-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BbLGOusjzF4yaQJPGG30uvBQQ5zzN/RKnwM0eEMQObVZpb1tS73LAJW2u88mKJBa OoNOePCHk1Xu3Q2G/weMew== 0000063416-99-000005.txt : 19990422 0000063416-99-000005.hdr.sgml : 19990422 ACCESSION NUMBER: 0000063416-99-000005 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990130 FILED AS OF DATE: 19990421 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAY DEPARTMENT STORES CO CENTRAL INDEX KEY: 0000063416 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 431104396 STATE OF INCORPORATION: DE FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-00079 FILM NUMBER: 99598004 BUSINESS ADDRESS: STREET 1: 611 OLIVE ST CITY: ST LOUIS STATE: MO ZIP: 63101 BUSINESS PHONE: 3143426300 10-K405 1 1998 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 30, 1999 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 May's common stock held by non-affiliates as of April 3, 1999: $13,024,264,023 Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 334,848,699 shares of common stock, $.50 par value, as of April 3, 1999. Documents incorporated by reference: 1. Portions of May's 1998 Annual Report to Shareowners are incorporated into Parts I and II. 2. Portions of May's 1999 Proxy Statement, dated April 16, 1999, are incorporated into Part III. PART I Items 1 and 2. Business and Description of Property May, a corporation organized under the laws of the State of Delaware in 1976, became the successor to The May Department Stores Company, a New York corporation (May NY) in a reincorporation from New York to Delaware pursuant to a statutory share exchange accomplished in 1996. As a result of the share exchange, May NY became a wholly owned subsidiary of May. May NY was organized under the laws of the State of New York in 1910, as the successor to a business founded by David May, who opened his first store in Leadville, Colorado, in 1877. May operates eight quality regional department store companies nationwide under eleven trade names. At fiscal year-end 1998, May operated 393 department stores in 32 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 29 markets, including New York/New Jersey Metro, Chicago, Boston, Washington D.C., Detroit, Houston, Atlanta, Dallas, and Miami Hecht's and 18 markets, including Washington D.C. Metro, Strawbridge's Philadelphia (Strawbridge's), Baltimore, Norfolk, and Richmond Foley's 17 markets, including Houston, Dallas/Fort Worth, Denver, San Antonio, Austin, and Oklahoma City Robinsons-May 9 markets, including Los Angeles/Orange County, Riverside/San Bernardino, Phoenix, San Diego, and Anaheim Filene's 15 markets, including Boston Metro, Southern Connecticut, Hartford, Providence, and Albany Kaufmann's 20 markets, including Pittsburgh, Cleveland, Buffalo, Rochester, Syracuse, and Akron Famous-Barr, L.S. 20 markets, including St. Louis, Kansas City Ayres and The (The Jones Store), Indianapolis (L.S. Ayres), Jones Store Fort Wayne, and South Bend Meier & Frank Four markets: Portland/Vancouver, Salem, Eugene, and Medford May employs approximately 60,000 full-time and 67,000 part-time associates in 32 states, the District of Columbia, and nine offices overseas. 2 Management's Discussion and Analysis (pages 16-20) of May's 1998 Annual Report to Shareowners is incorporated herein by reference. A. Property Ownership The following summarizes the property ownership of department stores at January 30, 1999: % of Gross Number of Building Stores* Sq. Footage Entirely or mostly owned 219 59% Entirely or mostly leased 103 26 Owned on leased land 71 15 393 100% * Includes a total of 18 department stores subject to financing. B. Credit Sales Sales at May's department stores are made for cash or credit, including May's 30-day charge accounts and open-end credit plans, which include revolving charge accounts and revolving installment accounts. During the fiscal year ended January 30, 1999, 43.6% of revenues were made through May's credit plans. In 1991, May formed May National Bank of Arizona (MBA) and May National Bank of Ohio (MBO), which are indirectly wholly-owned and consolidated subsidiaries of May. During fiscal 1998, MBA and MBO extended credit to customers of May's Lord & Taylor, Foley's (beginning March 1998), Hecht's, Strawbridge's, Robinsons-May, Filene's (beginning September 1998), Kaufmann's, Famous-Barr, L.S. Ayres, The Jones Store (beginning September 1998), and Meier & Frank department stores companies. Throughout 1998, MBA and MBO sold the resulting accounts receivables at face value to May NY. In addition, MBA and MBO process remittances for their parent, Grande Levee, Inc., and its other subsidiaries. MBA and MBO receive processing fee revenue for this service. C. Competition in Retail Merchandising May's retail merchandising business is conducted under highly competitive conditions. Although May is one of the nation's largest department store retailers, it has numerous competitors at the local level which compete with May's individual department stores. Competition at the local level is characterized by many factors including convenience of facilities, reputation, procurement of merchandise, product mix, advertising, price, quality, service, and credit availability. May believes that it is in a strong competitive position with regard to each of these factors. 3 D. Executive Officers of May The names and ages (as of April 21, 1999) 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 49 President and Chief Executive Officer Jerome T. Loeb 58 Chairman of the Board Anthony J. Torcasio 53 Vice Chairman; and Chief Executive Officer, May Merchandising Company John L. Dunham 52 Executive Vice President and Chief Financial Officer R. Dean Wolfe 55 Executive Vice President Alan E. Charlson 50 Senior Vice President and Chief Counsel William D. Edkins 46 Senior Vice President Lonny J. Jay 57 Senior Vice President Jan R. Kniffen 50 Senior Vice President Richard A. Brickson 51 Secretary and Senior Counsel Martin M. Doerr 44 Vice President Michael G. Culhane 36 Vice President Each of the above named executive officers shall remain in office until the annual meeting of directors following the next annual meeting of shareowners of May and until the officer's successor shall have been elected and shall qualify. Mr. David C. Farrell retired as an officer and director on April 30, 1998. At that time Mr. Kahn became president and chief executive officer and Mr. Loeb became chairman of the board. Mr. Louis J. Garr, Jr. retired on January 31, 1999. Mr. Charlson was appointed senior vice president and chief counsel on July 29, 1998. Messrs. Kahn, Loeb, Torcasio, Dunham, and Wolfe are also directors of May. Each of the executive officers has been an officer of May for at least the last five years, with the following exceptions: Mr. Kahn served as president and chief executive officer of Filene's from 1992 to March 1996 when he became vice chairman. He was appointed executive vice chairman in June 1997 and assumed his current position in May 1998. Mr. Dunham served as chairman of May Merchandising Company from 1993 to May 1996 when he assumed his current position and became an executive officer of May. 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. Mr. Doerr joined May in 1992 as vice president and became an executive officer in 1994. 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. 4 Item 3. Legal Proceedings There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which May or any of its subsidiaries is a party or of which any of their property is the subject. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the 13 weeks ended January 30, 1999. PART II Item 5. Market for May's Common Equity and Related Shareowner Matters Common Stock Dividends and Market Prices (page 20) of May's 1998 Annual Report to Shareowners are incorporated herein by reference. Item 6. Selected Financial Data The Eleven Year Financial Summary (pages 32 and 33) of May's 1998 Annual Report to Shareowners is incorporated herein by reference. In addition, basic earnings per share from continuing operations and the weighted average shares used to calculate basic earnings per share for the last five years are as follows: Earnings Shares Per Share (millions) 1998 $ 2.43 342.6 1997 2.18 348.5 1996 1.97 370.8 1995 1.82 373.4 1994 1.69 372.6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis (pages 16-20) and Notes to Consolidated Financial Statements (pages 25-31) of May's 1998 Annual Report to Shareowners are incorporated herein by reference. Item 8. Financial Statements and Supplementary Data Consolidated Financial Statements (pages 21-24), Notes to Consolidated Financial Statements (pages 25-31), Report of Independent Public Accountants (page 34), and Quarterly Results (page 26) of May's 1998 Annual Report to Shareowners are incorporated herein by reference. In the first quarter 1997, the company had an aftertax extraordinary loss of $4 million ($5 million pretax), or $0.01 per share related to the early retirement of debt. 5 SUMMARIZED FINANCIAL INFORMATION - THE MAY DEPARTMENT STORES COMPANY, NEW YORK. Summarized financial information of The May Department Stores Company, New York, is set forth below for 1998, 1997 and 1996. January 30, January 31, (Millions) 1999 1998 Financial Position Current assets $ 4,984 $ 4,878 Noncurrent assets 5,557 5,048 Current liabilities 2,083 1,894 Noncurrent liabilities 7,815 7,437 52 Weeks Ended Jan. 30, Jan. 31, Feb. 1, 1999 1998 1997 Operating Results Revenues $ 13,413 $ 12,685 $ 12,000 Cost of sales 9,224 8,732 8,226 Net earnings from continuing operations before extraordinary loss 662 591 662 Net earnings 662 587 657 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Items 10, 11, 12, 13. Directors and Executive Officers of May, Executive Compensation, Security Ownership of Certain Beneficial Owners and Management, Certain Relationships and Related Transactions Pursuant to paragraph G (Information to be Incorporated by Reference) of the General Instructions to Form 10-K, the information required by Items 10, 11, 12 and 13 (other than information about executive officers of May) is incorporated by reference from the definitive proxy statement dated April 16, 1999, and filed pursuant to Regulation 14A. Information about executive officers of May is set forth in Part I of this Form 10-K, under the heading "Items 1. and 2. Business and Description of Property." 6 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents filed as part of this report: (1) Financial Statements. Incorporated by reference to May's 1998 Annual Report to Shareowners (Exhibit 13): Page in Annual Report Financial Statements- Consolidated Statement of Earnings for the three fiscal years ended January 30, 1999 21 Consolidated Balance Sheet - January 30, 1999, and January 31, 1998 22 Consolidated Statement of Cash Flows for the three fiscal years ended January 30, 1999 23 Consolidated Statement of Shareowners' Equity for the three fiscal years ended January 30, 1999 24 Notes to Consolidated Financial Statements 25-31 Report of Independent Public Accountants 34 Page in this Report (2) Supplemental Financial Statement Schedule (for the three fiscal years ended January 30, 1999): Report of Independent Public Accountants on Schedule II 11 II Valuation and Qualifying Accounts 12 (3) Exhibits: Location 3(a) Amended and Restated Certificate Incorporated of Incorporation of May, by Reference dated May 22, 1996 to Exhibit 4(a) of Post Effective Amendment No. 1 to Form S-8, filed May 29, 1996. 3(b) By-Laws of May, as amended Incorporated by Reference to Exhibit 3 of Form 10-Q, filed December 8, 1998. 7 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) Location 12 Computation of Ratio of Filed Earnings to Fixed Charges herewith. 13 The May Department Stores Filed Company 1998 Annual Report to herewith. Shareowners (only those portions specifically incorporated by reference shall be deemed filed with the Commission) 21 Subsidiaries of May Filed herewith. 23 Consent of Independent Public Page 11 of Accountants this Report. 27 Financial Data Schedule Filed herewith. 99 Form 11-K Annual Report of the Filed Profit Sharing and Savings Plan herewith. of The May Department Stores Company for the fiscal year ended December 31, 1998 (4) Reports on Form 8-K A report dated November 13, 1998 (Date of earliest event reported - November 11, 1998) which contained information concerning the debt rating on May's long-term debt and its bank credit facility. All other schedules and exhibits of May for which provision is made in the applicable regulations of the Securities and Exchange Commission have been omitted, as they are not required or are inapplicable or the information required thereby has been given otherwise. 8 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, May has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE MAY DEPARTMENT STORES COMPANY Date: April 21, 1999 By: /s/ John L. Dunham John L. Dunham Director, 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 21, 1999 /s/ Eugene S. Kahn Director, Eugene S. Kahn President and Chief Executive Officer Principal Financial and Accounting Officer: April 21, 1999 /s/ John L. Dunham Director, John L. Dunham Executive Vice President and Chief Financial Officer Directors: April 21, 1999 /s/ Jerome T. Loeb Director and Jerome T. Loeb Chairman of the Board 9 Date Signature Title April 21, 1999 /s/ Anthony J. Torcasio Director and Vice Anthony J. Torcasio Chairman; and Chief Executive Officer, May Merchandising Company April 21, 1999 /s/ R. Dean Wolfe Director and R. Dean Wolfe Executive Vice President April 21, 1999 /s/ Marsha J. Evans Director Marsha J. Evans April 21, 1999 /s/ Helene L. Kaplan Director Helene L. Kaplan April 21, 1999 /s/ James M. Kilts Director James M. Kilts April 21, 1999 /s/ Edward H. Meyer Director Edward H. Meyer April 21, 1999 /s/ Russell E. Palmer Director Russell E. Palmer April 21, 1999 /s/ Michael R. Quinlan Director Michael R. Quinlan April 21, 1999 /s/ William P. Stiritz Director William P. Stiritz April 21, 1999 /s/ Robert D. Storey Director Robert D. Storey April 21, 1999 /s/ Murray L. Weidenbaum Director Murray L. Weidenbaum 10 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The May Department Stores Company: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in The May Department Stores Company's Annual Report to Shareowners incorporated by reference in this Form 10-K, and have issued our report thereon dated February 10, 1999. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. Schedule II included in this Form 10-K is the responsibility of the company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the consolidated financial statements. The Schedule has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP 1010 Market Street St. Louis, Missouri 63101-2089 February 10, 1999 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Annual Report on Form 10-K for the year ended January 30, 1999 into the Company's previously filed Registration Statements on Form S-3 (No. 333-71413, 333-71413-01, 333-11539 and 333-11539-01) and Form S-8 (No. 33-21415, 33-98045, 33-58985, 333-00957 and 333-76227). ARTHUR ANDERSEN LLP 1010 Market Street St. Louis, Missouri 63101-2089 April 21, 1999 11 SCHEDULE II THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE FISCAL YEARS ENDED January 30, 1999 (Millions) Charges to costs and Balance expenses Balance beginning and other Deductions end of of period adjustments (a) period FISCAL YEAR ENDED JANUARY 30, 1999 Allowance for uncollectible accounts $ 96 $ 76 $ (93) $ 82 FISCAL YEAR ENDED JANUARY 31, 1998 Allowance for uncollectible accounts $ 104 $ 104 $ (112) $ 96 FISCAL YEAR ENDED FEBRUARY 1, 1997 Allowance for uncollectible accounts $ 75 $ 134 $ (105) $ 104 (a) Write-off of accounts determined to be uncollectible, net of recoveries of $25 million in 1998 and $26 million in 1997 and 1996. 12 Exhibit 21 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES SUBSIDIARIES OF MAY The corporations listed below are subsidiaries of May, and all are included in the consolidated financial statements of May as subsidiaries (unnamed subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary): Jurisdiction in which Name organized The May Department Stores Company New York May Capital, Inc. Delaware Grande Levee, Inc. (formerly May Funding, Inc.) Nevada Leadville Insurance Company Vermont EX-12 2 1998 EXHIBIT 12 TO FORM 10K-405
Exhibit 12 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES FOR THE FIVE FISCAL YEARS ENDED JANUARY 30, 1999 (Dollars in Millions) Fiscal Year Ended Jan. 30, Jan. 31, Feb. 1, Feb. 3, Jan. 28, 1999 1998 1997 1996 1995 Earnings Available for Fixed Charges: Pretax earnings from continuing operations $ 1,395 $ 1,279 $ 1,232 $ 1,160 $ 1,079 Fixed charges (excluding interest capitalized and pretax preferred stock dividend requirements) 344 363 346 317 293 Dividends on ESOP Preference Shares (25) (26) (26) (28) (28) Capitalized interest amortization 7 6 6 5 4 1,721 1,622 1,558 1,454 1,348 Fixed Charges: Gross interest expense (a) $ 339 $ 353 $ 341 $ 316 $ 289 Interest factor attributable to rent expense 21 23 22 20 19 360 376 363 336 308 Ratio of Earnings to Fixed Charges 4.8 4.3 4.3 4.3 4.4 (a) Represents interest expense on long-term and short-term debt, ESOP debt and amortization of debt discount and debt issue expense.
