10-K405 1 tenk.txt FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 2, 2002 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 March 28, 2002: $9,975,760,678 Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 286,248,513 shares of common stock, $.50 par value, as of March 28, 2002. 1 Documents incorporated by reference: 1. Registrant's Proxy Statement for the 2002 Annual Meeting of Shareowners (to be filed with the commission under Rule 14A within 120 days after the end of registrant's fiscal year-end and, upon such filing, to be incorporated by reference 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. Information required by this item is also included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", which is incorporated herein by reference. DEPARTMENT STORES May operates eight quality regional department store companies nationwide under 11 long-standing and widely recognized trade names. Each department store company holds a leading market position in its region. At fiscal year-end 2001, May operated 439 department stores in 37 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 33 markets, including New York/New Jersey Metro; Chicago; Boston; Dallas/Fort Worth; Philadelphia Metro; Washington, D.C., Metro; Detroit; Houston; Atlanta; and Miami Hecht's and 20 markets, including Washington, D.C., Metro; Strawbridge's Philadelphia Metro (Strawbridge's); Baltimore; Norfolk; Nashville; and Richmond Foley's 19 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, San Diego, and Las Vegas Filene's 16 markets, including Boston Metro, Southern Connecticut, Hartford, Providence Metro, and Albany Kaufmann's 23 markets, including Pittsburgh, Cleveland, Buffalo, and Rochester Famous-Barr, L.S. 24 markets, including St. Louis Metro, Kansas Ayres and The City Metro (The Jones Store), and Indianapolis Jones Store (L.S. Ayres) Meier & Frank 6 markets, including Portland/Vancouver Metro and Salt Lake City Metro 2 We plan to open 11 department stores in 2002 in the following cities: Lord & Taylor Robinsons-May Houston, TX Irvine, CA Orlando, FL St. Louis, MO Filene's Leominster, MA Hecht's Greensboro, NC Kaufmann's Raleigh, NC Cleveland, OH Foley's Famous-Barr Beaumont, TX Kansas City, KS El Paso, TX BRIDAL GROUP David's Bridal Inc. is the nation's largest retailer of bridal gowns and bridal-related merchandise and offers a variety of special occasion dresses and accessories. At fiscal year-end 2001, David's Bridal operated 150 stores in 42 states and Puerto Rico. After Hours Formalwear Inc. is the largest tuxedo rental and sales retailer in the United States. At fiscal year-end 2001, After Hours operated 240 stores in 19 states. Priscilla of Boston is one of the most highly recognized upscale bridal retailers in the United States. At fiscal year-end 2001, Priscilla of Boston operated 10 stores in nine states. A. Associates May employs approximately 60,000 full-time and 67,000 part-time associates in 44 states, the District of Columbia, Puerto Rico and 10 offices overseas. B. Property Ownership The following summarizes the property ownership of department stores and the Bridal Group at February 2, 2002: % of Gross Number of Building Stores* Sq. Footage Department Department Stores Bridal Group Stores Bridal Group Entirely or mostly owned 256 2 61% 1% Entirely or mostly leased 110 398 25 99 Owned on leased land 73 - 14 - 439 400 100% 100% * Includes a total of 14 department stores subject to financing.
3 C. Credit Sales Sales at May's stores are made for cash or credit, including May's 30-day charge accounts and open-end credit plans for department store companies, which include revolving charge accounts and revolving installment accounts. During the fiscal year ended February 2, 2002, 39.1% of department store net retail sales were made through May's credit plans. May National Bank of Arizona (MBA) and May National Bank of Ohio (MBO) are indirectly wholly-owned and consolidated subsidiaries of May. MBA and MBO extend credit to customers of May's eight department store companies. D. 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 and the Bridal Group. Competitors include department stores, specialty, off-price, discount, internet, and mail-order retailers. 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. E. May Merchandising Company/May Department Stores International, Inc. May Merchandising Company ("MMC"), an indirectly wholly-owned and consolidated subsidiary of May, identifies emerging fashion trends in both domestic brands and our exclusive private-label merchandise. MMC works closely with our eight department store companies and our merchandise vendors to communicate emerging fashion trends, to develop meaningful merchandise assortments and negotiate the best overall terms for delivery of merchandise in a timely manner to our stores. May Department Stores International, Inc. ("MDSI"), a wholly-owned and consolidated subsidiary of May, is primarily a design and sourcing company. MDSI owns all trade names and marks associated with private-label merchandise and develops, designs, sources, imports, and distributes them for May. MDSI has approximately 50 to 60 private labels in use at the department store companies and employs approximately 800 persons worldwide. In addition, to its corporate office in St. Louis, MDSI operates offices in New York City and ten countries. F. Executive Officers of May The names and ages (as of April 5, 2002) 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 52 Chairman of the Board and Chief Executive Officer John L. Dunham 55 President Richard W. Bennet III 49 Vice Chairman 4 F. Executive Officers of May (continued) Name Age Positions and Offices William P. McNamara 51 Vice Chairman Thomas D. Fingleton 54 Executive Vice President and Chief Financial Officer Judith K. Hofer 62 Chief Executive Officer, May Merchandising Company and May Department Stores International Jay A. Levitt 44 President, May Merchandising Company and May Department Stores International R. Dean Wolfe 57 Executive Vice President Alan E. Charlson 53 Senior Vice President and General Counsel Martin M. Doerr 47 Senior Vice President William D. Edkins 49 Senior Vice President Lonny J. Jay 60 Senior Vice President Jan R. Kniffen 53 Senior Vice President Richard A. Brickson 54 Secretary and Senior Counsel Michael G. Culhane 39 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, Dunham, and Wolfe are also directors of May. Mr. Jerome T. Loeb retired as an officer and director on April 30, 2001. At that time Mr. Kahn became chairman of the board and chief executive officer, Mr. Dunham became president, and Mr. Fingleton became executive vice president and chief financial officer. Ms. Hofer will retire as an officer on July 31, 2002. At that time Mr. Levitt will assume the additional position of chief executive officer of May Merchandising Company and May Department Stores International. Each of the executive officers has been an officer of May for at least the last five years, with the following exceptions: - 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. - Mr. Fingleton served as chairman of Hecht's from 1991 to May 2000 when he became executive vice president and an executive officer of May. He assumed his current position in April 2001. - 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, and chief executive officer of Filene's from 1999 to February 2000 when she assumed her current position and became an executive officer of May. 5 - Mr. Levitt served as vice president and general merchandising manager of Robinsons-May from 1991 to 1999 when he was named president and chief executive officer. He became president of May Merchandising Company and May Department Stores International and an executive officer of May in July 2001. - Mr. Charlson served as senior counsel for May from 1988 to 1998 when he became senior vice president and chief counsel and an executive officer of May. He assumed his current position in January 2001. - 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 The company is involved in claims, proceedings, and litigation arising from the operation of its business. The company does not believe any such claim, proceeding, or litigation, either alone or in the aggregate, will have a material adverse effect on the company's financial position or results of operations. 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 February 2, 2002. PART II Item 5. Market for May's Common Equity and Related Shareowner Matters Common Stock Dividends and Market Prices information included in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" is incorporated herein by reference. 6 Item 6. Selected Financial Data FIVE-YEAR FINANCIAL SUMMARY (in millions, except per share and operating statistics) 2001 2000 1999 1998 1997 Net retail sales $14,215 $14,372 $13,810 $12,992 $12,215 Total percent increase (decrease) (1.1)% 4.1% 6.3% 6.4% 7.0% Store-for-store percent increase (decrease) (4.6) 0.5 2.6 3.5 3.6 Operations Revenues $14,175 $14,511 $13,866 $13,090 $12,390 Cost of sales 9,770 9,929 9,370 8,901 8,437 Selling, general, and administrative expenses 2,912 2,835 2,686 2,516 2,375 Interest expense, net 349 345 287 278 299 Earnings before income taxes 1,144 1,402 1,523 1,395 1,279 Provision for income taxes 438 544 596 546 500 Net earnings(1) 706 858 927 849 779 Percent of revenues 5.0% 5.9% 6.7% 6.5% 6.3% LIFO credit $ (30) $ (29) $ (30) $ (28) $ (5) Per share Net earnings(1) $ 2.22 $ 2.62 $ 2.60 $ 2.30 $ 2.07 Dividends paid(2) 0.94 0.93 0.89 0.85 0.80 Book value 13.37 12.93 12.53 11.46 10.99 Market price - high 41.25 39.50 45.38 47.25 38.08 Market price - low 27.00 19.19 29.19 33.17 29.08 Market price - year-end close 36.07 37.30 31.25 40.25 35.04 Financial statistics Return on equity 18.3% 21.0% 24.1% 22.2% 21.2% Return on net assets 15.5 19.5 20.7 19.8 18.5 Operating statistics Stores open at year-end: Department stores 439 427 408 393 369 Bridal Group(3) 400 123 - - - Gross retail square footage (in millions): Department stores 75.3 72.0 69.1 66.7 62.8 Bridal Group 1.9 1.3 - - - Sales per square foot(4)(5) $ 193 $ 205 $ 210 $ 209 $ 204 Cash flows and financial position Cash flows from operations $ 1,644 $ 1,346 $ 1,530 $ 1,505 $ 1,526 Depreciation and amortization 559 511 469 439 412 Capital expenditures 797 598 703 630 496 Dividends on common stock 278 286 295 290 279 Working capital 2,387 3,056 2,700 2,928 3,012 Long-term debt and preference stock 4,689 4,833 3,875 4,152 3,849 Shareowners' equity 3,841 3,855 4,077 3,836 3,809 Total assets 11,920 11,574 10,935 10,533 9,930 Average diluted shares outstanding and equivalents 317.6 327.7 355.6 367.4 373.6 All years included 52 weeks, except 2000, which included 53 weeks. Net retail sales for 2000 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 $0.95 per share effective with the March 15, 2002, dividend payment. (3) After Hours and Priscilla of Boston joined the company in 2001. David's Bridal joined the company in 2000. (4) David's Bridal included since August 2000. (5) Sales per square foot are calculated from net retail sales plus finance charge revenues and average gross retail square footage.
