10-Q 1 tenq102.txt FORM 10-Q FOR THE PERIOD ENDED MAY 4, 2002 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended May 4, 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) (314) 342-6300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 288,129,399 common stock, $.50 par value, as of May 4, 2002. 1 PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Millions) May 4, May 5, Feb. 2, ASSETS 2002 2001 2002 Current Assets: Cash and cash equivalents $ 61 $ 57 $ 52 Accounts receivable, net 1,690 1,869 1,938 Merchandise inventories 3,141 3,351 2,875 Other current assets 61 118 60 Total current assets 4,953 5,395 4,925 Property and equipment, at cost 9,101 8,485 8,996 Accumulated depreciation (3,841) (3,386) (3,732) Property and equipment, net 5,260 5,099 5,264 Goodwill 1,433 1,295 1,433 Intangible assets, net 179 165 179 Other assets 119 91 119 Total assets $ 11,944 $ 12,045 $ 11,920 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ 77 $ 378 $ 78 Current maturities of long-term debt 263 107 255 Accounts payable 1,269 1,232 1,023 Accrued expenses 854 872 910 Income taxes payable 96 111 272 Total current liabilities 2,559 2,700 2,538 Long-term debt 4,336 4,427 4,403 Deferred income taxes 706 594 696 Other liabilities 358 328 360 ESOP preference shares 283 296 286 Unearned compensation (152) (204) (204) Shareowners' equity 3,854 3,904 3,841 Total liabilities and shareowners' equity $ 11,944 $ 12,045 $ 11,920 The accompanying notes to condensed consolidated financial statements are an integral part of these balance sheets. 2 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (Millions, except per share) 13 Weeks Ended May 4, May 5, 2002 2001 Net retail sales $ 3,153 $ 3,115 Revenues $ 3,169 $ 3,153 Cost of sales 2,235 2,202 Selling, general, and administrative expenses 699 688 Division combination costs 40 - Interest expense, net 83 86 Earnings before income taxes 112 177 Provision for income taxes 42 68 Net earnings $ 70 $ 109 Basic earnings per share $ .23 $ .35 Diluted earnings per share $ .23 $ .34 Dividends paid per common share $.23-3/4 $.23-1/2 Weighted average shares outstanding: Basic 287.7 298.7 Diluted 308.9 321.2 The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 3 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Millions) 13 Weeks Ended May 4, May 5, 2002 2001 Operating Activities: Net earnings $ 70 $ 109 Depreciation and other amortization 130 120 Goodwill and intangible amortization 3 10 Division combination costs 40 - Working capital changes: Accounts receivable, net 247 244 Merchandise inventories (266) (377) Other current assets (1) (14) Accounts payable 246 267 Accrued expenses (74) (47) Income taxes payable (176) (182) Other, net 5 2 Cash flows from operations 224 132 Investing Activities: Net additions to property and equipment (144) (203) Business combination - (304) Cash flows used for investing activities (144) (507) Financing Activities: Net issuances (repayments): Short-term debt (1) 378 Long-term debt (9) (39) Net issuances of common stock 12 12 Dividend payments, net of tax benefit (73) (75) Cash flows (used for) provided by financing activities (71) 276 Increase(Decrease) in cash and cash equivalents 9 (99) Cash and cash equivalents, beginning of period 52 156 Cash and cash equivalents, end of period $ 61 $ 57 Cash paid during the period: Interest $ 105 $ 78 Income taxes 203 237 The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 4 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Interim Results. These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission and should be read in conjunction with the Notes to Consolidated Financial Statements (pages 29-35) in the 2001 Annual Report. In the opinion of management, this information is fairly presented and all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods have been included; however, certain items are included in these statements based on estimates for the entire year. Also, operating results of periods which exclude the Christmas season may not be indicative of the operating results that may be expected for the fiscal