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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 1, 1997
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 registrant's common stock held by non-
affiliates as of March 24, 1997: $10,760,871,413
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
234,648,732 shares of common stock, $.50 par value, as of April 5,
1997.
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Documents incorporated by reference:
1. Portions of Registrant's 1996 Annual Report to Shareowners are
incorporated into Parts I and II.
2. Portions of Registrant's 1997 Proxy Statement, dated April 17,
1997, are incorporated into Part III.
PART I
Items 1 and 2. Business and Description of Property
Registrant, a corporation organized under the laws of the State of
Delaware, 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.
May NY was organized under the laws of the State of New York on
June 4, 1910, as the successor to a business founded by David May,
who opened his first store in Leadville, Colorado, in 1877. At the
shareowners' annual meeting on May 24, 1996, the shareowners
approved the change of the state of incorporation from New York to
Delaware. The reincorporation in Delaware was accomplished by
means of a statutory share exchange, whereby each share of common
stock of May NY (and associated preferred stock purchase right),
outstanding prior to the filing of a "Certificate of Exchange" by
the Department of State of the State of New York, was exchanged for
one share of common stock of registrant. As a result of the share
exchange, May NY became a wholly owned subsidiary of registrant.
Registrant operates eight quality regional department store
companies nationwide using ten trade names. At fiscal year-end
1996, registrant operated 365 department stores in 30 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 24 markets including New York City, Chicago,
Boston, Washington, D.C., Detroit, Dallas/Fort
Worth, Atlanta and Miami
Hecht's and 17 markets including Washington, D.C.,
Strawbridge's Philadelphia (Strawbridge's), Baltimore,
Norfolk, and Richmond
Foley's 15 markets, including Houston, Dallas/Fort
Worth, Denver, San Antonio, and Oklahoma City
Robinsons-May 10 markets, including Los Angeles, San Diego,
Orange County, Phoenix, and Riverside/San
Bernardino
Kaufmann's 20 markets, including Pittsburgh, Cleveland,
Buffalo, Rochester, Akron and Syracuse
Filene's 16 markets, including Boston, New Haven,
Hartford, Providence, R.I., and Albany
Famous Barr and 14 markets, including St. Louis, Indianapolis
L.S. Ayres (L.S. Ayres), Fort Wayne and South Bend
Meier & Frank Four markets: Portland/Vancouver, Salem,
Eugene and Medford
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On January 17, 1996, registrant announced the spin-off of Payless
ShoeSource, Inc., its chain of self-service family shoe stores.
The spin-off was completed effective May 4, 1996 as a tax-free
distribution to shareowners.
On July 18, 1996, registrant purchased 13 former Strawbridge &
Clothier department stores in the greater Philadelphia area.
Registrant 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.
The acquisition was accounted for as a purchase.
Registrant employs approximately 53,000 full-time and 58,000 part-
time associates in 30 states, the District of Columbia and eight
offices overseas.
Management's Discussion and Analysis (pages 12-16) of registrant's
1996 Annual Report to Shareowners is incorporated herein by
reference.
A. Property Ownership
The following summarizes the property ownership of department
stores at February 1, 1997:
% of Gross
Number of Building
Stores Sq. Footage
Entirely or mostly owned* 204 60%
Entirely or mostly leased 98 26
Owned on leased land* 63 14
365 100%
* Includes a total of 19 department stores subject to
financing.
B. Credit Sales
Sales at registrant's department stores are made for cash or
credit, including registrant's 30-day charge accounts and open-end
credit plans, which include revolving charge accounts and revolving
installment accounts. During the fiscal year ended February 1,
1997, 50.0% of the total revenues of registrant's department stores
were made through registrant's credit plans.
In 1991, registrant formed May National Bank of Arizona (MBA) and
May National Bank of Ohio (MBO), which are indirectly wholly owned
and consolidated subsidiaries of registrant.
During fiscal 1996, MBA and MBO extended credit to customers of
registrant's Lord & Taylor (effective October 1, 1996), Hecht's
(effective October 1, 1996), Strawbridge's (effective August 1,
1996), Robinsons-May, Kaufmann's, Famous-Barr (effective October 1,
1996), L.S. Ayres and Meier & Frank department stores companies.
Throughout 1996, MBA and MBO sold the resulting accounts
receivables at face value, to May NY. In addition, MBA and MBO
process remittances for their parent, May Funding, Inc. and its
other subsidiaries. MBA and MBO receive processing fee revenue for
this service.
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C. Competition in Retail Merchandising
Registrant's retail merchandising business is conducted under
highly competitive conditions. During the past several years, the
retail industry has seen major changes which have increased
competition. Although registrant is one of the nation's largest
department store retailers, it has thousands of competitors at the
local level which compete with registrant's individual department
stores. Competition at the local level is characterized by
numerous factors including convenience of facilities, reputation,
procurement of merchandise, product mix, advertising, price,
quality, service and credit availability. Registrant believes that
it is in a strong competitive position with regard to each of these
factors.
D. Executive Officers of Registrant
The names and ages (as of April 17, 1997) of all executive officers
of registrant, and the positions and offices held with registrant
by each such person are as follows:
Name Age Positions and Offices
David C. Farrell 63 Chairman and Chief Executive Officer
Jerome T. Loeb 56 President
Richard L. Battram 62 Executive Vice Chairman
Eugene S. Kahn 47 Vice Chairman
Anthony J. Torcasio 51 President and Chief Executive Officer,
May Merchandising Company
John L. Dunham 50 Executive Vice President and Chief
Financial Officer
Louis J. Garr, Jr. 57 Executive Vice President and General
Counsel
R. Dean Wolfe 53 Executive Vice President
William D. Edkins 44 Senior Vice President
Lonny J. Jay 55 Senior Vice President
Jan R. Kniffen 48 Senior Vice President
Richard A. Brickson 49 Secretary and Senior Counsel
Martin M. Doerr 42 Vice President
Andrew T. Hall 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 registrant, or until their respective
successors shall have been elected and shall qualify. Messrs.
Farrell, Loeb, Battram, Kahn and Torcasio also serve as directors
of registrant.
Each of the executive officers has been an officer of registrant
for at least the last five years, with the following exceptions:
Mr. Kahn served as president of the former G. Fox department store
company from 1990 to 1992 and as president and chief executive
officer of Filene's from 1992 to March, 1996 when he became vice
chairman. Mr. Torcasio served as president and chief executive
officer of Famous-Barr from 1991 to 1993 when he became president
and chief executive officer of May Merchandising Company and became
an executive officer of registrant. Mr. Dunham served as chairman
of the former G. Fox department store company from 1989 to 1993 and
4
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as chairman of May Merchandising Company from 1993 to May, 1996
when he became an executive officer of registrant. Mr. Doerr was
associated with the public accounting firm of Arthur Andersen LLP
from 1976 to 1992 and became an executive officer of registrant in
1994. Mr. Hall was associated with the public accounting firm of
Arthur Andersen LLP from 1983 to 1993 and became an executive
officer of registrant in 1994.
Item 3. Legal Proceedings
There are no material pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which
registrant or any of its subsidiaries is a party or of which any of
their property is the subject.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders
during the 13 weeks ended February 1, 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareowner Matters
Common Stock Dividends and Market Prices (page 16) of registrant's
1996 Annual Report to Shareowners are incorporated herein by
reference.
Item 6. Selected Financial Data
The Eleven Year Financial Summary (pages 28 and 29) of registrant's
1996 Annual Report to Shareowners is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Management's Discussion and Analysis (pages 12-16) and Notes to
Consolidated Financial Statements (pages 21-27) of registrant's
1996 Annual Report to Shareowners are incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements (pages 17-20), Notes to
Consolidated Financial Statements (pages 21-27) and Report of
Independent Public Accountants (page 30) of registrant's 1996
Annual Report to Shareowners are incorporated herein by reference.
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QUARTERLY RESULTS (Unaudited)
Quarterly results are determined in accordance with the annual
accounting policies and include certain items based upon estimates
for the entire year. Summarized quarterly results for the last two
years were as follows:
(millions, except
per share) 1996
Quarter First Second Third Fourth Year
Revenues $ 2,511 $ 2,533 $ 2,855 $ 4,101 $ 12,000
Cost of sales $ 1,755 $ 1,773 $ 2,004 $ 2,694 $ 8,226
Net Earnings:
Continuing operations $ 98 $ 110 $ 118 $ 423 $ 749
Discontinued operation 11 - - - 11
Before extraordinary loss 109 110 118 423 760
Extraordinary loss
related to early
extinguishment
of debt - - - (5) (5)
Net Earnings 109 110 118 418 755
Primary earnings
per share:
Continuing operations $ 0.37 $ 0.42 $ 0.45 $ 1.70 $ 2.94
Discontinued operation 0.05 - - - 0.05
Before extraordinary loss 0.42 0.42 0.45 1.70 2.99
Extraordinary loss
related to early
extinguishment
of debt - - - (0.02) (0.02)
Primary earnings
per share 0.42 0.42 0.45 1.68 2.97
Fully diluted earnings
per share:
Continuing operations $ 0.36 $ 0.41 $ 0.44 $ 1.61 $ 2.82
Discontinued operation 0.05 - - (0.01) 0.04
Before extraordinary loss 0.41 0.41 0.44 1.60 2.86
Extraordinary loss
related to early
extinguishment
of debt - - - (0.02) (0.02)
Fully Diluted Earnings
Per Share $ 0.41 $ 0.41 $ 0.44 $ 1.58 $ 2.84
6
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(millions, except
per share) 1995
Quarter First Second Third Fourth Year
Revenues $ 2,218 $ 2,325 $ 2,569 $ 3,840 $ 10,952
Cost of sales $ 1,543 $ 1,625 $ 1,798 $ 2,495 $ 7,461
Net Earnings:
Continuing operations $ 87 $ 107 $ 110 $ 396 $ 700
Discontinued operation 27 34 25 (31) 55
Before extraordinary loss 114 141 135 365 755
Extraordinary loss
related to early
extinguishment
of debt - - - (3) (3)
Net Earnings 114 141 135 362 752
Primary earnings
per share:
Continuing operations $ 0.33 $ 0.41 $ 0.42 $ 1.57 $ 2.73
Discontinued operation 0.11 0.13 0.10 (0.12) 0.22
Before extraordinary loss 0.44 0.54 0.52 1.45 2.95
Extraordinary loss
related to early
extinguishment
of debt - - - (0.01) (0.01)
Primary earnings
per share 0.44 0.54 0.52 1.44 2.94
Fully diluted earnings
per share:
Continuing operations $ 0.32 $ 0.40 $ 0.41 $ 1.48 $ 2.61
Discontinued operation 0.10 0.13 0.09 (0.11) 0.21
Before extraordinary loss 0.42 0.53 0.50 1.37 2.82
Extraordinary loss
related to early
extinguishment
of debt - - - (0.01) (0.01)
Fully Diluted Earnings
Per Share $ 0.42 $ 0.53 $ 0.50 $ 1.36 $ 2.81
7
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SUMMARIZED FINANCIAL INFORMATION - THE MAY DEPARTMENT STORES
COMPANY, NEW YORK. At the shareowners' annual meeting on May 24,
1996, the shareowners approved the change of the state of
incorporation of The May Department Stores Company from New York to
Delaware. This transaction did not result in any change in the
business or the consolidated assets, liabilities or net worth of
the reincorporated entity.
Summarized financial information for The May Department Stores
Company, New York, is set forth below for 1996. Corresponding
information for fiscal year 1995 is not included below as amounts
reflected in the respective consolidated financial statements
reflect information for The May Department Stores Company, New
York.
February 1,
1997
Balance Sheet
Current assets $ 5,415
Noncurrent assets 5,008
Current liabilities 1,912
Noncurrent liabilities 7,673
February 1, 1997
13 Weeks 52 Weeks
Ended Ended
Statement of Earnings
Revenues 4,101 12,000
Cost of sales 2,694 8,225
Net earnings 377 662
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
8
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PART III
Items 10, 11, 12, 13. Directors and Executive Officers of
Registrant, 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 registrant) is incorporated
by reference from the definitive proxy statement dated April 17,
1997, and filed pursuant to Regulation 14A. Information about
executive officers of registrant is set forth in Part I of this
Form 10-K, under the heading "Items 1. and 2. Business and
Description of Property."
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) Documents filed as part of this report:
(1) Financial Statements. Incorporated by reference to
registrant's 1996 Annual Report to Shareowners (Exhibit
13):
Page in
Annual Report
Financial Statements-
Consolidated Statement of Earnings for
the three fiscal years ended
February 1, 1997 17
Consolidated Balance Sheet -
February 1, 1997, and February 3, 1996 18
Consolidated Statement of Cash Flows
for the three fiscal years ended
February 1, 1997 19
Consolidated Statement of Shareowners'
Equity for the three fiscal years
ended February 1, 1997 20
Notes to Consolidated Financial Statements 21-27
Report of Independent Public Accountants 30
Page in
this Report
(2) Supplemental Financial Statement
Schedule (for the three fiscal years
ended February 1, 1997):
Report of Independent Public Accountants
on Schedule II 13
II Valuation and Qualifying Accounts 14
9
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Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K (continued)
(3) Exhibits: Location
3(a) Amended and Restated Certificate Incorporated
of Incorporation of Registrant, 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 Registrant, as amended Incorporated
by Reference
to Exhibit
3(ii) of Form
10-Q, filed
December 10,
1996.
11 Computation of Net Earnings Filed
Per Share herewith.
12 Computation of Ratio of Filed
Earnings to Fixed Charges herewith.
13 The May Department Stores Filed
Company 1996 Annual Report to herewith.
Shareowners (only those portions
specifically incorporated by
reference shall be deemed filed
with the Commission)
21 Subsidiaries of Registrant Filed
herewith.