7 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) 2001 $ 2.32 296.0 2000 2.74 306.4 1999 2.73 332.2 1998 2.43 342.6 1997 2.18 348.5 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Fiscal 2001 was a challenging year for our company and many other retailers. The underlying strength of our divisions to perform profitably in a difficult economic environment is reflected in earnings per share of $2.22. Net retail sales were $14.2 billion, a 1.1% decline, compared with 2000 net retail sales of $14.4 billion. The decrease was due to a $668 million decrease in store-for-store sales, offset by $511 million of new-store sales, which included David's Bridal. In 2001, we opened 22 department stores, including eight former Saks stores, adding 4.1 million square feet of retail space: Lord & Taylor Alexandria, VA Landmark Mall Columbus, OH Polaris Fashion Place Dallas, TX Shops at Willow Bend Tampa, FL International Plaza Palm Beach County, FL Mall at Wellington Green Hecht's Bowie, MD Bowie Town Center Durham, NC The Streets at Southpoint Nashville, TN Bellevue Center Nashville, TN Galleria at CoolSprings Nashville, TN Mall at Green Hills Nashville, TN Hickory Hollow Nashville, TN Rivergate Mall Foley's Baton Rouge, LA Cortana Mall Baton Rouge, LA Mall of Louisiana Dallas, TX Shops at Willow Bend Houston, TX Baybrook Mall Houston, TX Memorial City Mall Lafayette, LA Acadiana Mall Hurst, TX Northeast Mall Robinsons-May Chandler, AZ Fashion Center 8 Kaufmann's Columbus, OH Polaris Fashion Place Famous-Barr St. Louis, MO West County Center We also remodeled 23 department stores in 2001 totaling 1.6 million square feet, including the expansion of 11 stores by 375,000 square feet. At fiscal year-end, we operated 439 department stores in 37 states and the District of Columbia. We plan to open 11 new department stores in 2002 totaling 1.7 million square feet. We plan to remodel 31 department stores totaling 2.7 million square feet of retail space, which includes the expansion of 14 stores by a total of 591,000 square feet. Our Bridal Group includes David's Bridal, After Hours Formalwear (After Hours), and Priscilla of Boston. David's Bridal, the largest retailer of bridal-related apparel in the United States, joined May in August 2000. In 2001, we opened 28 David's Bridal stores, adding 305,000 square feet of retail space. After Hours, the largest tuxedo rental and sales retailer in the United States, joined May in December 2001. On January 31, 2002, we acquired substantially all of the assets of Priscilla of Boston, one of the most highly recognized, upscale bridal gown retailers in the United States. At fiscal year-end, our Bridal Group operated 150 David's Bridal stores in 42 states and Puerto Rico, 240 After Hours stores in 19 states, and 10 Priscilla of Boston stores in nine states. Our Bridal Group plans to add 30 new David's Bridal stores in 2002 totaling 309,000 square feet of retail space. The new-store plan for 2002 through 2006 adds 62 new department stores and at least 150 Bridal Group stores totaling 12 million retail square feet, a 3% annualized increase. During this five-year period, the major components of our $4.1 billion capital plan include plans to invest $1.6 billion for new stores, $1.2 billion to expand and remodel existing stores, and $370 million related to systems and operations improvements. In 2001, our board of directors authorized and we completed the repurchase of $400 million of common stock. Common stock repurchase programs authorized by our board of directors since 1996 have totaled almost $3.0 billion: As Repurchased ______________________________ Average (in millions, Price per except per share) Authorized $ Shares Share 2001 $ 400 $ 400 11.9 $34 2000 650 789 28.4 28 1999 500 361 9.9 36 1998 500 500 12.5 40 1997 300 300 9.6 31 1996 600 600 19.1 31 Total $2,950 $2,950 91.4 $32 9 REVIEW OF OPERATIONS Earnings per share was $2.22 in 2001, compared with $2.62 in 2000 and $2.60 in 1999. Net earnings totaled $706 million in 2001, compared with $858 million in 2000 and $927 million in 1999. Return on revenues was 5.0% in 2001, compared with 5.9% in 2000 and 6.7% in 1999. References to net earnings relate to earnings before extraordinary loss and earnings per share relate to diluted earnings per share before extraordinary loss. Results for the past three years and the related percent of revenues were: (dollars in millions, except per share) 2001 2000 1999 $ % $ % $ % Net retail sales(1) $14,215 $14,372 $13,810 Revenues $14,175 100.0 % $14,511 100.0% $13,866 100.0% Cost of sales 9,770 68.9 9,929 68.4 9,370 67.6 Selling, general, and administrative 2,912 20.5 2,835 19.5 2,686 19.4 Interest expense, net 349 2.5 345 2.4 287 2.0 Earnings before income taxes 1,144 8.1 1,402 9.7 1,523 11.0 Provision for income taxes(2) 438 38.3 544 38.8 596 39.1 Net earnings $ 706 5.0 % $ 858 5.9% $ 927 6.7% Earnings per share(3) $ 2.22 (15.3)% $ 2.62 0.8% $ 2.60 13.0% (1) Net retail sales for the 53 weeks ended February 3, 2001 were $14,511. (2) Percent of revenues columns represent effective income tax rates. (3) Percent of revenues columns represent percent change in earnings per share. Fiscal 2000 included 53 weeks. The additional week did not materially affect 2000 earnings. All net retail sales information is presented on a 52-week basis for comparability. The following table shows earnings before interest and taxes excluding the LIFO (last-in, first-out) credit of $30 million in 2001, $29 million in 2000, and $30 million in 1999: (dollars in millions) 2001 2000 1999 Operating earnings $1,463 $1,718 $1,780 Percent of revenues 10.3% 11.8% 12.8% Our 439 quality department stores are operated by eight regional department store companies across the United States under 11 long-standing and widely recognized trade names. Each department store company holds a leading market position in its region. Our Bridal Group operates 150 David's Bridal stores, 240 After Hours stores, and 10 Priscilla of Boston stores. 10 The tables below summarize net retail sales, sales per square foot, gross retail square footage, and the number of stores for each department store company and the Bridal Group: Net Retail Sales in Millions of Dollars(1) Store Company: Headquarters 2001 2000 Lord & Taylor: New York City $ 2,024 $ 2,175 Hecht's, Strawbridge's: Washington, D.C. 2,527 2,498 Foley's: Houston 2,159 2,204 Robinsons-May: Los Angeles 2,119 2,168 Filene's: Boston 1,771 1,788 Kaufmann's: Pittsburgh 1,549 1,598 Famous-Barr, L.S. Ayres, The Jones Store: St. Louis 1,243 1,296 Meier & Frank: Portland, Ore. 502 541 Total Department Stores $13,894 $14,268 Bridal Group: Philadelphia(2) 321 104 The May Department Stores Company $14,215 $14,372 Sales per Square Foot(1) Store Company: Headquarters 2001 2000 Lord & Taylor: New York City $ 193 $ 214 Hecht's, Strawbridge's: Washington, D.C. 190 203 Foley's: Houston 179 201 Robinsons-May: Los Angeles 213 217 Filene's: Boston 249 253 Kaufmann's: Pittsburgh 180 191 Famous-Barr, L.S. Ayres, The Jones Store: St. Louis 164 174 Meier & Frank: Portland, Ore. 170 170 Total Department Stores $ 193 $ 205 Bridal Group: Philadelphia(2) 216 205(3) The May Department Stores Company $ 193 $ 205 Gross Retail Square Footage in Thousands Store Company: Headquarters 2001 2000 Lord & Taylor: New York City 10,981 10,601 Hecht's, Strawbridge's: Washington, D.C 13,993 12,583 Foley's: Houston 12,623 11,572 Robinsons-May: Los Angeles 10,471 10,210 Filene's: Boston 7,294 7,222 Kaufmann's: Pittsburgh 8,965 8,721 Famous-Barr, L.S. Ayres, The Jones Store: St. Louis 7,920 7,630 Meier & Frank: Portland, Ore. 3,038 3,487 Total Department Stores 75,285 72,026 Bridal Group: Philadelphia(2) 1,930 1,322 The May Department Stores Company 77,215 73,348 11 Number of Stores Store Company: Headquarters 2001 New Closed 2000 Lord & Taylor: New York City 84 5 3 82 Hecht's, Strawbridge's: Washington, D.C. 80 7 - 73 Foley's: Houston 65 7 2 60 Robinsons-May: Los Angeles 56 1 - 55 Filene's: Boston 44 - - 44 Kaufmann's: Pittsburgh 52 1 - 51 Famous-Barr, L.S. Ayres, The Jones Store: St. Louis 43 1 - 42 Meier & Frank: Portland, Ore. 15 - 5 20 Total Department Stores 439 22 10 427 Bridal Group: Philadelphia(2) 400 278 1 123 The May Department Stores Company 839 300 11 550 (1) Fiscal 2000 net retail sales and sales per square foot are shown on a 52- week basis for comparability. (2) Results of David's Bridal and After Hours included since acquisition date. (3) David's Bridal annualized sales per square foot. Net retail sales include lease department sales but exclude sales from closed and non-replaced stores. Sales per square foot are calculated from net retail sales plus finance charge revenues and average gross retail square footage. Gross retail square footage and number of stores represent locations open at the end of the period presented. Net Retail Sales Net retail sales include lease department sales but exclude sales from closed and non-replaced stores and finance charge revenues. Store-for-store sales represent sales of those stores open during both years. Lease department sales are integral to our operations and are used in our evaluation of operating performance. Net retail sales differ from generally accepted accounting principles due to the inclusion of lease department sales and the exclusion of sales from closed and non-replaced stores. Consequently, net retail sales may not be comparable to sales reported by other retailers and are not an alterna- tive to revenues. Net retail sales increases (decreases) for 2001 and 2000 were: 2001 2000 Store-for- Store-for- Quarter Total Store Total Store First 3.7 % (1.1)% 3.3% 0.0% Second 1.6 (3.1) 2.3 (0.6) Third (3.6) (6.1) 4.7 (0.1) Fourth (4.0) (6.9) 5.3 1.8 Year (1.1)% (4.6)% 4.1% 0.5% The total net retail sales decrease for 2001 was due to a $668 million decrease in store-for-store sales, offset by $511 million of new-store sales, which included David's Bridal. The total net retail sales increase for 2000 was due to $537 million of new-store sales, including David's Bridal, and a $63 million increase in store-for-store sales. Revenues Revenues include sales from all stores operating during the period, finance charge revenues, and lease department income. Finance charge revenues were $292 million, $301 million, and $304 million in 2001, 2000, and 1999, 12 respectively. The fluctuation in revenues is due primarily to the change in net retail sales discussed above. 