year. The seasonality of the Bridal Group varies from department stores, with sales and operating results peaking in the first half of the fiscal year. Division Combination Costs. In the first quarter of 2002, The May Department Stores Company (the company or the parent) announced that, effective August 3, 2002, it will combine its Kaufmann's division with its Filene's division, based in Boston, and its Meier & Frank division with its Robinsons-May division, based in Los Angeles. Total non-recurring pre-tax charges associated with the division combinations are expected to be approximately $110 million or $0.23 per share, of which $40 million or $0.08 per share was recognized in the first quarter. The significant components of the division combination costs and status of the related liability are summarized below: (Millions) Initial Non-cash Balance at Charge Payments Uses May 4, 2002 Severance benefits $ 37 $ - $ - $ 37 Other 3 - (3) - Total $ 40 $ - $ (3) $ 37 The company expects to incur division combination costs of approximately $60 million or $0.13 per share in the second quarter, and approximately $10 million or $0.02 per share in the third quarter. The company anticipates that the division combinations will save approximately $60 million pre-tax or $0.13 per share annually. Net earnings excluding division combination costs for the first quarter of 2002 were $95 million or $0.31 per share. Income Taxes. The effective income tax rate for the first quarter 2002 was 37.4%, compared with 38.8% in the first quarter of 2001. The rate reduction is due to the favorable impact of eliminating goodwill amortization, corporate structure changes and changes in tax regulations. Inventories. Merchandise inventories are principally valued at the lower of LIFO (last-in, first-out) cost basis or market using the retail method. Based upon current estimates, the company does not expect a LIFO provision or credit in 2002, compared to a fiscal 2001 LIFO credit of $30 million. No LIFO provision was recorded in the first quarter of 2002, compared with an $8 million provision in the first quarter of 2001. 5 Impact of New Accounting Pronouncements. In the first quarter of fiscal 2002, the company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which eliminates goodwill amortization and prescribes a new approach for assessing potential goodwill impairments. The company completed the transitional goodwill impairment test required by SFAS No. 142 and identified no potential impairment. The following table illustrates the impact of goodwill amortization on the results of the first quarter of 2001. (Millions, except per share) 13 Weeks Ended May 4, May 5, 2002 2001 Reported net income $ 70 $ 109 Add back: Goodwill amortization - 8 Adjusted net income $ 70 $ 117 Basic earnings per share: Reported net income $0.23 $0.35 Add back: Goodwill amortization - 0.03 Adjusted net income $0.23 $0.38 Diluted earnings per share: Reported net income $0.23 $0.34 Add back: Goodwill amortization - 0.03 Adjusted net income $0.23 $0.37 In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 eliminates the requirement to classify gains and losses from the extinguishment of indebtedness as extraordinary, requires certain lease modifications to be treated the same as a sale-leaseback transaction, and makes other non-substantive technical corrections to existing pronouncements. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with earlier adoption encouraged. The company expects the only impact of adopting SFAS No. 145 to be the reclassification of prior year extraordinary losses to interest expense and income taxes. Reclassifications. Certain prior period amounts have been reclassified to conform with current year presentation. Earnings per Share. The following table reconciles net earnings and weighted average shares outstanding to amounts used to calculate basic and diluted earnings per share ("EPS") for the periods shown (millions, except per share). 