23 Consent of Independent Public Page 13 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, 1996
(4) Reports on Form 8-K
A report dated November 4, 1996 which contained a copy of
the Underwriting Agreement dated October 30, 1996, among
registrant, The May Department Stores Company, New York,
Morgan Stanley & Co. Incorporated, Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Citicorp Securities, Inc.; and a specimen of 6.875%
debentures due November 1, 2005.
All other schedules and exhibits of registrant 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.
10
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
THE MAY DEPARTMENT STORES COMPANY
Date: April 23, 1997 By: /s/ John L. Dunham
John L. Dunham
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 registrant and in the capacities and on the dates
indicated.
Date Signature Title
Principal Executive Officer:
April 23, 1997 /s/ David C. Farrell Director,
David C. Farrell Chairman and Chief
Executive Officer
Principal Financial and
Accounting Officer:
April 23, 1997 /s/ John L. Dunham Executive
John L. Dunham Vice President
and Chief
Financial Officer
Directors:
April 23, 1997 /s/ Jerome T. Loeb Director and
Jerome T. Loeb President
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Date Signature Title
April 23, 1997 /s/ Richard L. Battram Director and
Richard L. Battram Executive Vice
Chairman
April 23, 1997 /s/ Eugene S. Kahn Director and Vice
Eugene S. Kahn Chairman
April 23, 1997 /s/ Anthony J. Torcasio Director,
Anthony J. Torcasio President and
Chief Executive
Officer, May
Merchandising
Company
April 23, 1997 /s/ Helene L. Kaplan Director
Helene L. Kaplan
April 23, 1997 /s/ Edward H. Meyer Director
Edward H. Meyer
April 23, 1997 /s/ Russell E. Palmer Director
Russell E. Palmer
April 23, 1997 /s/ Michael R. Quinlan Director
Michael R. Quinlan
April 23, 1997 /s/ William P. Stiritz Director
William P. Stiritz
April 23, 1997 /s/ Robert D. Storey Director
Robert D. Storey
April 23, 1997 /s/ Murray L. Weidenbaum Director
Murray L. Weidenbaum
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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 12, 1997. 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 12, 1997
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 February 1,
1997 into the Company's previously filed Registration Statements on
Form S-3 (No. 333-11539 and 333-11539-01) and Form S-8
(No. 33-21415, 33-98045, 33-58985, 333-00957 and 333-02127).
ARTHUR ANDERSEN LLP
1010 Market Street
St. Louis, Missouri 63101-2089
April 23, 1997
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SCHEDULE II
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE FISCAL YEARS ENDED February 1, 1997
(Millions)
Charges
Balance to costs Balance
beginning and Deductions end of
of period expenses (a) period
FISCAL YEAR ENDED
FEBRUARY 1, 1997
Allowance for
doubtful accounts $ 75 $ 116 $ (87) $ 104
FISCAL YEAR ENDED
FEBRUARY 3, 1996
Allowance for
doubtful accounts $ 69 $ 88 $ (82) $ 75
FISCAL YEAR ENDED
JANUARY 28, 1995:
Allowance for
doubtful accounts $ 68 $ 77 $ (76) $ 69
(a) Write-off of accounts determined to be uncollectible, net of
recoveries of $26 million in 1996, $24 million in 1995 and $23
million in 1994.
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Exhibit 21
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
SUBSIDIARIES OF REGISTRANT
The corporations listed below are subsidiaries of registrant, and
all are included in the consolidated financial statements of
registrant 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
May Funding, Inc. Nevada
Leadville Insurance Company Vermont
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<TABLE>
<CAPTION>
Exhibit 11
THE MAY DEPARTMENT STORES COMPANY
COMPUTATION OF NET EARNINGS PER SHARE
FOR THE THREE FISCAL YEARS ENDED FEBRUARY 1, 1997
(millions, except per share) 1996 1995 1994
<S> <C> <C> <C>
Net earnings from continuing operations $ 749 $ 700 $ 650
ESOP Preferred Dividends, net of tax
benefit on unallocated shares (18) (19) (19)
Preferred Dividend requirements - - -
Net earnings available for
common shareowners:
Continuing operations 731 681 631
Discontinued operation 11 55 132
Extraordinary loss (5) (3) -
Total net earnings available for
common shareowners $ 737 $ 733 $ 763
Average common shares outstanding 247.2 248.9 248.4
Net earnings per share:
Continuing operations $ 2.95 $ 2.73 $ 2.54
Discontinued operation 0.05 0.22 0.53
Extraordinary loss (0.02) (0.01) -
Total net earnings per share $ 2.98 $ 2.94 $ 3.07
Primary Computation:
Net earnings available from
continuing operations $ 731 $ 681 $ 631
Deferred comp. dividend adjustment 1 1 1
Adjusted net earnings available:
Continuing operations 732 682 632
Discontinued operation 11 55 132
Extraordinary loss (5) (3) -
Total adjusted net earnings available: $ 738 $ 734 $ 764
Average common shares outstanding 247.2 248.9 248.4
Common share equivalents (CSE's) 1.5 1.0 1.2
Average common stock and CSE's 248.7 249.9 249.6
Primary earnings per share:
Continuing operations $ 2.94 $ 2.73 $ 2.53
Discontinued operation 0.05 0.22 0.53
Extraordinary loss (0.02) (0.01) -
Total Primary Earnings per share $ 2.97 $ 2.94 $ 3.06
</TABLE>
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<TABLE>
<CAPTION>
Exhibit 11
THE MAY DEPARTMENT STORES COMPANY
COMPUTATION OF NET EARNINGS PER SHARE
FOR THE THREE FISCAL YEARS ENDED FEBRUARY 1, 1997
(millions, except per share) 1996 1995 1994
<S> <C> <C> <C>
Fully Diluted Computation:
Adjusted net earnings available
from continuing operations-PRIMARY $ 732 $ 682 $ 632
Earnings impact of assumed conversion of
ESOP Preference Shares, net of tax
benefit on unallocated common shares 12 11 10
Adjusted net earnings available-FULLY DILUTED:
Continuing operations 744 693 642
Discontinued operation 11 55 132
Extraordinary loss (5) (3) -
Total adjusted net earnings
available-FULLY DILUTED: $ 750 $ 745 $ 774
Average common shares and CSE's 248.7 249.9 249.6
Additional CSE's attributable to treasury
stock method - 0.4 -
ESOP Preference Shares 15.4 15.0 15.3
Average Common Shares Outstanding on
fully diluted basis 264.1 265.3 264.9
Fully Diluted earnings per share:
Continuing operations $ 2.82 $ 2.61 $ 2.43
Discontinued operation 0.04 0.21 0.49
Extraordinary loss (0.02) (0.01) -
Total Fully Diluted Earnings per share $ 2.84 $ 2.81 $ 2.92
</TABLE>
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<TABLE>
<CAPTION>
Exhibit 12
THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE FIVE FISCAL YEARS ENDED FEBRUARY 1, 1997
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended
Feb. 1, Feb. 3, Jan. 28, Jan. 29, Jan. 30,
1997 1996 1995 1994 1993
Earnings Available for Fixed Charges:
Pretax earnings from continuing operations $ 1,232 $ 1,160 $ 1,079 $ 957 $ 579
Fixed charges (excluding interest
capitalized and pretax preferred stock
dividend requirements) 346 317 293 305 361
Dividends on ESOP Preference Shares (26) (28) (28) (28) (29)
Capitalized interest amortization 6 5 4 4 3
1,558 1,454 1,348 1,238 914
Fixed Charges:
Gross interest expense (a) $ 341 $ 316 $ 289 $ 295 $ 338
Interest factor attributable to
rent expense 22 20 19 20 24
Other (b) - - - - 5
363 336 308 315 367
Ratio of Earnings to Fixed Charges 4.3 4.3 4.4 3.9 2.5
(a) Represents interest expense on long-term and short-term debt, ESOP debt and amortization of
debt discount and debt issue expense.
(b) Represents the company's proportionate share of interest of unconsolidated 50% owned persons
and pretax preferred stock dividend requirements.
</TABLE>
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EXHIBIT 13
[The following "Management's Dicussion and Analysis" section is a reproduction
of the same named section included in the paper format Annual Report on pages
12 - 16.]
Management's Discussion and Analysis
May achieved its 22nd consecutive year of record sales and earnings
per share from continuing operations. Our five-year compound growth
rate for earnings per share from continuing operations was 13.2% -
among the best in the retail industry.
Sales in 1996 were $11.6 billion, an increase of 11.1% over 1995
sales of $10.5 billion. The increase reflects the benefit of
new-store openings and an increase in store-for-store sales of
4.3%. Store-for-store sales increases for the first through fourth
quarters in 1996 were 6.7%, 2.3%, 3.9%, and 4.4%, respectively.
Our 1996 earnings per share from continuing operations increased
8.0% to $2.82 from last year's $2.61. Net earnings from continuing
operations totaled $749 million, compared with $700 million last
year. Returns on revenues, equity, and continuing operations' net
assets were 6.2%, 19.4%, and 18.8%, respectively. Return on equity
is computed as net earnings from continuing operations divided by
beginning shareowners' equity adjusted for the Payless spin-off.
We opened 28 department stores during 1996, adding 5.2 million
square feet of retail space. Four of these stores were Lord &
Taylor locations, in Paramus, N.J.; Gaithersburg, Md.; Fairfax,
Va.; and Woodbridge, N.J. Hecht's opened 14 locations, 13 of which
were acquired Strawbridge & Clothier stores. These include eight
Pennsylvania locations, in Philadelphia, Willow Grove, Exton,
Bensalem, Plymouth Meeting, Springfield, Ardmore, and King of
Prussia; three New Jersey locations, in Cherry Hill, Voorhees, and
Burlington; two Delaware locations, in Newark and Wilmington; and
one Virginia location, in Manassas. Foley's opened two Texas
stores, in Sugarland and Laredo; one location in Albuquerque, N.M.;
and one location in Tulsa, Okla. Robinsons-May opened one location
in Henderson, Nev. Kaufmann's opened one store in Strongsville,
Ohio. Filene's opened two locations, in Marlborough, Mass.; and
Manchester, N.H. Famous-Barr opened two locations, a Famous-Barr
store in Evansville, Ind., and an L.S. Ayres store in Muncie, Ind.
In addition, we remodeled 22 department stores in 1996, totaling
1.8 million retail square feet, which included the expansion of 12
stores by 405,000 square feet. At fiscal year-end, May operated 365
department stores in 30 states and the District of Columbia.
Nine department stores were closed during the year, resulting in a
net increase of 19 department stores and 4.0 million square feet of
retail space. This is the third consecutive year of significant
store openings following several years in which the department
store count decreased as new department store openings were more
than offset by the closings of low-productivity stores.
During 1996, the company purchased 13 former Strawbridge & Clothier
department stores in the greater Philadelphia area. These stores
were added to the existing Hecht's stores in Philadelphia. All
operate under the name Strawbridge's. The Strawbridge's operation
enjoys a strong leadership position in Philadelphia.
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.
Subsequent to the transaction, the company repurchased 4.5 million
shares in the open market.
In addition to the repurchase of 4.5 million shares, the company
used its financial strength to purchase 12.7 million shares for
$600 million. These stock purchases and corresponding borrowings
result in a capital structure that is better balanced for
shareowners and debtholders.
In February 1997, the company announced plans to repurchase up to
$300 million of May common stock.
In May 1996, May completed the spin-off of Payless ShoeSource, Inc.
("Payless"), a self-service family shoe store subsidiary, as a
tax-free distribution to shareowners. Payless is reported as a
discontinued operation.
Our expansion program for 1997 includes 13 new department stores,
totaling 2.0 million square feet of retail space. In addition, the
company plans to remodel 29 department stores totaling 2.4 million
square feet of retail space, which includes the expansion of 13
stores by a total of 430,000 square feet. The 1997-2001 new-store
plan would add 100 new department stores totaling 15 million retail
square feet, a 4% net annualized increase in department store
square footage. During this five-year period, May plans to invest
$1.7 billion for new stores, $650 million to expand and remodel
existing stores, and $560 million related to systems and
operations. These are the major components of a $3.4 billion
capital plan.
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings per share from
continuing operations $0.83 $1.03 $1.23 $1.50 $1.51 $1.52 $1.76 $2.15 $2.43 $2.61 $2.82
</TABLE>
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net retail sales from
continuing operations (in billions) $4.3 $4.7 $6.2 $7.0 $7.5 $7.9 $8.4 $9.0 $9.7 $10.5 $11.6
</TABLE>
<PAGE>
REVIEW OF OPERATIONS
Net earnings from continuing operations totaled $749 million in
1996, compared with $700 million in 1995 and $650 million in 1994.
Return on revenues was 6.2% in 1996, compared with 6.4% in 1995 and
1994. Fully diluted earnings per share from continuing operations
reached $2.82 in 1996, compared with $2.61 in 1995 and $2.43 in
1994.
<TABLE>
<CAPTION>
Results of continuing operations for the past three years were as
follows:
1996 1995 1994
(DOLLARS IN
MILLIONS,
EXCEPT PERCENT OF PERCENT OF PERCENT OF
PER SHARE) $ REVENUES $ REVENUES $ REVENUES
<S> <C> <C> <C> <C> <C> <C>
NET RETAIL
SALES $ 11,650 $ 10,484 $ 9,748
Revenues $ 12,000 100.0% $ 10,952 100.0% $ 10,107 100.0%
Cost of sales 8,226 68.5 7,461 68.1 6,879 68.1
Selling, general
and administra-
tive expenses 2,265 18.9 2,081 19.0 1,916 18.9
Interest
expense, net 277 2.3 250 2.3 233 2.3
Earnings before
income taxes 1,232 10.3 1,160 10.6 1,079 10.7
Provision for
income taxes* 483 39.3 460 39.7 429 39.7
NET EARNINGS $ 749 6.2% $ 700 6.4% $ 650 6.4%
FULLY DILUTED
EARNINGS
PER SHARE $ 2.82 $ 2.61 $ 2.43
<FN>
* Percent of Revenues column represents effective income tax rate.