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 were: 2001 2000 1999 (dollars in millions) $ % $ % $ % Cost of sales $9,770 68.9% $9,929 68.4% $9,370 67.6% LIFO credit 30 0.2 29 0.2 30 0.2 Cost of sales before LIFO credit $9,800 69.1% $9,958 68.6% $9,400 67.8% Before the LIFO credit, cost of sales as a percent of revenues increased by 0.5% in 2001 compared with 2000 due to an 0.8% increase related to buying and occupancy costs growing as revenues declined, partially offset by a 0.1% increase in the merchandise gross margin rate due to lower markdowns and a 0.2% decrease due to the addition of David's Bridal. Before the LIFO credit, cost of sales as a percent of revenues increased in 2000 compared with 1999 by 0.8% as a result of a 0.7% decrease in the merchandise gross margin rate primarily due to a $63 million charge to clear excess spring and summer merchandise and a 0.2% increase in buying and occupancy costs, partially offset by a 0.1% decrease due to the addition of David's Bridal. Selling, General, and Administrative Expenses Selling, general, and administrative expenses and the related percent of revenues were: 2001 2000 1999 (dollars in millions) $ % $ % $ % Selling, general, and administrative $2,912 20.5% $2,835 19.5% $2,686 19.4% As a percent of revenues, selling, general, and administrative expenses for 2001 increased by 1.0% compared with 2000 primarily due to a 0.4% increase in department store payroll, a 0.3% increase in employee benefit expenses, and a 0.3% increase due to the addition of David's Bridal. As a percent of revenues, selling, general, and administrative expenses for 2000 increased by 0.1% compared with 1999 primarily due to a 0.3% increase in department store payroll and a 0.1% increase due to the addition of David's Bridal, offset by a 0.3% decrease in employee benefit expenses. Selling, general, and administrative expenses included advertising and sales promotion costs of $590 million, $572 million, and $540 million in 2001, 2000, and 1999, respectively. As a percent of revenues, advertising and sales promotion costs were 4.2% in 2001 and 3.9% in 2000 and 1999, of which 0.1% of the 2001 increase was due to the addition of David's Bridal. Interest Expense Interest expense components were: (dollars in millions) 2001 2000 1999 Interest expense $378 $373 $315 Interest income (7) (11) (12) Capitalized interest (22) (17) (16) Interest expense, net $349 $345 $287 Percent of revenues 2.5% 2.4% 2.0% Interest expense principally relates to long-term debt. The interest expense change between years was primarily due to the amount and timing of long-term debt issuances and repayments. We issued $250 million and $1.1 billion in new long-term debt in 2001 and 2000, respectively. We did not issue any long-term debt in 1999. 13 Income Taxes The effective income tax rate for 2001 was 38.3%, compared with 38.8% in 2000 and 39.1% in 1999. The rate reduction was a result of implementing corporate structure changes and changes in tax regulations, which have a favorable impact on our effective tax rate. Extraordinary Item During the third quarter of 2001, we recorded an after-tax extraordinary loss of $3 million ($5 million pretax), or $0.01 per share, due to the call of $100 million of 9.875% debentures due in 2021. The debentures were called effective October 9, 2001. Impact of Inflation Inflation did not have a material impact on our 2001 sales and earnings. We value inventory principally 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 top quartile shareowner returns in the retail industry 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 18.3% in 2001, compared with 21.0% in 2000 and 24.1% in 1999. 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 15.5% in 2001, compared with 19.5% in 2000 and 20.7% in 1999. Cash Flows Cash flows from operations was $1.6 billion in 2001. This compares with $1.3 billion in 2000 and $1.5 billion in 1999. The increase in cash flows from operations in 2001 was principally related to lower customer accounts receivable and merchandise inventories. Sources (uses) of cash flows were: (dollars in millions) 2001 2000 1999 Net earnings(1) $ 703 $ 858 $ 927 Depreciation and amortization 559 511 469 Working capital (increases) decreases 339 (71) 14 Other operating activities 43 48 120 Cash flows from operations 1,644 1,346 1,530 Net capital expenditures (756) (550) (678) Business combinations (425) (420) (40) Cash flows used for investing activities (1,181) (970) (718) Net long-term debt issuances (repayments) 72 835 (135) Net short-term debt issuances 78 - - Net purchases of common stock(2) (420) (792) (434) Dividend payments (297) (304) (314) Cash flows used for financing activities (567) (261) (883) Increase (decrease) in cash and cash equivalents $ (104) $ 115 $ (71) (1) After extraordinary loss of $3 million in 2001. (2) Includes common stock repurchase programs authorized by our board of directors as described on page 9. See "Consolidated Statements of Cash Flows" on page 21. 14 Capital Expenditures Capital expenditures are primarily related to new stores, remodels, and expansions. Our strong financial condition enables us to make capital expenditures to enhance growth and improve operations. 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. In April 2001, we completed the purchase of 15 former Wards and Bradlees stores, which are included in capital expenditures in the above cash flows table. Eight of the 15 stores are planned as new stores, and the other stores generally will provide expansion in existing malls, with most locations opening in 2002. Business Combinations In the fourth quarter of 2001, we acquired After Hours and substantially all of the assets of Priscilla of Boston for an aggregate cost of $121 million, which included $67 million of outstanding debt repaid at closing. In March 2001, we purchased nine department store locations from Saks Incorporated. The cash purchase price included approximately $237 million for the stores and approximately $67 million for merchandise inventories and accounts receivable. In August 2000, David's Bridal joined May. The cost of this transaction was approximately $420 million. In December 1999, we completed the merger of Zions Co-operative Mercantile Institution (ZCMI) stores. We 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. These business combinations have been accounted for as purchases and did not have a material effect on our results of operations or financial position. Liquidity, Available Credit, and Debt Ratings We finance our activities primarily with cash flows from operations, borrowings under credit facilities, and issuances of long-term debt. We have $1.0 billion of credit under unsecured revolving facilities consisting of a $700 million five-year credit agreement expiring July 31, 2006, and a $300 million 364-day credit agreement expiring July 30, 2002. These credit agreements support our commercial paper borrowings. As of February 2, 2002, there was $78 million of commercial paper outstanding. Financial covenants under the credit agreements include a minimum fixed-charge coverage ratio and a maximum debt-to-capitaliza- tion ratio. We also maintain a $30 million credit facility with minority-owned banks. In addition we have filed shelf registration statements with the Securities and Exchange Commission that enable us to issue up to $525 million of debt securities. Annual maturities of long-term debt, including sinking fund requirements, are $255 million, $153 million, $253 million, $167 million, and $145 million for 2002 through 2006. Interest payments on long-term debt are typically paid on a semi-annual basis. Our bonds are rated A1 by Moody's Investors Service, Inc. and A+ by Standard & Poor's Corporation. Our commercial paper is rated P1 by Moody's and A1 by Standard & Poor's. Our senior unsecured bank credit agreement is rated A1 by Moody's. Off-balance-sheet Financing We do not sell or securitize customer accounts receivable. We have not entered into off-balance-sheet financing or other arrangements with any special- purpose entity. Our existing operating leases do not contain any significant termination payments if lease options are not exercised. The present value of operating leases (minimum rents) was $473 million as of February 2, 2002. 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 51%, 50%, and 44% for 2001, 2000, and 1999, respectively. The ratio increased in 2000 due to long-term borrowings of $1.1 billion and the repurchase of $789 million of our common stock. For 15 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 26 for discussion of the ESOP. The fixed-charge coverage ratios were 3.4x in 2001, 4.0x in 2000, and 4.8x in 1999. The ratio declined in 2001 due to lower operating earnings and higher interest expense compared with 2000. 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 Repurchases Since 1996, our board of directors has authorized and we have repurchased almost $3.0 billion in common stock totaling 91.4 million shares. Common Stock Dividends and Market Prices Our dividend policy is based on earnings growth and capital investment requirements. We increased the annual dividend by $0.01 to $0.95 per share effective with the March 2002 dividend. This is our 27th consecutive annual dividend increase. We have paid consecutive quarterly dividends since 1911. The quarterly price ranges of the common stock and dividends per share in 2001 and 2000 were: 2001 2000 Market Price Market Price Dividends Dividends Quarter High Low per Share High Low per Share First $41.25 $33.85 $0.2350 $32.13 $23.75 $0.2325 Second 37.29 30.61 0.2350 31.13 23.25 0.2325 Third 34.90 27.00 0.2350 25.50 19.19 0.2325 Fourth 38.86 33.17 0.2350 39.50 22.94 0.2325 Year $41.25 $27.00 $0.9400 $39.50 $19.19 $0.9300 The approximate number of common shareowners as of March 1, 2002, was 41,000. Critical Accounting Policies In 2001, approximately 39% of our net retail sales were made under our department store credit programs, which resulted in customer accounts receivable balances of approximately $1.9 billion at February 2, 2002. We have significant experience in managing our credit programs. The allowance for uncollectible accounts is based upon a number of factors including account write-off trends, account aging information, and year-end balances. We do not expect actual results to vary significantly from our estimate. We use the retail inventory method. Under this method, we record markdowns to value merchandise inventories at net realizable value. We closely monitor actual and forecasted sales trends, current inventory levels, and aging information by merchandise categories. If forecasted sales are not achieved, additional markdowns