EX-13 3 1998 EXHIBIT 13 TO FORM 10-K405 EXHIBIT 13 [The following "Management's Discussion and Analysis" section is a reproduction of the same named section included in the paper format Annual Report on pages 16-20.] Management's Discussion and Analysis Our 24th consecutive year of record sales and earnings per share positions May as one of the most consistent companies in the retail industry. Our five-year earnings per share compound growth rate of 10.0% and our 22.2% return on equity are among the industry's best. Sales were $13.1 billion, an increase of 6.4% over 1997 sales of $12.3 billion. The increase reflects a 3.5% rise in store-for- store sales, 1998 store openings, and the full-year impact of 1997 store openings. Store-for store sales increases for the first through fourth quarters in 1998 were 4.6%, 4.3%, 2.2%, and 3.3%, respectively. Our 1998 diluted earnings per share increased 11.1% to $2.30 from last year's $2.07. Net earnings totaled $849 million, compared with $779 million last year. Return on beginning equity increased to 22.2% from 21.2% in 1997, and return on net assets was 19.8%, compared with 18.5% in 1997. During 1998, the company purchased 11 former Mercantile stores. Ten of these stores were in operation at fiscal year-end 1998. The remaining store was closed for remodeling and will reopen in fall 1999. We acquired two additional stores which will open in 1999. We opened 29 department stores as detailed below during 1998, including the 10 former Mercantile stores, adding 4.6 million square feet of retail space: Lord & Taylor: 10 stores NY Palisades Ctr. West Nyack South Shore Bayshore Walt Whitman Long Island MD Owings Mill Baltimore White Marsh Baltimore Annapolis Mall Annapolis The Mall Columbia VA Dulles Town Ctr. Reston TX Willowbrook Houston KY St. Matthews Louisville Hecht's: 3 stores VA Patrick Henry Newport News Lynnhaven Virginia Beach Dulles Town Ctr. Reston Foley's: 2 stores CO Chapel Hill Colorado Springs TX Ridgmar Mall Ft. Worth Robinsons-May: 1 store CA Inland Ctr. San Bernardino Filene's: 2 stores NY Palisades Ctr. West Nyack MA Bangor Mall Bangor Kaufmann's: 2 stores PA Robinson Town Ctr. Pittsburgh OH Richmond Town Sq. Cleveland Famous-Barr: 9 stores Operating as The Jones Store: MO Metro North Kansas City Bannister Kansas City Blue Ridge Kansas City Independence Independence KS Metcalf South Overland Park West Ridge Topeka Prairie Village Ctr. Prairie Village Operating as Famous-Barr: KY Towne Sq. Owensboro Operating as L.S. Ayres: IN Honey Creek Sq. Terre Haute In addition, we remodeled 19 department stores in 1998, totaling 1.5 million retail square feet, which included the expansion of five stores by 164,000 square feet. At fiscal year-end, May operated 393 department stores in 32 states and the District of Columbia. Our expansion program for 1999 includes 18 new department stores, totaling 2.5 million square feet of retail space. In addition, the company plans to remodel 29 department stores totaling 1.5 million square feet of retail space, which includes the expansion of 23 stores by a total of 734,000 square feet. We also plan to continue the aggressive pursuit of home store sales by converting space previously dedicated to consumer electronics. We plan to complete conversion of this space in 190 stores in 1999 and 70 stores in 2000. The new-store plan for 1999 through 2003 would add 78 new department stores totaling 12 million retail square feet, a 3% annualized increase, net of closings. During this five-year period, May plans to invest $1.5 billion for new stores, $800 million to expand and remodel existing stores, and $360 million related to systems and operations. These are the major components of our $3.4 billion capital plan. During 1998, the company completed a $500 million stock repurchase program totaling 12.5 million shares. The 1998 buyback was in addition to a $300 million 1997 stock repurchase program totaling 9.6 million shares and a $600 million 1996 stock repurchase program totaling 19.1 million shares. In February 1999, the company announced plans to repurchase up to an additional $500 million of May shares. Review of Operations Diluted earnings per share reached $2.30 in 1998, compared with $2.07 in 1997 and $1.87 in 1996. Net earnings totaled $849 million in 1998, compared with $779 million in 1997 and $749 million in 1996. The 1998 and 1997 diluted earnings per share growth rates were 11.1% and 10.7%, respectively. Net earnings growth rates were lower than diluted earnings per share growth rates due to $1.4 billion of stock repurchases completed in 1998, 1997, and 1996. Return on revenues was 6.3% in 1998, compared with 6.1% in 1997 and 6.2% in 1996.
Results for the past three years on a continuing operations basis and the related percent of revenues were as follows: 1998 1997 1996 (dollars in millions, except per share data) $ % $ % $ % Net retail sales $13,072 $12,291 $11,492 Revenues $13,413 100.0% $12,685 100.0% $12,000 100.0% Cost of sales 9,224 68.8 8,732 68.8 8,226 68.5 Selling, general, and administrative expenses 2,516 18.7 2,375 18.7 2,265 18.9 Interest expense, net 278 2.1 299 2.4 277 2.3 Earnings before income taxes 1,395 10.4 1,279 10.1 1,232 10.3 Provision for income taxes* 546 39.1 500 39.1 483 39.3 Net earnings $ 849 6.3% $ 779 6.1% $ 749 6.2% Diluted earnings per share** $ 2.30 $ 2.07 $ 1.87 * Percent of revenues columns represent effective income tax rates. ** Reflects three-for-two common stock split effective March 22, 1999.
LIFO (last-in, first-out) was a credit of $28 million, $5 million, and $20 million in 1998, 1997, and 1996, respectively. The impact of LIFO on cost of sales, as a percent of revenues, is shown below: 1998 1997 1996 Cost of sales 68.8% 68.8% 68.5% LIFO credit (0.2) (0.1) (0.2) Cost of sales before LIFO credit 69.0% 68.9% 68.7% Earnings before interest and taxes excluding the LIFO credit for the past three years were as follows: Increase (dollars in millions) 1998 1997 1996 1998 1997 Operating earnings $1,645 $1,573 $1,489 4.6% 5.7% Percent of revenues 12.3% 12.4% 12.4% The slight decline in operating earnings as a percentage of revenues was due to lower gross margins resulting from higher markdown levels. May's 393 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 store company holds a leading market position in its region. The table below summarizes net retail sales, sales per square foot, gross retail square footage, and number of stores for each store company:
Net Retail Gross Retail Sales in Millions Sales per Square Footage of Dollars Square Foot in Thousands Number of Stores Store Company: Headquarters 1998 1997 1998 1997 1998 1997 1998 New Closed 1997 Lord & Taylor: New York City $ 1,976 $ 1,875 $232 $243 9,461 8,208 73 10 - 63 Hecht's, Strawbridge's: Washington, D.C. 2,368 2,285 200 195 12,231 12,318 71 3 3 71 Foley's: Houston 2,060 1,888 196 186 10,993 10,647 57 2 - 55 Robinsons-May: Los Angeles 1,936 1,849 196 189 10,156 10,140 55 1 1 55 Filene's: Boston 1,578 1,450 244 236 6,710 6,394 42 2 - 40 Kaufmann's: Pittsburgh 1,549 1,489 199 193 8,177 7,961 48 2 1 47 Famous-Barr, L.S. Ayres, The Jones Store: St. Louis 1,206 1,060 207 202 7,159 5,408 39 9 - 30 Meier & Frank: Portland, Ore. 399 395 231 229 1,768 1,768 8 - - 8 The May Department Stores Company $13,072 $12,291 $209 $204 66,655 62,844 393 29 5 369 Net retail sales represent sales of stores open at the end of 1998. Sales per square foot are calculated from revenues and average gross retail square footage. Gross retail square footage represents square footage of stores open at the end of the period presented.