</TABLE>
Fiscal 1995 included 53 weeks; however, the additional week did not
materially affect 1995 earnings. All net retail sales information
in this Review of Operations is presented on a 52-week basis for
comparability.
Earnings before interest and taxes (EBIT) for the past three years
were as follows:
INCREASE
(DOLLARS IN MILLIONS) 1996 1995 1994 1996 1995
Operating earnings $ 1,509 $ 1,410 $ 1,312 7.0% 7.5%
Percent of revenues 12.6% 12.9% 13.0%
EBIT presented above includes a LIFO (last-in, first out) credit of
$20 million, $53 million, and $46 million in 1996, 1995, and 1994,
respectively.
EBIT, excluding LIFO, is presented below on a supplementary basis
for comparative purposes:
INCREASE
(DOLLARS IN MILLIONS) 1996 1995 1994 1996 1995
Operating earnings $ 1,489 $ 1,357 $ 1,266 9.6% 7.2%
Percent of revenues 12.4% 12.4% 12.5%
May's 365 quality department stores are operated by eight regional
department store companies across the United States, operating
under 10 long-standing and widely recognized names. Each store
company holds a leading market position in its region.
The table below summarizes net retail sales, sales per square foot,
building area square footage, and number of stores for each store
company:
<TABLE>
<CAPTION>
NET RETAIL BUILDING AREA
SALES IN MILLIONS SALES PER SQUARE FOOTAGE
OF DOLLARS SQUARE FOOT IN THOUSANDS NUMBER OF STORES
STORE COMPANY AND HEADQUARTERS 1996 1995 1996 1995 1996 1995 1996 NEW CLOSED 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lord & Taylor, New York City $1,718 $1,574 $241 $233 7,473 7,131 59 4 2 57
Hecht's, Washington, D.C.
(Strawbridge's in Philadelphia) 2,159 1,650 193 207 12,787 10,455 71 14 5 62
Foley's, Houston 1,801 1,693 180 180 10,603 9,896 55 4 - 51
Robinsons-May, Los Angeles 1,751 1,562 185 170 9,808 9,568 54 1 - 53
Kaufmann's, Pittsburgh 1,447 1,394 191 201 7,968 7,747 47 1 - 46
Filene's, Boston 1,364 1,261 232 236 6,255 5,884 40 2 1 39
Famous-Barr, St. Louis
(L.S. Ayres in Indianapolis) 1,022 983 201 201 5,454 5,189 31 2 1 30
Meier & Frank, Portland, Ore. 388 367 225 213 1,768 1,770 8 - - 8
The May Department Stores Company $11,650 $10,484 $201 $201 62,116 57,640 365 28 9 346
<FN>
Net retail sales represent sales of stores open at the end of 1996.
Sales per square foot are calculated from revenues and average
gross retail square footage.
Building area represents gross retail square footage of stores open
at the end of the period presented.
</TABLE>
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year-end dividend rate
per common share $0.52 $0.57 $0.64 $0.71 $0.79 $0.81 $0.83 $0.92 $1.04 $1.14 $1.16
</TABLE>
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales per square foot $138 $143 $158 $168 $172 $171 $179 $191 $200 $201 $201
</TABLE>
<PAGE>
NET RETAIL SALES. Net retail sales (see page 21 for definition)
increases for 1996 and 1995 were as follows:
1996 VS. 1995 1995 VS. 1994 FIVE-YEAR
STORE-FOR- STORE-FOR- COMPOUND
TOTAL STORE TOTAL STORE GROWTH RATE
11.1% 4.3% 7.5% 2.5% 8.2%
The total sales increase for 1996 reflects the opening of 28 new
department stores and a 4.3% store-for-store increase. The total
sales increase for 1995 includes the results of 37 new department
stores and a 2.5% store-for-store increase.
Sales include leased and licensed department sales of $342 million,
$311 million, and $290 million in 1996, 1995, and 1994,
respectively. Revenues include finance charge revenues of $338
million, $340 million, and $334 million in 1996, 1995, and 1994,
respectively. Finance charge revenues have remained relatively
constant due to increased use of third-party credit cards.
COST OF SALES. Cost of sales includes cost of merchandise sold and
buying and occupancy costs. Cost of sales was $8.23 billion in
1996, compared with $7.46 billion in 1995, a 10.2% increase. The
overall increase resulted from a 9.9% increase in sales (52 weeks
in 1996 versus 53 weeks in 1995) and a decrease in the LIFO credit.
As a percent of revenues, cost of sales increased 0.4% from 68.1%
in 1995 to 68.5% in 1996. This increase was caused primarily by
the decrease in the LIFO credit.
Cost of sales was $7.46 billion in 1995, compared with $6.88
billion in 1994, an 8.5% increase. The overall increase resulted
from an 8.6% increase in sales. As a percent of revenues, cost of
sales remained constant between 1995 and 1994 at 68.1%.
The impact of LIFO on cost of sales, as a percent of revenues, is
shown below:
1996 1995 1994
Cost of sales 68.5% 68.1% 68.1%
LIFO credit (0.2) (0.5) (0.4)
Cost of sales before LIFO 68.7% 68.6% 68.5%
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general,
and administrative expenses were $2.27 billion in 1996, compared
with $2.08 billion in 1995, an 8.9% increase. The overall increase
was due to a 9.6% increase in revenues. As a percent of revenues,
selling, general, and administrative expenses decreased 0.1% to
18.9% in 1996, compared with 19.0% in 1995, as an increase in
bad-debt expense was offset by efficiencies across the other
selling, general, and administrative expense components.
Selling, general, and administrative expenses were $2.08 billion in
1995, compared with $1.92 billion in 1994, an 8.6% increase. The
overall increase was due to an 8.4% increase in revenues. As a
percent of revenues, selling, general, and administrative expenses
increased 0.1% to 19.0% in 1995, compared with 18.9% in 1994, as
payroll costs increased at a slightly higher rate than revenues.
Selling, general, and administrative expenses include advertising
and sales promotion costs of $439 million, $404 million, and $370
million in 1996, 1995, and 1994, respectively.
INTEREST EXPENSE. Interest expense components were:
(DOLLARS IN MILLIONS) 1996 1995 1994
Interest expense $310 $283 $256
Interest income (16) (14) (8)
Capitalized interest (17) (19) (15)
Interest expense, net $277 $250 $233
Percent of revenues 2.3% 2.3% 2.3%
The increase in 1996 net interest expense from 1995 was due to
increased average borrowings related to store growth, including the
acquisition of certain assets of Strawbridge & Clothier, and
financing the company's common stock repurchases.
The increase in 1995 net interest expense from 1994 was due to
increased average borrowings related to store growth, including the
acquisition of certain assets of John Wanamaker and Woodward &
Lothrop.
INCOME TAXES. The effective income tax rates were 39.3%, 39.7%, and
39.7% in 1996, 1995, and 1994, respectively.
The 1996 effective income tax rate of 39.3% decreased compared with
1995 as the company realized a partial-year benefit from our
reincorporation in the state of Delaware and an overall decrease in
our effective federal tax rate.
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock price range:
Low price $15.94 $11.13 $14.38 $17.31 $18.69 $22.63 $26.00 $33.44 $32.25 $33.50 $40.50
High price $22.06 $25.44 $20.00 $26.31 $29.56 $30.19 $37.25 $46.50 $45.13 $46.25 $52.25
Closing price $21.31 $16.81 $18.75 $22.88 $22.75 $27.44 $35.19 $39.75 $35.13 $43.88 $44.50
</TABLE>
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Book value per common share
(1996 reflects the spin-off
of Payless) $ 8.50 $ 9.13 $10.75 $ 9.32 $10.04 $11.26 $12.82 $14.65 $16.65 $18.42 $15.41
</TABLE>
<PAGE>
IMPACT OF INFLATION. Inflation has not had a material impact on the
company's 1996 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.
DISCONTINUED OPERATION. In January 1996, the company announced its
intention to spin off Payless, its chain of self-service family
shoe stores. The spin-off was completed effective May 4, 1996, as
a tax-free distribution to shareowners.
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 in
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 19.4% in 1996, compared
with 20.8% in 1995, and 21.3% in 1994. The 1996 decrease results in
part from our share repurchase. The cost of the share repurchase is
included in interest expense with no corresponding reduction in
beginning equity.
RETURN ON NET ASSETS. Return on continuing operations' net assets
measures performance independent of capital structure. Return on
continuing operations' net assets represents pretax earnings before
net interest expense and the interest component of operating
leases, divided by beginning of year continuing operations' net
assets (including present value of operating leases). Return on
continuing operations' net assets was 18.8% in 1996, compared with
20.1% in 1995 and 1994.
CASH FLOW. Cash flow from continuing operations (earnings plus
depreciation/amortization) was $1.1 billion. This was 9.3% of
revenues in 1996, compared with 9.4% in 1995 and 1994. The
company's cash flow as a percent of revenues continues to be one of
the highest in the retail industry, and it provides the company
significant resources to invest in its business.
Sources and (uses) of cash flows are summarized below:
(MILLIONS) 1996 1995 1994
Earnings and depreciation/amortization $1,122 $1,033 $947
Working capital (increases) decreases 142 (330) (165)
Discontinued operation (13) 97 (1)
Other operating activities 8 48 (17)
Investing activities (603) (871) (580)
Net long-term debt issuances 412 444 118
Net purchases of common stock (820) (14) (23)
Dividend payments (305) (296) (270)
Increase (decrease) in
cash and cash equivalents $ (57) $ 111 $ 9
FINANCING ACTIVITIES. Debt issuances for the second through fourth
quarters of 1996 were $200 million, $475 million, and $125 million,
respectively. Maturities range from 2005 to 2036, with interest
rates ranging from 6.875% to 8.30%. The proceeds from the issuances
were added to the company's general funds. They were available for
stock repurchases, capital expenditures, working capital needs, the
purchase of certain of the company's other indebtedness, and other
general corporate purposes, including investments and acquisitions.
During the fourth quarter of 1996, the company recorded an
extraordinary aftertax loss of $5 million ($8 million pretax) as it
retired $150 million of 9.125% debentures due to mature December 1,
2016.
During the fourth quarter of 1995, the company recorded an
extraordinary aftertax loss of $3 million ($5 million pretax) as it
executed a binding contract to call $112 million of 9.25%
debentures due to mature March1, 2016. The debentures were called,
effective March 1, 1996.
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.
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Return on equity 15.7% 17.0% 18.6% 18.0% 21.8% 20.7% 21.5% 22.1% 21.3% 20.8% 19.4%
</TABLE>
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Return on net assets
from continuing operations 15.4% 15.7% 16.2% 16.9% 15.8% 14.5% 15.4% 19.0% 20.1% 20.1% 18.8%
</TABLE>
<PAGE>
The debt-to-capitalization ratios were 48%, 42%, and 41% for 1996,
1995, and 1994, respectively. For purposes of the
debt-to-capitalization ratio, total debt is defined as short-term
and long-term debt (including the ESOP debt reduced by unearned
compensation), redeemable preferred stock, 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. The 1996 debt-to-capitalization
ratio increased because of the common stock repurchases previously
discussed and debt assumed in the Strawbridge & Clothier
transaction. See Profit Sharing on page 22 for discussion of the
ESOP.
The fixed-charge coverage ratios were 4.1x in 1996, and 4.2x for
1995 and 1994. 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.
Our bonds continue to be rated A2 by Moody's Investors Service,
Inc. and A by Standard & Poor's Corporation. Our commercial paper
is rated P1 by Moody's and A1 by Standard & Poor'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 and remodelings, and as we eliminate unproductive space.
Capital expenditures in 1997 will approximate $635 million. Capital
expenditures for the 1997 - 2001 period are planned at $3.4
billion. We intend to use internal cash flow to finance
substantially all of these expenditures.
AVAILABLE CREDIT. The company has $750 million of available
borrowing under its multiyear credit agreement. In addition, the
company has filed with the Securities and Exchange Commission a shelf
registration statement that would enable it to issue up to $500
million of additional debt securities.
COMMON STOCK DIVIDENDS AND MARKET PRICES. Our dividend policy is
based on historical and expected earnings growth rates and capital
investment requirements. Our objective is to increase dividends on
common stock consistent with our long-term earnings growth. The
1997 annual dividend rate was increased by 3.4%, or $.04 per share,
to $1.20 per share. This is the 22nd consecutive annual dividend
increase. The new annual dividend rate of $1.20 per share was
effective with the March 1997 dividend payment. Dividends paid have
increased at a compound rate of 7.4% during the past five years.
This rate is lower than the five-year compound earnings growth rate
of 13.2% as, over time, we are adjusting our dividend payout ratio
to reflect the spin-off of Payless. The company has paid
consecutive quarterly dividends since December 1, 1911.
The quarterly price ranges of the common stock and dividends per
share in 1996 and 1995 were:
1996 1995
MARKET PRICE DIVIDENDS MARKET PRICE DIVIDENDS
QUARTER HIGH LOW PER SHARE HIGH LOW PER SHARE
First $51-7/8 $43-3/8 $ .28-1/2 $38 $33-1/2 $ .26
Second 52-1/4 40-1/2 .29 44-1/4 35-1/4 .28-1/2
Third 49-1/2 44-1/8 .29 45-3/8 37 .28-1/2
Fourth 49-5/8 43-5/8 .29 46-1/4 38-3/8 .28-1/2
Year $52-1/4 $40-1/2 $1.15-1/2 $46-1/4 $33-1/2 $1.11-1/2
The approximate number of common shareowners as of March 1, 1997,
was 43,100.
Effective May 4, 1996, the company distributed the common shares of
Payless pro rata to May common shareowners of record on April 25,
1996. The May common stock price on May 8, 1996, was adjusted by
the New York Stock Exchange from $50.00 per share to $45.25 per
share, reflecting the impact of the distribution of the Payless
common stock to May common shareowners.