may be needed in future periods to clear excess or slow- moving merchandise, which may result in lower gross margins. When a store experiences unfavorable operating performance, we evaluate whether an impairment charge should be recorded. A store's assets are evaluated for impairment by comparing its estimated undiscounted cash flows to its carrying value. If the cash flows are not sufficient to recover the carrying value, the assets are written down to fair value. Impairment losses associated with these reviews have not been significant. However, if store- for-store sales declines and general negative economic trends continue, future impairment losses may be significant. Impact of New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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 16 accounting and specifies criteria for recognizing intangible assets separate from goodwill. This statement applies to all business combinations after June 30, 2001. Under SFAS No. 142, goodwill and intangible assets that have indefinite lives will no longer be amortized but will be tested for impairment annually or more frequently if circumstances indicate potential impairment. Other intangible assets will continue to be amortized over their estimated useful lives. SFAS No. 142 is effective for fiscal 2002, which began on February 3, 2002. Adoption of this standard in fiscal 2002 is not expected to result in a goodwill impairment charge. For the 52-week period ended February 2, 2002, the pro forma effect of adopting SFAS No. 142 eliminates $42 million of goodwill amortization included in selling, general, and administrative expenses, increasing net earnings by $37 million, or $0.11 per share. The fiscal 2001 pro forma effective income tax rate would have been 37.4% due to the elimination of non-tax-deductible goodwill amortization. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment and disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board (APB) Opinion No. 30, "Reporting the Results of Operations for a Disposal of a Segment of a Business." We adopted this statement in 2001, and it did not affect our annual operating results or financial position. Quantitative and Qualitative Disclosures About Market Risk Our exposure to market risk primarily arises from changes in interest rates on short-term debt. Short-term debt has generally been used to finance seasonal working capital needs resulting in minimal exposure to interest rate fluctuations. Long-term debt is at fixed interest rates. Our merchandise purchases are denominated in United States dollars. Operating expenses of our international buying offices located outside the United States are generally paid in local currency and are not material. During fiscal 2001, 2000, and 1999, we did not enter into any derivative financial instruments. 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. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Information required by this item is included in Quantitative and Qualitative Disclosures About Market Risk in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations", which is incorporated herein by reference. 17 Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareowners of The May Department Stores Company We have audited the accompanying consolidated balance sheets of The May Department Stores Company (a Delaware corporation) and subsidiaries as of February 2, 2002, and February 3, 2001, and the related consolidated statements of earnings, shareowners' equity and cash flows for each of the three fiscal years in the period ended February 2, 2002. 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 February 2, 2002, and February 3, 2001, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 2, 2002, in conformity with accounting principles generally accepted in the United States. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II included in this Form 10-K is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic 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 basic financial statements taken as a whole. /s/Arthur Andersen LLP 1010 Market Street St. Louis, Missouri 63101-2089 February 13, 2002 18 CONSOLIDATED STATEMENTS OF EARNINGS (dollars in millions, except per share) 2001 2000 1999 Net retail sales $14,215 $14,372 $13,810 Revenues $14,175 $14,511 $13,866 Cost of sales 9,770 9,929 9,370 Selling, general, and administrative expenses 2,912 2,835 2,686 Interest expense, net 349 345 287 Earnings before income taxes 1,144 1,402 1,523 Provision for income taxes 438 544 596 Earnings before extraordinary loss 706 858 927 Extraordinary loss, net of tax (3) - - Net earnings $ 703 $ 858 $ 927 Basic earnings per share: Earnings before extraordinary loss $ 2.32 $ 2.74 $ 2.73 Extraordinary loss (.01) - - Net earnings $ 2.31 $ 2.74 $ 2.73 Diluted earnings per share: Earnings before extraordinary loss $ 2.22 $ 2.62 $ 2.60 Extraordinary loss (.01) - - Net earnings $ 2.21 $ 2.62 $ 2.60 Fiscal 2000 was a 53-week year. Net retail sales for fiscal 2000 are shown on a 52-week basis for comparability. Net retail sales for the 53 weeks ended February 3, 2001, were $14,511. See Notes to Consolidated Financial Statements. 19 CONSOLIDATED BALANCE SHEETS February 2, February 3, (dollars in millions, except per share) 2002 2001 Assets Current assets: Cash $ 20 $ 17 Cash equivalents 32 139 Accounts receivable, net of allowance for uncollectible accounts of $90 and $76 1,938 2,081 Merchandise inventories 2,875 2,938 Other current assets 60 95 Total current assets 4,925 5,270 Property and equipment: Land 339 329 Buildings and improvements 4,536 4,090 Furniture, fixtures, equipment, and other 4,062 3,689 Property under capital leases 59 59 Total property and equipment 8,996 8,167 Accumulated depreciation (3,732) (3,268) Property and equipment, net 5,264 4,899 Goodwill and other intangibles, net of accumulated amortization of $311 and $263 1,612 1,312 Other assets 119 93 Total assets $ 11,920 $ 11,574 Liabilities and shareowners' equity Current liabilities: Short-term debt $ 78 $ - Current maturities of long-term debt 255 85 Accounts payable 1,023 965 Accrued expenses 910 871 Income taxes payable 272 293 Total current liabilities 2,538 2,214 Long-term debt 4,403 4,534 Deferred income taxes 696 586 Other liabilities 360 335 ESOP preference shares 286 299 Unearned compensation (204) (249) Shareowners' equity: Common stock 144 149 Additional paid-in capital - - Retained earnings 3,709 3,706 Accumulated other comprehensive loss (12) - Total shareowners' equity 3,841 3,855 Total liabilities and shareowners' equity $ 11,920 $ 11,574 Common stock has a par value of $0.50 per share; 1 billion shares are authorized; and 470.5 million shares were issued. At February 2, 2002, 287.2 million shares were outstanding, and 183.3 million shares were held in treasury. At February 3, 2001, 298.2 million shares were outstanding, and 172.3 million shares were held in treasury. ESOP preference shares have a par value of $0.50 per share and a stated value of $507 per share; 800,000 shares are authorized. At February 2, 2002, 564,047 shares (convertible into 19.1 million shares of common stock) were issued and outstanding. At February 3, 2001, 589,962 shares (convertible into 19.9 million shares of common stock) were issued and outstanding. See Notes to Consolidated Financial Statements. 20 CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in millions) 2001 2000 1999 Operating activities Net earnings $ 703 $ 858 $ 927 Adjustments for noncash items included in earnings: Depreciation and other amortization 511 476 440 Goodwill and other intangible amortization 48 35 29 Deferred income taxes 63 59 75 Working capital changes: Accounts receivable, net 180 97 13 Merchandise inventories 103 (77) (137) Other current assets 34 (9) (22) Accounts payable 51 (77) 57 Accrued expenses (10) (70) 57 Income taxes payable (19) 65 46 Other assets and liabilities, net (20) (11) 45 Cash flows from operations 1,644 1,346 1,530 Investing activities Capital expenditures (797) (598) (703) Proceeds from dispositions of property and equipment 41 48 25 Business combinations (425) (420) (40) Cash flows used for investing activities (1,181) (970) (718) Financing activities Issuances of long-term debt 250 1,076 - Repayments of long-term debt (178) (241) (135) Net issuances of short-term debt 78 - - Purchases of common stock (474) (828) (468) Issuances of common stock 54 36 34 Dividend payments (297) (304) (314) Cash flows used for financing activities (567) (261) (883) Increase (decrease) in cash and cash equivalents (104) 115 (71) Cash and cash equivalents, beginning of year 156 41 112 Cash and cash equivalents, end of year $ 52 $ 156 $ 41 Cash paid during the year: Interest expense $ 339 $ 376 $ 307 Income taxes 369 414 463 See "Business Combinations" in Notes to Consolidated Financial Statements for a description of noncash transactions. See Notes to Consolidated Financial Statements. 21 CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY Accumulated Additional Other Total (dollars in millions, Outstanding Common Stock Paid-in Retained Comprehensive Shareowners' shares in thousands) Shares $ Capital Earnings Loss Equity 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 Net earnings - - - 858 - 858 Dividends paid: Common stock ($0.93 per share) - - - (286) - (286) ESOP preference shares, net of tax benefit - - - (18) - (18) Common stock issued 2,350 1 51 - - 52 Common stock purchased (29,645) (15) (51) (762) - (828) Balance at February 3, 2001 298,170 149 - 3,706 - 3,855 Net earnings - - - 703 - 703 Minimum pension liability, net - - - - (12) (12) Comprehensive income - - - - - 691 Dividends paid: Common stock ($0.94 per share) - - - (278) - (278) ESOP preference shares, net of tax benefit - - - (19) - (19) Common stock issued 3,038 2 64 - - 66 Common stock purchased (14,035) (7) (64) (403) - (474) Balance at February 2, 2002 287,173 $144 $ - $3,709 $ (12) $3,841
Treasury Shares (shares in thousands) 2001 2000 1999 Balance, beginning of year 172,285 144,990 135,791 Common stock issued: Exercise of stock options (1,588) (569) (673) Deferred compensation plan (231) (221) (224) Restricted stock grants, net of forfeitures (337) (158) (372) Conversion of ESOP preference shares (876) (1,089) (781) Contribution to profit sharing plan (6) (313) - Business combination - - (1,628) (3,038) (2,350) (3,678) Common stock purchased 14,035 29,645 12,877 Balance, end of year 183,282 172,285 144,990 Outstanding common stock excludes shares held in treasury. See Notes to Consolidated Financial Statements.