13 Weeks Ended May 4, 2002 May 5, 2001 Earnings Shares EPS Earnings Shares EPS Net earnings $ 70 $ 109 ESOP preference shares' dividends (4) (5) Basic EPS 66 287.7 $ 0.23 104 298.7 $ 0.35 ESOP preference shares 4 19.0 4 19.8 Assumed exercise of options (treasury stock method) - 2.2 - 2.7 Diluted EPS $ 70 308.9 $ 0.23 $ 108 321.2 $ 0.34 6 Condensed Consolidating Financial Information. The 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. Condensed consolidating balance sheets as of May 4, 2002, May 5, 2001, and February 2, 2002 and the related condensed consolidating statements of earnings and cash flows for the thirteen week periods ended May 4, 2002 and May 5, 2001 are presented below. 7 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Balance Sheet May 4, 2002 (Unaudited) (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated ASSETS Current assets: Cash and cash equivalents $ - $ 44 $ 17 $ - $ 61 Accounts receivable, net - 1,681 45 (36) 1,690 Merchandise inventories - 3,053 88 - 3,141 Other current assets - 44 17 - 61 Total current assets - 4,822 167 (36) 4,953 Property and equipment, at cost - 8,939 162 - 9,101 Accumulated depreciation - (3,810) (31) - (3,841) Property and equipment, net - 5,129 131 - 5,260 Goodwill - 1,128 305 - 1,433 Intangible assets - 8 171 - 179 Other assets - 109 10 - 119 Intercompany (payable) receivable (866) 561 305 - - Investment in subsidiaries 4,851 - - (4,851) - Total assets $ 3,985 $11,757 $ 1,089 $ (4,887) $11,944 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ - $ 77 $ - $ - $ 77 Current maturities of long- term debt - 262 1 - 263 Accounts payable - 1,218 51 - 1,269 Accrued expenses - 804 86 (36) 854 Income taxes payable - 77 19 - 96 Total current liabilities - 2,438 157 (36) 2,559 Long-term debt - 4,335 1 - 4,336 Intercompany note payable (receivable) - 3,200 (3,200) - - Deferred income taxes - 639 67 - 706 Other liabilities - 822 - (464) 358 ESOP preference shares 283 - - - 283 Unearned compensation (152) (152) - 152 (152) Shareowners' equity 3,854 475 4,064 (4,539) 3,854 Total liabilities and shareowners' equity $ 3,985 $11,757 $ 1,089 $ (4,887) $11,944
8 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Statement of Earnings For the Thirteen Weeks Ended May 4, 2002 (Unaudited) (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Revenues $ - $ 3,019 $ 355 $ (205) $ 3,169 Cost of sales - 2,161 258 (184) 2,235 Selling, general, and administrative expenses - 664 62 (27) 699 Division combination costs - 40 - - 40 Interest expense (income), net: External - 83 - - 83 Intercompany - 70 (70) - - Equity in earnings of subsidiaries (70) - - 70 - Earnings before income taxes 70 1 105 (64) 112 Provision for income taxes - 1 41 - 42 Net earnings $ 70 $ - $ 64 $ (64) $ 70
Condensed Consolidating Statement of Cash Flows For the Thirteen Weeks Ended May 4, 2002 (Unaudited) (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Operating activities: Net earnings $ 70 $ - $ 64 $ (64) $ 70 Equity in earnings of subsidiaries (70) - - 70 - Depreciation and other amortization - 123 7 - 130 Goodwill and intangible amortization - 1 2 - 3 Division combination costs - 40 - - 40 (Increase) Decrease in working capital (6) 9 (27) - (24) Other, net 25 (27) 13 (6) 5 19 146 59 - 224 Investing activities: Net additions to property and equipment - (133) (11) - (144) - (133) (11) - (144) Financing activities: Net repayments of short-term debt - (1) - - (1) Net repayments of long-term debt - (9) - - (9) Net issuances of common stock 8 4 - - 12 Dividend payments, net of tax benefit (74) 1 - - (73) Intercompany activity, net 47 - (47) - - (19) (5) (47) - (71) Increase in cash and cash equivalents - 8 1 - 9 Cash and cash equivalents, beginning of year - 36 16 - 52 Cash and cash equivalents, end of year $ - $ 44 $ 17 $ - $ 61