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(in millions)
Cash flow from continuing operations $ 454 $ 505 $ 599 $ 659 $ 657 $ 677 $ 755 $ 859 $ 947 $1,033 $1,122
Depreciation and amortization $ 189 $ 187 $ 236 $ 234 $ 253 $ 273 $ 283 $ 281 $ 297 $ 333 $ 373
Net earnings $ 264 $ 318 $ 362 $ 425 $ 404 $ 404 $ 472 $ 578 $ 650 $ 700 $ 749
</TABLE>
<PAGE>
[The following "Consolidated Financial Statements" section is a reproduction
of the same named section included in the Annual Report on pages 17 - 20.]
<TABLE>
<CAPTION>
Consolidated Statement of Earnings
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE) 1996 1995 1994
<S> <C> <C> <C>
Net Retail Ssles $11,650 $10,484 $ 9,748
Revenues $12,000 $10,952 $10,107
Cost of sales 8,226 7,461 6,879
Selling, general, and
administrative expenses 2,265 2,081 1,916
Interest expense, net 277 250 233
Total cost of sales and expenses 10,768 9,792 9,028
Earnings from continuing operations
before income taxes 1,232 1,160 1,079
Provision for income taxes 483 460 429
NET EARNINGS FROM
CONTINUING OPERATIONS 749 700 650
Net earnings from
discontinued operation 11 55 132
Net earnings before
extraordinary loss 760 755 782
Extraordinary loss related to
early extinguishment of debt,
net of income taxes (5) (3) -
Net earnings $ 755 $ 752 $ 782
Primary Earnings per Share:
Continuing operations $ 2.94 $ 2.73 $ 2.53
Discontinued operation 0.05 0.22 0.53
Net earnings before
extraordinary loss 2.99 2.95 3.06
Extraordinary loss (0.02) (0.01) -
Primary Earnings per Share $ 2.97 $ 2.94 $ 3.06
FULLY DILUTED EARNINGS PER SHARE:
CONTINUING OPERATIONS $ 2.82 $ 2.61 $ 2.43
Discontinued operation 0.04 0.21 0.49
Net earnings before
extraordinary loss 2.86 2.82 2.92
Extraordinary loss (0.02) (0.01) -
Fully Diluted Earnings per Share $ 2.84 $ 2.81 $ 2.92
<FN>
Fiscal 1995 was a 53-week year. Net retail sales for fiscal 1995
are shown on a 52-week basis for comparability. Net retail sales
for the 53 weeks ended February 3, 1996, were $10,588.
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
Consolidated Balance Sheet
FEBRUARY 1, FEBRUARY 3,
(DOLLARS IN MILLIONS, EXCEPT PER SHARE) 1997 1996
ASSETS
Current Assets:
Cash $ 12 $ 12
Cash equivalents 90 147
Accounts receivable, net 2,425 2,403
Merchandise inventories 2,380 2,134
Other current assets 128 169
Net current assets of
discontinued operation - 232
Total Current Assets 5,035 5,097
Property and Equipment:
Land 287 238
Buildings and improvements 3,252 2,908
Furniture, fixtures, and equipment 2,765 2,416
Property under capital leases 68 75
Total property and equipment 6,372 5,637
Accumulated depreciation (2,213) (1,893)
Property and equipment, net 4,159 3,744
Goodwill 776 671
Other Assets 89 89
Net Noncurrent Assets of
Discontinued Operation - 521
Total Assets $10,059 $10,122
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 256 $ 132
Accounts payable 872 692
Accrued expenses 658 650
Income taxes payable 137 128
Total Current Liabilities 1,923 1,602
Long-term Debt 3,849 3,333
Deferred Income Taxes 401 378
Other Liabilities 223 204
ESOP Preference Shares 347 366
Unearned Compensation (334) (346)
Shareowners' Equity:
Common stock 118 124
Additional paid-in capital - -
Retained earnings 3,532 4,461
Total Shareowners' Equity 3,650 4,585
Total Liabilities and Shareowners' Equity $10,059 $10,122
Common stock has a par value of $.50 per share; 700 million shares
are authorized and 313.6 million shares were issued. At February 1,
1997, 236.9 million shares were outstanding, and 76.7 million
shares were held in treasury. At February 3, 1996, 248.9 million
shares were outstanding, and 64.7 million shares were held in
treasury.
ESOP Preference Shares have a par value of $.50 per share, a stated
value of $507 per share, and 800,000 shares are authorized. At
February 1, 1997, 685,050 shares (convertible into 15.4 million
shares of common stock) were issued and outstanding. At February 3,
1996, 722,111 shares (convertible into 14.8 million shares of common
stock) were issued and outstanding.
See Preferred and Preference Stock in Notes to Consolidated
Financial Statements for discussion of other preferred stock.
See Notes to Consolidated Financial Statements.
<PAGE>
Consolidated Statement of Cash Flows
(DOLLARS IN MILLIONS) 1996 1995 1994
OPERATING ACTIVITIES:
Net earnings from continuing operations $ 749 $ 700 $ 650
Net earnings from discontinued operation 11 55 132
Extraordinary loss related to early
extinguishment of debt,
net of income taxes (5) (3) -
Net earnings 755 752 782
Adjustments for noncash items
included in earnings:
Depreciation and amortization 373 333 297
Deferred income taxes (noncurrent) 62 42 15
Deferred and unearned compensation 10 15 16
Working capital changes* 142 (330) (165)
Other assets and liabilities, net (59) (6) (48)
Total Operating Activities 1,283 806 897
INVESTING ACTIVITIES:
Capital expenditures (632) (801) (682)
Dispositions of property and equipment 53 20 106
Goodwill (24) (89) -
Other - (1) (4)
Cash provided by (used in)
discontinued operation (24) 42 (133)
Total Investing Activities (627) (829) (713)
FINANCING ACTIVITIES:
Issuances of long-term debt 800 600 200
Repayments of long-term debt (388) (156) (82)
Purchases of common stock (869) (71) (56)
Issuances of common stock 49 57 33
Dividend payments (305) (296) (270)
Total Financing Activities (713) 134 (175)
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (57) 111 9
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 159 48 39
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 102 $ 159 $ 48
*Working capital changes comprise:
Accounts receivable, net $ 137 $ 29 $ (43)
Merchandise inventories (211) (321) (166)
Other current assets 45 13 14
Accounts payable 180 (43) (44)
Accrued expenses (18) (8) (6)
Income taxes payable 9 - 80
Net decrease (increase)
in working capital $ 142 $(330) $(165)
Cash paid during the year:
Interest $ 288 $ 268 $ 240
Income taxes 380 448 418
Noncash investing and financing activities include conversions of
ESOP Preference Shares into common stock of $19 million, $8
million, and $7 million in 1996, 1995, and 1994, respectively.
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Shareowners' Equity
OUTSTANDING
COMMON STOCK ADDITIONAL TOTAL
(DOLLARS IN MILLIONS, PAID-IN RETAINED SHAREOWNERS'
SHARES IN THOUSANDS) SHARES DOLLARS CAPITAL EARNINGS EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 29, 1994 248,342 $ 124 $ 21 $3,494 $3,639
Net earnings - - - 782 782
Dividends paid:
Common stock
($1.01 per share) - - - (251) (251)
ESOP Preference
Shares, net of
tax benefit - - - (19) (19)
Preferred stock - - - - -
Common stock issued 1,429 1 39 - 40
Purchase of common stock (1,388) (1) (55) - (56)
BALANCE AT JANUARY 28, 1995 248,383 124 5 4,006 4,135
Net earnings - - - 752 752
Dividends paid:
Common stock
($1.11-1/2 per share) - - - (277) (277)
ESOP Preference
Shares, net of
tax benefit - - - (19) (19)
Preferred stock - - - - -
Common stock issued 2,198 1 64 - 65
Purchase of common stock (1,710) (1) (69) (1) (71)
BALANCE AT FEBRUARY 3, 1996 248,871 124 - 4,461 4,585
Net earnings - - - 755 755
Dividends paid:
Common stock
($1.15-1/2 per share) - - - (287) (287)
ESOP Preference
Shares, net of
tax benefit - - - (18) (18)
Preferred stock - - - - -
Common stock issued 6,646 3 258 - 261
Purchase of common stock (18,591) (9) (258) (602) (869)
Distribution of equity
in Payless
ShoeSource, Inc. - - - (777) (777)
BALANCE AT FEBRUARY 1, 1997 236,926 $ 118 $ - $3,532 $3,650
</TABLE>
Outstanding common stock excludes shares held in treasury. Treasury
share activity for the last three years is summarized below:
1996 1995 1994
BALANCE, BEGINNING OF YEAR 64,766 65,254 65,295
Common stock issued:
Exercise of stock options (997) (1,419) (677)
Deferred compensation plan (150) (158) (181)
Restricted stock grants,
net of forfeitures (246) (236) (157)
Contribution to Profit
Sharing Plan - (89) (145)
Conversion of ESOP
Preference Shares (796) (296) (269)
Strawbridge & Clothier
acquisition (4,457) - -
(6,646) (2,198) (1,429)
Purchase of common stock 18,591 1,710 1,388
BALANCE, END OF YEAR 76,711 64,766 65,254
See Notes to Consolidated Financial Statements.
<PAGE>
[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 21 - 27.]
Notes to Consolidated
Financial Statements
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
FISCAL YEAR. The company's fiscal year ends on the Saturday closest
to January 31. Fiscal years 1996, 1995, and 1994 ended on February
1, 1997, February 3, 1996, and January 28, 1995, respectively.
Fiscal 1995 included 53 weeks. 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 company and all wholly owned subsidiaries (the
company), reflecting the operation of 365 quality department
stores. The consolidated financial statements reflect Payless
ShoeSource, Inc. ("Payless"), as a discontinued operation through
May 4, 1996. All the following notes, except Discontinued Operation
on page 27, reflect data on a continuing operations basis.
USE OF ESTIMATES. Management makes estimates and assumptions that
affect the amounts reported in the consolidated statements of
earnings, shareowners' equity and cash flows, the consolidated
balance sheet, and notes to 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 buying and occupancy costs.
ADVERTISING COSTS. Advertising and sales promotion costs are
expensed at the time the advertising takes place.
PREOPENING EXPENSES. Costs associated with the opening of new
stores are expensed during the year incurred.
INCOME TAXES. Income taxes are accounted for using a balance sheet
approach known as the liability method. The liability method
accounts for deferred income taxes by applying 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.
Adjustments to deferred taxes resulting from statutory rate changes
flow through the tax provision in the year of the change.
EARNINGS PER SHARE. Primary earnings per share are computed by
dividing net earnings less dividend requirements on redeemable
preferred stock and ESOP Preference Shares (net of related income
tax benefits on unallocated shares) by the average number of shares
of common stock outstanding and common share equivalents during the
period. Fully diluted earnings per share assume conversion of the
ESOP Preference Shares into common stock, and adjust net earnings
for the additional expense required to fund the ESOP debt service
resulting from the assumed replacement of the ESOP Preference
Shares dividends with common stock dividends. The average number of
shares of common stock outstanding and common share equivalents
used to calculate fully diluted earnings per share were 264.1
million, 265.3 million, and 264.9 million in 1996, 1995, and 1994,
respectively. References to earnings per share in this annual
report relate to fully diluted earnings per share.
STOCK-BASED COMPENSATION. In 1996, the company adopted the
alternative under Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," which
allows for continued application of APB Opinion No. 25 in
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. The accumulated LIFO provision
was $98 million and $118 million in 1996 and 1995, respectively.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at
cost. Property and equipment are depreciated on a straight-line
basis over their estimated useful lives. Investments in properties
under capital leases and leasehold improvements are amortized over
the shorter of their useful lives or their related lease terms.
GOODWILL. Goodwill represents the excess of cost over the fair
value of net tangible assets acquired, at the dates of acquisition.
Substantially all amounts are amortized using the straight-line
method over a 40-year period. Goodwill is presented in the
consolidated balance sheet
<PAGE>
net of accumulated amortization of $151 million and $129 million
in 1996 and 1995, respectively.
LONG-LIVED ASSETS. Beginning in 1995, long-lived assets and certain
identifiable intangibles to be held and used or disposed of were
reviewed to determine whether the carrying amount of the asset was
recoverable. No impairment losses needed to be recognized for
applicable assets of continuing operations.
DERIVATIVES POLICY. The company's policy is to use financial
derivatives only to reduce risk in conjunction with specific
business transactions. Gains and losses on hedges of existing
assets or liabilities are included in the respective balance sheet
amounts. Gains and losses related to hedges of firm commitments or
anticipated transactions are deferred and recognized in operating
results or included in balance sheet amounts when the transaction
occurs.
RECLASSIFICATIONS. Certain prior-period amounts have been
reclassified to conform with the current-year presentation.
QUARTERLY RESULTS (UNAUDITED)
Quarterly results of continuing operations are determined in
accordance with the 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:
(MILLIONS, EXCEPT PER SHARE) 1996
QUARTER FIRST SECOND THIRD FOURTH YEAR
Revenues $2,511 $2,533 $2,855 $4,101 $12,000
Cost of sales $1,755 $1,773 $2,004 $2,694 $ 8,226
NET EARNINGS FROM
CONTINUING OPERATIONS $ 98 $ 110 $ 118 $ 423 $ 749
Primary earnings
per share from
continuing operations $ 0.37 $ 0.42 $ 0.45 $ 1.70 $ 2.94
FULLY DILUTED EARNINGS
PER SHARE FROM
CONTINUING OPERATIONS $ 0.36 $ 0.41 $ 0.44 $ 1.61 $ 2.82
(MILLIONS, EXCEPT PER SHARE) 1995
QUARTER FIRST SECOND THIRD FOURTH YEAR
Revenues $2,218 $2,325 $2,569 $3,840 $10,952
Cost of sales $1,543 $1,625 $1,798 $2,495 $ 7,461
NET EARNINGS FROM
CONTINUING OPERATIONS $ 87 $ 107 $ 110 $ 396 $ 700
Primary earnings
per share from
continuing operations $ 0.33 $ 0.41 $ 0.42 $ 1.57 $ 2.73
FULLY DILUTED EARNINGS
PER SHARE FROM
CONTINUING OPERATIONS $ 0.32 $ 0.40 $ 0.41 $ 1.48 $ 2.61
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 the pro
forma per share impact of LIFO had the final variables and factors
been known at the beginning of each year.