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 Return on beginning equity 22.2% 21.2% 19.4% 20.8% 21.3% 22.1% 21.5% 20.7% 21.8% 18.0% 18.6%
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 Return on net assets 19.8% 18.5% 18.8% 20.1% 20.1% 19.0% 15.4% 14.5% 15.8% 16.9% 16.2%
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 Year-end dividend rate per common share $0.85 $0.80 $0.77 $0.76 $0.69 $0.61 $0.55 $0.54 $0.53 $0.47 $0.38
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 Common stock closing price and price range: Low price $33.17 $29.08 $27.00 $22.33 $21.50 $22.29 $17.33 $15.08 $12.46 $11.54 $ 9.58 High price $47.25 $38.08 $34.83 $30.83 $30.08 $31.00 $24.83 $20.13 $19.71 $17.54 $13.33 Closing price $40.25 $35.04 $29.67 $29.25 $23.42 $26.50 $23.46 $18.29 $15.17 $15.25 $12.50
Net Retail Sales Net retail sales (see page 25 for definition) increases for 1998 and 1997 were as follows: 1998 vs. 1997 1997 vs. 1996 Five-year Store-for- Store-for- Compound Total Store Total Store Growth Rate 6.4% 3.5% 7.0% 3.6% 7.9% The total sales increase for 1998 reflects a 3.5% rise in store-for-store sales, the opening of 24 net new stores in 1998, and the full-yearimpact of 1997 store openings. The total sales increase for 1997 includes a 3.6% store for-store sales increase, the opening of four net new stores, and the full year impact of 1996 store openings. Sales include leased and licensed department sales of $385 million, $353 million, and $326 million in 1998, 1997, and 1996,respectively. Revenues include finance charge revenues of $298 million, $319 million, and $338 million in 1998, 1997, and 1996, respectively. Finance charge revenues have decreased due to increased use of third-party credit cards and corresponding decreased use of the company's proprietary credit cards. Cost of Sales Cost of sales includes cost of merchandise sold and buying and occupancy costs. Cost of sales was $9.22 billion in 1998, compared with $8.73 billion in 1997, a 5.6% increase. The overall increase resulted from a 6.4% increase in sales. As a percent of revenues, cost of sales remained constant between 1997 and 1998 at 68.8%. Excluding the LIFO credit, cost of sales increased to 69.0% in 1998, compared with 68.9% in 1997. This increase was primarily the result of higher promotional markdown levels. Cost of sales was $8.73 billion in 1997, compared with $8.23 billion in 1996, a 6.2% increase. The overall increase resulted from a 7.0% increase in sales. As a percent of revenues, cost of sales increased 0.3% from 68.5% in 1996 to 68.8% in 1997. This increase was due to higher promotional activity and a lower LIFO credit in 1997. Excluding the LIFO credit, cost of sales increased to 68.9% in 1997, compared with 68.7% in 1996. Selling, General, and Administrative Expenses Selling, general, and administrative expenses were $2.52 billion in 1998, compared with $2.38 billion in 1997, a 5.9% increase. The overall increase was due to a 6.4% increase in sales. As a percent of revenues, selling, general, and administrative expenses remained constant at 18.7% in 1998, compared with 1997. A decrease in credit expense, partly related to lower bankruptcy rates, was offset by increases in advertising, retirement, and profit-sharing expense. Selling, general, and administrative expenses were $2.38 billion in 1997, compared with $2.27 billion in 1996, a 4.8% increase. The overall increase was due to a 7.0% increase in sales. As a percent of revenues, selling, general, and administrative expenses decreased 0.2% to 18.7% in 1997, compared with 18.9% in 1996, due to a decrease in credit expense that was partially offset by higher payroll costs. Selling, general, and administrative expenses include advertising and sales promotion costs of $500 million, $463 million, and $439 million in 1998, 1997, and 1996, respectively. Interest Expense Interest expense components were: (dollars in millions) 1998 1997 1996 Interest expense $311 $324 $310 Interest income (19) (11) (16) Capitalized interest (14) (14) (17) Interest expense, net $278 $299 $277 Percent of revenues 2.1% 2.4% 2.3% The decrease in 1998 net interest expense compared with 1997 was due to both lower average long-term debt balances and higher average cash equivalent balances. The increase in 1997 net interest expense compared with 1996 was due to increased averagelong-term debt balances related to borrowings to finance the company's 1996 common stock repurchases and debt assumed in the Strawbridge & Clothier transaction. Income Taxes The effective income tax rates were 39.1%, 39.1%, and 39.3% in 1998, 1997, and 1996, respectively. Discontinued Operation Effective May 4, 1996,the company spun off Payless ShoeSource, Inc. (Payless) as a tax-free distribution to shareowners. Extraordinary Items The company recorded an aftertax loss of $4 million ($5 million pretax) in 1997 and $5 million ($8 million pretax) in 1996 related to the early retirement of debt. Impact of Inflation Inflation did not have a material impact on the company's 1998 sales growth and earnings. The company values its inventory on a LIFO basis, and as a result, the current cost of merchandise is reflected in current operating results. Review of Financial Condition We continue to meet our objective of generating superior shareowner returns while maintaining access to capital at reasonable costs. Return on Equity Return on equity is our principal measure for evaluating our performance for shareowners and our ability to invest shareowners' funds profitably. Our objective is performance that places our return on equity in the top quartile of the retail industry. Return on beginning equity was 22.2% in 1998, compared with 21.2% in 1997 and 19.4% in 1996. Both years' increases resulted from net earnings growth and stock repurchases in the prior year. Return on Net Assets Return on net assets measures performance independent of capital structure. Return on net assets represents 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 19.8% in 1998, compared with 18.5% in 1997 and 18.8% in 1996. Cash Flow Cash flow from operations (net earnings plus depreciation/ amortization) was $1.3 billion, or 9.6% of revenues in 1998. This compares with 9.4% in 1997 and 9.3% in 1996. The company's cash flow as a percent of revenues continues to be one of the highest in the retail industry, and provides the company with significant resources to enhance shareowners' value. Sources (uses) of cash flows are summarized below: (dollars in millions) 1998 1997 1996 Net earnings and depreciation/amortization $1,288 $1,191 $1,123 Working capital decreases 158 265 142 Discontinued operation - - (13) Other operating activities 59 70 7 Capital expenditures and other investing activities (888) (463) (603) Net long-term debt issuances (repayments) 129 (340) 412 Net purchases of common stock (525) (329) (820) Dividend payments (308) (297) (305) Increase (decrease) in cash and cash equivalents $ (87) $ 97 $ (57) See "Consolidated Statement of Cash Flows" on page 23. Financing Activities During the third quarter of 1998, May issued $350 million in new debt: $200 million of 6.70% debentures due September 15, 2028, and $150 million of 5.95% notes due November 1, 2008. The proceeds from the issuances were added to the company's general funds and were used primarily for repayment of a portion of May's short-term indebtedness, capital expenditures, store acquisitions, and stock repurchases. Commercial paper borrowings were made to fund seasonal working capital requirements. In 1997, the company did not issue any long term debt. Available Credit The company has $767 million of available borrowing under its multiyear credit agreements, including a minority-owned bank facility. In addition, the company has filed with the Securities and Exchange Commission shelf registration statements that would enable it to issue up to $1.0 billion of additional debt securities. Financial Condition Ratios Our debt-to-capitalization and fixed-charge coverage ratios are consistent with our capital structure objective. They provide us with substantial financial flexibility. The debt-to-capitalization ratios were 45%, 44%, and 48% for 1998, 1997, and 1996, respectively. For purposes of the debt-to-capitalization ratio, total debt is defined 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. Capitalization is defined 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 4.5x in 1998 and 4.1x in 1997 and 1996. Fixed charges are defined as gross interest expense, interest expense on the ESOP debt, total rent expense, and the pretax equivalent of dividends on redeemable preferred stock. Debt Ratings In November 1998, May's bond rating by Moody's Investors Service, Inc. was increased from A2 to A1. Our bonds continue to be rated A by Standard & Poor's Corporation. Our commercial paper is rated P1 by Moody's and A1 by Standard & Poor's. May's senior unsecured bank credit agreement was assigned an A1 rating by Moody's. Capital Expenditures Our strong financial condition enables us to make capital expenditures to enhance shareowners' returns. Return on net assets, internal rate of return, and sales per square foot are emphasized as the principal operating measures as we invest in new stores, remodel existing stores, and eliminate unproductive space. The 1999 capital expenditure plan approximates $700 million. Capital expenditures for the period 1999 through 2003 are planned at $3.4 billion. Common Stock Dividends and Market Prices Subsequent to year-end, the board of directors approved a three-for-two common stock split for distribution on March 22, 1999, equivalent to one share of common stock for each two shares of common stock held by shareowners of record on March 1, 1999. All share and per share data included in this annual report have been restated to reflect the stock split. Our dividend policy is based on earnings growth and capital investment requirements. Our objective is to increase dividends on common stock as we achieve earnings growth. The company increased the 1999 annual dividend rate by 5.1%, or 4-1/3 cents per share, to 89 cents per share. This is our 24th consecutive annual dividend increase. The new annual dividend rate of 89 cents per share was effective with the March 1999 dividend payment. Dividends paid have increased at a compound rate of 7.2% during the past five years. The company has paid consecutive quarterly dividends since 1911. The quarterly price ranges of the common stock and dividends per share in 1998 and 1997 were: 1998 1997 Market Price Dividends Market Price Dividends Quarter High Low per Share High Low per Share First $44-5/16 $35-5/16 $.21-1/6 $33-3/16 $29-1/16 $.20 Second 47-1/4 41-5/16 .21-1/6 37-15/16 30-3/16 .20 Third 44-11/16 33-3/16 .21-1/6 38-1/16 33-13/16 .20 Fourth 43 37-11/16 .21-1/6 37-15/16 33-1/4 .20 Year $47-1/4 $33-3/16 $.84-2/3 $38-1/16 $29-1/16 $.80 The approximate number of common shareowners as of March 1, 1999, was 46,000. Forward-looking Statements Management's Discussion and Analysis contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. While such statements reflect all available information and management's judgment and estimates of current and anticipated conditions and circumstances, prepared with the assistance of specialists within and outside the company, many factors outside of May's control exist that have an impact on its 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; ability to hire and retain qualified associates; possible widespread inability to perform due to year 2000 issues by merchandise vendors, public utilities, telecommunications providers, and financial institutions; and the general economic impact of the year 2000 issues. Because of these factors, actual performance could differ materially from that described in the forward-looking statements. Year 2000 Readiness In 1996, May began assessing and preparing its critical information systems, communications networks, equipment, and facilities for the year 2000. As of the end of fiscal 1998, May completed this assessment and substantially completed the coding, testing, and installation of necessary modifications. May will test certain interfaces with some merchandise and service vendors for year 2000 compliance through the spring of 1999. Since May is substantially complete with its modifications, the company does not expect any material disruption of business. Through participation in a National Retail Federation sponsored survey and other means, May is receiving assurances from its primary merchandise vendors and service providers regarding their year 2000 readiness. May developed and maintains most of its application systems internally. Over the past 12 months, May used approximately 15% of its information systems resources to address companywide year 2000 issues. May's use of outside consultants and contractors to address year 2000 compliance has not been significant. Through fiscal 1998, the cumulative cost of the company's year 2000 effort approximates $6 million, which May expensed as incurred. Under the most reasonably likely worst case scenario, May does not anticipate more than isolated, temporary disruptions of its operations caused by year 2000 failures affecting either the company or its primary merchandise and service vendors. May expects that its technically trained personnel, working in cooperation with key vendors and service providers, should be able to address year 2000 system issues that may arise. To the extent May's vendors are unable to deliver products and provide services due to their own year 2000 issues, May believes it will generally have alternative sources for comparable products and services and does not expect to experience any material business disruptions. Many risks, however, such as the failure to perform by public utilities, telecommunications providers, and financial institutions, and the impact of the year 2000 issue on the economy as a whole, are outside May's control and could adversely affect the company and its ability to conduct business. While May has made a significant effort to address all anticipated risks within its control, this is an event without precedent; consequently, there can be no assurance that the year 2000 issue will not have a material adverse impact on May's financial condition, operating results, or business. [The following "Consolidated Financial Statements" section is a reproduction of the same named section in the paper format Annual Report on pages 21-24.] Consolidated Statement of Earnings (dollars in millions, except per share) 1998 1997 1996 Net retail sales $13,072 $12,291 $11,492 Revenues $13,413 $12,685 $12,000 Cost of sales 9,224 8,732 8,226 Selling, general, and administrative expenses 2,516 2,375 2,265 Interest expense, net 278 299 277 Total cost of sales and expenses 12,018 11,406 10,768 Earnings from continuing operations before income taxes 1,395 1,279 1,232 Provision for income taxes 546 500 483 Net earnings from continuing operations 849 779 749 Net earnings from discontinued operation - - 11 Net earnings before extraordinary loss 849 779 760 Extraordinary loss related to early extinguishment of debt, net of income taxes - (4) (5) Net earnings $ 849 $ 775 $ 755 Basic earnings per share: Continuing operations $ 2.43 $ 2.18 $ 1.97 Discontinued operation - - 0.03 Net earnings before extraordinary loss 2.43 2.18 2.00 Extraordinary loss - (0.01) (0.01) Basic earnings per share $ 2.43 $ 2.17 $ 1.99 Diluted earnings per share: Continuing operations $ 2.30 $ 2.07 $ 1.87 Discontinued operation - - 0.03 Net earnings before extraordinary loss 2.30 2.07 1.90 Extraordinary loss - (0.01) (0.01) Diluted earnings per share $ 2.30 $ 2.06 $ 1.89 See Notes to Consolidated Financial Statements. Consolidated Balance Sheet (dollars in millions, January 30, January 31, except per share) 1999 1998 Assets Current assets: Cash $ 15 $ 14 Cash equivalents 97 185 Accounts receivable, net 2,144 2,164 Merchandise inventories, net of LIFO reserves of $65 and $93 2,655 2,433 Other current assets 76 82 Total current assets 4,987 4,878 Property and equipment: Land 316 304 Buildings and improvements 3,581 3,393 Furniture, fixtures, and equipment 3,232 3,028 Property under capital leases 131 62 Total property and equipment 7,260 6,787 Accumulated depreciation (2,747) (2,563) Property and equipment, net 4,513 4,224 Goodwill, net of accumulated amortization of $199 and $174 933 752 Other assets 100 76 Total assets $ 10,533 $ 9,930 Liabilities and shareowners' equity Current liabilities: Current maturities of long-term debt $ 98 $ 233 Accounts payable 1,017 842 Accrued expenses 755 640 Income taxes payable 189 151 Total current liabilities 2,059 1,866 Long-term debt 3,825 3,512 Deferred income taxes 482 449 Other liabilities 309 277 ESOP preference shares 327 337 Unearned compensation (305) (320) Shareowners' equity: Common stock 167 173 Additional paid-in capital - - Retained earnings 3,669 3,636 Total shareowners' equity 3,836 3,809 Total liabilities and shareowners' equity $ 10,533 $ 9,930 Common stock has a par value of $.50 per share; 700 million shares are authorized and 470.5 million shares were issued. At January 30, 1999, 334.7 million shares were outstanding, and 135.8 million shares were held in treasury. At January 31, 1998, 346.5 million shares were outstanding, and 124.0 million shares were held in treasury. ESOP preference shares have a par value of $.50 per share and a stated value of $507 per share; 800,000 shares are authorized. At January 30, 1999, 645,320 shares (convertible into 21.8 million shares of common stock) were issued and outstanding. At January 31, 1998, 665,866 shares (convertible into 22.5 million shares of common stock) were issued and outstanding. See Notes to Consolidated Financial Statements. Consolidated Statement of Cash Flows (dollars in millions) 1998 1997 1996 Operating activities: Net earnings $ 849 $ 775 $ 755 Adjustments for noncash items included in earnings: Depreciation and amortization 439 412 374 Deferred income taxes 48 58 45 Deferred and unearned compensation 5 8 10 Working capital changes* 158 265 142 Other assets and liabilities, net 6 8 (43) Total operating activities 1,505 1,526 1,283 Investing activities: Capital expenditures (630) (496) (632) Dispositions of property and equipment 44 33 29 Acquisition (302) - - Cash used in discontinued operation - - (24) Total investing activities (888) (463) (627) Financing activities: Issuances of long-term debt 350 - 800 Repayments of long-term debt (221) (340) (388) Purchases of common stock (589) (394) (869) Issuances of common stock 64 65 49 Dividend payments (308) (297) (305) Total financing activities (704) (966) (713) Increase (decrease) in cash and cash equivalents (87) 97 (57) Cash and cash equivalents, beginning of year 199 102 159 Cash and cash equivalents, end of year $ 112 $ 199 $102 *Working capital changes comprise: Accounts receivable, net $ 20 $ 262 $139 Merchandise inventories (176) (53) (211) Other current assets 12 46 45 Accounts payable 176 (30) 180 Accrued expenses 89 26 (20) Income taxes payable 37 14 9 Net decrease in working capital $ 158 $ 265 $ 142 Cash paid during the year: Interest $ 297 $ 319 $ 288 Income taxes 411 355 380 See Notes to Consolidated Financial Statements.