9 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Balance Sheet May 5, 2001 (Unaudited) (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated ASSETS Current assets: Cash and cash equivalents $ - $ 40 $ 17 $ - $ 57 Accounts receivable, net - 1,864 42 (37) 1,869 Merchandise inventories - 3,280 71 - 3,351 Other current assets - 106 12 - 118 Total current assets - 5,290 142 (37) 5,395 Property and equipment, at cost - 8,405 80 - 8,485 Accumulated depreciation - (3,370) (16) - (3,386) Property and equipment, net - 5,035 64 - 5,099 Goodwill - 1,115 180 - 1,295 Intangible assets - 6 159 - 165 Other assets - 89 2 - 91 Intercompany (payable) receivable (680) 458 222 - - Investment in subsidiaries 4,677 - - (4,677) - Total assets $ 3,997 $11,993 $ 769 $ (4,714) $12,045 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ - $ 378 $ - $ - $ 378 Current maturities of long- term debt - 107 - - 107 Accounts payable - 1,186 46 - 1,232 Accrued expenses 1 856 52 (37) 872 Income taxes payable - 111 - - 111 Total current liabilities 1 2,638 98 (37) 2,700 Long-term debt - 4,426 1 - 4,427 Intercompany note payable (receivable) - 3,200 (3,200) - - Deferred income taxes - 591 3 - 594 Other liabilities - 775 - (447) 328 ESOP preference shares 296 - - - 296 Unearned compensation (204) (204) - 204 (204) Shareowners' equity 3,904 567 3,867 (4,434) 3,904 Total liabilities and shareowners' equity $ 3,997 $11,993 $ 769 $ (4,714) $12,045
10 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Statement of Earnings For the Thirteen Weeks Ended May 5, 2001 (Unaudited) (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Revenues $ - $ 3,061 $ 334 $ (242) $ 3,153 Cost of sales - 2,164 262 (224) 2,202 Selling, general, and administrative expenses - 674 37 (23) 688 Interest expense (income), net: External - 86 - - 86 Intercompany - 71 (71) - - Equity in earnings of subsidiaries (109) - - 109 - Earnings before income taxes 109 66 106 (104) 177 Provision for income taxes - 30 38 - 68 Net earnings $ 109 $ 36 $ 68 $ (104) $ 109
Condensed Consolidating Statement of Cash Flows For the Thirteen Weeks Ended May 5, 2001 (Unaudited) (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Operating activities: Net earnings $ 109 $ 36 $ 68 $ (104) $ 109 Equity in earnings of subsidiaries (109) - - 109 - Depreciation and other amortization - 117 3 - 120 Goodwill and intangible amortization - 8 2 - 10 (Increase)Decrease in working capital (5) (107) 3 - (109) Other, net 32 - (25) (5) 2 27 54 51 - 132 Investing activities: Net additions to property and equipment - (197) (6) - (203) Business combinations - (304) - - (304) - (501) (6) - (507) Financing activities: Net issuances of short-term debt - 378 - - 378 Net repayments of long-term debt - (38) (1) - (39) Net issuances of common stock 3 9 - - 12 Dividend payments, net of tax benefit (76) 1 - - (75) Intercompany activity, net 46 - (46) - - (27) 350 (47) - 276 Decrease in cash and cash equivalents - (97) (2) - (99) Cash and cash equivalents, beginning of period - 137 19 - 156 Cash and cash equivalents, end of period $ - $ 40 $ 17 $ - $ 57
11 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Balance Sheet February 2, 2002 (Unaudited) (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 - 1,128 305 - 1,433 Intangible assets 6 173 - 179 Other assets - 109 10 - 119 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
12 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations 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 periods. Net retail sales increases (decreases) are as follows: Store-for- Total Store 13 Weeks Ended May 4, 2002 1.2% (2.4)% The total net retail sales increase for the first quarter of 2002 was due to $111 million of new store sales offset by a $73 million decrease in store-for- store sales. The following table presents the components of costs and expenses, as a percent of revenues, for the first quarter. 