1996 1995
PRO AS PRO AS
QUARTER FORMA REPORTED FORMA REPORTED
First $(0.01) $ 0.02 $(0.02) $ 0.02
Second (0.01) 0.02 (0.03) 0.02
Third (0.01) 0.00 (0.03) 0.00
Fourth (0.02) (0.09) (0.04) (0.16)
Year $(0.05) $(0.05) $(0.12) $(0.12)
ACQUISITIONS
On July 18, 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.
In August 1995, the company purchased 14 John Wanamaker stores in
the Philadelphia area and three Woodward & Lothrop stores in the
Washington, D.C., area, for approximately $412 million. This
acquisition was funded principally with long-term debt.
These asset acquisitions have been accounted for as purchases, and
accordingly, the operating results of the acquired stores have been
included in the company's consolidated results since the
acquisition dates. The acquisitions did not have a material effect
on the results of operations or financial position of the company
in 1996 or 1995.
PROFIT SHARING
The company has a qualified profit-sharing plan that covers
substantially all 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 $43 million in 1996,
representing a record effective match rate of 103%. The matching
allocation value was $33 million and $29 million in 1995 and 1994,
respectively.
The company's Profit Sharing Plan includes an Employee Stock
Ownership Plan (ESOP) under which the Profit Sharing Plan borrowed
$400 million in 1989, guaranteed by the company, at an average rate
of 8.5% with an average maturity of 12 years. The proceeds were
used to purchase $400 million, or 788,955 shares, of a new class of
convertible preference stock of the company (ESOP Preference
Shares). Each share is currently convertible into 22.525 shares of
common stock and has a stated value of $22.51 per common share
equivalent. The annual dividend rate on the ESOP Preference Shares
is 7.5%, and the shares are redeemable by the holder or the company
in certain situations.
<PAGE>
The $363 million outstanding portion of the guaranteed ESOP debt is
reflected on the consolidated balance sheet as long-term debt
because the company will ultimately fund the required debt service.
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
$31 million in 1996, $32 million in 1995, and $33 million in 1994.
ESOP Preference Shares dividends were $26 million in 1996, and $28
million in 1995 and 1994. ESOP debt principal payments began in
1993. The release of ESOP Preference Shares is based upon
debt-service payments, and 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, and it is amortized as principal is repaid.
The company's expense related to the Profit Sharing Plan was $22
million, $17 million, and $19 million in 1996, 1995, and 1994,
respectively.
At February 1, 1997, the Profit Sharing Plan beneficially owned
11.5 million shares of the company's common stock and 100% of the
company's ESOP Preference Shares. The Preference Shares are
convertible into 15.4 million shares of the company's common stock,
which represents 10.7% of the company's common stock on a fully
converted basis.
PENSION
The company has a qualified retirement plan that covers
substantially all associates who work 1,000 hours or more in a year
and have attained age 21. The plan is noncontributory. It provides
benefits based upon years of service and pay during employment. In
addition, during 1996 the company assumed a fully funded qualified
pension plan in connection with the acquisition of the Strawbridge
& Clothier department store assets. This plan operates under
provisions similar to those of the company's qualified plan. The
acquired plan has an accumulated benefit obligation of $98 million
and a pro-projected benefit obligation of $98 million. At February
1, 1997, the qualified plans' assets exceed the accumulated benefit
obligation by $62 million.
The company also maintains a nonqualified supplementary retirement
plan for certain associates. Further, the company assumed a similar
nonqualified supplementary retirement plan from Strawbridge &
Clothier with an accumulated benefit obligation of $13 million and
a projected benefit obligation of $13 million.
Pension expense is based on information provided by an outside
actuarial firm, which uses assumptions to estimate the total
benefits ultimately payable to associates and then allocates this
cost to service periods. The actuarial assumptions used to
calculate pension costs are reviewed annually.
The following tables summarize the funded status of the plans,
components of pension expense, actuarial assumptions, and
definitions of terms for both the qualified and nonqualified plans.
QUALIFIED PLANS (FUNDED)
(MILLIONS) 1996 1995
Actuarial Present Value of Benefit Obligations:
Vested benefit obligation $ 323 $ 213
Nonvested benefit obligation 24 16
Accumulated benefit obligation (ABO) 347 229
Estimated effect of future salary increases 33 35
Projected benefit obligation (PBO) 380 264
Plan assets at fair value (primarily
equity and fixed income securities) 409 290
Plan assets in excess of PBO 29 26
Unrecognized obligation 1 1
Unrecognized gain (32) (30)
Unrecognized prior service cost 2 3
Accrued pension cost $ 0 $ 0
Plan assets in excess of ABO $ 62 $ 61
NONQUALIFIED PLANS (UNFUNDED)
(MILLIONS) 1996 1995
Actuarial Present Value of Benefit Obligations:
Vested benefit obligation $ 59 $ 47
Nonvested benefit obligation 13 13
Accumulated benefit obligation (ABO) 72 60
Estimated effect of future salary increases 18 14
Projected benefit obligation (PBO) 90 74
Plan assets at fair value 0 0
Plan assets less than PBO (90) (74)
Unrecognized obligation 2 2
Unrecognized loss 3 3
Unrecognized prior service cost 13 18
Accrued pension cost $ (72) $ (51)
Plan assets less than ABO $ (72) $ (60)
The accrued pension cost is included in other liabilities on the
accompanying balance sheet. Accrued pension cost principally
represents amounts expensed but not yet contributed to the
nonqualified supplementary retirement plans.
COMPONENTS OF PENSION EXPENSE (ALL PLANS)
(MILLIONS) 1996 1995 1994
Service cost $27 $21 $22
Interest on PBO 24 22 19
Actual return on assets (30) (61) 6
Net amortization and deferral 10 46 (19)
Total $31 $28 $28
ACTUARIAL ASSUMPTIONS
JANUARY 1,
1997 1996 1995
Discount rate 7.5 % 7.0 % 8.0 %
Expected return on plan assets 7.75 7.25 8.25
Salary increase 4.5 4.0 5.0
At the end of 1996, the discount rate was increased as a result of
a general increase in interest rates during the year.
<PAGE>
DEFINITIONS OF TERMS:
ABO is the actuarial present value of benefits (both vested and
nonvested) attributed by the pension benefit formula to prior
associate service; it is based on current and past compensation
levels.
PBO is the actuarial present value of benefits attributed by the
pension benefit formula to prior associate service; it takes into
consideration future salary increases.
Accrued pension cost is the balance sheet accrued expense not yet
paid to a plan.
Net amortization and deferral represents the net effect during the
period of the delayed recognition provisions of SFAS No. 87.
Another important element in the retirement programs for associates
is the federal Social Security system, into which the company paid
$135 million in 1996 as its matching contribution to the $135
million paid in by associates.
The company maintains a postretirement benefit plan for certain
associates. Benefits vary by the group of associates covered. They
include fixed or variable benefits for life and/or health
insurance. At the end of 1996, the company increased the discount
rate assumption from 7.0% to 7.5%, which resulted in a $2 million
decrease in the present value of future obligations.
As of February 1, 1997, the company's estimated present value of
future obligations for postretirement benefits of $41 million is
fully accrued in accordance with SFAS No. 106, "Employers'
Accounting for Post-retirement Benefits Other Than Pensions." The
estimated future obligations are based upon assumed annual health
care cost increases of 11% for 1997, decreasing by 1% annually to
7% for 2001 and future years. A one-percentage-point increase/
decrease in the assumed annual health care cost increases would
increase/decrease the present value of estimated future obligations
for postretirement benefits by $1 million. The postretirement plan
is unfunded. The postretirement expense was $3 million, $2 million,
and $3 million in 1996, 1995, and 1994, respectively.
TAXES
The provision for income taxes and related percent of pretax
earnings for the last three years were as follows:
1996 1995 1994
(DOLLARS IN MILLIONS) $ % $ % $ %
Federal $344 $343 $331
State and local 69 70 72
Taxes currently payable 413 33.6% 413 35.7% 403 37.3%
Federal 58 40 22
State and local 12 7 4
Deferred taxes 70 5.7 47 4.0 26 2.4
Total $483 39.3% $460 39.7% $429 39.7%
The reconciliation between the statutory federal income tax rate
and the effective income tax rate for the last three years follows:
1996 1995 1994
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes 6.6 6.7 7.2
Federal tax benefit of state
and local income taxes (2.3) (2.3) (2.5)
Other, net - 0.3 -
Effective income tax rate 39.3% 39.7% 39.7%
Major components of deferred tax assets and (liabilities) were as
follows:
FEBRUARY 1, FEBRUARY 3,
(MILLIONS) 1997 1996
Accrued expenses and reserves $ 130 $ 132
Deferred and other compensation 103 104
Depreciation/amortization
and basis differences (407) (323)
Other deferred income
tax liabilities, net (155) (173)
Net deferred income taxes (329) (260)
Less: Net current deferred
income tax assets 72 118
Noncurrent deferred income taxes $(401) $(378)
Net current deferred income tax assets are included in other
current assets in the accompanying balance sheet.
ACCOUNTS RECEIVABLE
During 1996, credit sales under department store credit programs
were $6.0 billion, or 50.0% of 1996 department store revenues; this
compares with 54.5% in 1995 and 57.3% in 1994. An estimated 30
million customers hold credit cards under the company's various
credit programs. Sales made through third-party credit cards
totaled $3.0 billion in 1996, compared with $2.4 billion in 1995
and $1.8 billion in 1994.
Net accounts receivable consisted of:
FEBRUARY 1, FEBRUARY 3,
(MILLIONS) 1997 1996
Customer accounts receivable $2,410 $2,377
Other accounts receivable 119 101
Total accounts receivable 2,529 2,478
Allowance for uncollectible accounts (104) (75)
Accounts receivable, net $2,425 $2,403
OTHER CURRENT ASSETS
In addition to net current deferred income tax assets, other
current assets consisted of prepaid expenses and supply inventories
of $56 million and $51 million in 1996 and 1995, respectively.
OTHER ASSETS
Major components of other assets included:
FEBRUARY 1, FEBRUARY 3,
(MILLIONS) 1997 1996
Notes receivable $32 $37
Deferred debt expense 31 26
ACCRUED EXPENSES
Major components of accrued expenses included:
FEBRUARY 1, FEBRUARY 3,
(MILLIONS) 1997 1996
Insurance costs $197 $185
Salaries, wages, and employee benefits 105 89
Interest and rent expense 94 79
Sales and use and other taxes 91 96
Store closings and real estate-related 51 71
Advertising and other operating expenses 51 53
Construction costs 44 43
<PAGE>
SHORT-TERM DEBT AND LINES OF CREDIT
Short-term borrowings for the last three years were:
(DOLLARS IN MILLIONS) 1996 1995 1994
Balance outstanding at year-end - - -
Average balance outstanding $ 35 $ 75 $ 83
Average interest rate on average balance 5.7% 6.2% 5.0%
Maximum balance outstanding $178 $246 $317
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 $750 million
available under a credit agreement. At February 1, 1997, there were
no amounts outstanding under this agreement.
LONG-TERM DEBT
Long-term debt and capital lease obligations were:
FEBRUARY 1, FEBRUARY 3,
(DOLLARS IN MILLIONS) 1997 1996
5.7% to 10.75% unsecured notes and
sinking-fund debentures due 1997 - 2036 $3,981 $3,341
3.0% to 10.0% mortgage notes
and bonds due 1997 - 2012 66 65
Debt 4,047 3,406
Capital lease obligations 58 59
Total debt and capital lease obligations 4,105 3,465
Less current maturities 256 132
Total long-term $3,849 $3,333
In the second quarter of 1996, the company issued $200 million of
8.30% debentures due in 2026. During the 1996 third quarter, the
company issued a total of $475 million in debt securities which
comprised $200 million of 7.875% debentures due in 2036, $150
million of 7.45% debentures due in 2011, and $125 million of 7.45%
debentures due in 2016. During the 1996 fourth quarter, the company
issued $125 million of 6.875% debentures due in 2005. The proceeds
from these issuances were added to the company's general funds.
They were available for capital expenditures, working-capital
needs, stock repurchases, the purchase of certain of the company's
other indebtedness, and other general corporate purposes, including
investments and acquisitions.
During the 1996 fourth quarter, the company called $150 million of
9.125% debentures due to mature December 1, 2016, and recorded an
extraordinary aftertax loss of $5 million ($8 million pretax).
During the 1995 fourth quarter, the company recorded an
extraordinary aftertax loss of $3 million ($5 million pretax), as
it executed a binding contract to call $112 million of 9.25%
debentures due to mature March 1, 2016. The debentures were called
on March 1, 1996.
The annual maturities of long-term debt, including sinking fund
requirements, are $255 million, $237 million, $97 million, $250
million, and $83 million for 1997 through 2001, respectively.
The net book value of property and equipment encumbered under
long-term debt agreements was $107 million at February 1, 1997.
LEASE OBLIGATIONS
The company owns approximately 74% of its stores. Rental expense
for the company's operating leases consisted of:
(MILLIONS) 1996 1995 1994
Minimum rentals $45 $38 $38
Contingent rentals based on sales 17 15 14
Real property rentals 62 53 52
Equipment rentals 4 4 5
Total $66 $57 $57
Future minimum lease payments at February 1, 1997, were as follows:
CAPITAL OPERATING
(MILLIONS) LEASES LEASES TOTAL
1997 $ 8 $ 44 $ 52
1998 8 40 48
1999 7 35 42
2000 7 32 39
2001 7 29 36
After 2001 115 297 412
Minimum lease payments 152 $477 $629
Less imputed interest component 94
Present value of net minimum lease
payments, of which $1 million is
included in current liabilities $ 58
The present value of operating leases was $242 million at February
1, 1997.