22 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 2001, 2000, and 1999 ended on February 2, 2002, February 3, 2001, and January 29, 2000, respectively. Fiscal years 2001 and 1999 included 52 weeks. Fiscal year 2000 included 53 weeks. The additional week did not materially affect 2000 earnings. 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 439 quality department stores are operated by eight regional department store companies across the United States under 11 long-standing and widely recognized trade names. The Bridal Group operates 150 David's Bridal stores, 240 After Hours Formalwear (After Hours) stores, and 10 Priscilla of Boston stores. The company aggregates its eight department store companies into a single reportable segment because they have similar economic and operating characteristics. 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. Revenues Revenues include sales from all stores operating during the period, finance charge revenues, and lease department income. Merchandise sales are recognized at the time the sale is made to the customer, are net of estimated returns and promotional coupons, and exclude sales tax. Finance charge revenues are recognized in accordance with the contractual provisions of customer credit agreements. Finance charge revenues were $292 million, $301 million, and $304 million in 2001, 2000, and 1999, respectively. Lease department income is recognized based on a percentage of lease department sales, net of estimated returns. Net Retail Sales Net retail sales include lease department sales but exclude sales from closed and non-replaced stores and finance charge revenues. Sales are net of returns and promotional coupons and exclude sales tax. Store-for- store sales represent sales of those stores open during both years. Lease department sales are integral to our operations and are used in our evaluation of operating performance. Net retail sales differ from generally accepted accounting principles due to the inclusion of lease department sales and the exclusion of sales from closed and non-replaced stores. Consequently, net retail sales may not be comparable to sales reported by other retailers and are not an alternative to revenues. Cost of Sales Cost of sales includes the cost of merchandise sold and buying and occupancy costs. Preopening Expenses Preopening expenses of new stores are expensed as incurred. Advertising Costs Advertising and sales promotion costs are expensed at the time the advertising takes place. These costs are net of cooperative advertising reimbursements and are included in selling, general, and administrative expenses. These costs were $590 million, $572 million, and $540 million in 2001, 2000, and 1999, respectively. 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. 23 Stock-based Compensation The company accounts for stock-based compensation by applying Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed under Statement of Financial Accounting Standards (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 principally valued at the lower of LIFO (last-in, first-out) cost basis or market using the retail method. Merchandise inventories on a FIFO (first-in, first-out) cost basis approximate LIFO. Property and Equipment Property and equipment are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives. Properties under capital leases and leasehold improvements are amortized over the shorter of their useful lives or related lease terms. Software development costs are capitalized and amortized over the expected useful life. Capitalized interest was $22 million, $17 million, and $16 million in 2001, 2000, and 1999, respectively. The estimated useful life for each major class of long- lived asset is as follows: Buildings and improvements: Buildings and improvements 10-50 years Leasehold interests 5-30 years Furniture, fixtures, equipment, and other: Furniture, fixtures, and equipment 3-15 years Software development costs 2-7 years Rental formalwear 2-4 years Property under capital leases 16-50 years Goodwill and Other Intangibles Goodwill represents the excess of cost over the fair value of net tangible and separately recognized intangible assets acquired at the dates of acquisition. Substantially all amounts are amortized using the straight-line method over a 40-year period. Other intangibles include trade names and customer lists and are amortized using the straight- line method over a period of up to 40 years. Impairment of Long-lived Assets Long-lived assets and certain identifiable intangibles are reviewed when events or circumstances indicate that the net book value may not be recoverable. The estimated future undiscounted cash flows associated with the asset are compared to the asset's carrying amount to determine if a write-down to fair value is required. Impairment losses resulting from these reviews have not been significant. Financial Derivatives The company uses derivative financial instruments 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. The company did not enter into any derivative financial instruments in 2001, 2000, or 1999. Impact of New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (FASB) 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 specifies criteria for recognizing intangible assets separate from goodwill. This statement applies to all business combinations after June 30, 2001. Under SFAS No. 142, goodwill and intangible assets that have indefinite lives will no longer be amortized but will be tested for impairment annually or more frequently if circumstances indicate potential impairment. Other intangible assets will continue to be amortized over their estimated useful lives. SFAS No. 142 is effective for fiscal 2002, which began on February 3, 2002. Adoption of this standard in fiscal 2002 is not expected to result in a goodwill impairment charge. 24 For the 52-week period ended February 2, 2002, the pro forma effect of adopting SFAS No. 142 eliminates $42 million of goodwill amortization included in selling, general, and administrative expenses, increasing net earnings by $37 million, or $0.11 per share. The fiscal 2001 pro forma effective tax rate would have been 37.4% due to the elimination of non-tax-deductible goodwill amortization. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment and disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations for a Disposal of a Segment of a Business." The company adopted this statement in 2001, and it did not affect the company's annual operating results or financial position. Reclassifications Certain prior-year 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: (dollars in millions, except per share) 2001 First Second Third Fourth Year Revenues $3,153 $3,173 $3,202 $4,647 $14,175 Cost of sales 2,202 2,183 2,319 3,066 9,770 Selling, general, and administrative expenses 688 718 707 799 2,912 Pretax earnings 177 183 89 695 1,144 Net earnings(1) 109 111 55 431 706 Earnings per share:(1) Basic $ 0.35 $ 0.36 $ 0.17 $ 1.44 $ 2.32 Diluted 0.34 0.35 0.17 1.36 2.22 (1)Before after-tax extraordinary loss of $3 million ($5 million pretax), or $0.01 per share, in the third quarter. (dollars in millions, except per share) 2000 First Second Third(1) Fourth Year Revenues $3,050 $3,131 $3,326 $5,004 $14,511 Cost of sales 2,141 2,154 2,397 3,237 9,929 Selling, general, and administrative expenses 638 670 697 830 2,835 Pretax earnings 200 225 141 836 1,402 Net earnings 120 135 85 518 858 Earnings per share: Basic $ 0.36 $ 0.42 $ 0.28 $ 1.68 $ 2.74 Diluted 0.35 0.41 0.27 1.59 2.62 (1)The 2000 third quarter results included $63 million of costs related to the clearance of excess spring and summer merchandise. 25 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 earnings (loss) per share impact of LIFO would have been: 2001 2000 Pro As Pro As Quarter Forma Reported Forma Reported First $0.01 $(0.02) $0.01 $(0.01) Second 0.01 (0.02) 0.01 (0.01) Third 0.02 (0.01) 0.01 (0.01) Fourth 0.02 0.11 0.02 0.08 Year $0.06 $ 0.06 $0.05 $ 0.05 PROFIT SHARING The company has a qualified profit sharing plan that covers most 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 $33 million for 2001, an effective match rate of 56%. The matching allocation values were $52 million in 2000 and $54 million in 1999. 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 $204 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 $18 million in 2001, $22 million in 2000, and $25 million in 1999. ESOP preference shares' dividends were $22 million in 2001, $23 million in 2000, and $24 million in 1999. 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 $47 million in 2001, $41 million in 2000, and $40 million in 1999. At February 2, 2002, the plan beneficially owned 14.5 million shares of the company's common stock and 100% of the company's ESOP preference shares, representing 11.0% of the company's common stock. David's Bridal and After Hours provide retirement benefits to associates who have worked three months or more and have attained age 21 through separate 401(k) plans (defined-contribution plans) that provide for discretionary company contributions. 