2002 2001 Revenues 100.0% 100.0% Cost of sales 70.5 69.8 Selling, general and administrative expenses 22.1 21.8 Division combination costs 1.3 0.0 Interest expense, net 2.6 2.8 Earnings before income taxes 3.5 5.6 Provision for income taxes 37.4* 38.8* Net earnings 2.2% 3.5% * - Percent represents effective income tax rate. Revenues include sales from all stores operating during the period, finance charge revenues, and lease department income. The fluctuation in revenues is due primarily to the change in net retail sales discussed above. Cost of sales as a percent of revenues increased 0.7% in the first quarter of 2002 principally due to 1.1% increase in buying and occupancy costs, partially offset by the effect of the LIFO (last-in, first-out) cost method. Based upon current estimates, we do not expect a LIFO provision or credit in fiscal 2002, compared to a fiscal 2001 LIFO credit of $30 million. No LIFO provision was recorded in the first quarter of 2002, compared with an $8 million provision in the first quarter of 2001. Selling, general, and administrative expenses as a percent of revenues increased from 21.8% in the first quarter of 2001 to 22.1% in the first quarter of 2002, due to a 0.3% increase in payroll and 0.7% increase in other expenses, including insurance, advertising and pension costs, offset by a 0.5% decrease in credit expense and a 0.2% decrease due to the elimination of goodwill amortization. 13 Total non-recurring pre-tax charges associated with the division combinations (Kaufmann's with Filene's, based in Boston, and Meier & Frank with Robinsons- May, based in Los Angeles) are expected to be approximately $110 million or $0.23 per share, of which $40 million ($25 million after-tax) or $0.08 per share was recognized in the first quarter. We expect to incur division combination costs of approximately $60 million or $0.13 per share in the second quarter, and approximately $10 million or $0.02 per share in the third quarter. Approximately $95 million of these costs are expected to result in cash payments, primarily in the second quarter of 2002. We also anticipate that the division combinations will save approximately $60 million pre-tax or $0.13 per share annually. Components of net interest expense for the first quarter were (millions): 2002 2001 Interest expense $ 94 $ 94 Interest income (6) (4) Capitalized interest (5) (4) Net interest expense $ 83 $ 86 Interest expense principally relates to long-term debt Short-term borrowings for the first quarter were (dollars in millions): 2002 2001 Average balance outstanding $ 48 $112 Average interest rate on average balance 1.8% 4.8% The effective income tax rate for the first quarter of 2002 was 37.4%, compared with 38.8% in the first quarter of 2001. The rate reduction is due to the favorable impact of eliminating goodwill amortization, corporate structure changes and changes in tax regulations. Operating results excluding division combination costs for the trailing years were (millions, except per share): 52 Weeks Ended May 4, May 5, 2002 2001 Net retail sales $ 14,199 $ 14,424 Revenues 14,191 14,614 Net earnings 692 847 Diluted earnings per share 2.19 2.61 Financial Condition Cash Flows. Cash flows from operations were $224 million and $132 million in the first quarter of 2002 and 2001, respectively. The increase in current year cash flows is primarily due to changes in working capital accounts. 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 can borrow up to $1.0 billion under our credit agreements. In addition, we have filed with the Securities and Exchange Commission shelf registration statements that enable us to issue up to $525 million of debt securities. 14 As of May 23, 2002, our bonds are rated A2 by Moody's Investors Service, Inc. and A+ by Standard & Poor's Corporation. Our commercial paper is rated P1 by Moody's and A1 by Standard & Poors. Our senior unsecured bank credit agreement is rated A1 by Moody's. Financial Ratios. Key financial ratios for the periods indicated are: May 4, May 5, Feb. 2, 2002 2001 2002 Current Ratio 1.9 2.0 1.9 Debt-Capitalization Ratio 51% 52% 51% Fixed Charge Coverage* 3.3x 3.8x 3.4x * Fixed charge coverage, which is presented for the 52 weeks ended May 4, 2002, May 5, 2001 and February 2, 2002, is defined as earnings before division combination costs and gross interest expense, the expense portion of interest on the ESOP debt, rent expense and income taxes divided by gross interest expense, interest expense on the ESOP debt, and total rent expense. Recent Sales Results Sales for the four-week period ending June 1, 2002 were $1.05 billion, a 4.0% decrease over $1.10 billion in the similar period last