Property under capital leases is summarized as follows:
FEBRUARY 1, FEBRUARY 3,
(MILLIONS) 1997 1996
Cost $ 68 $ 75
Accumulated amortization (34) (39)
Total $ 34 $ 36
OTHER LIABILITIES
In addition to accrued pension cost, other liabilities principally
consisted of deferred compensation liabilities of $151 million at
February 1, 1997, and at February 3, 1996. Under the company's
deferred compensation plan, eligible associates may elect to defer
a portion of their compensation each year into cash and/or stock
unit alternatives. The company makes payments in shares to settle
obligations with most participants who defer in stock units, and
maintains shares in treasury sufficient to settle all outstanding
stock unit obligations.
<PAGE>
PREFERRED AND PREFERENCE STOCK
The company is authorized to issue 25,134,474 shares of preferred
and preference stock. The following table summarizes the
authorized, issued, and outstanding shares by type:
ISSUED AND OUTSTANDING
FEBRUARY 1, FEBRUARY 3,
1997 1996
(DOLLARS IN MILLIONS, SHARES
EXCEPT PER SHARE) AUTHORIZED $ SHARES $ SHARES
Preferred Stock, no par value 51,323 $ - - $ 1 11,974
$1.80 Preference Stock,
no par value 73,273 - - 1 26,653
3-3/4 % Cumulative Preference
Stock, $100 par value per share 9,878 - - - -
Preference Stock, $.50 par value
per share, in the aggregate,
including ESOP shares 25,000,000 $347 685,050 $366 722,111
The Preferred Stock and the $1.80 Preference Stock were included in
other liabilities in 1995. The ESOP Preference Shares are shown
separately in the consolidated balance sheet outside of
shareowners' equity as the shares are redeemable by the holder or
the company in certain situations.
COMMON STOCK REPURCHASE PROGRAM
During 1996, the company repurchased $600 million of its common
stock (12.7 million shares) in the open market from time to time as
market conditions allowed.
In addition, on February 12, 1997, the company announced plans to
repurchase up to $300 million of May common stock. Such purchases,
which will be made in the open market from time to time as market
conditions allow, are subject to Securities and Exchange Commission
rules and regulations.
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 a period of 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.
During 1996, the number of stock options and option prices were
adjusted proportionally to reflect the distribution of Payless
common shares to May common shareowners. For comparability with
1996, option information for 1995 is presented on an adjusted
basis.
A summary of the status of the various stock option plans at the
end of 1996 and 1995, and the changes within years is presented
below:
1996 1995
RANGE OF AVERAGE RANGE OF AVERAGE
(SHARES IN EXERCISE EXERCISE EXERCISE EXERCISE
THOUSANDS) SHARES PRICES PRICE SHARES PRICES PRICE
Outstanding at
beginning of year 5,687 $11-40 $32 5,874 $11-40 $29
Granted 2,583 43-49 45 1,704 33-40 34
Exercised (1,042) 11-40 28 (1,567) 12-38 24
Forfeited or expired (507) 25-45 36 (324) 19-40 33
Outstanding at
end of year 6,721 $11-49 $37 5,687 $11-40 $32
Exercisable at
end of year 2,186 $11-40 $31 1,929 $11-40 $29
Shares available for
additional grants 9,349 11,535
Fair value of
options granted $17 $12
The following table summarizes information about stock options
outstanding at February 1, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
AVERAGE
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT FEB. 1 LIFE PRICES AT FEB. 1 LIFE
$ 11 4 4 $11 4 4
19-27 833 5 25 723 5
28-40 3,378 7 34 1,411 7
43-49 2,506 9 46 48 9
6,721 8 $31 2,186 6
Under the 1994 Stock Incentive Plan, the company is authorized to
grant a maximum of 1.75 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. Restrictions,
including performance restrictions, lapse over periods of up to
10years, as determined at the date of the grant. In 1996 and 1995,
the company granted 257,790 and 274,750 shares of restricted stock,
respectively, under the 1994 Stock Incentive Plan.
The company's plans are accounted for by applying 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 and 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 and the issuance-date market
price.
<PAGE>
In October 1995, SFAS No. 123, "Accounting for Stock-Based
Compensation," was issued. SFAS No. 123 provides an alternative
method of accounting for stock-based compensation. 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:
1996 1995
Net earnings from continuing operations:
As reported $ 749 $ 700
Pro forma 740 697
Primary EPS from continuing operations:
As reported $2.94 $2.73
Pro forma 2.91 2.72
Fully diluted EPS from continuing operations:
As reported $2.82 $2.61
Pro forma 2.79 2.60
The option expense is estimated on the date of grant (for 1995 or
later grants) using the Black-Scholes option pricing model. The
option expense is recognized (on a pro forma basis) as the options
vest. As the option expense only measures 1995 or later grants,
the pro forma impact above may not be representative of future
years. The respective 1996 and 1995 Black-Scholes assumptions
include 6.8% and 6.4% risk-free interest rates, $1.16 and $1.14
expected dividend yields, 10-year lives, and 25.1% and 23.0%
expected volatility.
SHAREOWNER RIGHTS PLAN
The company has a Shareowner Rights Plan (Preferred Stock Purchase
Rights) 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values
of the company's financial instruments at February 1, 1997, and
February 3, 1996. SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments," defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged
in a current transaction between willing parties, other than in a
forced or liquidation sale.
1996 1995
CARRYING FAIR CARRYING FAIR
(MILLIONS) AMOUNT VALUE AMOUNT VALUE
Accounts receivable $2,425 $2,425 $2,403 $2,403
Long-term debt 4,047 4,381 3,406 3,977
The carrying amounts shown in the table are included in the
consolidated balance sheet under the indicated captions.
The decrease in the spread between the fair value and carrying
amount of long-term debt in 1996 compared with 1995 was due to
higher interest rates at the end of 1996. The fair value was
determined with the use of borrowing rates currently available for
debt instruments with similar remaining terms and maturities.
DISCONTINUED OPERATION
On January 17, 1996, the company announced its intention to spin
off Payless, its chain of self-service family shoe stores. The
spin-off was completed effective May 4, 1996, as a tax-free
distribution to shareowners. The company's financial statements
presented herein have been restated to reflect Payless as a
discontinued operation.
Payless revenues were $601 million, $2,330 million, and $2,116
million for 1996, 1995, and 1994, respectively. The reported net
earnings from the discontinued operation are net of $16 million,
$36 million, and $86 million in income tax expense for 1996, 1995,
and 1994, respectively.
In 1995, Payless recorded a pretax special and nonrecurring charge
of $72 million, related primarily to store closings. Payless's 1995
net earnings before special and nonrecurring items would have been
$99 million, or $.37 per fully diluted share.
<PAGE>
[The following "Eleven Year Financial Summary" section is a reproduction of the
same named section included in the paper format Annual Report on pages 28 -
29.]
<TABLE>
<CAPTION>
Eleven-Year Financial Summary
(DOLLARS IN MILLIONS, EXCEPT PER SHARE) 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Retail Sales $11,650 $10,484 $ 9,748 $9,010 $8,405 $7,862 $7,491 $7,026 $6,175 $4,744 $4,343
OPERATIONS
Revenues $12,000 $10,952 $10,107 $9,562 $9,362 $9,068 $8,700 $8,356 $7,742 $6,415 $6,503
Cost of sales 8,226 7,461 6,879 6,537 6,459 6,275 6,047 5,734 5,348 4,492 4,625
Selling, general, and
administrative expenses 2,265 2,081 1,916 1,824 1,859 1,861 1,772 1,735 1,645 1,325 1,353
Interest expense, net 277 250 233 244 279 315 278 231 196 77 90
Earnings from continuing operations
before income taxes 1,232 1,160 1,079 957 579* 617 603 656 553 521 435
Provision for income taxes 483 460 429 379 107* 213 199 231 191 203 171
NET EARNINGS FROM
CONTINUING OPERATIONS 749 700 650 578 472 404 404 425 362 318 264
LIFO charge (credit) (20) (53) (46) 7 10 26 39 (22) (3) 8 4
Net earnings 755 752 782 711 603 515 500 498 534 444 381
Depreciation and amortization 373 333 297 281 283 273 253 234 236 187 189
Cash flow from operations 1 1,122 1,033 947 859 755 677 657 659 599 505 454
Net issuances (repayments)
of long-term debt 2 412 444 118 (190) (248) 313 590 169 891 (61) 159
Capital expenditures 632 801 682 560 284 366 466 470 292 353 374
Dividends on common stock 287 278 251 223 204 198 191 186 184 170 131
PER SHARE
NET EARNINGS FROM
CONTINUING OPERATIONS 3 $ 2.82 $ 2.61 $ 2.43 $ 2.15 $ 1.76 $ 1.52 $ 1.51 $ 1.50 $ 1.23 $ 1.03 $ .83
Net earnings 3,4 2.84 2.81 2.92 2.65 2.26 1.93 1.87 1.76 1.81 1.44 1.20
Dividends paid 1.16 1.12 1.01 .90 .83 .81 .77 .69 .62 .56 .51
Annual dividend rate at year-end 1.16 1.14 1.04 .92 .83 .81 .79 .71 .64 .57 .52
Book value 15.41 18.42 16.65 14.65 12.82 11.26 10.04 9.32 10.75 9.13 8.50
Market price - high 52.25 46.25 45.13 46.50 37.25 30.19 29.56 26.31 20.00 25.44 22.06
Market price - low 40.50 33.50 32.25 33.44 26.00 22.63 18.69 17.31 14.38 11.13 15.94
Market price - average of high and low 46.38 39.88 38.69 39.97 31.63 26.41 24.13 21.81 17.19 18.28 19.00
FINANCIAL POSITION
Customer accounts receivable $ 2,410 $ 2,377 $ 2,418 $2,367 $2,373 $2,377 $2,456 $2,223 $2,099 $1,590 $1,516
Merchandise inventories 2,380 2,134 1,813 1,647 1,476 1,436 1,375 1,278 1,141 880 848
Working capital 3,112 3,495 3,029 2,921 2,691 3,051 2,635 2,059 2,093 1,821 1,921
Property and equipment, net 4,159 3,744 3,275 2,977 2,774 2,808 2,728 2,446 2,285 1,830 1,745
Long-term debt, preferred, and
preference stock 4,196 3,701 3,240 3,192 3,256 4,299 3,948 3,387 2,384 1,048 1,131
Shareowners' equity 3,650 4,585 4,135 3,639 3,181 2,781 2,467 2,319 3,050 2,723 2,595
Total assets 10,059 10,122 9,237 8,614 8,376 8,566 8,083 7,570 7,374 5,464 5,629
STATISTICS
Percent of revenues:
Net earnings from continuing operations 6.2% 6.4% 6.4% 6.0% 5.0% 4.5% 4.6% 5.1% 4.7% 5.0% 4.1%
Cash flow from operations 1 9.3 9.4 9.4 9.0 8.1 7.5 7.6 7.9 7.7 7.9 7.0
Return on equity 19.4 20.8 21.3 22.1 21.5 20.7 21.8 18.0 18.6 17.0 15.7
Return on net assets 18.8 20.1 20.1 19.0 15.4** 14.5 15.8 16.9 16.2 15.7 15.4
STORES OPEN AT YEAR-END 365 346 314 301 303 318 324 288 297 258 286
AVERAGE SHARES OUTSTANDING
AND EQUIVALENTS
Primary 248.7 249.9 249.6 249.9 248.8 248.0 249.0 267.2 294.8 306.3 313.1
Fully diluted 264.1 265.3 264.9 265.5 265.3 264.2 264.8 280.0 295.4 306.3 314.9
<FN>
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 Cash flow from operations represents net earnings and
depreciation/amortization from continuing operations. It is
different from cash flow from operating activities as shown on the
statement of cash flows.
2 Net issuances (repayments) of long-term debt exclude the
elimination of $618 million of MCAC loans in 1992 and $400 million
of guaranteed ESOP debt in 1989.
3 Represents earnings per share on a fully diluted basis.
4 Primary earnings per share were $.13 higher in 1996, $.13 higher
in 1995, $.14 higher in 1994, $.12 higher in 1993, $.09 higher in
1992, $.08 higher in 1991, $.07 higher in 1990, $.05 higher in
1989, and $.01 higher in each of 1988 and 1986.
* Pretax earnings include a net charge of $187 million from special
and nonrecurring items, and income taxes include a tax benefit of
$187 million from special and nonrecurring items.
** Based on pretax earnings before special and nonrecurring items.
</TABLE>
<PAGE>
Management's Responsibility and Report of Independent Public
Accountants
REPORT OF MANAGEMENT. Management is responsible for the
preparation, integrity, and objectivity of the financial
information included in this annual report. The financial
statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts.
Although the financial statements reflect all available information
and management's judgment and estimates of current conditions and
circumstances, prepared with the assistance of specialists within
and outside the company, actual results could differ from those
estimates.
Management has established and maintains an internal control
structure to provide reasonable assurance that assets are
safeguarded against loss from unauthorized use or disposition, that
the accounting records provide a reliable basis for the preparation
of financial statements, and that such financial statements are not
misstated due to material fraud or error. Internal controls include
the careful selection of associates, the proper segregation of
duties, and the communication and application of formal policies
and procedures that are consistent with high standards of
accounting and administrative practices. An important element of
this structure is a comprehensive internal audit program.
Management continually reviews, modifies, and improves its systems
of accounting and controls in response to changes in business
conditions and operations, and in response to recommendations in
the reports prepared by the independent public accountants and
internal auditors.
Management believes that it is essential for the company to conduct
its business affairs in accordance with the highest ethical
standards and in conformity with the law. This standard is
described in the company's policies on business conduct, which are
publicized throughout the company.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS. The Board of Directors,
through the activities of its Audit Committee, participates in the
reporting of financial information by the company. The committee
meets regularly with management, the internal auditors, and the
independent public accountants. The committee met four times
during 1996. 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 members of the Audit Committee are Russell E. Palmer
(chairman), Helene L. Kaplan, Edward H. Meyer, Michael R. Quinlan,
William P. Stiritz, Robert D. Storey, and Murray L. Weidenbaum.