Consolidated Statement of Shareowners' Equity Outstanding Additional Total (dollars in millions, Common Stock Paid-in Retained Shareowners' shares in thousands) Shares Dollars Capital Earnings Equity Balance at February 3, 1996 373,307 $187 $ - $4,398 $4,585 Net earnings - - - 755 755 Dividends paid: Common stock ($0.77 per share) - - - (287) (287) ESOP preference shares, net of tax benefit - - - (18) (18) Common stock issued 9,968 5 256 - 261 Common stock purchased (27,886) (14) (256) (599) (869) Distribution of equity in Payless ShoeSource, Inc. - - - (777) (777) Balance at February 1, 1997 355,389 178 - 3,472 3,650 Net earnings - - - 775 775 Dividends paid: Common stock ($0.80 per share) - - - (279) (279) ESOP preference shares, net of tax benefit - - - (18) (18) Common stock issued 3,419 2 73 - 75 Common stock purchased (12,296) (7) (73) (314) (394) Balance at January 31, 1998 346,512 173 - 3,636 3,809 Net earnings - - - 849 849 Dividends paid: Common stock ($0.84 2/3 per share) - - - (290) (290) ESOP preference shares, net of tax benefit - - - (18) (18) Common stock issued 3,141 1 74 - 75 Common stock purchased (14,989) (7) (74) (508) (589) Balance at January 30, 1999 334,664 $167 $ - $3,669 $3,836
Outstanding common stock excludes shares held in treasury. Treasury share activity for the last three years is summarized below: 1998 1997 1996 Balance, beginning of year 123,943 115,066 97,148 Common stock issued: Exercise of stock options (1,914) (2,372) (1,495) Deferred compensation plan (227) (243) (225) Restricted stock grants, net of forfeitures (306) (156) (368) Conversion of ESOP preference shares (694) (648) (1,194) Acquisitions - - (6,686) (3,141) (3,419) (9,968) Common stock purchased 14,989 12,296 27,886 Balance, end of year 135,791 123,943 115,066 See Notes to Consolidated Financial Statements.
[The following "Notes to Consolidated Financial Statements" section is a reproduction of the same named section included in the paper format Annual Report on pages 25-31.] Notes to Consolidated Financial Statements Summary of Significant Accounting Policies Fiscal Year The company's fiscal year ends the Saturday closest to January 31. Fiscal years 1998, 1997, and 1996 ended on January 30, 1999, January 31, 1998, and February 1, 1997, respectively. References to years in this annual report relate to fiscal years rather than calendar years. Basis of Reporting The consolidated financial statements include the accounts of The May Department Stores Company, a Delaware corporation, and all wholly owned subsidiaries (May or the company). The company's 393 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 company aggregates its eight store companies into one reportable segment. The consolidated financial statements reflect Payless ShoeSource, Inc. (Payless), as a discontinued operation through May 4, 1996. All the notes, except "Discontinued Operation" on page 31, reflect data on a continuing operations basis. Use of Estimates Management makes estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from these estimates. Net Retail Sales and Revenues Net retail sales (sales) represent sales of stores operating at the end of the latest period, and exclude finance charge revenues and the sales of stores that have been closed and not replaced. Sales include sales of merchandise and services, and sales from leased and licensed departments. Sales are net of returns and exclude sales tax. Store-for-store sales represent sales of those stores open during both years. Revenues include finance charge revenues and all sales from all stores operating during the period. Cost of Sales Cost of sales includes the cost of merchandise sold and the company's buying and occupancy costs. Advertising Costs Advertising and sales promotion costs are expensed at the time the advertising takes place. Preopening Expenses Preopening expenses of new stores are expensed as incurred. Income Taxes Income taxes are accounted for by the liability method. The liability method applies statutory tax rates in effect at the date of the balance sheet to differences between the book basis and the tax basis of assets and liabilities. Earnings per Share In 1997, the company adopted Statement of Financial Accounting Standards (SFAS) No.128, "Earnings per Share," for all periods presented. References to earnings per share relate to diluted earnings per share. Common Stock Split All share and per share data included in this annual report have been restated to reflect a three-for-two common stock split effective March 22, 1999. Stock-based Compensation The company accounts for stock-based compensation by applying APB Opinion No. 25, as allowed under SFAS No. 123, "Accounting for Stock-based Compensation." Cash Equivalents Cash equivalents consist primarily of commercial paper with maturities of less than three months. Cash equivalents are stated at cost, which approximates fair value. Accounts Receivable In accordance with industry practice, installments on deferred- payment accounts receivable maturing in more than one year have been included in current assets. Merchandise Inventories Merchandise inventories are valued by the retail method and are stated on the LIFO (last-in, first-out) cost basis, which is lower than market. Property and Equipment Property and equipment are recorded at cost and are depreciated on a straight line basis over their estimated useful lives. Investments in properties under capital leases and leasehold improvements are amortized over their useful lives or related lease terms, whichever is shorter. In 1998, the company adopted Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which did not have a significant impact on the company. Goodwill Goodwill represents the excess of cost over the fair value, at the dates of acquisition, of net tangible assets acquired. Substantially all amounts are amortized using the straight-line method over a 40-year period. Long-lived Assets Long-lived assets and certain identifiable intangibles, to be held and used or disposed of, are reviewed to determine whether the carrying amount of the asset is recoverable. Impairment losses resulting from these reviews have not been significant. Financial Derivatives Financial derivatives are used only to reduce risk in specific business transactions. The company periodically purchased forward contracts on firm commitments to minimize the risk of foreign currency fluctuations. These contracts were not significant. Reclassifications Certain prior-period amounts have been reclassified to conform with the current-year presentation. Quarterly Results (Unaudited) Quarterly results are determined in accordance with annual accounting policies. They include certain items based upon estimates for the entire year. Summarized quarterly results for the last two years were as follows: (dollars in millions, 1998 Quarter 1998 except per share) First Second Third Fourth Year Revenues $2,817 $2,889 $3,089 $4,618 $13,413 Cost of sales 1,983 2,019 2,180 3,042 9,224 Selling, general, and administrative expenses 584 587 625 720 2,516 Pretax earnings 183 218 215 779 1,395 Net earnings 110 131 130 478 849 Basic earnings per share $ 0.30 $ 0.37 $ 0.36 $ 1.40 $ 2.43 Diluted earnings per share 0.29 0.35 0.35 1.31 2.30 (dollars in millions, 1997 Quarter 1997 except per share) First Second Third Fourth Year Revenues $2,675 $2,749 $2,969 $4,292 $12,685 Cost of sales 1,881 1,921 2,097 2,833 8,732 Selling, general, and administrative expenses 555 559 599 662 2,375 Pretax earnings 163 193 199 724 1,279 Net earnings 98 116 120 445 779 Basic earnings per share $ 0.26 $ 0.32 $ 0.34 $ 1.26 $ 2.18 Diluted earnings per share 0.26 0.31 0.32 1.18 2.07 There are variables and uncertainties in the factors used to estimate the annual LIFO provision (credit) on an interim basis. The following unaudited supplementary information shows what the pro forma diluted per share impact of LIFO would have been had the final variables and factors been known at the beginning of each year: 1998 1997 Pro As Pro As Quarter Forma Reported Forma Reported First $(0.01) $ 0.01 $ 0.00 $ 0.01 Second (0.01) 0.01 0.00 0.01 Third (0.01) 0.01 0.00 0.01 Fourth (0.02) (0.08) (0.01) (0.04) Year $(0.05) $(0.05) $(0.01) $(0.01) Profit Sharing The company has a qualified profit-sharing plan that covers associates who work 1,000 hours or more in a year and have attained age 21. The plan is a defined-contribution program that provides for discretionary matching allocations at a variable matching rate generally based upon changes in the company's annual earnings per share, as defined in the plan. The plan's matching allocation value totaled $57 million for 1998, which represents a record effective match rate of 113%. The matching allocation value was $48 million and $43 million in 1997 and 1996, respectively. 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 $317 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, along with the dividends on the ESOP preference shares, are used to repay the loan principal and interest. Interest expense associated with the ESOP debt was $27 million in 1998, $29 million in 1997, and $31 million in 1996. ESOP preference shares' dividends were $25 million in 1998, and $26 million in 1997 and 1996. 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 $28 million, $24 million, and $22 million in 1998, 1997, and 1996, respectively. At January 30, 1999, the plan beneficially owned 15.6 million shares of the company's common stock and 100% of the company's ESOP preference shares. These holdings represent 10.5% of the company's common stock. Pension and Other Postretirement Benefits The company has two qualified defined-benefit plans that cover associates who work 1,000 hours or more in a year and have attained age 21. The company also maintains two nonqualifled, 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, which uses assumptions to estimate the total benefits ultimately payable to associates, then allocates this cost to service periods. The actuarial assumptions used to calculate pension costs are reviewed annually. The accumulated benefit obligations (ABO), change in projected benefit obligations (PBO), change in net plan assets, and funded status of the benefit plans are summarized in the tables below: Qualified Nonqualified Plans Plans (funded) (unfunded) (dollars in millions) 1998 1997 1998 1997 Change in PBO: (1) PBO at beginning of year $476 $383 $102 $ 90 Service cost 30 25 3 3 Interest cost 32 28 8 6 Business combinations 8 - - - Actuarial loss (2) 24 71 14 7 Benefits paid (53) (31) (5) (4) PBO at end of year $517 $476 $122 $ 102 ABO at end of year (3) $464 $433 $ 99 $ 86 Change in net plan assets: Fair value of net plan assets at beginning of year $490 $409 $ - $ - Actual return on plan assets 89 89 - - Employer contribution 44 23 - - Business combinations 9 - - - Benefits paid (53) (31) - - Fair value of net plan assets at end of year $579 $490 $ - $ - Funded status: Plan assets in excess of(less than) PBO $ 62 $ 14 $(122) $(102) Unrecognized net actuarial loss (gain) (50) (20) 21 10 Unrecognized prior service cost 2 3 14 14 Additional minimum liability (4) - - (12) - Prepaid (accrued) benefit cost $ 14 $(3) $ (99) $ (78) Plan assets in excess of(less than) ABO $115 $57 $ (99) $ (86) The components of net periodic benefit costs and actuarial assumptions for the benefit plans are summarized in the following tables: (dollars in millions) 1998 1997 1996 Components of pension expense (all plans): Service cost $ 33 $ 28 $ 27 Interest on PBO 40 34 24 Expected return on assets (34) (30) (20) Net amortization (5) 3 2 - Total $ 42 $ 34 $ 31 January 1, 1999 1998 1997 Actuarial assumptions: Discount rate 6.75% 7.00% 7.50% Expected return on plan assets 7.00 7.25 7.75 Salary increase 4.25 4.50 4.50 Definition of terms: (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 value of the benefit obligations or the plan assets resulting from changes in actuarial assumptions or from experience different than assumed. (3) ABO is the actuarial present value of benefits (both vested and nonvested) attributed by the pension benefit formula to prior associate service based on current and past compensation levels. (4) The additional minimum liability represents the excess of the accumulated benefit obligation over the accrued pension costs recognized. Recognizing the additional minimum liability results in an intangible asset being recorded for an equal amount. (5) Prior service cost is amortized over the remaining service period. The accrued pension costs are included in other liabilities. Prepaid pension costs and intangible assets are included in other assets. The company also provides postretirement life and/or health benefits for certain associates. As of January 30, 1999, the company's estimated PBO (using a discount rate of 6.75%) for postretirement benefits was $48 million, of which $45 million was accrued in other liabilities. As of January 31, 1998, the company's estimated PBO (using a discount rate of 7.0%) for postretirement benefits was $44 million, of which $42 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 1998, and $3 million in 1997 and 1996. The estimated future obligations for postretirement medical benefits are based upon assumed annual healthcare cost increases of 10% for 1999, decreasing by 1% annually to 6% for 2003 and future years. A 1% increase or decrease in the assumed annual health care cost increases would increase or decrease the present value of estimated future obligations for postretirement benefits by approximately $1 million. Another important element in the retirement programs is the federal Social Security system, into which the company paid $155 million in 1998 as its matching contribution to the $155 million paid in by associates. Taxes The provision for income taxes and the related percent of pretax earnings for the last three years were as follows: 1998 1997 1996 (dollars in millions) $ % $ % $ % Federal $420 $359 $344 State and local 77 65 69 Current taxes 497 35.6% 424 33.2% 413 33.6% Federal 41 64 58 State and local 8 12 12 Deferred taxes 49 3.5 76 5.9 70 5.7 Total $546 39.1% $500 39.1% $483 39.3% The reconciliation between the statutory federal income tax rate and the effective income tax rate for the last three years follows: 1998 1997 1996 Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes 6.1 6.0 6.6 Federal tax benefit of state and local incometaxes (2.2) (2.1) (2.3) Other, net 0.2 0.2 - Effective income tax rate 39.1% 39.1% 39.3% Major components of deferred tax assets (liabilities) were as follows: Jan. 30, Jan. 31, (dollars in millions) 1999 1998 Accrued expenses and reserves $102 $ 144 Deferred and other compensation 123 116 Depreciation/amortization and basis differences (474) (460) Other deferred income tax liabilities, net (206) (224) Net deferred income taxes (455) (424) Less: Net current deferred income tax assets 27 25 Noncurrent deferred income taxes $(482) $(449) Net current deferred income tax assets are included in other current assets in the accompanying balance sheet. Earnings per Share The following tables reconcile net earnings and weighted average shares outstanding to amounts used to calculate basic and diluted earnings per share for 1998, 1997, and 1996. 