26 PENSION AND OTHER POSTRETIREMENT BENEFITS The company has a qualified defined-benefit plan that covers most 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 components of net periodic benefit costs and actuarial assumptions for the benefit plans were: (dollars in millions) 2001 2000 1999 Components of pension expense (all plans) Service cost $39 $34 $39 Interest cost 53 51 45 Expected return on assets (42) (48) (39) Net amortization(1) 12 4 8 Total $62 $41 $53 (1) Prior service cost and actuarial (gain) loss are amortized over the remaining service period. (as of January 1) 2002 2001 2000 Actuarial assumptions Discount rate 7.25% 7.50% 8.00% Expected return on plan assets 7.50 7.75 8.25 Salary increase 4.00 4.25 4.50 The accumulated benefit obligations (ABO), change in projected benefit obligations (PBO), change in net plan assets, and funded status of the benefit plans were: Qualified Plan Nonqualified Plans (dollars in millions) 2001 2000 2001 2000 Change in PBO(1) PBO at beginning of year $592 $542 $ 147 $ 129 Service cost 35 31 4 3 Interest cost 42 41 11 10 Actuarial loss(2) 23 52 15 12 Plan amendments 2 - 1 - Benefits paid (56) (74) (8) (7) PBO at end of year $638 $592 $ 170 $ 147 ABO at end of year(3) $570 $536 $ 147 $ 121 Change in net plan assets Fair value of net plan assets at beginning of year $578 $622 $ - $ - Actual return on plan assets (16) 4 - - Employer contribution 43 26 - - Benefits paid (56) (74) - - Fair value of net plan assets at end of year $549 $578 $ - $ - Funded status (PBO less plan assets) $(89) $(14) $(170) $(147) Unrecognized net actuarial loss (gain) 54 (26) 41 28 Unrecognized prior service cost 54 59 14 14 Net prepaid (accrued) benefit cost $ 19 $ 19 $(115) $(105) Plan assets in excess of (less than) ABO $(21) $ 42 $(147) $(121) 27 Qualified Plan Nonqualified Plans (dollars in millions) 2001 2000 2001 2000 Amounts recognized in the balance sheets(4) Accrued benefit liability $(21) $ - $(147) $(121) Prepaid benefit cost - 19 - - Intangible asset 40 - 13 16 Accumulated other comprehensive loss - - 19 - Net amount recognized $ 19 $ 19 $(115) $(105) (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 is the change in benefit obligations or 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) Accrued benefit liability is included in accrued expenses and other liabilities. Prepaid benefit costs and intangible pension assets are included in other assets. Accumulated other comprehensive loss, net of tax benefit, is included in equity. The company also provides postretirement life and/or health benefits for certain associates. As of February 2, 2002, the company's estimated PBO (at a discount rate of 7.25%) for postretirement benefits was $52 million, of which $49 million was accrued in other liabilities. As of February 3, 2001, the company's estimated PBO (at a discount rate of 7.50%) for postretirement benefits was $51 million, of which $49 million was accrued in other liabilities. An unrecognized net loss of less than 10% of PBO need not be amortized. The postretirement plan is unfunded. The postretirement benefit expense was $4 million in 2001, 2000, and 1999. The estimated future obligations for postretirement medical benefits are based upon assumed annual healthcare cost increases of 11% for 2002, decreasing by 1% annually to 5% for 2008 and future years. A 1% increase or decrease in the assumed annual healthcare 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 $180 million in 2001 as its matching contribution to the $180 million paid in by associates. TAXES The provision for income taxes and the related percent of pretax earnings for the last three years were: (dollars in millions) 2001 2000 1999 $ % $ % $ % Federal $317 $412 $440 State and local 58 73 81 Current taxes 375 32.8% 485 34.6% 521 34.2% Federal 54 50 63 State and local 9 9 12 Deferred taxes 63 5.5 59 4.2 75 4.9 Total $438 38.3% $544 38.8% $596 39.1% 28 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) 2001 2000 1999 Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes 5.9 5.8 6.1 Federal tax benefit of state and local income taxes (2.1) (2.0) (2.2) Other, net (0.5) - 0.2 Effective income tax rate 38.3% 38.8% 39.1% Major components of deferred tax assets (liabilities) were: (dollars in millions) 2001 2000 Accrued expenses and reserves $ 140 $ 123 Deferred and other compensation 151 150 Merchandise inventories (198) (164) Depreciation and amortization and basis differences (692) (570) Other deferred income tax liabilities, net (92) (79) Net deferred income taxes (691) (540) Less: Net current deferred income tax assets 5 46 Noncurrent deferred income taxes $(696) $(586) Net current deferred income tax assets are included in other current assets in the accompanying balance sheets. EARNINGS PER SHARE All ESOP preference shares were issued in 1989 and earnings per share is computed in accordance with the provisions of Statement of Position 76-3, "Accounting Practices for Certain Employee Stock Ownership Plans," and Emerging Issues Task Force 89-12, "Earnings Per Share Issues Related to Convertible Preferred Stock Held by an Employee Stock Ownership Plan." For basic earnings per share purposes, the ESOP preference shares dividend, net of income tax benefit, is deducted from net earnings to arrive at net earnings available for common shareowners. Diluted earnings per share is computed by use of the "if converted" method, which assumes all ESOP preference shares were converted as of the beginning of the year. Net earnings are adjusted to add back the ESOP preference dividend deducted in computing basic earnings per share less the amount of additional ESOP contribution required to fund ESOP debt service in excess of the current common stock dividend attributable to the ESOP preference shares. The following tables reconcile net earnings before extraordinary loss and weighted average shares outstanding to amounts used to calculate basic and diluted earnings per share before extraordinary loss for 2001, 2000, and 1999. (in millions, except per share) 2001 Net Earnings Earnings Shares per Share Net earnings(1) $706 ESOP preference shares' dividends (19) Basic earnings per share(1) $687 296.0 $2.32 ESOP preference shares 17 19.5 Assumed exercise of options (treasury stock method) - 2.1 Diluted earnings per share(1) $704 317.6 $2.22 (1) Before after-tax extraordinary loss of $3 million ($5 million pretax), or $0.01 per share. 29 (in millions, except per share) 2000 Net Earnings Earnings Shares per Share Net earnings $858 ESOP preference shares' dividends (18) Basic earnings per share $840 306.4 $2.74 ESOP preference shares 17 20.5 Assumed exercise of options (treasury stock method) - 0.8 Diluted earnings per share $857 327.7 $2.62 (in millions, except per share) 1999 Net Earnings 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 ACCOUNTS RECEIVABLE Credit sales under department store credit programs as a percent of net retail sales were 39.1% in 2001. This compares with 40.3% in 2000 and 40.7% in 1999. An estimated 25 million customers hold credit cards under the company's various credit programs. Sales made through third-party credit cards totaled $5.1 billion in 2001, compared with $5.0 billion in 2000 and $4.6 billion in 1999. Net accounts receivable consisted of: (dollars in millions) 2001 2000 Customer accounts receivable $1,907 $2,032 Other accounts receivable 121 125 Total accounts receivable 2,028 2,157 Allowance for uncollectible accounts (90) (76) Accounts receivable, net $1,938 $2,081 The fair value of customer accounts receivable approximates their carrying values at February 2, 2002, and February 3, 2001, due to the short-term nature of these accounts. We do not sell or securitize customer accounts receivables. OTHER CURRENT ASSETS In addition to net current deferred income tax assets, other current assets consisted of prepaid expenses and supply inventories of $55 million in 2001 and $49 million in 2000. 30 OTHER ASSETS Other assets consisted of: (dollars in millions) 2001 2000 Prepaid and intangible pension asset $ 53 $35 Deferred debt expense 43 40 Other 23 18 Total $119 $93 ACCRUED EXPENSES Accrued expenses consisted of: (dollars in millions) 2001 2000 Salaries, wages, and employee benefits $202 $172 Insurance costs 198 184 Advertising and other operating expenses 142 148 Interest and rent expense 140 127 Sales, use, and other taxes 105 116 Construction costs 59 52 Other 64 72 Total $910 $871 SHORT-TERM DEBT AND LINES OF CREDIT Short-term debt for the last three years was: (dollars in millions) 2001 2000 1999 Balance outstanding at year-end $ 78 $ - $ - Average balance outstanding 397 242 67 Average interest rate: At year-end 1.8% - - On average balance 3.0% 6.6% 5.7% Maximum balance outstanding $1,090 $667 $407 The average balance of short-term debt outstanding, primarily commercial paper, and the respective weighted average interest rates are based on the number of days such short-term debt was outstanding during the year. The maximum balance outstanding in 2001 consisted of $985 million of commercial paper and $105 million of short-term bank financing. The company has $1.0 billion of credit under unsecured revolving facilities consisting of a $700 million five-year credit agreement expiring July 31, 2006, and a $300 million 364-day credit agreement expiring July 30, 2002. These credit agreements support the company's commercial paper borrowings. As of February 2, 2002, there was $78 million