The Audit Committee reports the results of its activities to the
full Board of Directors.
[The following "Report of Independent Public Accountants" section is a
reproduction of the same named section of the paper format Annual Report
on page 30.]
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 February 1, 1997, and February 3, 1996, and the
related consolidated statements of earnings, shareowners' equity
and cash flows for each of the three fiscal years in the period
ended February 1, 1997. 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 February 1, 1997,
and February 3, 1996, and the results of their operations and their
cash flows for each of the three fiscal years in the period ended
February 1, 1997, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
1010 Market Street
St. Louis, Missouri 63101-2089
February 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF EARNINGS ON PAGES 17 AND 18 OF THE
MAY DEPARTMENT STORES COMPANY 1996 ANNUAL REPORT TO SHAREOWNERS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> FEB-01-1997
<CASH> 12
<SECURITIES> 90
<RECEIVABLES> 2,529
<ALLOWANCES> 104
<INVENTORY> 2,380
<CURRENT-ASSETS> 5,035
<PP&E> 6,372
<DEPRECIATION> 2,213
<TOTAL-ASSETS> 10,059
<CURRENT-LIABILITIES> 1,923
<BONDS> 4,105
0
0
<COMMON> 118
<OTHER-SE> 3,532
<TOTAL-LIABILITY-AND-EQUITY> 10,059
<SALES> 11,650
<TOTAL-REVENUES> 12,000
<CGS> 8,226
<TOTAL-COSTS> 8,226
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 277
<INCOME-PRETAX> 1,232
<INCOME-TAX> 483
<INCOME-CONTINUING> 749
<DISCONTINUED> 11
<EXTRAORDINARY> (5)
<CHANGES> 0
<NET-INCOME> 755
<EPS-PRIMARY> 2.97
<EPS-DILUTED> 2.84
</TABLE>
<PAGE>
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, 1996
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
<PAGE>
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, 1996 4
Statement of Net Assets Available for
Benefits - December 31, 1995 7
Statement of Changes in Net Assets
Available for Benefits for the Year
Ended December 31, 1996 10
Notes to Financial Statements -
December 31, 1996 and 1995 12
Schedule I - Item 27(a): Schedule of Assets
Held for Investment Purposes -
December 31, 1996 18
Schedule II - Item 27(d): Schedule of
Reportable Transactions for the Year
Ended December 31, 1996 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 23, 1997 By: /s/ John L. Dunham
John L. Dunham
Executive Vice President and Chief
Financial Officer
<PAGE>
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, including the schedules referred to below, of The May Department
Stores Company Profit Sharing Plan as of December 31, 1996 and 1995, and the
related statement of changes in net assets available for benefits for the year
ended December 31, 1996. These financial statements and 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, 1996 and 1995, and the changes in net assets available for
benefits for the year ended December 31, 1996, 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,
April 23, 1997
<PAGE>
THE MAY DEPARTMENT STORES COMPANY
PROFIT SHARING PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
DECEMBER 31, 1996
(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 $544,377 $178,483 $ -
Common stock - - 158,322
Short-term investments - - 737
Commingled equity index fund - - -
U.S. government securities - - -
Fixed income investments - - -
-------- -------- --------
Total investments 544,377 178,483 159,059
OTHER ASSETS:
Receivable (payable) for
allocation to member accounts (40,127) 40,127 -
Dividends and interest receivable - - 4
Receivable - withholdings of
member contributions - - -
Interfund receivable (payable) - (137) 405
-------- -------- --------
Total assets 504,250 218,473 159,468
-------- -------- --------
LIABILITIES
LIABILITIES:
Notes payable 362,557 - -
Accrued interest payable 5,085 - -
Net amount payable (receivable)
for investment security
transactions and other - - 213
Amounts payable for
administrative expenses - - 128
-------- -------- --------
Total liabilities 367,642 - 341
-------- -------- --------
NET ASSETS AVAILABLE FOR BENEFITS $136,608 $218,473 $159,127
======== ======== ========
NUMBER OF UNITS AT DECEMBER 31, 1996 3,420
========
VALUE PER UNIT AT DECEMBER 31, 1996 $ 46.53
========
(Continued on following page)
<PAGE>
THE MAY DEPARTMENT STORES COMPANY
PROFIT SHARING PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
DECEMBER 31, 1996
(Thousands, except per unit information)
Participant Directed
Investment Funds
-----------------------------------
May Common Fixed
Common Money Stock Income
ASSETS Stock Market Index Index
INVESTMENTS, at fair value:
The May Department Stores Company-
Convertible preferred stock $ - $ - $ - $ -
Common stock 380,739 - - -
Short-term investments 1,771 50,701 461 1,570
Commingled equity index fund - - 81,872 -
U.S. government securities - - - 26,715
Fixed income investments - - - 5,802
-------- ------- ------- -------
Total investments 382,510 50,701 82,333 34,087
OTHER ASSETS:
Receivable (payable) for
allocation to member accounts - - - -
Dividends and interest receivable 9 234 271 418
Receivable - withholdings of
member contributions 350 70 139 47
Interfund receivable (payable) 975 (1,034) (170) (39)
-------- ------- ------- -------
Total assets 383,844 49,971 82,573 34,513
-------- ------- ------- -------
LIABILITIES
LIABILITIES:
Notes payable - - - -
Accrued interest payable - - - -
Net amount payable (receivable)
for investment security
transactions and other 511 - - 896
Amounts payable for
administrative expenses 307 130 158 107
-------- ------- ------- -------
Total liabilities 818 130 158 1,003
-------- ------- ------- -------
NET ASSETS AVAILABLE FOR BENEFITS $383,026 $49,841 $82,415 $33,510
======== ======= ======= =======
NUMBER OF UNITS AT DECEMBER 31, 1996 8,232 32,234 26,571 18,858
======== ======= ======= =======
VALUE PER UNIT AT DECEMBER 31, 1996 $46.53 $1.55 $3.10 $1.78
====== ===== ===== =====
(Continued on following page)
<PAGE>
THE MAY DEPARTMENT STORES COMPANY
PROFIT SHARING PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
DECEMBER 31, 1996
(Thousands, except per unit information)
Distribution
ASSETS Account Total
INVESTMENTS, at fair value:
The May Department Stores Company-
Convertible preferred stock $ - $ 722,860
Common stock - 539,061
Short-term investments 2,602 57,842
Commingled equity index fund - 81,872
U.S. government securities - 26,715
Fixed income investments - 5,802
------ ----------
Total investments 2,602 1,434,152
OTHER ASSETS:
Receivable (payable) for
allocation to member accounts - -
Dividends and interest receivable - 936
Receivable - withholdings of
member contributions - 606
Interfund receivable (payable) - -
------ ----------
Total assets 2,602 1,435,694
------ ----------
LIABILITIES
LIABILITIES:
Notes payable - 362,557
Accrued interest payable - 5,085
Net amount payable (receivable)
for investment security
transactions and other 2,602 4,222
Amounts payable for
administrative expenses - 830
------ ----------
Total liabilities 2,602 372,694
------ ----------
NET ASSETS AVAILABLE FOR BENEFITS $ - $1,063,000
====== ==========
The accompanying notes are an integral part of this statement.
<PAGE>
THE MAY DEPARTMENT STORES COMPANY
PROFIT SHARING PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
DECEMBER 31, 1995
(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 $485,970 $138,402 $ -
Common stock - - 145,141
Short-term investments - - 1,053
Commingled equity index fund - - -
U.S. government securities - - -
Fixed income investments - - -
-------- -------- --------
Total investments 485,970 138,402 146,194
OTHER ASSETS:
Receivable (payable) for
allocation to member accounts (29,770) 29,770 -
Dividends and interest receivable - - 5
Receivable - withholdings of member
contributions - - -
Interfund receivable (payable) - (144) (1,062)
-------- -------- --------
Total assets 456,200 168,028 145,137
-------- -------- --------
LIABILITIES
LIABILITIES:
Notes payable 378,031 - -
Accrued interest payable 5,300 - -
Net amount payable (receivable) for
investment securities transactions
and other - - -
Amounts payable for administrative
expenses - - 135
-------- -------- --------
Total liabilities 383,331 - 135
-------- -------- --------
NET ASSETS AVAILABLE FOR BENEFITS $ 72,869 $168,028 $145,002
======== ======== ========
NUMBER OF UNITS AT DECEMBER 31, 1995 3,847
========
VALUE PER UNIT AT DECEMBER 31, 1995 $ 37.69
========
(Continued on following page)
<PAGE>
THE MAY DEPARTMENT STORES COMPANY
PROFIT SHARING PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
DECEMBER 31, 1995
(Thousands, except per unit information)
Participant Directed
Investment Funds
-----------------------------------
May Common Fixed
Common Money Stock Income
ASSETS Stock Market Index Index
INVESTMENTS, at fair value:
The May Department Stores Company-
Convertible preferred stock $ - $ - $ - $ -
Common stock 339,470 - - -
Short-term investments 2,462 56,132 515 771
Commingled equity index fund - - 71,097 -
U.S. government securities - - - 32,711
Fixed income investments - - - 5,746
-------- ------- ------- -------
Total investments 341,932 56,132 71,612 39,228
OTHER ASSETS:
Receivable (payable) for
allocation to member accounts - - - -
Dividends and interest receivable 11 280 130 568
Receivable - withholdings of
member contributions 83 59 11 20
Interfund receivable (payable) (2,486) 1,068 1,939 685
-------- ------- ------- -------
Total assets 339,540 57,539 73,692 40,501
-------- ------- ------- -------
LIABILITIES
LIABILITIES:
Notes payable - - - -
Accrued interest payable - - - -
Net amount payable (receivable) for
investment securities transactions
and other - - - (194)
Amounts payable for
administrative expenses 316 168 179 137
-------- ------- ------- -------
Total liabilities 316 168 179 (57)
-------- ------- ------- -------
NET ASSETS AVAILABLE FOR BENEFITS $339,224 $57,371 $73,513 $40,558
======== ======= ======= =======
NUMBER OF UNITS AT DECEMBER 31, 1995 9,001 38,813 28,985 23,362
======== ======= ======= =======
VALUE PER UNIT AT DECEMBER 31, 1995 $37.69 $1.48 $2.54 $1.74
====== ===== ===== =====
(Continued on following page)
<PAGE>
THE MAY DEPARTMENT STORES COMPANY
PROFIT SHARING PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
DECEMBER 31, 1995
(Thousands, except per unit information)
Distribution
ASSETS Account Total
INVESTMENTS, at fair value:
The May Department Stores Company-
Convertible preferred stock $ - $ 624,372
Common stock - 484,611
Short-term investments 1,660 62,593
Commingled equity index fund - 71,097
U.S. government securities - 32,711
Fixed income investments - 5,746
------ ----------
Total investments 1,660 1,281,130
OTHER ASSETS:
Receivable (payable) for
allocation to member accounts - -
Dividends and interest receivable - 994
Receivable - withholdings of
member contributions - 173
Interfund receivable (payable) - -
------ ----------
Total assets 1,660 1,282,297
------ ----------
LIABILITIES
LIABILITIES:
Notes payable - 378,031
Accrued interest payable - 5,300
Net amount payable (receivable)
for investment securities
transactions and other 1,660 1,466
Amounts payable for
administrative expenses - 935
------ ----------
Total liabilities 1,660 385,732
------ ----------
NET ASSETS AVAILABLE FOR BENEFITS $ - $ 896,565
====== ==========
The accompanying notes are an integral part of this statement.
<PAGE>
THE MAY DEPARTMENT STORES COMPANY
PROFIT SHARING PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
FOR THE YEAR ENDED DECEMBER 31, 1996
(Thousands)
Nonparticipant Directed
Investment Funds
--------------------------------
ESOP Preference
---------------------- May
Member Common
Unallocated Allocated Stock
NET APPRECIATION (DEPRECIATION) IN FAIR
VALUE OF INVESTMENTS $ 94,043 $ 41,736 $ 29,085
-------- -------- --------
INVESTMENT INCOME:
Dividends 20,731 5,742 3,899
Interest - - 53
-------- -------- --------
20,731 5,742 3,952
-------- -------- --------
CONTRIBUTIONS:
Member - - -
Employer allocation (40,251) 40,251 -
Employer ESOP contribution 20,156 - -
Member interfund transfers - (1,005) (741)
Forfeiture reallocation - - (10)
-------- -------- --------
(20,095) 39,246 (751)
-------- -------- --------
DEDUCTIONS:
Member terminations and
withdrawals - 15,998 17,607
Interest expense 30,940 - -
Transfer to plan of divested subsidiary - 20,281 -
Administrative expenses - - 554
-------- -------- --------
30,940 36,279 18,161
-------- -------- --------
INCREASE (DECREASE) IN NET ASSETS
AVAILABLE FOR BENEFITS 63,739 50,445 14,125
NET ASSETS AVAILABLE FOR BENEFITS AT
DECEMBER 31, 1995 72,869 168,028 145,002
-------- -------- --------
NET ASSETS AVAILABLE FOR BENEFITS AT
DECEMBER 31, 1996 $136,608 $218,473 $159,127
======== ======== ========
(Continued on following page)
<PAGE>
THE MAY DEPARTMENT STORES COMPANY
PROFIT SHARING PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
FOR THE YEAR ENDED DECEMBER 31, 1996
(Thousands)
Participant Directed
Investment Funds
-----------------------------------
May Common Fixed
Common Money Stock Income
Stock Market Index Index Total
NET APPRECIATION
(DEPRECIATION) IN FAIR
VALUE OF INVESTMENTS $ 69,943 $ - $13,712 $(1,013) $ 247,506
-------- ------- ------- ------- ----------
INVESTMENT INCOME:
Dividends 9,375 - 1,649 - 41,396
Interest 128 2,752 51 2,097 5,081
-------- ------- ------- ------- ----------
9,503 2,752 1,700 2,097 46,477
-------- ------- ------- ------- ----------
CONTRIBUTIONS:
Member 41,439 7,359 13,005 5,816 67,619
Employer allocation - - - - -
Employer ESOP contribution - - - - 20,156
Member interfund transfers (11,306) 6,854 5,513 685 -
Forfeiture reallocation (23) 29 1 3 -
-------- ------- ------- ------- ----------
30,110 14,242 18,519 6,504 87,775
-------- ------- ------- ------- ----------
DEDUCTIONS:
Member terminations and
withdrawals 42,343 13,421 10,538 6,230 106,137
Interest expense - - - - 30,940
Transfer to plan of
divested subsidiary 22,079 10,544 13,855 7,969 74,728
Administrative expenses 1,332 559 636 437 3,518
-------- ------- ------- ------- ----------
65,754 24,524 25,029 14,636 215,323
-------- ------- ------- ------- ----------
INCREASE (DECREASE) IN NET
ASSETS AVAILABLE FOR
BENEFITS 43,802 (7,530) 8,902 (7,048) 166,435
NET ASSETS AVAILABLE FOR
BENEFITS AT DECEMBER 31,
1995 339,224 57,371 73,513 40,558 896,565
-------- ------- ------- ------- ----------
NET ASSETS AVAILABLE FOR
BENEFITS AT DECEMBER 31,
1996 $383,026 $49,841 $82,415 $33,510 $1,063,000
======== ======= ======= ======= ==========
The accompanying notes are an integral part of this statement.