1998 Net Earnings (in millions, except per share) Earnings Shares per Share Net earnings $849 ESOP preference shares' dividends (18) Basic earnings per share 831 342.6 $2.43 ESOP preference shares 15 22.2 Assumed exercise of options (treasury stock method) - 2.6 Diluted earnings per share $846 367.4 $2.30 1997 Net Earnings (in millions, except per share) Earnings Shares per Share Net earnings $779 ESOP preference shares' dividends (18) Basic earnings per share 761 348.5 $2.18 ESOP preference shares 14 22.9 Assumed exercise of options (treasury stock method) - 2.2 Diluted earnings per share $775 373.6 $2.07 1996 Net Earnings (in millions, except per share) Earnings Shares per Share Net earnings $749 ESOP preference shares' dividends (18) Basic earnings per share 731 370.8 $1.97 ESOP preference shares 13 23.1 Assumed exercise of options (treasury stock method) - 2.3 Diluted earnings per share $744 396.2 $1.87 Accounts Receivable During 1998, credit sales under department store credit programs were $5.8 billion, or 43.6% of 1998 revenues; this compares with 45.6% in 1997 and 50.0% in 1996. An estimated 27 million customers hold credit cards under the company's various credit programs. Sales made through third-party credit cards totaled $4.1 billion in 1998, compared with $3.6 billion in 1997 and $3.0 billion in 1996. Net accounts receivable consisted of: Jan. 30, Jan. 31, (dollars in millions) 1999 1998 Customer accounts receivable $2,127 $2,167 Other accounts receivable 99 93 Total accounts receivable 2,226 2,260 Allowance for uncollectible accounts (82) (96) Accounts receivable, net $2,144 $2,164 The fair value of customer accounts receivable approximates their carrying values at January 30, 1999, and January 31, 1998, due to the short-term nature of these accounts. Other Current Assets In addition to net current deferred income tax assets, other current assets consisted of prepaid expenses and supply inventories of $49 million and $57 million in 1998 and 1997, respectively. Other Assets Other assets consisted of: Jan. 30, Jan. 31, (dollars in millions) 1999 1998 Deferred debt expense $ 33 $30 Notes receivable 30 29 Prepaid and intangible pension asset 26 - Other 11 17 Total $100 $76 Accrued Expenses Accrued expenses consisted of: Jan. 30, Jan. 31, (dollars in millions) 1999 1998 Insurance costs $179 $164 Salaries, wages, and employee benefits 127 112 Sales, use, and other taxes 107 97 Interest and rent expense 96 92 Advertising and other operating expenses 79 65 Construction costs 51 34 Store closings and real estate-related expenses 45 38 Other 71 38 Total $755 $640 Short-term Debt and Lines of Credit Short-term borrowings for the last three years were: (dollars in millions) 1998 1997 1996 Balance outstanding at year end - - - Average balance outstanding $195 $182 $ 35 Average interest rate on average balance 5.4% 5.7% 5.7% Maximum balance outstanding $621 $487 $178 The average balance of short-term borrowings outstanding, primarily commercial paper, and the respective weighted average interest rates are based on the number of days such short-term borrowings were outstanding during the year. The company has $767 million available under credit agreements, including a minority-owned bank facility. Long-term Debt Long-term debt and capital lease obligations were: Jan. 30, Jan. 31, (dollars in millions) 1999 1998 5.7% to 10.75% unsecured notes and sinking-fund debentures due 1999-2036 $3,741 $3,630 3.0% to 10.0% mortgage notes and bonds due 2000-2012 59 62 Debt 3,800 3,692 Capital lease obligations 123 53 Total debt and capital lease obligations 3,923 3,745 Less current maturities 98 233 Total long-term $3,825 $3,512 The company recorded an extraordinary aftertax loss of $4 million ($5 million pretax) in 1997 and $5 million ($8 million pretax) in 1996 related to the early retirement of debt. The annual maturities of long-term debt, including sinking fund requirements, are $98 million, $260 million, $86 million, $270 million, and $134 million for 1999 through 2003. The net book value of property and equipment encumbered under long-term debt agreements was $114 million at January 30, 1999. The fair value of long-term debt (excluding capital lease obligations) was approximately $4.5 billion and $4.2 billion at January 30, 1999, and January 31, 1998, respectively. The fair value was determined using borrowing rates for debt instruments with similar terms and maturities. Lease Obligations The company owns approximately 75% of its stores. Rental expense for the company's operating leases consisted of: (dollars in millions) 1998 1997 1996 Minimum rentals $49 $47 $45 Contingent rentals based on sales 18 17 17 Real property rentals 67 64 62 Equipment rentals 3 4 4 Total $70 $68 $66 Future minimum lease payments at January 30, 1999, were as follows: Capital Operating (dollars in millions) Leases Leases Total 1999 $ 14 $ 46 $ 60 2000 13 41 54 2001 13 37 50 2002 13 35 48 2003 13 31 44 After 2003 189 241 430 Minimum lease payments $255 $431 $686 Less imputed interest component 132 Present value of net minimum lease payments of which $3 million is included in current liabilities $123 The present value of operating leases was $256 million at January 30, 1999. Property under capital leases, including property under capital leases described in the "Acquisitions" footnote (page 31), is summarized as follows: Jan. 30, Jan. 31, (dollars in millions) 1999 1998 Cost $131 $ 62 Accumulated amortization (32) (33) Total $ 99 $ 29 Other Liabilities In addition to accrued pension and postretirement costs, other liabilities consisted principally of deferred compensation liabilities of $161 million at January 30, 1999, and $154 million at January 31, 1998. 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. Preference Stock The company is authorized to issue up to 25,000,000 shares of $.50 par value preference stock. As of January 30, 1999, 800,000 ESOP preference shares were authorized and 645,320 were outstanding. The ESOP preference shares are shown separately outside of shareowners' equity in the consolidated balance sheet because the shares are redeemable by the holder or by the company in certain situations. Common Stock Repurchase Programs During 1998, 1997, and 1996, the company repurchased $500 million, $300 million, and $600 million of May common stock (12.5 million shares, 9.6 million shares, and 19.1 million shares, respectively) in the open market. On February 10, 1999, the board of directors authorized the company to repurchase up to an additional $500 million of May shares as market conditions allow. 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 options may be exercised during certain periods following retirement, disability, or death. A summary of the status of the various stock option plans at the end of 1998 and 1997 and of the changes within years is presented below: 1998 1997 Exercise Average Exercise Average (shares in Price Exercise Price Exercise thousands) Shares Range Price Shares Range Price Outstanding at beginning of year 10,230 $ 7-36 $28 10,081 $ 7-33 $25 Granted 4,230 36-43 43 3,158 32-36 32 Exercised (1,922) 7-36 25 (2,384) 7-32 21 Forfeited or expired (774) 16-43 33 (625) 12-36 28 Outstanding at end of year 11,764 $ 7-43 $33 10,230 $ 7-36 $28 Exercisable at end of year 3,719 $ 7-36 $26 3,214 $ 7-33 $24 Shares available for additional grants 9,832 13,287 Fair value of options granted $12 $11 The following table summarizes information about stock options outstanding at January 30, 1999: Options Outstanding Options Exercisable Number Average Number Exercise Outstanding Remaining Average Exercisable Average Price at Jan. 30 Contractual Exercise at Jan.30 Exercise Range (in thousands) Life Price (in thousands) Life $ 7 2 2 $ 7 2 2 16-24 2,143 5 22 1,740 5 25-36 5,853 8 30 1,977 8 40-43 3,766 9 - - - 11,764 8 26 3,719 6 Under the 1994 Stock Incentive Plan, the company is authorized to grant a maximum of 2.9 million shares of restricted stock to management associates. No monetary consideration is paid by associates who receive restricted stock. Restricted stock can be granted with or without performance restrictions. All restrictions lapse over periods of up to 10 years, as determined at the date of the grant. In 1998 and 1997, the company granted 328,356 and 184,548 shares of restricted stock, respectively, under the 1994 Stock Incentive Plan. The company's plans are accounted for as provided by APB Opinion No. 25. For stock options, no compensation cost has been recognized because the option exercise price is fixed at the market price on the date of grant. 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 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. As the fair value represents only 1995 and later option grants, the pro forma impact shown below may not be representative of future years. Had compensation cost for these plans been determined in accordance with SFAS No. 123, the company's net earnings and net earnings per share would have been as follows: (dollars in millions, except per share) 1998 1997 1996 Net earnings from continuing operations: As reported $ 849 $ 779 $ 749 Pro forma 833 766 740 Basic EPS from continuing operations: As reported $2.43 $2.18 $1.97 Pro forma 2.38 2.14 1.95 Diluted EPS from continuing operations: As reported $2.30 $2.07 $1.87 Pro forma 2.27 2.04 1.85 The following Black-Scholes assumptions were used in the calculations above: 1998 1997 1996 Risk-free interest rate 5.6% 6.6% 6.8% Expected dividend yield $0.85 $0.80 $0.77 Expected option life (years) 7 7 7 Expected volatility 23% 24% 25% 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 the company's common stock by a person or by affiliated persons. Depending upon the circumstances, if the rights become exercisable, the holder may be entitled to purchase units of the company's preference stock, shares of the company's common stock, or shares of common stock of the acquiring person. The rights will remain in existence until August 31, 2004, unless they are terminated, extended, exercised, or redeemed. Acquisitions In September 1998, May purchased 11 former Mercantile stores for approximately $302 million, including merchandise inventories. Nine of these stores are leased under a long-term capital lease. The lease has both put and call options that, if exercised, would result in the company buying the underlying properties for approximately $100 million. In July 1996, the company purchased 13 former Strawbridge & Clothier department stores in the greater Philadelphia area. The company delivered 4.5 million shares of May common stock and assumed $255 million of debt and certain other liabilities in exchange for the Strawbridge & Clothier department store assets. These acquisitions have been accounted for as purchases and did not have a material effect on the results of operations or financial position. Discontinued Operation The company spun off Payless effective May 4, 1996, as a tax-free distribution to shareowners. The company's financial statements reflect Payless as a discontinued operation. Payless revenues were $601 million in 1996. The reported net earnings from the discontinued operation were net of $16 million in income tax expense for 1996. [The following "Eleven-year Financial Summary" is a reproduction of the same named section in the paper format Annual Report on pages 32-33.]
Eleven-year Financial Summary (in millions, except per share and operating statistics) 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 Net retail sales $13,072 $12,291 $11,492 $10,374 $ 9,666 $8,921 $8,304 $7,755 $7,386 $6,917 $6,072 Total percent increase 6.4% 7.0% 10.8% 7.3% 8.4% 7.4% 7.1% 5.0% 6.8% 13.9% 30.6% Store-for-store percent increase 3.5% 3.6% 4.3% 2.5% 5.4% 5.4% 4.5% (0.6%) 0.6% 6.4% 5.5% Operations Revenues $13,413 $12,685 $12,000 $10,952 $10,107 $9,562 $9,362 $9,068 $8,700 $8,356 $7,742 Cost of sales 9,224 8,732 8,226 7,461 6,879 6,537 6,459 6,275 6,047 5,734 5,348 Selling, general, and administrative expenses 2,516 2,375 2,265 2,081 1,916 1,824 1,859 1,861 1,772 1,735 1,645 Interest expense, net 278 299 277 250 233 244 279 315 278 231 196 Earnings before income taxes 1,395 1,279 1,232 1,160 1,079 957 579* 617 603 656 553 Provision for income taxes 546 500 483 460 429 379 107* 213 199 231 191 Net earnings (1) 849 779 749 700 650 578 472 404 404 425 362 Percent of revenues 6.3% 6.1% 6.2% 6.4% 6.4% 6.0% 5.0% 4.5% 4.6% 5.1% 4.7% LIFO charge (credit) $ (28) $ (5) $ (20) $ (53) $ (46) $ 7 $ 10 $ 26 $ 39 $ (22) $ (3) Per share Net earnings (1) $ 2.30 $ 2.07 $ 1.87 $ 1.75 $ 1.62 $ 1.43 $ 1.18 $ 1.02 $ 1.01 $ 1.00 $ .82 Dividends paid (2) .85 .80 .77 .74 .67 .60 .55 .54 .51 .46 .42 Book value 11.46 10.99 10.27 12.28 11.10 9.77 8.55 7.51 6.69 6.22 7.17 Market price - high 47.25 38.08 34.83 30.83 30.08 31.00 24.83 20.13 19.71 17.54 13.33 Market price - low 33.17 29.08 27.00 22.33 21.50 22.29 17.33 15.08 12.46 11.54 9.58 Market price - year-end close 40.25 35.04 29.67 29.25 23.42 26.50 23.46 18.29 15.17 15.25 12.50 Financial statistics Return on equity 22.2% 21.2% 19.4% 20.8% 21.3% 22.1% 21.5% 20.7% 21.8% 18.0% 18.6% Return on net assets 19.8 18.5 18.8 20.1 20.1 19.0 15.4** 14.5 15.8 16.9 16.2 Operating Statistics Stores open at year-end 393 369 365 346 314 301 303 318 324 288 297 Gross retail square footage (in millions) 66.7 62.8 62.1 57.6 52.0 49.4 49.5 51.9 52.4 48.4 50.0 Sales per square foot (3) $ 209 $ 204 $ 201 $ 201 $ 200 $ 191 $ 179 $ 171 $ 172 $ 168 $ 158 Cash flow and financial position Cash flow from operations (4) $ 1,288 $ 1,191 $ 1,123 $ 1,033 $ 947 $ 859 $ 755 $ 677 $ 657 $ 659 $ 599 Percent of revenues 9.6% 9.4% 9.3% 9.4% 9.4% 9.0% 8.1% 7.5% 7.6% 7.9% 7.7% Depreciation and amortization $ 439 $ 412 $ 374 $ 333 $ 297 $ 281 $ 283 $ 273 $ 253 $ 234 $ 236 Capital expenditures 630 496 632 801 682 560 284 366 466 470 292 Dividends on common stock 290 279 287 277 251 223 204 198 191 186 184 Working capital 2,928 3,012 3,156 3,536 3,069 2,960 2,730 3,089 2,672 2,094 2,123 Long-term debt and preference stock 4,152 3,849 4,196 3,701 3,240 3,192 3,256 4,299 3,948 3,387 2,384 Shareowners' equity 3,836 3,809 3,650 4,585 4,135 3,639 3,181 2,781 2,467 2,319 3,050 Total assets 10,533 9,930 10,059 10,122 9,237 8,614 8,376 8,566 8,083 7,570 7,374 Average shares outstanding and equivalents Diluted 367.4 373.6 396.2 397.3 397.3 398.2 397.0 394.3 397.1 419.3 442.2 All years included 52 weeks, except 1995 and 1989, which included 53 weeks. Net retail sales for 1995 and 1989 are shown on a 52-week basis for comparability. (1) Represents net earnings and diluted earnings per share from continuing operations. (2) The annual dividend was increased to $.89 per share effective with the March 15, 1999, dividend payment. (3) Sales per square foot are calculated from revenues and average gross retail square footage. (4) Cash flow from operations represents net earnings plus depreciation/amortization. It is different from cash flow from operating activities as shown on the statement of cash flows. * Pretax earnings include a net special and nonrecurring charge of $187 million, and the provision for income taxes includes a nonrecurring tax benefit of $187 million. ** Based on pretax earnings before special and nonrecurring items.