of commercial paper outstanding. Financial covenants under the credit agreements include a minimum fixed-charge coverage ratio and a maximum debt-to-capitalization ratio. The company also maintains a $30 million credit facility with minority-owned banks and during 2001 borrowed an additional $75 million under a short-term note agreement with a bank. 31 LONG-TERM DEBT Long-term debt and capital lease obligations were: (dollars in millions) 2001 2000 Unsecured notes and sinking-fund debentures due 2002-2036 $4,561 $4,470 Mortgage notes and bonds due 2002-2020 47 97 Capital lease obligations 50 52 Total debt 4,658 4,619 Less: Current maturities of long-term debt 255 85 Long-term debt $4,403 $4,534 The weighted average interest rate of long-term debt was 8.1% at February 2, 2002, and 8.2% at February 3, 2001. The annual maturities of long-term debt, including sinking fund requirements, are $255 million, $153 million, $253 million, $167 million, and $145 million for 2002 through 2006. Maturities of long-term debt are scheduled over the next 35 years, with the largest principal repayment in any single year being $280 million. Interest payments on long-term debt are typically paid on a semi-annual basis. The net book value of property encumbered under long-term debt agreements was $93 million at February 2, 2002. The fair value of long-term debt (excluding capital lease obligations) was approximately $5.1 billion and $4.8 billion at February 2, 2002, and February 3, 2001, respectively. The fair value was determined using borrowing rates for debt instruments with similar terms and maturities. During the third quarter of 2001, the company recorded an after-tax extraordinary loss of $3 million ($5 million pretax), or $0.01 per share, due to the call of $100 million of 9.875% debentures due in 2021. These debentures were called effective October 9, 2001. LEASE OBLIGATIONS The company leases approximately 27% of its gross retail square footage. Rental expense for the company's operating leases consisted of: (dollars in millions) 2001 2000 1999 Minimum rentals $80 $63 $48 Contingent rentals based on sales 15 18 18 Real property rentals 95 81 66 Equipment rentals 4 4 3 Total $99 $85 $69 Future minimum lease payments at February 2, 2002, were: Capital Operating (dollars in millions) Leases Leases Total 2002 $ 7 $ 89 $ 96 2003 7 83 90 2004 7 77 84 2005 7 70 77 2006 7 63 70 After 2006 69 298 367 Minimum lease payments $104 $680 $784 32 The present value of minimum lease payments under capital leases was $50 million at February 2, 2002, of which $1 million was included in current liabilities. The present value of operating leases (minimum rents) was $473 million at February 2, 2002. Property under capital leases was: (dollars in millions) 2001 2000 Cost $59 $59 Accumulated amortization (31) (29) Total $28 $30 OTHER LIABILITIES In addition to accrued pension and postretirement costs, other liabilities consisted principally of deferred compensation liabilities of $164 million at February 2, 2002, and $165 million at February 3, 2001. 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. LITIGATION The company is involved in claims, proceedings, and litigation arising from the operation of its business. The company does not believe any such claim, proceeding, or litigation, either alone or in the aggregate, will have a material adverse effect on the company's financial position or results of operations. BUSINESS COMBINATIONS In the fourth quarter of 2001, May acquired After Hours and substantially all of the assets of Priscilla of Boston for an aggregate cost of $121 million, which included $67 million of outstanding debt repaid at closing. In March 2001, the company purchased nine department store locations from Saks Incorporated. The cash purchase price included approximately $237 million for the stores and approximately $67 million for merchandise inventories and accounts receivable. In August 2000, David's Bridal joined the company. The cost of this transaction was approximately $420 million. In December 1999, the company completed the merger 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. These business combinations 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, "Accounting for Stock Issued to Employees." 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. 33 A combined summary of the stock option plans at the end of 2001, 2000, and 1999 and of the changes in outstanding shares within years is presented below: (shares in thousands) 2001 2000 1999 Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Beginning of year 20,057 $33 14,872 $37 11,764 $33 Granted 4,688 36 7,222 25 4,329 44 Exercised (1,588) 26 (570) 24 (690) 25 Forfeited or expired (683) 35 (1,467) 34 (531) 42 End of year 22,474 $34 20,057 $33 14,872 $37 Exercisable at end of year 11,049 $34 8,377 $34 5,904 $30 Shares available for grants 10,457 14,463 4,218 Fair value of options granted $11 $ 8 $14 The following table summarizes information about stock options outstanding at February 2, 2002: Options Outstanding Options Exercisable Average Exercise Number Remaining Average Number Average Price Outstanding Contractual Exercise Exercisable Exercise Range (in thousands) Life Price (in thousands) Price $16-24 936 3 $22 834 $22 25-34 9,985 7 28 5,584 29 35-45 11,553 8 41 4,631 43 22,474 7 $34 11,049 $34 Under the 1994 Stock Incentive Plan, the company is authorized to grant up to 3.4 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 2001 and 2000, the company granted 419,392 and 235,150 shares of restricted stock, respectively. The aggregate outstanding shares of restricted stock as of February 2, 2002, and February 3, 2001, were 1,058,425 and 925,483, respectively. 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 before extraordinary loss and net earnings per share before extraordinary loss would have been: (dollars in millions, except per share) 2001 2000 1999 Net earnings: As reported $ 706 $ 858 $ 927 Pro forma 680 835 903 Basic earnings per share: As reported $2.32 $2.74 $2.73 Pro forma 2.24 2.67 2.66 Diluted earnings per share: As reported $2.22 $2.62 $2.60 Pro forma 2.15 2.55 2.54 34 The Black-Scholes assumptions were: 2001 2000 1999 Risk-free interest rate 4.6% 6.4% 5.5% Expected dividend $0.94 $0.93 $0.89 Expected option life (years) 7 7 7 Expected volatility 32% 32% 26% COMMON STOCK REPURCHASE PROGRAMS In 2001, the company's board of directors authorized a common stock repurchase program of $400 million. During 2001, the company completed this repurchase program totaling 11.9 million shares of May common stock at an average price of $34 per share. During 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 $500 million 1999 stock repurchase program and the $650 million common stock repurchase program authorized in 2000. The 2000 buyback was in addition to $361 million, or 9.9 million shares, purchased in 1999. PREFERENCE STOCK The company is authorized to issue up to 25 million shares of $0.50 par value preference stock. As of February 2, 2002, 800,000 ESOP preference shares were authorized and 564,047 shares were outstanding. Each ESOP preference share is convertible into shares of May common stock, at a conversion rate of 33.787 shares of May common stock for each ESOP preference share. Each ESOP preference share carries the number of votes equal to the number of shares of May common stock into which the ESOP preference share could be converted. Dividends are cumulative and are paid semi-annually at a rate of $38.025 per share per year. ESOP preference shares have a liquidation preference of $507 per share plus accumulated and unpaid dividends. ESOP preference shares may be redeemed, in whole or in part, at the option of May or an ESOP preference shareowner, at a redemption price of $507 per share, plus accumulated and unpaid dividends. The redemption price may be satisfied in cash or May common stock or a combination of both. 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. 35 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, David's Bridal, Inc. and subsidiaries, After Hours Formalwear, Inc. and Priscilla of Boston. 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. Condensed consolidating balance sheets as of February 2, 2002, and February 3, 2001, and the related condensed consolidating statements of earnings and cash flows for each of the three fiscal years in the period ended February 2, 2002, are presented below. Condensed Consolidating Balance Sheet As of February 2, 2002 (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated ASSETS Current assets: Cash and cash equivalents $ - $ 36 $ 16 $ - $ 52 Accounts receivable, net - 1,930 45 (37) 1,938 Merchandise inventories - 2,801 74 - 2,875 Other current assets - 43 17 - 60 Total current assets - 4,810 152 (37) 4,925 Property and equipment, at cost - 8,844 152 - 8,996 Accumulated depreciation - (3,709) (23) - (3,732) Property and equipment, net - 5,135 129 - 5,264 Goodwill and other assets - 1,243 488 - 1,731 Intercompany (payable)/ receivable (841) 523 318 - - Investment in subsidiaries 4,770 - - (4,770) - Total assets $ 3,929 $11,711 $ 1,087 $ (4,807) $11,920 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ - $ 78 $ - $ - $ 78 Current maturities of long- term debt - 254 1 - 255 Accounts payable - 947 76 - 1,023 Accrued expenses 6 854 87 (37) 910 Income taxes payable - 263 9 - 272 Total current liabilities 6 2,396 173 (37) 2,538 Long-term debt - 4,402 1 - 4,403 Intercompany note payable/ (receivable) - 3,200 (3,200) - - Deferred income taxes - 629 67 - 696 Other liabilities - 818 - (458) 360 ESOP preference shares 286 - - - 286 Unearned compensation (204) (204) - 204 (204) Shareowners' equity 3,841 470 4,046 (4,516) 3,841 Total liabilities and shareowners' equity $ 3,929 $11,711 $ 1,087 $ (4,807) $11,920