<PAGE>
THE MAY DEPARTMENT STORES COMPANY
PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
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. 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 $22.51 per common share equivalent ($24.74 per common share equivalent
before the Payless ShoeSource, Inc. "spin-off" in May 1996). 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 the original cost. This market value of the employer
allocation (including supplemental contributions, if any), 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 will be used for the employer allocation and no May common
shares will be contributed as a supplemental contribution. The effective
matching rate will also be 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.
<PAGE>
Investments
Members' contributions may be invested in any of four investment funds:
May Common Stock Fund - For investment of contributions in May common
stock.
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.
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. This index represents the
composite performance of the 500 major stocks in the United States.
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, 1996, the nonparticipant directed May Common Stock and ESOP
Member Allocated Funds include approximately $59,673,000 and $47,190,000,
respectively, attributable to participants over the age of 55. These amounts
can be transferred to other funds at the discretion of the participants.
Employer allocations and supplemental contributions are invested in the ESOP
Preference Fund and the May Common Stock Fund, respectively. The employer
allocation to the Plan for the year ended December 31, 1996, will be made in
May 1997 and will be in the form of 38,106 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 was previously convertible into 20.49031 shares of May
common stock. Effective May 4, 1996, in connection with May's spin-off of
Payless ShoeSource, Inc., the conversion rate was adjusted to 22.52498 shares
of May common stock. The acquisition of the ESOP Preference Shares was
financed with the proceeds of a private placement to a group of institutional
investors of an aggregate $400 million principal amount (the "ESOP Loans")
(see Note 4).
The ESOP Loans are guaranteed by The May Department Stores Company, a New York
corporation. 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, 1996 and 1995.
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.
<PAGE>
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 may make
"supplemental" contributions to the Plan to make up the difference, subject to
the 100% effective matching rate limitations described in Note 1.
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 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). Generally, 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 stated 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, 1996 and 1995, the
ESOP Preference Shares were valued at their conversion values of $1,053.04 and
$863.15, respectively.
<PAGE>
Federal Income Taxes
The Trust established under the Plan to hold the Plan's assets is qualified
pursuant to Section 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 in prior
years, and the Company believes that the Plan continues to qualify and operate
in accordance with the Internal Revenue Code.
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. Prior to 1996, May provided the
salaries and related benefits of associates who administer 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.
<PAGE>
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, 1996 and 1995,
are as follows (dollars in thousands):
December 31, 1996 December 31, 1995
---------------------- ----------------------
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 516,956 $ 544,377 563,016 $ 485,970
Member allocated 169,492 178,483 160,344 138,402
---------- ---------- ---------- ----------
686,448 722,860 723,360 624,372
========== ==========
The May Department
Stores Company
Common Stock 11,530,716 539,061 11,504,123 484,611
The Bank of New
York Short-Term
Investment Fund -
Master Notes $57,842 57,842 $62,593 62,593
Chase Investors
Commingled Equity
Index fund 112,782 81,872 117,694 71,097
---------- ----------
Total $1,401,635 $1,242,673
========== ==========
4. NOTES PAYABLE:
Notes payable as of December 31 consisted of the following (in thousands):
1996 1995
ESOP Notes Payable:
Series A, 8.32%, due April 30, 2001 $158,593 $174,067
Series B, 8.49%, due April 30, 2004 203,964 203,964
-------- --------
$362,557 $378,031
======== ========
The scheduled principal payments for the Series A ESOP Note for the next five
years are as follows: 1997 - $20,228,000; 1998 - $25,385,000; 1999 -
$31,118,000; 2000 - $37,354,000; and 2001 - $44,508,000. Principal payments
on the Series B ESOP Note begin in 2002. As of December 31, 1996 and 1995,
the total fair value of the ESOP Notes was approximately $430,341,000 and
$468,290,000, respectively.
<PAGE>
5. RECONCILIATION TO FORM 5500:
As of December 31, 1996 and 1995, the Plan had approximately $13,523,000 and
$16,340,000, respectively, of pending distributions to participants. These
amounts are included in Net Assets Available for Benefits. For reporting on
the Plan's Form 5500 Annual Report, 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,
1996 (thousands):
Net Assets
Benefits Available
Payable to Benefits for
Participants Paid Benefits
Per financial statements $ - $106,137 $1,063,000
Pending benefit distributions -
December 31, 1996 13,523 13,523 (13,523)
Pending benefit distributions -
December 31, 1995 - (16,340) -
------- -------- ----------
Per Form 5500 $13,523 $103,320 $1,049,477
======= ======== ==========
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.
7. TRANSFER OF PLAN ASSETS - PAYLESS SHOESOURCE, INC.:
On May 4, 1996, May completed the "spin-off" of Payless ShoeSource, Inc.
("Payless"). A separate defined contribution profit sharing plan for Payless
was established April 1, 1996, and an asset transfer of Payless associate
accounts was made from the Plan to the Payless Plan in April 1996. The amount
of the asset transfer was approximately $74,728,000.
<PAGE>
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, 1996
(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 516,956 $262,097 $ 544,377
Member allocated 169,492 85,932 178,483
-------- ----------
ESOP Preference Fund Total $348,029 $ 722,860
======== ==========
MAY COMMON STOCK FUND
* The May Department Stores Company
Common Stock 11,530,716 $255,650 $ 539,061
* The Bank of New York Short-Term
Investment Fund- Master Notes $ 2,507,648 2,508 2,508
-------- ----------
May Common Stock Fund Total $258,158 $ 541,569
======== ==========
MONEY MARKET FUND
* The Bank of New York Short-Term
Investment Fund- Master Notes $50,700,898 $ 50,701 $ 50,701
======== ==========
COMMON STOCK INDEX FUND
Chase Investors Commingled Equity
Index Fund 112,782 $ 49,666 $ 81,872
* The Bank of New York Short-Term
Investment Fund- Master Notes $ 461,359 461 461
-------- ----------
Common Stock Index Fund Total $ 50,127 $ 82,333
======== ==========
FIXED INCOME INDEX FUND
* The Bank of New York Short-Term
Investment Fund- Master Notes $ 1,569,823 $ 1,570 $ 1,570
-------- ----------
* Also a party-in-interest.
<PAGE>
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:
5.625%, due 8/31/97 $ 300,000 $ 300 $ 300
5.125%, due 6/30/98 $ 3,200,000 3,127 3,171
5.125%, due 12/31/98 $ 2,300,000 2,241 2,268
7.875%, due 11/15/04 $ 700,000 782 764
13.75%, due 8/15/04 $ 525,000 810 756
5.5%, due 4/15/00 $ 2,300,000 2,178 2,259
6.75%, due 6/30/99 $ 4,500,000 4,544 4,579
5.0%, due 1/31/98 $ 1,500,000 1,490 1,489
7.75%, due 1/31/00 $ 400,000 411 419
5.875%, due 2/15/04 $ 1,500,000 1,425 1,460
5.25%, due 1/31/01 $ 1,750,000 1,744 1,694
6.875%, due 5/15/06 $ 1,400,000 1,436 1,443
6.5%, due 5/31/01 $ 900,000 895 910
6.375%, due 8/15/02 $ 1,200,000 1,207 1,208
8.75%, due 8/15/00 $ 700,000 829 759
-------- ----------
Total U.S. treasury notes 23,419 23,479
-------- ----------
U.S. Government Agency Securities:
Federal Home Loan Bank Consumer Bonds-
6.12%, due 1/24/01 $ 250,000 251 246
Federal Home Loan Mortgage Corporation-
6.22%, due 3/24/03 $ 200,000 182 197
6.81%, due 6/4/99 $ 200,000 199 201
Federal National Mortgage Association
Securities-
8.35%, due 11/10/99 $ 325,000 333 344
Debentures-
9.55%, due 12/10/97 $ 320,000 326 331
7.65%, due 3/10/05 $ 160,000 163 170
Medium Term Notes-
6.41%, due 3/8/06 $ 400,000 402 392
6.69%, due 8/7/01 $ 400,000 402 405
International Bank for Recon & Dev BD-
5.875%, due 7/16/97 $ 300,000 302 301
Tennessee Valley Authority, Power
Bond 1992 Series F, 6.875%,
due 8/1/02 $ 250,000 259 250
SLMA Medium Term Notes-
6.58%, due 1/2/02 $ 400,000 399 399
-------- ----------
Total U.S. government agency
securities 3,218 3,236
-------- ----------
Total U.S. government
securities 26,637 26,715
-------- ----------
<PAGE>
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 Corporation, 7.75%, due
7/15/02 $ 300,000 $ 306 $ 314
Republic NY Corporation, 7.25%, due
7/15/02 $ 100,000 98 103
NCNB Corporation, 9.125%, due
10/15/01 $ 268,000 306 294
-------- ----------
Total bank corporate bonds 710 711
-------- ----------
Finance and Insurance Corporate Bonds:
American Express Company, 8.5%, due
8/15/01 $ 200,000 201 215
Commercial Credit Corporation, 8.125%,
due 3/1/97 $ 200,000 179 201
Ford Motor Credit Co., 6.25%, due
2/26/98 $ 400,000 405 401
ABN-AMRO Bank, 6.625%, due 10/31/01 $ 300,000 300 300
General Electric Capital Corporation,
8.85%, due 4/1/05 $ 300,000 364 337
Grace W R T Company, 8.00%, due
8/15/04 $ 500,000 519 529
Simon Debartolo Group, 6.875%, due
11/15/06 $ 500,000 498 487
Travelers/Aetna Property Casualty
Corporation, 6.75%, due 4/15/01 $ 300,000 301 301
-------- ----------
Total finance and insurance
corporate bonds 2,767 2,771
-------- ----------
Industrial Corporate Bonds:
Coca Cola Company, 7.875%, due 9/15/98 $ 200,000 203 206
Eli Lilly & Co., 8.125%, due 12/1/01 $ 200,000 199 213
General Motors Corporation, 7.10%,
due 3/15/06 $ 300,000 303 302
Philip Morris Companies, Inc., 8,625%
due 3/1/99 $ 250,000 248 260
Lockheed Martin Corporation, 6.85%,
due 5/15/01 $ 400,000 400 403
-------- ----------
Total industrial corporate
bonds 1,353 1,384
-------- ----------
Oil Corporate Bond:
Tenneco Inc., 7.875%, due 10/1/02 $ 250,000 248 263
-------- ----------
Utilities Corporate Bonds:
Duke Power Company, 1st and Refunding
Mortgage Note, 7%, due 6/1/00 $ 195,000 203 198
-------- ----------
<PAGE>
SCHEDULE I
(Continued)
(c) (e)
(b) Principal (d) Fair
(a) Identity of Issue Amount Cost Value
(Thousands)
FIXED INCOME INDEX FUND (Continued)
Foreign Obligations:
Finland Rep NT, 7.875%, due 7/28/04 $ 150,000 150 162
Hydro-Quebec Debenture, Series IF,
7.375%, due 2/1/03 $ 150,000 161 154
Province of Ontario, Canada
Debenture, 8%, due 10/17/01 $ 150,000 149 159
-------- ----------
Total foreign obligations 460 475
-------- ----------
Total fixed income investments 5,741 5,802
-------- ----------
Fixed Income Index Fund Total $ 33,948 $ 34,087
======== ==========
DISTRIBUTION ACCOUNT
* The Bank of New York Short-Term
Investment Fund- Master Notes $ 2,602,126 $ 2,602 $ 2,602
======== ==========
TOTAL ASSETS HELD FOR INVESTMENT
PURPOSES AT DECEMBER 31, 1996 $743,565 $1,434,152
======== ==========
* Also a party-in-interest.
<PAGE>
SCHEDULE II
THE MAY DEPARTMENT STORES COMPANY
PROFIT SHARING PLAN
ITEM 27(d): SCHEDULE OF REPORTABLE TRANSACTIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(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) 414 $134,559 241 $140,252 $140,252 $ -
The May Department
Stores Company
Common Stock (1) (2) 67 80,241 51 34,701 76,853 42,152
Payless ShoeSource, Inc.
Common Stock (1) - - 30 20,723 47,964 27,241
-------- -------- -------- -------
$214,800 $195,676 $265,069 $69,393
======== ======== ======== =======
(1) Also a party-in-interest.
(2) Includes conversion of ESOP Preference Shares.
<PAGE>
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 Statements on Form S-8 Files No. 33-26016, 33-38104, 33-51849 and
333-00957.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
April 23, 1997