[The following "Reports of Management and Audit Committee" and "Report of Independent Public Accountants" section is a reproduction of the same named section included in the paper format Annual Report on page 34.] Reports of Management and Audit Committee Report of Management Management is responsible for the preparation, integrity, and objectivity of the financial information included in this annual report. The financial statements have been prepared in conformity with generally acceptedaccounting principles applied on a consistent basis. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts. Although the financial statements reflect all available information and management's judgment and estimates of current conditions and circumstances, prepared with the assistance of specialists withinand outside the company, actual results could differ from those estimates. Management has established and maintains an internal control structure to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, that the accounting records provide a reliable basis for the preparation of financial statements, and that such financial statements are not misstated due to material fraud or error. Internal controls include the careful selection of associates, the proper segregation of duties, and the communication and application of formal policies and procedures that are consistent with high standards of accounting and administrative practices. An important element of this structure is a comprehensive internal audit program. Management continually reviews, modifies, and improves its systems of accounting and controls in response to changes in business conditions and operations, and in response to recommendations in the reports prepared by the independent public accountants andinternal auditors. Management believes that it is essential for the company to conduct its business affairs in accordance with the highest ethical standards and in conformity with the law. This standard is described in the company's policies on business conduct, which are publicized throughout the company. Report of Audit Committee The Board of Directors, through the activities of its audit committee, participates in the reporting of financialinformation by the company. The committee meets regularly with management, the internal auditors, and the independent public accountants. The committee met three times during 1998. It reviewed the scope, timing, and fees for the annual audit and the results of audit examinations completed by the internal auditors and independent public accountants. The audit results included recommendations to improve certain internal controls and the follow-up reports prepared by management. The independent public accountants and internal auditors have free access to the committee and the Board of Directors. They attend each meeting of the committee. The audit committee reports the results of its activities to the Board of Directors. Members of the audit committee are Russell E. Palmer (chairman), Marsha J. Evans, Helene L. Kaplan, James M. Kilts, Edward H. Meyer, Michael R. Quinlan, William P. Stiritz, Robert D. Storey, and Murray L. Weidenbaum. Report of Independent Public Accountants To the Board of Directors and Shareowners of The May Department Stores Company: We have audited the accompanying consolidated balance sheet of The May Department Stores Company (a Delaware corporation) and subsidiaries as of January 30, 1999, and January 31, 1998, and the related consolidated statements of earnings, shareowners' equity and cash flows for each of the three fiscal years in the period ended January 30, 1999. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The May Department Stores Company and subsidiaries as of January 30, 1999, and January 31, 1998, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 30, 1999, in conformity with generally accepted accounting principles. /s/Arthur Andersen LLP 1010 Market Street St. Louis, Missouri 63101-2089 February 10, 1999 EX-27 4 1998 EXHIBIT 27 TO FORM 10-K405
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET, STATEMENT OF EARNINGS, AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ON PAGES 22, 21 AND 25-31, RESPECTIVELY, OF THE MAY DEPARTMENT STORES COMPANY 1998 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR JAN-30-1999 JAN-30-1999 15 97 2,226 82 2,655 4,987 7,260 2,747 10,533 2,059 3,923 0 0 167 3,669 10,533 13,072 13,413 9,224 9,224 0 0 278 1,395 546 849 0 0 0 849 2.43 2.30
EX-99 5 1998 EXHIBIT 99 TO FORM 10-K405 (1998 FORM 11-K) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Year Ended December 31, 1998 A. Full title of the plan if different from that of the issuer named below: THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN B. Name of issuer of securities held pursuant to the plan and the address of its principal executive office: THE MAY DEPARTMENT STORES COMPANY 611 Olive Street St. Louis, MO 63101 Commission File Number 1-79 THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN FINANCIAL STATEMENTS AND EXHIBIT Listed below are all financial statements and exhibit filed as part of this annual report on Form 11-K: Page of this Financial Statements Form 11-K Report of Independent Public Accountants 3 Financial Statements of the Plan: Statement of Net Assets Available for Benefits - December 31, 1998 4 Statement of Net Assets Available for Benefits - December 31, 1997 7 Statement of Changes in Net Assets Available for Benefits for the Year Ended December 31, 1998 10 Notes to Financial Statements - December 31, 1998 and 1997 12 Schedule I - Item 27(a): Schedule of Assets Held for Investment Purposes - December 31, 1998 18 Schedule II - Item 27(d): Schedule of Reportable Transactions for the Year Ended December 31, 1998 22 Exhibit Consent of Independent Public Accountants 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Plan Administrator has duly caused this annual report to be signed by the undersigned, thereunto duly authorized. THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN By: The May Department Stores Company Date: April 21, 1999 By: /s/ John L. Dunham John L. Dunham Executive Vice President and Chief Financial Officer REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The May Department Stores Company Profit Sharing Plan: We have audited the accompanying statements of net assets available for benefits of The May Department Stores Company Profit Sharing Plan as of December 31, 1998 and 1997, and the related statement of changes in net assets available for benefits for the year ended December 31, 1998. These financial statements and the schedules referred to below are the responsibility of the Plan Administrator. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Plan as of December 31, 1998 and 1997, and the changes in net assets available for benefits for the year ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules of assets held for investment purposes and reportable transactions are presented for the purpose of additional analysis and are not a required part of the basic financial statements but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The Fund Information in the statements of net assets available for benefits and the statement of changes in net assets available for benefits is presented for purposes of additional analysis rather than to present the net assets available for benefits and changes in net assets available for benefits of each fund. The supplemental schedules and Fund Information have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP St. Louis, Missouri, March 19, 1999 THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1998 (Thousands, except per unit information) Nonparticipant Directed Investment Funds -------------------------------- ESOP Preference ---------------------- May Member Common ASSETS Unallocated Allocated Stock INVESTMENTS, at fair value: The May Department Stores Company- Convertible preferred stock $558,434 $322,703 $ - Common stock - - 165,401 Commingled equity index fund - - - Short-term investments - - 443 U.S. government securities - - - Fixed income investments - - - -------- -------- -------- Total investments 558,434 322,703 165,844 OTHER ASSETS: Receivable (payable) for allocation to member accounts (53,934) 53,934 - Dividends and interest receivable - - 3 Receivable - withholdings of member contributions - - - Member interfund transfers - (314) (379) -------- -------- -------- Total assets 504,500 376,323 165,468 -------- -------- -------- LIABILITIES LIABILITIES: Notes payable 316,944 - - Accrued interest payable 4,453 - - Net amount (receivable) payable for investment securities transactions and other - - - Amounts payable for administrative expenses - - 172 -------- -------- -------- Total liabilities 321,397 - 172 -------- -------- -------- NET ASSETS AVAILABLE FOR BENEFITS $183,103 $376,323 $165,296 ======== ======== ======== NUMBER OF UNITS AT DECEMBER 31, 1998 2,652 ======== VALUE PER UNIT AT DECEMBER 31, 1998 $ 62.34 ======== (Continued on following page) THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1998 (Thousands, except per unit information) Participant Directed Investment Funds ------------------------------------ May Common Fixed Common Stock Money Income ASSETS Stock Index Market Index INVESTMENTS, at fair value: The May Department Stores Company- Convertible preferred stock $ - $ - $ - $ - Common stock 465,418 - - - Commingled equity index fund - 171,212 - - Short-term investments 1,248 1,039 60,591 878 U.S. government securities - - - 32,801 Fixed income investments - - - 11,731 -------- -------- ------- ------- Total investments 466,666 172,251 60,591 45,410 OTHER ASSETS: Receivable (payable) for allocation to member accounts - 6 (4) (2) Dividends and interest receivable 9 4 275 781 Receivable - withholdings of member contributions 1,307 582 224 182 Member interfund transfers (1,069) 599 821 342 -------- -------- ------- ------- Total assets 466,913 173,442 61,907 46,713 -------- -------- ------- ------- LIABILITIES LIABILITIES: Notes payable - - - - Accrued interest payable - - - - Net amount (receivable) payable for investment securities transactions and other - (454) - 533 Amounts payable for administrative expenses 484 345 238 200 -------- -------- ------- ------- Total liabilities 484 (109) 238 733 -------- -------- ------- ------- NET ASSETS AVAILABLE FOR BENEFITS $466,429 $173,551 $61,669 $45,980 ======== ======== ======= ======= NUMBER OF UNITS AT DECEMBER 31, 1998 7,482 32,932 36,276 22,429 ======== ======== ======= ======= VALUE PER UNIT AT DECEMBER 31, 1998 $ 62.34 $ 5.27 $ 1.70 $ 2.05 ======== ======== ======= ======= (Continued on following page) THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1998 (Thousands, except per unit information) Distribution ASSETS Account Total INVESTMENTS, at fair value: The May Department Stores Company- Convertible preferred stock $ - $ 881,137 Common stock - 630,819 Commingled equity index fund - 171,212 Short-term investments 4,217 68,416 U.S. government securities - 32,801 Fixed income investments - 11,731 ------ ---------- Total investments 4,217 1,796,116 OTHER ASSETS: Receivable (payable) for allocation to member accounts - - Dividends and interest receivable - 1,072 Receivable - withholdings of member contributions - 2,295 Member interfund transfers - - ------ ---------- Total assets 4,217 1,799,483 ------ ---------- LIABILITIES LIABILITIES: Notes payable - 316,944 Accrued interest payable - 4,453 Net amount (receivable) payable for investment securities transactions and other 4,217 4,296 Amounts payable for administrative expenses - 1,439 ------ ---------- Total liabilities 4,217 327,132 ------ ---------- NET ASSETS AVAILABLE FOR BENEFITS $ - $1,472,351 ====== ========== The accompanying notes are an integral part of this statement. THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1997 (Thousands, except per unit information) Nonparticipant Directed Investment Funds -------------------------------- ESOP Preference ---------------------- May Member Common ASSETS Unallocated Allocated Stock INVESTMENTS, at fair value: The May Department Stores Company- Convertible preferred stock $551,965 $241,377 $ - Common stock - - 160,657 Commingled equity index fund - - - Short-term investments - - 605 U.S. government securities - - - Fixed income investments - - - -------- -------- -------- Total investments 551,965 241,377 161,262 OTHER ASSETS: Receivable (payable) for allocation to member accounts (45,558) 45,558 - Dividends and interest receivable - - 3 Receivable - withholdings of member contributions - - - Member interfund transfers - (190) (65) -------- -------- -------- Total assets 506,407 286,745 161,200 -------- -------- -------- LIABILITIES LIABILITIES: Notes payable 342,329 - - Accrued interest payable 4,805 - - Net amount payable for investment securities transactions and other - - 47 Amounts payable for administrative expenses - - 151 -------- -------- -------- Total liabilities 347,134 - 198 -------- -------- -------- NET ASSETS AVAILABLE FOR BENEFITS $159,273 $286,745 $161,002 ======== ======== ======== NUMBER OF UNITS AT DECEMBER 31, 1997 3,009 ======== VALUE PER UNIT AT DECEMBER 31, 1997 $ 53.51 ======== (Continued on following page) THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1997 (Thousands, except per unit information) Participant Directed Investment Funds ------------------------------------ May Common Fixed Common Stock Money Income ASSETS Stock Index Market Index INVESTMENTS, at fair value: The May Department Stores Company- Convertible preferred stock $ - $ - $ - $ - Common stock 415,381 - - - Commingled equity index fund - 124,796 - - Short-term investments 1,564 330 63,908 1,191 U.S. government securities - - - 28,367 Fixed income investments - - - 9,196 -------- -------- ------- ------- Total investments 416,945 125,126 63,908 38,754 OTHER ASSETS: Receivable (payable) for allocation to member accounts - - - - Dividends and interest receivable 8 187 322 569 Receivable - withholdings of member contributions 381 250 60 56 Member interfund transfers (167) 2,119 (1,520) (177) -------- -------- ------- ------- Total assets 417,167 127,682 62,770 39,202 -------- -------- ------- ------- LIABILITIES LIABILITIES: Notes payable - - - - Accrued interest payable - - - - Net amount payable for investment securities transactions and other 123 130 - 304 Amounts payable for administrative expenses 392 216 165 133 -------- -------- ------- ------- Total liabilities 515 346 165 437 -------- -------- ------- ------- NET ASSETS AVAILABLE FOR BENEFITS $416,652 $127,336 $62,605 $38,765 ======== ======== ======= ======= NUMBER OF UNITS AT DECEMBER 31, 1997 7,786 30,982 38,645 20,403 ======== ======== ======= ======= VALUE PER UNIT AT DECEMBER 31, 1997 $ 53.51 $ 4.11 $ 1.62 $ 1.90 ======== ======== ======= ======= (Continued on following page) THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1997 (Thousands, except per unit information) Distribution ASSETS Account Total INVESTMENTS, at fair value: The May Department Stores Company- Convertible preferred stock $ - $ 793,342 Common stock - 576,038 Commingled equity index fund - 124,796 Short-term investments 4,425 72,023 U.S. government securities - 28,367 Fixed income investments - 9,196 ------ ---------- Total investments 4,425 1,603,762 OTHER ASSETS: Receivable (payable) for allocation to member accounts - - Dividends and interest receivable - 1,089 Receivable - withholdings of member contributions - 747 Member interfund transfers - - ------ ---------- Total assets 4,425 1,605,598 ------ ---------- LIABILITIES LIABILITIES: Notes payable - 342,329 Accrued interest payable - 4,805 Net amount payable for investment securities transactions and other 4,425 5,029 Amounts payable for administrative expenses - 1,057 ------ ---------- Total liabilities 4,425 353,220 ------ ---------- NET ASSETS AVAILABLE FOR BENEFITS $ - $1,252,378 ====== ========== The accompanying notes are an integral part of this statement. THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED DECEMBER 31, 1998 (Thousands) Nonparticipant Directed Investment Funds -------------------------------- ESOP Preference ---------------------- May Member Common Unallocated Allocated Stock NET APPRECIATION IN FAIR VALUE OF INVESTMENTS $ 60,203 $ 55,938 $ 22,814 -------- -------- -------- INVESTMENT INCOME: Dividends 16,871 8,092 3,654 Interest - - 40 -------- -------- -------- 16,871 8,092 3,694 -------- -------- -------- CONTRIBUTIONS: Member - - - Employer allocation (54,018) 54,018 - Employer ESOP contribution 28,195 - - Member interfund transfers - (3,110) (5,068) -------- -------- -------- (25,823) 50,908 (5,068) -------- -------- -------- DEDUCTIONS: Member terminations and withdrawals - 25,360 16,565 Interest expense 27,421 - - Administrative expenses - - 581 -------- -------- -------- 27,421 25,360 17,146 -------- -------- -------- INCREASE IN NET ASSETS AVAILABLE FOR BENEFITS 23,830 89,578 4,294 NET ASSETS AVAILABLE FOR BENEFITS AT DECEMBER 31, 1997 159,273 286,745 161,002 -------- -------- -------- NET ASSETS AVAILABLE FOR BENEFITS AT DECEMBER 31, 1998 $183,103 $376,323 $165,296 ======== ======== ======== (Continued on following page) THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED DECEMBER 31, 1998 (Thousands) Participant Directed Investment Funds ------------------------------------ May Common Fixed Common Stock Money Income Stock Index Market Index Total NET APPRECIATION IN FAIR VALUE OF INVESTMENTS $ 60,577 $ 34,932 $ - $ 924 $ 235,388 -------- -------- ------- ------- ---------- INVESTMENT INCOME: Dividends 9,829 2,100 - - 40,546 Interest 104 68 3,528 2,646 6,386 -------- -------- ------- ------- ---------- 9,933 2,168 3,528 2,646 46,932 -------- -------- ------- ------- ---------- CONTRIBUTIONS: Member 47,281 21,517 7,747 6,243 82,788 Employer allocation - - - - - Employer ESOP contribution - - - - 28,195 Member interfund transfers (22,029) 5,945 18,532 5,730 - -------- -------- ------- ------- ---------- 25,252 27,462 26,279 11,973 110,983 -------- -------- ------- ------- ---------- DEDUCTIONS: Member terminations and withdrawals 44,489 17,463 30,154 7,838 141,869 Interest expense - - - - 27,421 Administrative expenses 1,496 884 589 490 4,040 -------- -------- ------- ------- ---------- 45,985 18,347 30,743 8,328 173,330 -------- -------- ------- ------- ---------- INCREASE IN NET ASSETS AVAILABLE FOR BENEFITS 49,777 46,215 (936) 7,215 219,973 NET ASSETS AVAILABLE FOR BENEFITS AT DECEMBER 31, 1997 416,652 127,336 62,605 38,765 1,252,378 -------- -------- ------- ------- ---------- NET ASSETS AVAILABLE FOR BENEFITS AT DECEMBER 31, 1998 $466,429 $173,551 $61,669 $45,980 $1,472,351 ======== ======== ======= ======= ========== The accompanying notes are an integral part of this statement. THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 1. DESCRIPTION OF THE PLAN: The following description of The May Department Stores Company Profit Sharing Plan (the "Plan") is provided for financial statement purposes only. Members should refer to the Plan document and the Summary Plan Description dated May 1996, with updates, for more complete information. General The Plan is a defined contribution profit sharing plan. The Plan covers eligible associates of The May Department Stores Company, a Delaware corporation ("May"), and its subsidiaries and affiliates who are members of The May Department Stores Company Retirement Plan. Participation is voluntary. Contributions Plan members may contribute 1% to 15% of their annual pay as defined. Contributions may be made prior to federal and certain other income taxes pursuant to Section 401(k) of the Internal Revenue Code. The employer allocation is variable and discretionary. Generally, the employer allocation for each Plan year is determined by multiplying a base matching rate times members' basic contributions (generally, contributions up to 5% of pay each paycheck), reduced by forfeitures, one-third of annual dividends with respect to the Employee Stock Ownership Plan ("ESOP") Preference Shares, as defined, administrative expenses and excess ESOP allocations from prior Plan years (to the extent such amounts have not been previously used to reduce employer allocations for earlier Plan years). The base matching rate is determined as follows: In the event May has earnings per share ("EPS") of its common stock for its most recent fiscal year ("current year") resulting in a 6.0% increase over the EPS for the fiscal year immediately preceding the current year, the base matching rate will be 50%. For each percentage point increase over 6.0% or decrease below 6.0%, there is a 1.25 percentage point increase in or decrease from the 50% base matching rate. ESOP Preference Shares allocated to associates' accounts through application of the base matching rate formula are allocated at their original cost to the Plan of $15.01 per common share equivalent ($22.51 per common share equivalent before the three-for-two common stock split in March 1999). Because the ESOP Preference Shares are convertible into May common stock, the ESOP Preference Shares are worth more than original cost when the market value of May common stock is higher than $15.01 per share. This market value of the employer allocation (including any supplemental contributions), divided by associates' matchable contributions, is the effective matching rate. If the effective matching rate for a Plan year exceeds 100%, only ESOP Preference Shares are used for the employer allocation and no May common shares are contributed as a supplemental contribution. The effective matching rate is also limited to 2.5 times the base matching rate. The base matching rate formula may be adjusted at any time for unusual events including discontinued operations, accounting changes, or items of extraordinary gain or loss. Investments Members' contributions may be invested in any of four investment funds: May Common Stock Fund - For investment of contributions in May common stock. Common Stock Index Fund - For investment of contributions in a fund comprised proportionately of all the common stock of corporations that make up the Standard & Poor's 500 Composite Stock Price Index. Investment mix is determined based on the relative market size of the 500 corporations, with larger corporations making up a higher proportion of the fund than smaller corporations. Money Market Fund - For investment of contributions in short-term (less than one year) obligations of high-quality issuers including banks, corporations, municipalities, the U.S. Treasury and other federal agencies. Fixed Income Index Fund - For investment of contributions in corporate, U.S. Government, federal agency and certain foreign government securities that make up the Lehman Intermediate Government/Corporate Bond Index. The securities that comprise this index have maturities ranging from one to 10 years, with an average of four years. (The Lehman Intermediate Government/Corporate Bond Index represents the composite performance of intermediate-term, fixed income securities.) At December 31, 1998, the nonparticipant directed May Common Stock and ESOP Member Allocated Funds include approximately $102.5 million and $289.0 million, respectively, attributable to participants over the age of 55. These amounts can be transferred to other funds at the discretion of the participants. Employer allocations are invested in the ESOP Preference Fund. The employer allocation to the Plan for the year ended December 31, 1998, will be made in May 1999 and will be in the form of 39,659 ESOP Preference Shares. ESOP Feature In 1989, the Plan was amended and restated to add an ESOP feature and acquired 788,955 shares of convertible preferred stock of May (the "ESOP Preference Shares"). Each ESOP Preference Share costs $507, has a guaranteed minimum value of $507 and is convertible into 33.78747 shares of May common stock (22.52498 conversion rate before the three-for-two stock split in March 1999). The acquisition of the ESOP Preference Shares was financed with the proceeds of a private placement to a group of institutional investors of an aggregate $400 million principal amount (the "ESOP Loans") (see Note 4). The ESOP Loans are guaranteed by The May Department Stores Company. The excess of the value of the unallocated ESOP Preference Shares over the principal amount of guaranteed ESOP Loans and accrued interest payable is reflected as Net Assets Available for Benefits in the Statement of Net Assets Available for Benefits as of December 31, 1998 and 1997. The ESOP Loans are repaid by the Plan from the following sources in the following order: (a) dividends from May on ESOP Preference Shares previously allocated to members; (b) dividends from May on unallocated ESOP Preference Shares; and (c) contributions by May. During the term of the ESOP Loans, the ESOP Preference Shares which have not been allocated to members' company accounts serve as collateral for the ESOP Loans. ESOP Preference Shares are initially held by the Plan in an Unallocated account. As ESOP Loans are repaid, ESOP Preference Shares are released to a suspense account pending release to the members' company accounts in satisfaction of the employer allocation. If the guaranteed minimum value of the ESOP Preference Shares allocated to members' company accounts as a result of the ESOP Loan payments (principal and interest) for a year is less than the employer allocation, then May makes supplemental contributions to the Plan for the difference, subject to the 100% effective matching rate limitations described above. Supplemental contributions can be made in either shares of May common stock or cash. If the guaranteed minimum value of the ESOP Preference Shares released for allocation to members' company accounts as a result of the ESOP Loan payments is greater than the required employer allocation, any "excess" would be applied (in accordance with applicable law) to satisfy required employer allocations in future Plan years. Vesting The method of calculating vesting service is the elapsed time approach. Elapsed time is measured by calculating the time which has elapsed between the member's hire date and retirement date/termination date (excluding certain break-in- service periods). Plan members are vested in company accounts in accordance with the following schedule: Years of Vesting Vesting Service Percentage Less than 3 years 0% 3 years 20% 4 years 40% 5 years 60% 6 years 80% 7 years or more 100% Plan members are always fully vested in the value of their member accounts. Payment of Benefits Amounts in a member's account and the vested portion of a member's company account may be distributed upon retirement, death, disability or termination of employment. Distributions from the May Common Stock Fund and ESOP Preference Fund are made in shares of May common stock if the combined distribution exceeds 100 shares. All other distributions are generally made in cash. Transfers are made from the investment funds to the Distribution account to fund the Plan's cash distributions. Administration of Plan The Plan is administered by a Committee consisting of at least five persons appointed by May. An Administrative Subcommittee has the general responsibility for administration of the Plan and an Investment Subcommittee establishes and monitors investment policies and activities. The assets of the Plan are held in a trust for which The Bank of New York is the Trustee. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Investments Except for the ESOP Preference Fund, the Plan's investments are stated at fair value, as determined by the Trustee, based on publicly reported price information. Each ESOP Preference Share is valued at the greater of (a) the guaranteed minimum value (original cost) of $507 per share or (b) a conversion value equal to the market price of May common stock multiplied by the conversion rate for each ESOP Preference Share. As of December 31, 1998 and 1997, the ESOP Preference Shares were valued at their conversion values of $1,359.95 and $1,186.78, respectively. Federal Income Taxes The Trust established under the Plan to hold the Plan's assets is qualified pursuant to Sections 401(a), 401(k) and 4975(e)(7) of the Internal Revenue Code and accordingly, the Trust's net investment income is exempt from income taxes. The Plan has received a favorable tax determination letter dated December 13, 1994. The Plan has been amended since receiving the determination letter. The Plan administrators believe that the amendments do not affect the tax-exempt status of the Plan. In a request filed under the Voluntary Compliance Resolution ("VCR") program, May identified a nonexempt prohibited transaction. In April 1997, May, in conformance with a VCR Compliance Statement issued by the Internal Revenue Service ("IRS"), corrected the transaction. In September 1997, May filed Forms 5330 and paid the applicable excise tax. In December 1997, May received notice that the IRS accepted the Forms 5330. Employer allocations and contributions, member before-tax contributions and the income of the Plan are not taxable to the members until distributions or withdrawals are made. Administrative Expenses All administrative expenses (including the allocable portion of expenses for data processing services, and salaries and benefits of employees providing services to the Plan) are paid by the Plan. Monthly Valuation of the Trust The unit value of each investment fund is determined by dividing the month-end market value of the particular investment fund by the total number of units outstanding at month-end in all member accounts in such investment fund. As of each succeeding monthly valuation date, the unit value of each fund is redetermined and account balances in each fund are adjusted as follows: (a) All payments made from an account (except for the ESOP Preference Fund) are valued based on the unit value at the month-end valuation date. Payments from the ESOP Preference Fund are valued at the greater of the guaranteed minimum value (plus accrued dividends) or conversion value, as of the distribution date. (b) With respect to any dollar amount contributed during the month (except for the ESOP Preference Fund), an equivalent number of additional units are credited to the appropriate accounts in such investment fund based on the unit value at the month-end valuation date. Allocations of ESOP Preference Shares are valued at the greater of the guaranteed minimum value (plus accrued dividends) or conversion value, as of the distribution date. (c) In the event that a member's employment is terminated and a portion of such member's company account has been forfeited, the forfeited units or ESOP Preference Shares shall be canceled as of the last day of the Plan year. The dollar amount of such forfeited units or ESOP Preference Shares is reallocated among the remaining members of the Plan as of the last day of the Plan year in the same manner as the employer allocation for such year. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of net assets available for benefits and the reported amounts of additions to and deductions from net assets available for benefits during the year. Actual results could differ from those estimates. May Commmon Stock Split All May common share data included in these financial statements has been restated to reflect a three-for-two common stock split announced on February 11, 1999, for owners of record as of March 1, 1999, for distribution on March 22, 1999. 3. INVESTMENTS: The fair market value of the Plan's investments that represent 5% or more of the Plan's Net Assets Available for Benefits as of December 31, 1998 and 1997, are as follows (dollars in thousands): December 31, 1998 December 31, 1997 ---------------------- ---------------------- Number of Number of Shares or Shares or Principal Fair Principal Fair Amount Value Amount Value The May Department Stores Company 7.5% ESOP Preference Stock: Unallocated 410,629 $ 558,434 465,093 $ 551,965 Member allocated 237,291 322,703 203,387 241,377 ---------- ---------- ---------- ---------- 647,920 881,137 668,480 793,342 ========== ========== The May Department Stores Company Common Stock 15,672,525* 630,819 16,399,650* 576,038 Chase Investors Commingled Equity Index Fund 141,865 171,212 131,291 124,796 The Bank of New York Short-Term Investment Fund - Master Notes $68,416 68,416 $72,023 72,023 ---------- ---------- Total $1,751,584 $1,566,199 ========== ========== *Restated to reflect the three-for-two stock split in March 1999. 4. NOTES PAYABLE: Notes payable as of December 31 consisted of the following (in thousands): 1998 1997 ESOP Notes Payable: Series A, 8.32%, due April 30, 2001 $112,980 $138,365 Series B, 8.49%, due April 30, 2004 203,964 203,964 -------- -------- $316,944 $342,329 ======== ======== The scheduled principal payments for the Series A ESOP Note for the remaining three years are as follows: 1999 - $31,118,000; 2000 - $37,354,000; and 2001 - $44,508,000. Principal payments on the Series B ESOP Note begin in 2002 with the first two payments of $52,317,000 and $60,787,000 due in 2002 and in 2003, respectively. As of December 31, 1998 and 1997, the total fair value of the ESOP Notes was approximately $361,445,000 and $402,988,000, respectively. 5. RECONCILIATION TO FORM 5500: As of December 31, 1998 and 1997, the Plan had approximately $15,929,000 and $19,127,000, respectively, of pending distributions to participants. These amounts are included in Net Assets Available for Benefits. For reporting on the Plan's Form 5500, these amounts will be classified as Benefit Claims Payable with a corresponding reduction in Net Assets Available for Benefits. The following table reconciles the financial statements to the Form 5500 which will be filed by the Plan for the Plan year ended December 31, 1998 (thousands): Net Assets Benefits Available Payable to Benefits for Participants Paid Benefits Per financial statements $ - $141,869 $1,472,351 Pending benefit distributions - December 31, 1998 15,929 15,929 (15,929) Pending benefit distributions - December 31, 1997 - (19,127) - ------- -------- ---------- Per Form 5500 $15,929 $138,671 $1,456,422 ======= ======== ========== 6. DISTRIBUTION OF ASSETS UPON TERMINATION OF THE PLAN: May reserves the right to terminate the Plan, in whole or in part, at any time. If an employer shall cease to be a participating employer in the Plan, the accounts of the members of the withdrawing employer shall be revalued as if such withdrawal date were a valuation date. The Plan Committee is then to direct the Trustee either to distribute the accounts of the members of the withdrawing employer as of the date of such withdrawal on the same basis as if the Plan had been terminated, or to deposit in a trust established by the withdrawing employer, pursuant to a plan substantially similar to the Plan, assets equal in value to the assets allocable to the accounts of the members of the withdrawing employer. If the Plan is terminated at any time or contributions are completely discontinued and May determines that the Trust shall be terminated, the members' company accounts shall become fully vested and nonforfeitable, all accounts shall be revalued as if the termination date were a valuation date and such accounts shall be distributed to members. If the Plan is terminated or contributions completely discontinued but May determines that the Trust shall be continued pursuant to the terms of the Trust agreement, no further contributions shall be made by members or the employer and the members' company accounts shall become fully vested, but the Trust shall be administered as though the Plan were otherwise in effect. SCHEDULE I THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN EMPLOYER #: 43-1104396 PLAN #: 003 ITEM 27(a): SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES DECEMBER 31, 1998 (c) Number of Shares or (e) (b) Principal (d) Fair (a) Identity of Issue Amount Cost Value (Thousands) ESOP PREFERENCE FUND * The May Department Stores Company 7.5% ESOP Preference Stock: Unallocated 410,629 $208,189 $ 558,434 Allocated 237,291 120,307 322,703 -------- ---------- ESOP Preference Fund Total $328,496 $ 881,137 ======== ========== MAY COMMON STOCK FUND * The May Department Stores Company Common stock 15,672,525**$266,847 $ 630,819 * The Bank of New York Short-Term Investment Fund- Master Notes $ 1,691,665 1,691 1,691 -------- ---------- May Common Stock Fund Total $268,538 $ 632,510 ======== ========== COMMON STOCK INDEX FUND Chase Investors Commingled Equity Index Fund 141,865 $ 87,839 $ 171,212 * The Bank of New York Short-Term Investment Fund- Master notes $ 1,038,740 1,039 1,039 -------- ---------- Common Stock Index Fund Total $ 88,878 $ 172,251 ======== ========== MONEY MARKET FUND * The Bank of New York Short-Term Investment Fund- Master Notes $60,590,688 $ 60,591 $ 60,591 ======== ========== FIXED INCOME INDEX FUND * The Bank of New York Short-Term Investment Fund- Master Notes $ 878,041 $ 878 $ 878 -------- ---------- * Also a party-in-interest. ** Restated to reflect the three-for-two stock split in March 1999. SCHEDULE I (Continued) (c) (e) (b) Principal (d) Fair (a) Identity of Issue Amount Cost Value (Thousands) FIXED INCOME INDEX FUND (Continued) U.S. Government Securities U.S. Treasury Notes: 6.625%, due 05/15/07 $1,400,000 $ 1,462 $ 1,574 5.75%, due 08/15/03 $2,000,000 2,072 2,089 7.875%, due 11/15/04 $ 600,000 668 695 13.75%, due 08/15/04 $ 525,000 810 755 5.5%, due 04/15/00 $3,700,000 3,583 3,738 5.625%, due 05/15/08 $ 300,000 323 320 6.125%, due 12/31/01 $1,100,000 1,123 1,144 7.75%, due 01/31/00 $1,700,000 1,763 1,754 5.875%, due 02/15/04 $3,200,000 3,266 3,376 5.25%, due 01/31/01 $3,900,000 3,860 3,948 6.875%, due 05/15/06 $1,850,000 1,959 2,092 6.375%, due 08/15/02 $3,800,000 3,918 4,008 8.75%, due 08/15/00 $1,800,000 2,000 1,913 6.875%, due 03/31/00 $ 300,000 310 308 5.500%, due 02/15/08 $ 450,000 460 477 -------- ---------- Total U.S. treasury notes 27,577 28,191 -------- ---------- U.S. Government Agency Securities: Federal Home Loan Mortgage Corp.: 6.22%, due 3/24/03 $ 200,000 182 208 4.75%, due 12/14/01 $1,000,000 997 996 Federal National Mortgage Assoc. Securities- 8.35%, due 11/10/99 $ 525,000 544 540 5.75%, due 6/15/05 $ 800,000 824 826 4.625%, due 10/15/01 $ 500,000 498 497 Debentures- 7.65%, due 3/10/05 $ 260,000 268 292 5.75%, due 7/15/03 $ 400,000 406 410 Medium Term Notes- 6.41%, due 3/8/06 $ 400,000 402 425 6.69%, due 8/7/01 $ 400,000 402 416 -------- ---------- Total U.S. government agency securities 4,523 4,610 -------- ---------- Total U.S. government securities 32,100 32,801 -------- ---------- SCHEDULE I (Continued) (c) (e) (b) Principal (d) Fair (a) Identity of Issue Amount Cost Value (Thousands) FIXED INCOME INDEX FUND (Continued) Fixed Income Investments Bank Corporate Bonds: Bank America Corp., 7.75%, due 7/15/02 $ 300,000 $ 306 $ 320 Republic NY Corp., 7.25%, due 7/15/02 $ 100,000 98 105 NCNB Corp., 9.125%, due 10/15/01 $ 268,000 306 293 Bayerische Landesbank, 5.825%, due 12/01/08 $ 450,000 449 460 Interamerican Development Bank, 5.75%, due 2/26/08 $ 400,000 398 413 -------- ---------- Total bank corporate bonds 1,557 1,591 -------- ---------- Finance and Insurance Corporate Bonds: American Express Co., 8.5%, due 8/15/01 $ 200,000 201 215 Corestates Cap. Corp., 5.75%, due 1/15/01 $ 400,000 388 406 Finovia Cap Corp., 5.875%, due 10/15/01 $ 450,000 449 450 ABN-AMRO Bank, 6.625%, due 10/31/01 $ 300,000 300 308 General Electric Capital Corp., 8.85%, due 4/1/05 $ 300,000 364 355 Simon Debartolo Group, 6.875%, due 11/15/06 $ 500,000 498 488 Travelers/Aetna Property Casualty Corp., 6.75%, due 4/15/01 $ 300,000 301 309 Toyota Motor Corp., 5.5%, due 12/15/08 $ 450,000 449 448 United Dominion Realty Tr. Inc., 8.125%, due 11/15/00 $ 400,000 400 401 -------- ---------- Total finance and insurance corporate bonds 3,350 3,380 -------- ---------- Industrial Corporate Bonds: Comcast Cable, 6.2%, due 11/15/08 $ 450,000 449 458 Eli Lilly & Co., 8.125%, due 12/1/01 $ 200,000 199 217 General Motors Corp., 7.10%, due 3/15/06 $ 300,000 303 324 Philip Morris Co., Inc., 8.625%, due 3/1/99 $ 250,000 248 251 Lockhead Martin Corp., 6.85%, due 5/15/01 $ 400,000 400 412 Hercules, Inc., 6.15%, due 8/1/00 $ 400,000 401 402 Nabisco, Inc. NT; 6.00%, due 2/15/11 $ 400,000 399 395 -------- ---------- Total industrial corporate bonds 2,399 2,459 -------- ---------- Oil Corporate Bonds: Tenneco, Inc., 7.875%, due 10/1/02 $ 250,000 248 266 El Paso Nat. Gas Co., 6.75%, due 11/15/03 $ 300,000 305 310 -------- ---------- Total oil corporate bonds 553 576 -------- ---------- SCHEDULE I (Continued) (c) (e) (b) Principal (d) Fair (a) Identity of Issue Amount Cost Value (Thousands) FIXED INCOME INDEX FUND (Continued) Utilities Corporate Bonds: Duke Power Co., 1st & Refunding Mortgage Note, 7%, due 6/1/00 $ 195,000 $ 203 $ 200 Enron Corp., 9.5%, due 6/15/01 $ 100,000 110 108 Enron Corp., 6.50% due 8/1/02 $ 300,000 298 305 -------- ---------- Total utilities corporate bonds 611 613 -------- ---------- Telephone Corporate Bonds: Cable & Wireless Com. 6.625%, due 3/6/05 $ 400,000 399 403 Worldcom Inc. GA, 8.875%, due 1/15/06 $ 400,000 434 437 -------- ---------- Total telephone corporate bonds 833 840 -------- ---------- Asset Backed Securities: California Infrastructure, 6.32%, due 9/25/05 $ 400,000 403 411 -------- ---------- 403 411 -------- ---------- Foreign Obligations: Finland Rep NT, 7.875%, due 7/28/04 $ 225,000 229 254 Hydro-Quebec Debenture, Series IF, 7.375%, due 2/1/03 $ 150,000 161 160 Province of Ontario, Canada Debenture, 8%, due 10/17/01 $ 150,000 150 161 Province of Ontario, Canada Debenture, 7.375%, due 1/27/03 $ 400,000 415 429 British Columbia Prov. Canada, 5.375%, due 10/29/08 $ 450,000 448 449 Tyco International Grp. SA, 6.375%, due 6/15/05 $ 400,000 398 408 -------- ---------- Total foreign obligations 1,801 1,861 -------- ---------- Total fixed income investments 11,507 11,731 -------- ---------- Fixed Income Index Fund Total $ 44,485 $ 45,410 ======== ========== DISTRIBUTION ACCOUNT * The Bank of New York Short-Term Investment Fund- Master Notes $4,216,744 $ 4,217 $ 4,217 ======== ========== TOTAL ASSETS HELD FOR INVESTMENT PURPOSES AT DECEMBER 31, 1998 $795,205 $1,796,116 ======== ========== * Also a party-in-interest. SCHEDULE II THE MAY DEPARTMENT STORES COMPANY PROFIT SHARING PLAN EMPLOYER #: 43-1104396 PLAN #: 003 ITEM 27(d): SCHEDULE OF REPORTABLE TRANSACTIONS FOR THE YEAR ENDED DECEMBER 31, 1998 (Thousands, except number of transactions) Purchases Sales ---------------- ----------------------------------- No. of No. of Sales Gain or Trans. Cost Trans. Cost Price (Loss) The Bank of New York Short-Term Investment Fund-Master Notes (1) 439 $133,898 270 $137,297 $137,297 $ - The May Department Stores Company Common Stock (1) (2) 54 $ 37,193 46 $ 58,074 $ 65,803 $7,729 (1) Also a party-in-interest. (2) Includes conversion of ESOP Preference Shares. EXHIBIT CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report on The May Department Stores Company Profit Sharing Plan financial statements included in this Form 11-K, into the Company's previously filed Registration Statement on Form S-8 Files No. 333-00957 and 333-76227. ARTHUR ANDERSEN LLP St. Louis, Missouri, April 21, 1999 -----END PRIVACY-ENHANCED MESSAGE-----