year. Store-for-store sales decreased 7.6%. Sales for the first four months of fiscal 2002 were $4.21 billion, a 0.2% decrease, compared with the similar period last year. Store-for-store sales decreased 3.7%. Impact of New Accounting Pronouncements In the first quarter of fiscal 2002, we adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," which eliminates goodwill amortization and prescribes a new approach for assessing potential goodwill impairments. We completed the transitional goodwill impairment test required by SFAS No. 142 and identified no potential impairment. In the first quarter of fiscal 2001, selling, general, and administrative expenses included $9 million of goodwill amortization expense, which decreased net earnings by $8 million. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 eliminates the requirement to classify gains and losses from the extinguishment of indebtedness as extraordinary, requires certain lease modifications to be treated the same as a sale-leaseback transaction, and makes other non-substantive technical corrections to existing pronouncements. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002 with earlier adoption encouraged. We expect the only impact of adopting SFAS No. 145 to be the reclassification of prior year extraordinary losses to interest expense and income taxes. 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, our ability to hire and retain qualified associates, and 15 our ability to manage the business to minimize the disruption of sales and customer service as a result of the division combinations. Because of these factors, actual performance could differ materially from that described in the forward-looking statements. Item 3 - 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 offices located outside the United States are generally paid in local currency and are not material. During the first quarter of fiscal 2002 and fiscal 2001, we did not enter into any derivative financial instruments. PART II - OTHER INFORMATION Item 1 - 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 2 - Changes in Securities - None. Item 3 - Defaults Upon Senior Securities - None. Item 4 - Submission of Matters to a Vote of Security Holders - None. Item 5 - Other Information - None. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits (12) - Computation of Ratio of Earnings to Fixed Charges (15) - Letter Re:Unaudited Interim Financial Information (b) Reports on Form 8-K A report dated April 8, 2002, which contained information concerning debt ratings and incorporated by reference registrant's Annual Report and Form 10-K for the fiscal year ended February 2, 2002. A report dated April 12, 2002, which contained information concerning the changes in Registrant's certifying accountant. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE MAY DEPARTMENT STORES COMPANY (Registrant) Date: June 14, 2002 /s/ Thomas D. Fingleton Thomas D. Fingleton Executive Vice President and Chief Financial Officer 17 Exhibit 12 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES FOR THE FIVE FISCAL YEARS ENDED FEBRUARY 2, 2002 AND FOR THE THIRTEEN WEEKS ENDED MAY 4, 2002 AND MAY 5, 2001 (Dollars in millions) 13 Weeks Ended Fiscal Year Ended May 4, May 5, Feb. 2, Feb. 3, Jan. 29, Jan. 30, Jan. 31, 2002 2001 2002 2001 2000 1999 1998 Earnings Available for Fixed Charges: Pretax earnings from continuing operations $ 112 $ 177 $ 1,144 $ 1,402 $ 1,523 $ 1,395 $ 1,279 Fixed charges (excluding interest capitalized and pretax preferred stock dividend requirements) 102 103 406 406 346 344 363 Dividends on ESOP Preference Shares (5) (5) (22) (23) (24) (25) (26) Capitalized interest amortization 2 2 8 8 7 7 6 211 277 1,536 1,793 1,852 1,721 1,622 Fixed Charges: Gross interest expense (a) $ 98 $ 99 $ 396 $ 395 $ 340 $ 339 $ 353 Interest factor attributable to rent expense 9 8 32 28 22 21 23 107 107 428 423 362 360 376 Ratio of Earnings to Fixed Charges 2.0 2.6 3.6 4.2 5.1 4.8 4.3 (a) Represents interest expense on long-term and short-term debt, ESOP debt and amortization of debt discount and debt issue expense.