36 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Statement of Earnings For the Fiscal Year Ended February 2, 2002 (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Revenues $ - $ 13,854 $ 1,647 $ (1,326) $ 14,175 Cost of sales - 9,649 1,358 (1,237) 9,770 Selling, general, and administrative expenses - 2,866 151 (105) 2,912 Interest expense (income), net: External - 350 (1) - 349 Intercompany - 284 (284) - - Equity in earnings of subsidiaries (706) - - 706 - Earnings before income taxes 706 705 423 (690) 1,144 Provision for income taxes - 282 156 - 438 Earnings before extra- ordinary loss $ 706 $ 423 $ 267 $ (690) $ 706 Extraordinary loss, net of tax (3) (3) - 3 (3) Net earnings $ 703 $ 420 $ 267 $ (687) $ 703
Condensed Consolidating Statement of Cash Flows For the Fiscal Year Ended February 2, 2002 (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Operating activities: Net earnings $ 703 $ 420 $ 267 $ (687) $ 703 Equity in earnings of subsidiaries (706) - - 706 - Depreciation and amortization - 536 23 - 559 (Increase) decrease in working capital (1) 293 47 - 339 Other, net 196 (13) (121) (19) 43 192 1,236 216 - 1,644 Investing activities: Net additions to property and equipment - (725) (31) - (756) Business combination - (304) (121) - (425) - (1,029) (152) - (1,181) Financing activities: Issuances of long-term debt - 250 - - 250 Repayments of long-term debt - (176) (2) - (178) Net issuances of short-term debt - 78 - - 78 Net (purchases) issuances of common stock (432) 12 - - (420) Dividend payments, net of tax benefit (300) 3 - - (297) Intercompany activity, net 540 (475) (65) - - (192) (308) (67) - (567) Decrease in cash and cash equivalents - (101) (3) - (104) Cash and cash equivalents, beginning of year - 137 19 - 156 Cash and cash equivalents, end of year $ - $ 36 $ 16 $ - $ 52
37 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
38 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Statement of Earnings For the Fiscal Year Ended February 3, 2001 (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Revenues $ - $ 14,406 $ 1,283 $ (1,178) $ 14,511 Cost of sales - 9,907 1,115 (1,093) 9,929 Selling, general, and administrative expenses - 2,870 63 (98) 2,835 Interest expense (income), net: External - 346 (1) - 345 Intercompany - 287 (287) - - Equity in earnings of subsidiaries (858) - - 858 - Earnings before income taxes 858 996 393 (845) 1,402 Provision for income taxes - 404 140 - 544 Net earnings $ 858 $ 592 $ 253 $ (845) $ 858
Condensed Consolidating Statement of Cash Flows For the Fiscal Year Ended February 3, 2001 (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Operating activities: Net earnings $ 858 $ 592 $ 253 $ (845) $ 858 Equity in earnings of subsidiaries (858) - - 858 - Depreciation and amortization - 501 10 - 511 Increase in working capital (8) (41) (22) - (71) Other, net 647 (545) (41) (13) 48 639 507 200 - 1,346 Investing activities: Net additions to property and equipment - (539) (11) - (550) Business combinations (427) - 7 - (420) (427) (539) (4) - (970) Financing activities: Issuances of long-term debt - 1,076 - - 1,076 Repayments of long-term debt - (241) - - (241) Net (purchases) issuances of common stock (815) 23 - - (792) Dividend payments, net of tax benefit (309) 5 - - (304) Intercompany activity, net 912 (725) (187) - - (212) 138 (187) - (261) Increase in cash and cash equivalents - 106 9 - 115 Cash and cash equivalents, beginning of year - 31 10 - 41 Cash and cash equivalents, end of year $ - $ 137 $ 19 $ - $ 156
39 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Statement of Earnings For the Fiscal Year Ended January 29, 2000 (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Revenues $ - $ 13,866 $ 1,052 $ (1,052) $ 13,866 Cost of sales - 9,413 937 (980) 9,370 Selling, general, and administrative expenses - 2,744 14 (72) 2,686 Interest expense (income), net: External - 287 - - 287 Intercompany - 285 (285) - - Equity in earnings of subsidiaries (927) - - 927 - Earnings before income taxes 927 1,137 386 (927) 1,523 Provision for income taxes - 461 135 - 596 Net earnings $ 927 $ 676 $ 251 $ (927) $ 927
Condensed Consolidating Statement of Cash Flows For the Fiscal Year Ended January 29, 2000 (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Operating activities: Net earnings $ 927 $ 676 $ 251 $ (927) $ 927 Equity in earnings of subsidiaries (927) - - 927 - Depreciation and amortization - 468 1 - 469 Decrease (increase) in working capital 6 (4) 12 - 14 Other, net (14) 139 (5) - 120 (8) 1,279 259 - 1,530 Investing activities: Net additions to property and equipment - (677) (1) - (678) Business combination - (40) - - (40) - (717) (1) - (718) Financing activities: Repayments of long-term debt - (135) - - (135) Net (purchases) issuances of common stock (452) 18 - - (434) Dividend payments, net of tax benefit (319) 5 - - (314) Intercompany activity, net 779 (528) (251) - - 8 (640) (251) - (883) (Decrease)/increase in cash and cash equivalents - (78) 7 - (71) Cash and cash equivalents, beginning of year - 109 3 - 112 Cash and cash equivalents, end of year $ - $ 31 $ 10 $ - $ 41
40 SCHEDULE II THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE FISCAL YEARS ENDED FEBRUARY 2, 2002 (Millions) Charges to costs and Balance expenses Balance Beginning and other Deductions end of of period adjustments (a) period FISCAL YEAR ENDED February 2, 2002 Allowance for uncollectible accounts $ 76 $117 $(103) $ 90 FISCAL YEAR ENDED February 3, 2001 Allowance for uncollectible accounts $ 76 $ 91 $ (91) $ 76 FISCAL YEAR ENDED January 29, 2000 Allowance for uncollectible accounts $ 82 $ 81 $ (87) $ 76 (a) Write-off of accounts determined to be uncollectible, net of recoveries of $24 million in 2001, $23 million in 2000 and $23 million in 1999.
41 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 for the registrant's 2002 Annual Meeting of Shareowners to be filed with the commission 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." 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. Page in this Report Report of Independent Public Accountants 18 Consolidated Statement of Earnings for the three fiscal years ended February 2, 2002 19 Consolidated Balance Sheet - February 2, 2002, and February 3, 2001 20 Consolidated Statement of Cash Flows for the three fiscal years ended February 2, 2002 21 Consolidated Statement of Shareowners' Equity for the three fiscal years ended February 2, 2002 22 Notes to Consolidated Financial Statements 23-40 (2) Supplemental Financial Statement Schedule (for the three fiscal years ended February 2, 2002): Schedule II Valuation and Qualifying Accounts 41 (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. 42 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) (3) Exhibits (continued): Location 3.2 Certificate of Amendment of the Incorporated by Amended and Restated Certificate of Reference to Incorporation, dated May 21, 1999 Exhibit 3(b) of Form 10-Q filed June 8, 1999. 3.3 By-Laws of May Incorporated by Reference to Exhibit 3 of Form 10-Q filed June 12, 2001. 10.1 1994 Stock Incentive Plan Incorporated by Reference to Exhibit 10.1 of Form 10-K,filed April 19,2000. 10.2 Deferred Compensation Plan Incorporated by Reference to Exhibit 10.2 of Form 10-K,filed April 19, 2000. 10.3 Executive Incentive Compensation Filed Plan for Corporate Executives herewith. 10.4 Form of Employment Agreement Incorporated by Reference to Exhibit 10.4 of Form 10-K filed April 19, 2000. 12 Computation of Ratio of Filed Earnings to Fixed Charges herewith. 21 Subsidiaries of May Filed herewith. 23 Consent of Independent Public Filed Accountants herewith. 99 Letter to Securities Exchange Commission Filed regarding representations to the herewith. Registrant from Arthur Andersen LLP (b) 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. 43 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 5, 2002 By: /s/ Thomas D. Fingleton Thomas D. Fingleton Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of May and in the capacities and on the dates indicated. Date Signature Title Principal Executive Officer: April 5, 2002 /s/ Eugene S. Kahn Director, Eugene S. Kahn Chairman of the Board and Chief Executive Officer Principal Financial and Accounting Officer: April 5, 2002 /s/ Thomas D. Fingleton Executive Vice Thomas D. Fingleton President and Chief Financial Officer Directors: April 5, 2002 /s/ John L. Dunham Director and John L. Dunham President April 5, 2002 /s/ R. Dean Wolfe Director and R. Dean Wolfe Executive Vice President April 5, 2002 /s/ Marsha J. Evans Director Marsha J. Evans 44 Date Signature Title April 5, 2002 /s/ James M. Kilts Director James M. Kilts April 5, 2002 /s/ Russell E. Palmer Director Russell E. Palmer April 5, 2002 /s/ Michael R. Quinlan Director Michael R. Quinlan 45