior Securities - None. Item 4 - Submission of Matters to a Vote of Security Holders (a) The annual meeting of shareowners of registrant was held on May 25, 2001. (b) At the annual meeting of shareowners of registrant held on May 25, 2001, the registrant's voting securities carried 318,556,805 votes, of which 279,225,229 were voted at the meeting. Action was taken with respect to: (i) the election of five directors of registrant; Authority For Withheld Eugene S. Kahn 275,286,616 3,938,613 Helene L. Kaplan 275,559,618 3,665,611 James M. Kilts 275,556,163 3,669,066 William D. Perez 275,654,913 3,570,316 R. Dean Wolfe 275,651,550 3,573,679 (ii) a ratification of the appointment of Arthur Andersen LLP as independent auditors (275,180,903 votes in favor, 2,832,490 votes against and 1,211,836 votes abstained); (iii) a proposal relating to a classified board of directors (130,427,893 votes in favor, 108,556,103 votes against, 6,949,662 votes abstained and 33,291,571 not voted). All such proposals were set forth and described in detail in the Notice of Annual Meeting and Proxy Statement of registrant dated April 20, 2001, filed with the Commission pursuant to Rule 12b-23 (b). Item 5 - Other Information - None. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits (10.1) - 364-Day Credit Agreement dated as of July 31, 2001 among The May Department Stores Company, a New York corporation, as Borrower, The May 18 Department Stores Company, a Delaware corporation, as Guarantor, certain Lenders, Citibank, N.A., as Agent for the Lenders, The Bank of New York, Bank One, NA, First Union National Bank and The Chase Manhattan Bank, as co-syndication agents, and Salomon Smith Barney Inc., as sole lead arranger and bookrunner. (10.2) - Five Year Credit Agreement dated as of July 31, 2001 among The May Department Stores Company, a New York corporation, as Borrower, The May Department Stores Company, a Delaware corporation, as Guarantor, certain Lenders, Citibank, N.A., as Agent for the Lenders, The Bank of New York, Bank One, NA, First Union National Bank and The Chase Manhattan Bank, as co-syndication agents, and Salomon Smith Barney Inc., as sole lead arranger and bookrunner. (12) - Computation of Ratio of Earnings to Fixed Charges (15) - Letter Re:Unaudited Interim Financial Information (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE MAY DEPARTMENT STORES COMPANY (Registrant) Date: September 12, 2001 /s/ Thomas D. Fingleton Thomas D. Fingleton Executive Vice President and Chief Financial Officer 19 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareowners of The May Department Stores Company: We have reviewed the accompanying condensed consolidated balance sheet of The May Department Stores Company (a Delaware corporation) and subsidiaries as of August 4, 2001, and July 29, 2000, and the related condensed consolidated statements of earnings for the thirteen week and twenty-six week periods ended August 4, 2001, and July 29, 2000, and the condensed consolidated statement of cash flows for the twenty-six week periods ended August 4, 2001, and July 29, 2000. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of The May Department Stores Company as of February 3, 2001, (not presented separately herein), and in our report dated February 14, 2001, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of February 3, 2001, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/Arthur Andersen LLP St. Louis, Missouri September 12, 2001 Exhibit 15 To the Board of Directors and Shareowners of The May Department Stores Company: We are aware that The May Department Stores Company has incorporated by reference in its Registration Statements on Form S-3 (No. 333-42940 and 333-42940-01) and Form S-8 (No. 33-21415, 33-58985, 333-59792 and 333-76227) its Form 10-Q for the quarter ended August 4, 2001, which includes our report dated September 12, 2001 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. It should be noted that we have not performed any procedures subsequent to September 12, 2001. /s/Arthur Andersen LLP St. Louis, Missouri September 12, 2001 20 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 AND FOR THE TWENTY-SIX WEEKS ENDED AUGUST 4, 2001 AND JULY 29, 2000 (Dollars in millions) 26 Weeks Ended Fiscal Year Ended Aug. 4, July 29, Feb. 3, Jan. 29, Jan. 30, Jan. 31, Feb. 1, 2001 2000 2001 2000 1999 1998 1997 Earnings Available for Fixed Charges: Pretax earnings from continuing operations $ 360 $ 425 $ 1,402 $ 1,523 $ 1,395 $ 1,279 $ 1,232 Fixed charges (excluding interest capitalized and pretax preferred stock dividend requirements) 205 183 406 346 344 363 346 Dividends on ESOP Preference Shares (10) (12) (23) (24) (25) (26) (26) Capitalized interest amortization 4 4 8 7 7 6 6 559 600 1,793 1,852 1,721 1,622 1,558 Fixed Charges: Gross interest expense (a) $ 200 $ 180 395 $ 340 $ 339 $ 353 $ 341 Interest factor attributable to rent expense 16 12 28 22 21 23 22 216 192 423 362 360 376 363 Ratio of Earnings to Fixed Charges 2.6 3.1 4.2 5.1 4.8 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.